ch07Long-TermLiabilities(评估用).ppt

Financial Accounting 2 Long-Term Liabilities Chapter 7 Objective 1 1.Bonds Bonds are groups of notes payable issued to multiple lenders called bondholders. 2.Types of Bonds 3.Bond Prices Issuing at a premium 4.Bond Interest Rates Two interest rates work together to set the price of bond: Objective 2 3.Straight-Line Amortizationof Bond Discount 3.Straight-Line Amortizationof Bond Discount 4.Straight-Line Amortizationof Bond Premium Objective 3 1.Effective-Interest Methodof Amortization The effective-interest method keeps interest expense at the same percentage over any bond’s life. 2.Effective-Interest Method:Bond Discount Assume that Corp. issues $400,000 of its 10% bonds at a price of $371,163, at a time when the market rate of interest is 12%. These bonds mature in five years and pay interest annually. 2.Effective-Interest Method:Bond Discount 2.Effective-Interest Method:Bond Discount Interest expense at the end of period one? 3.Effective-Interest Method:Bond Premium Assume the Corp. issues a $400,000, 5-year, 10% bond to yield 8%, at a premium of $31,940. Objective 4 1.Retirement of Bonds Payable To retire a bond early, the issuer can ... purchase the bonds in the open market, or exercise a call option. The journal entry is the same in either case. Retirement of Bonds Payable Example 2.Convertible Bonds and Notes Convertible bonds and notes give the holder the option of exchanging the bond for a specified number of shares of common stock. If a bond issue or a note payable is converted into common stock, stockholders’ equity is increased by the carrying amount of the bonds converted. Objective 5 Issuing Bonds versus Stock Advantage of Issuing Bondsversus Stock Example Suppose that Granite Corp., with net income of $300,000 and with 100,000 shares of common stock outstanding, needs $500,000 for expansion. Money can be borrowed at 10% interest. The income tax rate is 40%. Advantage of Issuing Bondsversus Stock Example 50,000 shares of common stock