Connect

Close
Skip to eBook contentSkip to Chapter linksSkip to Content links for this ChapterSkip to eBook links

Chapter14: Bonds and Long-Term Notes

Chapter Opener

p. 746

/ / /  OVERVIEW

This chapter continues the presentation of liabilities. Specifically, the discussion focuses on the accounting treatment of long-term liabilities. Long-term notes and bonds are discussed, as well as the extinguishment of debt and debt convertible into stock.


/ / /  LEARNING OBJECTIVES

  After studying this chapter, you should be able to:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO1  

Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt. (page 747)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO2  

Account for bonds issued at face value, at a discount, or at a premium, recording interest at the effective rate or by the straight-line method.(page 749)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO3  

Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.(page 759)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO4  

Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.(page 763)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO5  

Record the early extinguishment of debt and its conversion into equity securities.(page 769)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO6  

Understand the option to report liabilities at their fair values.(page 775)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/op_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO7  

Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for bonds and long-term notes.(page 751), (page 759), (page 771) and (page 777)


p. 747

 

FINANCIAL REPORTING CASE

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/spip1401.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

Service Leader, Inc.

   The mood is both upbeat and focused on this cool October morning. Executives and board members of Service Leader, Inc., are meeting with underwriters and attorneys to discuss the company's first bond offering in its 20-year history. You are attending in the capacity of company controller and two-year member of the board of directors. The closely held corporation has been financed entirely by equity, internally generated funds, and short-term bank borrowings.

   Bank rates of interest, though, have risen recently and the company's unexpectedly rapid, but welcome, growth has prompted the need to look elsewhere for new financing. Under consideration are 15-year, 6.25% first mortgage bonds with a principal amount of $70 million. The bonds would be callable at 103 any time after June 30, 2013, and convertible into Service Leader common stock at the rate of 45 shares per $1,000 bond.

   Other financing vehicles have been discussed over the last two months, including the sale of additional stock, nonconvertible bonds, and unsecured notes. This morning The Wall Street Journal indicated that market rates of interest for debt similar to the bonds under consideration are about 6.5%.

QUESTIONS  / / /

By the time you finish this chapter, you should be able to respond appropriately to the questions posed in this case. Compare your response to the solution provided at the end of the chapter.

1.

 

What does it mean that the bonds are “first mortgage” bonds? What effect does that have on financing? (page 749)

2.

 

From Service Leader's perspective, why are the bonds callable? What does that mean? (page 749)

3.

 

How will it be possible to sell bonds paying investors 6.25% when other, similar investments will provide the investors a return of 6.5%? (page 750)

4.

 

Would accounting differ if the debt were designated as notes rather than bonds? (page 759)

5.

 

Why might the company choose to make the bonds convertible into common stock? (page 769)

2011 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Notice.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.