Class Notes 11/8 Sunday, October 16, 2016 8:36 PM Chapter 9: Long‐Term Liabilities Class will cover: Not Specified Iclicker questions Iclicker 2 ‐ Quick Check 1 If bonds with a face value of $200,000 are issued at 102, what amount is recorded in the Bonds Payable account? $200,000 Iclicker 2 ‐ Bell Ringer If bonds were initially issued at a premium, the carrying value of the bonds (on the issuer's books) will: Decrease as the bonds approach maturity (A) Iclicker 2 ‐ Additional Question If bonds with a face value of $200,000 are issued at 102, what amount of cash is received? $204,000 In Class Exercise Review Bridges, Inc. issues $5,000,000 in 8% 5‐year bonds for $4,922,000. Interest payments are due each 6/30 & 12/31. The company uses the straight‐line method for amortization of premium or discount. Record the first semi‐annual payment of interest. Record beginning 1/1/15 Cash 4,922,000 Discount on Bonds Payable 78,000 Bonds Payable 5,000,000 Notes: Bonds Payable ‐ Bond Discount + Bond Premium Carrying Value of Bonds Record Payment 6/30/15 Bond Interest Expense 207,800 Bond Discount 7,800 Cash 200,000 10 payments at 8% 78,000/10=7,800 5,000,000*.08*.5=200,000.0 Consider instead that the above described bonds are issued at $5,035,000. Record the first interest payment: Exam 4 Page 1 Record issue of bond 1/1/15 Cash 5,035,000 Bond Premium 35,000 Bonds Payable 5,000,000 Record Payment 6/30/15 Bond Interest Expense 196,500 Bond Premium 3,500 Cash 200,000 35,000/10=3,500 My Note: If the bond is issued at a premium (company gets more money than was on the face of the bond), we have too much money in the account and the carrying value will decrease until we get back to face value. - So the extra money we received reduces interest payments. We only have to pay back face of bond amount, so the extra is used to reduce the interest expense. If the bond is issued at a discount (company gets less cash than on face of bond), there is not enough money in the account and the carrying value will rise over time to get back to face value. - Bond Retirement We were shortchanged up front, but still have to pay back the full amount on the face of the bond. We record it as a cost of issuing bonds and record it in interest expense. It's our cash going out to cover the amount, since cash in doesn't match cash out On 8/4/2016, Vandelay Industries retired bonds for a price of $888,000. The bonds had a face value of $900,000 and a carrying value of $894,000. (These balances already reflect the appropriate adjustment for bond interest due.) Prepare the journal entry to record the retirement. Notes: CV<price(payoff) ‐ Loss on retirement CV=price ‐ No gain or loss CV>price ‐ Gain on retirement 894,000 > 888,000 = 6,000 Gain on retirement of bond Bonds Payable 900,000 Gain on retirement of bond 6,000 Bond Discount 6,000 Cash 888,000 Bond Retirement On 7/16/16, Salazar, Inc. retired bonds for a price of $563,000. The bonds had a face value of $550,000, and a carrying value of $558,000. These balances already reflect the appropriate adjustment for bond interest due. Prepare the journal entry to record the retirement. Loss of $5,000
What is the debt to total assets ratio?
If bonds with a face value of $200,000 are issued at 102, what amount of cash is received?
If bonds with a face value of $200,000 are issued at 102, what amount is recorded in the Bonds Payable account?
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Exam 4 Page 2 Bonds Payable 550,000 Bond Premium 8,000 Loss on Retirement of Bond 5,000 Cash 563,000 Begin Slideshow Review ‐ Slide 27 ❖ Operating leases are on the up & up, but businesses look for ways to take advantage ❖ Capital lease ‐ lessee is responsible for many risks and obligations of ownership ❖ BIG RATIO TO KNOW ‐ Debt to Total Assets = Total Liabilities divided by Total Assets ❖ Anesthesiologist story In Class Exercise Debt to Total Assets Current assets are $300,000, long‐term assets are $400,000, current liabilities are $250,000, long‐ term liabilities are $300,000, paid in capital is $100,000, and retained earnings is $50,000. What is the debt to total assets ratio? Total Debt/Total Assets 550,000/700,000=0.7857 78.6% debt to 21.4% assets. Not good Debt to Total Assets Red Corp had $1,750,000 in total liabilities and $3,000,000 in total assets as of 12/31/14. Of Red's total liabilities, $600,000 is long term. Calculate Red's debt‐to‐total assets ratio. 1,750,000/3,000,000=0.5833 Not a great number ‐ likely means higher interest rate Exam 4 Page 3 What to Expect ‐ Exam 4 Wednesday, October 19, 2016 2:43 PM 10 multiple choice from each chapter Chapter 8 Open format ❖ Matching questions ✧ Definitions and terms ✧ Concepts Chapter 9 open format ❖ Bond return and redemption ❖ Issuance of bonds ○ Transactions ○ Premium ○ Discount ○ Interest payments ○ Amortization ❖ Open format is all about bonds Exam 4 Page 1