MGMT 351 Lecture 4
MGMT 351 Lecture 4 MGMT 351
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This 4 page One Day of Notes was uploaded by Emily McIlhattan on Wednesday January 28, 2015. The One Day of Notes belongs to MGMT 351 at Purdue University taught by Byong Ro in Winter2015. Since its upload, it has received 3064 views. For similar materials see Intermediate Accounting II in Accounting at Purdue University.
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Date Created: 01/28/15
MGMT 351 Lecture 4 Outline of Last Lecture LongTerm Liabilities a Notes Payable Outline of Current Lecture LongTerm Liabilities Cont d a Longterm Bonds Payable Current Lecture RECAP Bonds Payable securities issued for longterm debt nancing They are a liability to the issuer and an investment asset to the buyer Bond Indenture A contract that contains the terms on the bond issued such as face value interest rate or no interest and maturity date Companies either go through an underwriter investment bank or directly to the general investors Pricing bonds are the same way as longterm notes payable The price being the cash the issuer received form buyers o If coupon rate is less than yield rate discount o If coupon rate is more than yield rate premium o If they are equal then the bond is issued at Face Value Journal Entries Issuance Interest payment At FYE adjust for amortization and update interest expense Retire at maturity gtUUl 39 Now and forever assume effective rate interest amortization because Straightline is hardly used in the real world BV also called carrying value You can either retire a bond early or at maturity if early you update the lExp and Amortization of discount and premium rst EXAMPLES DONE IN CLASS HP122 BP3114 10702 Present Value Bond Price of bond today PV 8 03 PVOA 8 03 1 8 number of period 03 is half the discount rate PV at 51 10702 789426 10 676 you are accounting for the amount of months with 26 Date Cash Int Int Exp Amort Balance 3114 10702 5114 133 10702 2598 10676 9114 400 32106 7894 10623 3115 400 31869 8131 10542 9115 400 31625 8375 10458 3116 400 31374 8626 10372 9116 400 31115 8885 10283 3117 400 30849 9151 10191 9117 400 30574 9426 10097 3118 400 30291 9709 10000 You can do this in excel 2 5114 1 Cash 10676 BPay 10000 B Prem 676 2 Cash 133 lPay 133 40026 You are allocating the 6 month cash interest by the 2 months 9114 lPay 133 Cash 400 you basically get the 133 back IExp 214 3210646 B Prem 53 123114 IExp 213 Pay 267 FYE B Prem 54 3115 lPay 267 Cash 400 lExp 106 l 2 month Exp B Prem 27 l 2 months Amortization 3 85 at 12312014 Noncurrent Liab Bonds 10000 Prem 569 BV is 10569 4 Early Retirement 4115 Update interest amp amortization of discount or premium rst lExp 53 3162516 Cash 67 40016 B Prem 14 BV at 4115 10528 Face 10k premium balance BV 10542 prem Amort 837516 Loss on retirement 972 price paid BV existing BV BPay 10000 Cash 11500 in problem B Prem 528 prem Bal L055 972 5 Zero coupon BP3114 7894 5114 Cash 7894 PV 8 03 no interest BPay 10000 B Disct 2106 9114 lExp 237 B Disct 237 l037894 viewed as prepaid Exp so its amortized 123114 lExp 163 B Disct 163 interest lExp each period Why do people buy noninterest bearing bonds for investment They buy it at a discount Interest is still there its implicit Restructuring Troubled Debt A trouble debt restructuring is a special arrangement under which the creditor grants a concession to the debtor because the debtor s nancial dif culties All LongTerm Debt 1 Full settlement of debt by giving something noncash asset Asset Swap or giving stock of the debtor Equity Swap a Asset Swaps usually results in a gain i If MV is higher than BV Gain on asset given because of appreciation of value is asset since acquired by the debtor 2 Continuation of debt with modi ed terms
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