ch15 Non-Current Liabilities

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 15
Long-Term Liabilities
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter 15
Non-Current Liabilities
Chapter Outline
Learning Objectives
LO 1 Describe the major characteristics of bonds.
LO 2 Explain how to account for bond transactions.
LO 3 Explain how to account for other non-current
liabilities.
LO 4 Discuss how non-current liabilities are reported
and analyzed.
Copyright ©2019 John Wiley & Son, Inc.

Major Characteristics of Bonds
Non-current liabilities are obligations that are
expected to be paid after one year.
Bonds are a form of interest-bearing notes payable.
Sold in small denominations (usually $1,000 or
multiples of $1,000)
Attract many investors
Corporation issuing bonds is borrowing money
Person who buys the bonds (the bondholder) is
investing in bonds
LO 1 Copyright ©2019 John Wiley & Son, Inc.
Types of Bonds
Secured bonds have specific assets of issuer
pledged as collateral for bonds
Unsecured bonds, also called debenture bonds, are
issued against general credit of borrower
Convertible bonds can be converted into ordinary
shares at bondholder’s option
Callable bonds, issuing company can redeem (buy
back) at a stated currency amount prior to
maturity
Issuing Procedures
Governmental laws grant companies power to issue
bonds
Board of directors and shareholders must approve
bond issues
Board of directors must stipulate number of bonds
to be authorized, total face value, and contractual
interest rate
Bond terms set forth in bond indenture
LO 1 Bond certificate, typically a $1,000 face value
Issuing Procedures
Represents a promise to pay:
 sum of money at designated maturity date, plus
 periodic interest at a contractual (stated) rate on
maturity amount (face value)
Interest payments usually made semiannually
Issued to obtain large amounts of long-term capital
Investment company sells bonds for issuing
company
ILLUSTRATION 15.1
Bond certificate

Bond Trading
Bondholders can convert their holdings into cash by
selling the bonds at the current market price on
national securities exchanges
Prices are quoted as a percentage of the face value
ILLUSTRATION 15.2
Market information for bonds

Determining the Market Price of a Bond
Current market price (present value) is a function of
three factors:
1. the amounts to be received
2. length of time until the amounts are received
3. market rate of interest
Market interest rate is the rate investors demand for
loaning funds.

Illustration: Assume that Acropolis SA on January 1, 2020, issues
€100,000 of 9% bonds, due in five years, with interest payable
annually at year-end. The purchaser of the bonds would receive
the following two types of cash payments: (1) principal of
€100,000 to be paid at maturity, and (2) five €9,000 interest
payments (€100,000 x 9%) over the term of the bonds.
€100,000 Principal
€9,000 €9,000 €9,000 €9,000 €9,000 Interest
0 1 2 3 4 5 Years
ILLUSTRATION 15.3
Time diagram depicting cash flows

ILLUSTRATION 15.3
€100,000 Principal
€9,000 €9,000 €9,000 €9,000 €9,000 Interest
0 1 2 3 4 5 Years
The current market price of a bond is equal to the present

value of all the future cash payments promised by the bond.
Present value of €100,000 received in 5 years € 64,993
Present value of €9,000 received annually for 5 years 35,007
Market price of bonds €100,000
ILLUSTRATION 15.4
Computing the market price of bonds

DO IT! 1 Bond Terminology
State whether each of the following statements is true or false.
True 1.
_______ Mortgage bonds and sinking fund bonds are both
examples of secured bonds.
True
_______ 2. Unsecured bonds are also known as
debenture
False bonds.
_______ 3. The stated rate is the rate investors demand for
loaning
True funds.
_______ 4. The face value is the amount of principal the issuing
False company must pay at the maturity date.
_______ 5. The bond issuer must make journal entries to record
transfers of its bonds among investors.
Accounting for Bond Transactions
Corporation records bond transactions when it
issues (sells) bonds
redeems (buys back) bonds
when bondholders convert bonds into ordinary
shares
If bondholders sell their bond investments to other
investors, the issuing company receives no further
money on the transaction, nor does the issuing
company journalize the transaction.
Issuing at Face Value, Discount, or Premium
Market Bonds
Interest Rate Sell at
8% Premium
Bond Issued
Contractual when
10% Face Value
Interest
Rate 10%
12% Discount
ILLUSTRATION 15.5
Interest rates and bond prices

The market interest rate:
a. is the contractual interest rate used to determine
the amount of cash interest paid by the
borrower.
b. is listed in the bond indenture.
c. is the rate investors demand for loaning funds.
d. More than one of the above is true.

Issuing Bonds at Face Value
Illustration: On January 1, 2020, Candlestick AG issues
€100,000, five-year, 10% bonds at 100 (100% of face value).
The entry to record the sale is:
Cash 100,000
Bonds Payable 100,000

Assume that interest is payable annually on January 1. At
December 31, 2020, Candlestick recognizes interest expense
incurred with the following entry. Assume monthly accruals
have not been made.
Interest Expense 10,000
Interest Payable 10,000

Assume that interest is payable annually on January 1.
Candlestick records the payment on January 1, 2021, as
follows.
Cash 10,000

Issuing Bonds at a Discount
€100,000, five-year, 10% bonds for €98,000 (98% of face
value). Interest is payable annually on January 1. The entry to
record the issuance is as follows.
Cash 98,000

Issuing Bonds at a Discount ILLUSTRATION 15.6
Statement presentation
Candlestick AG
Statement of Financial Position (partial)
Non-current liabilities
Bonds Payable €98,000
Sale of bonds below face value (discount) =

total cost of borrowing > interest paid.
Reason: Borrower is required to pay the bond discount at the
maturity date. Therefore, the bond discount is considered to be an
increase in the cost of borrowing.

Total Cost of Borrowing ILLUSTRATIONS 15.7 and 15.8
Annual interest payments

(€100,000 × 10% = €10,000; €10,000 × 5) €50,000
Add: Bond discount (€100,000 − €98,000) 2,000
Total cost of borrowing €52,000
or
Principal at maturity €100,000
Annual interest payments (€10,000 × 5) 50,000
Cash to be paid to bondholders 150,000
Less: Cash received from bondholders 98,000
Total cost of borrowing € 52,000
ILLUSTRATION 15.9
Amortization of bond discount

Issuing Bonds at a Premium
€100,000, five-year, 10% bonds for €102,000 (102% of face
value). Interest is payable annually on January 1. The entry to
record the issuance is as follows.
Cash 102,000

Issuing Bonds at a Premium ILLUSTRATION 15.10
Statement presentation
Candlestick AG
Bonds payable €102,000
Sale of bonds below face value (premium) =

total cost of borrowing < interest paid.
Reason: Borrower is not required to pay the bond premium at the
maturity date. Therefore, the bond premium is considered to be a
reduction in the cost of borrowing.

Total Cost of Borrowing ILLUSTRATIONS 15.11 and 15.12
Annual interest payments

(€100,000 × 10% = €10,000; €10,000 × 5) €50,000
Less: Bond premium (€102,000 − €100,000) 2,000
Total cost of borrowing €48,000
or
Principal at maturity €100,000
Annual interest payments (€10,000 × 5) 50,000
Cash to be paid to bondholders 150,000
Less: Cash received from bondholders 102,000
Total cost of borrowing € 48,000
ILLUSTRATION 15.13
Amortization of bond premium

DO IT! 2a Bond Issuance
Giant Ltd. issues ¥200,000 of bonds for ¥189,000,000. (a)
Prepare the journal entry to record the issuance of the bonds,
and (b) show how the bonds would be reported on the
statement of financial position at the date of issuance
(a) Cash 189,000,000
Bonds Payable 189,000,000
(b) Non-current liabilities
Bonds Payable
¥189,000,000

Redeeming Bonds at Maturity
Illustration: Assuming that the company pays and records
separately the interest for the last interest period, Candlestick
records the redemption of its bonds at maturity as follows:
Cash 100,000

Redeeming Bonds before Maturity
When bonds are redeemed before maturity, it is
necessary to:
1. eliminate carrying value of bonds at redemption
date;
2. record cash paid; and
3. recognize gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds
less any remaining bond discount or plus any remaining bond
premium at the redemption date.

Redeeming Bonds before Maturity
Illustration: Assume Candlestick AG has sold its bonds at a
premium. At the end of the fourth period, Candlestick retires
these bonds at 103 after paying the annual interest. Assume
that the carrying value of the bonds at the redemption date is
€100,476. Candlestick makes the following entry to record the
redemption at the end of the fourth interest period (January
1, 2024):
Loss on Bond Redemption 2,524
Cash 103,000

DO IT! 2b Bond Redemption
R & B Ltd. issued £500,000, 10-year bonds at a discount. Prior
to maturity, when the carrying value of the bonds is £496,000,
the company redeems the bonds at 98. Prepare the entry to
record the redemption of the bonds.
Gain on Bond Redemption 6,000
Cash 490,000

Accounting for Long-Term Notes
Payable
May be secured by a mortgage that pledges title to
specific assets as security for a loan
Typically, terms require borrower to make
installment payments over term of loan
Each payment consists of interest on unpaid balance
of loan and a reduction of loan principal
Companies initially record mortgage notes payable
at face value
Long-Term Notes Payable
Illustration: Mongkok Technology Ltd. issues a
HK$500,000, 8%, 20-year mortgage note on
December 31, 2020, to obtain needed financing for a
new research laboratory. The terms provide for
annual installment payments of HK$50,926 (not
including real estate taxes and insurance).
The next illustration shows the installment payment
schedule for the first four years.

Long-Term Notes Payable
(B) (C) (D)
(A) Interest Reduction of Principal
Interest Cash Expense Principal Balance
Period Payment (D) X 8% (A) – (B) (D) – (C)
Issue date HK$500,000
1 HK$50,926 HK$40,000 HK$10,926 489,074
2 50,926 39,126 11,800 477,274
3 50,926 38,182 12,744 464,530
4 50,926 37,162 13,764 450,766
ILLUSTRATION 15.14
Mortgage installment payment schedule

Prepare the entries to record the mortgage and first payment.
Cash 500,000
Mortgage Payable 500,000
Mortgage Payable 10,926
Cash 50,926

DO IT! 3 Long-Term Notes
Cole Research issues a ₩250,000,000, 6%, 20-year mortgage note
to obtain needed financing for a new lab. The terms call for annual
payments of ₩21,796,000 each. Prepare the entries to record the
mortgage loan and the first payment.
Cash 250,000,000
Mortgage Payable 250,000,000
Interest Expense 15,000,000*

Mortgage Payable 6,796,000
Cash 21,796,000
*Interest expense = ₩250,000,000 × 6%.
Reporting Non-Current Liabilities
Guangzhou Ltd.
(in thousands)
Bonds payable 10% due in 2022 ¥ 920,000
Mortgage payable, 11%, due in 2028
and secured by plant assets 300,000
Lease liabilities 200,000
Total non-current liabilities ¥1,420,000
ILLUSTRATION 15.15
Statement of financial position presentation of non-current
liabilities

Analyzing Non-Current Liabilities
Use of Ratios
Illustration: LG (KOR) reported total liabilities of ₩22,839
billion, total assets of ₩35,528 billion, interest expense of
₩827 billion, income taxes of ₩354 billion, and net income of
₩223 billion.
ILLUSTRATION 15.16
Total Liabilities ÷ Total Assets = Debt to Assets Ratio

₩22,839 ÷ ₩35,528 = 64.3%
The higher the percentage, the greater the risk that the
company may be unable to meet its maturing obligations.

Use of Ratios
Illustration: LG (KOR) reported interest expense of ₩827
billion, income taxes of ₩354 billion, and net income of ₩223
billion.
ILLUSTRATION 15.17
Net Income +
Interest Expense + Interest Times Interest
Income Tax Expense ÷ Expense = Earned
₩223 + ₩827 + ₩354 ÷ ₩827 = 1.70 times
Times interest earned indicates the company’s ability to meet

interest payments as they come due.

Debt and Equity Financing
Bond Financing Advantages
1. Shareholder control is not affected. Bondholders do not
have voting rights, so current owners (shareholders)
retain full control of the company.
2. Tax savings result. Bond interest is deductible for tax
purposes; dividends on shares are not.
3. Earning per share (EPS) may be higher. Although bond
interest expense reduces net income, earnings per share
is higher under bond financing because no additional
shares are issued.

Illustration: Microsystems is considering two plans for
financing the construction of a new €5 million plant. Plan A
involves issuance of 200,000 ordinary shares at the current
market price of €25 per share. Plan B involves issuance of €5
million, 8% bonds at face value. Income before interest and
taxes on the new plant will be $1.5 million. Income taxes are
expected to be 30%. Microsystems currently has 100,000
ordinary shares outstanding.
The next illustration shows the alternative effects on earnings
per share.

ILLUSTRATION 15.18
Effects on earnings per share—
equity vs. debt
Plan A Plan B
Issue Stock Issue Bonds
Income before interest and taxes €1,500,000 €1,500,000
Interest (8% × €5,000,000) — 400,000
Income before income taxes 1,500,000 1,100,000
Income tax expense (30%) 450,000 330,000
Net income €1,050,000 €770,000
Outstanding shares 300,000 100,000
Earnings per share €3.50 €7.70

Lease Liabilities
A lease is a contractual agreement between a lessor
(owner of a property) and a lessee (renter of the
property).
Gives lessee right to use specific property, which is
owned by lessor, for a specified period of time
Lessee makes payments over lease term to lessor
For leases greater than one year, lessee records a
right-of-use asset and a lease liability equal to the
present value of the lease payments
Lease Liabilities
Accounting for Lease Arrangements
To illustrate, assume that Gonzalez Construction
decides to lease new equipment. The lease term is
four years; the economic life is estimated to be five
years. The present value of the lease payments is
€190,000. Gonzalez records the lease arrangement as
follows.
Right-of-Use Asset 190,000
Lease Liability 190,000
Lease Liabilities
Balance Sheet Presentation
Leased asset is reported on balance sheet in long-
term assets section
Lease liability is reported on balance sheet as a
liability
 Portion to be paid in next year is a current liability
 Remainder is classified as a non-current liability

Lease Liabilities
Income Statement Presentation
Depends on whether lease is considered a finance or
operating lease
For a finance lease, right-of-use asset is amortized
(depreciated) in a fashion similar to other fixed
assets, and interest expense is determined in a
fashion similar to other long-term liabilities
For an operating lease treatment, a single expense
amount is determined
DO IT! 4 Lease Liability
As of December 31, 2020, FX Group has the following:
Assets €200,000
Liabilities 1,200,000
Equity 800,000
Compute and discuss the debt to assets ratio at year-end.
The debt to assets ratio = €1,200,000 ÷ €2,000,000 = 60%.
This means that 60% of its assets were provided by creditors.
The higher the percentage of debt to assets, the greater the
risk that the company may be unable to meet its maturing
obligations.
Effective-Interest
Appendix 15A
Amortization
Under the effective-interest method, the
amortization of bond discount or bond premium
results in periodic interest expense equal to a
constant percentage of the carrying value of the
bonds.
Required steps:
1. Compute the bond interest expense
2. Compute the bond interest paid or accrued
LO 5 3. Compute the amortization amount
Effective-Interest Amortization
Required steps:
1. Compute the bond interest expense
2. Compute the bond interest paid or accrued
3. Compute the amortization amount ILLUSTRATION 15A.1
(1) (2) (3)

Bond Interest Expense Bond Interest Paid
Carrying Value Effective- Face Contractual
of Bonds at Amortization
Beginning of x Interest
Rate
- Amount x Interest
of Bonds Rate
= Amount
Period

Amortizing Bond Discount
Illustration: Candlestick AG sold €100,000, five-year, 10%
bonds on January 1, 2020, for €98,000. Interest is payable
each January 1.
ILLUSTRATION 15A.2
Bond Discount Amortization Schedule
Interest Interest Interest Expense (10.5348% x Discount Unamortized Carrying
Period Paid Preceding Carrying Value) Amort. Discount Value
0 €2,000 €98,000
1 €10,000 €10,324 (10.5348% × €98,000) €324 1,676 98,324
2 10,000 €10,358 (10.5348% × €98,324) €358 1,318 98,682
3 10,000 €10,396 (10.5348% × €98,682) €396 922 99,078
4 10,000 €10,438 (10.5348% × €99,078) €438 484 99,516
5 10,000 €10,484 (10.5348% × €99,516) €484 0 100,000
€50,000 €52,000 €2,000

ILLUSTRATION 15A.2
0 €2,000 €98,000
1 €10,000 €10,324 (10.5348% × €98,000) €324 1,676 98,324
2 10,000 €10,358 (10.5348% × €98,324) €358 1,318 98,682
Candlestick AG records the accrual of interest and

amortization of bond discount on December 31 as follows.
Bonds Payable 324
ILLUSTRATION 15A.2
0 €2,000 €98,000
1 €10,000 €10,324 (10.5348% × €98,000) €324 1,676 98,324
2 10,000 €10,358 (10.5348% × €98,324) €358 1,318 98,682
For the second interest period, at December 31, Candlestick

makes the following adjusting entry.
Bonds Payable 358
Amortizing Bond Premium
bonds on January 1, 2020, for €102,000. Interest is payable
each January 1.
ILLUSTRATION 15A.4
Bond Premium Amortization Schedule
Interest Interest Interest Expense (9.4794% x Premium Unamortized Carrying
Period Paid Preceding Carrying Value) Amort. Premium Value
0 €2,000 €102,000
1 €10,000 €9,669 (9.4794% × €102,000) €331 1,669 101,669
2 10,000 9,638 (9.4794% × €101,669) 362 1,307 101,307
3 10,000 9,603 (9.4794% × €101,307) 397 910 100,910
4 10,000 9,566 (9.4794% × €100,910) 434 476 100,476
5 10,000 9,524 (9.4794% × €100,476) 476 0 100,000
€50,000 €48,000 €2,000

ILLUSTRATION 15A.4
Bond Premium Amortization Schedule
Interest Interest Interest Expense (9.4794% x Premium Unamortized Carrying
Period Paid Preceding Carrying Value) Amort. Premium Value
0 €2,000 €102,000
1 €10,000 €9,669 (9.4794% × €102,000) €331 1,669 101,669
2 10,000 9,638 (9.4794% × €101,669) 362 1,307 101,307
Candlestick AG records the accrual of interest and

amortization of bond premium on December 31 as follows.
Bonds Payable 331
Appendix 15B Straight-Line Amortization
bonds on January 1, 2020, for €98,000. ILLUSTRATION 15B.2
Discount Bond
Interest Interest to Interest Amortization Unamortized Carrying
Period Be Paid Expense (€2,000 ÷ 5) Discount Value
Issue date €2,000 € 98,000
1 €10,000 €10,400 € 400 1,600 98,400
2 10,000 10,400 400 1,200 98,800
3 10,000 10,400 400 800 99,200
4 10,000 10,400 400 400 99,600
5 10,000 10,400 400 0 100,000
€50,000 €52,000 €2,000
Discount Bond
Period Be Paid Expense (€2,000 ÷ 5) Discount Value
Issue date €2,000 € 98,000
1 €10,000 €10,400 € 400 1,600 98,400
2 10,000 10,400 400 1,200 98,800
Interest is payable on January 1. Prepare the journal entry to

record the first accrual of bond interest and the amortization
of bond discount on December 31.
Bonds Payable 400
bonds on January 1, 2020, for €102,000. Interest is payable on
January 1. ILLUSTRATION 15B.4
Premium Bond
Period Be Paid Expense ($2,000 ÷ 5) Premium Value
Issue date €2,000 € 102,000
1 €10,000 €9,600 € 400 1,600 101,600
2 10,000 9,600 400 1,200 101,200
3 10,000 9,600 400 800 100,800
4 10,000 9,600 400 400 100,400
5 10,000 9,600 400 0 100,000
€50,000 €48,000 €2,000

Premium Bond
Period Be Paid Expense (€2,000 ÷ 5) Premium Value
Issue date €2,000 € 102,000
1 €10,000 €9,600 € 400 1,600 101,600
2 10,000 9,600 400 1,200 101,200
Interest is payable on January 1. Prepare the journal entry to

record the first accrual of bond interest and the amortization
of bond discount on December 31.
Bonds Payable 400
A Look at U.S. GAAP
Key Points
Similarities
As indicated in Chapter 11, in general GAAP and IFRS define liabilities
similarly.
IFRS requires that companies classify liabilities as current or noncurrent
on the face of the statement of financial position (balance sheet),
except in industries where a presentation based on liquidity would
be considered to provide more useful information (such as financial
institutions). When current liabilities (also called short-term
liabilities) are presented, they are generally presented in order of
liquidity.

A Look at U.S. GAAP
Key Points
Similarities
The basic definition of a liability under GAAP and IFRS is very similar.
Liabilities may be legally enforceable via a contract or law but need not
be; that is, they can arise due to normal business practice or customs.
Both GAAP and IFRS classify liabilities as current or non-current on the face
of the statement of financial position. IFRS specifically states, however,
that industries where a presentation based on liquidity would be
considered to provide more useful information (such as financial
institutions) can use that format instead.
The basic calculation for bond valuation is the same under GAAP and IFRS.
In addition, the accounting for bond liability transactions is essentially
the same between GAAP and IFRS.

A Look at U.S. GAAP
Key Points
Differences
Under IFRS, companies sometimes show liabilities before assets. Also,
they will sometimes show non-current liabilities before current
liabilities. Neither of these presentations is used under GAAP.
IFRS requires use of the effective-interest method for amortization of
bond discounts and premiums. GAAP allows use of the straight-line
method where the difference is not material.

A Look at U.S. GAAP
Looking to the Future
The FASB and IASB are currently involved in two projects, each of which
has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could change
the classification of many debt and equity securities.

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from the use of the information contained herein.

1/1- 2022 PT A MENERBITKAN OBLOGSI TOTAL 1.000.000.000,
BUNGA 10%, BUNGA DIBAYAR TAHUNAN, JANGKA WAKTU 10
TAHUN, TENTUKAN HARGA JUAL JIKA MARKET RATE
a. 9%
b. 12%

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Accounting Principles

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The current market price of a bond is equal to the present

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Sale of bonds below face value (discount) =

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Annual interest payments

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Sale of bonds below face value (premium) =

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Annual interest payments

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Interest Expense 15,000,000*

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Total Liabilities ÷ Total Assets = Debt to Assets Ratio

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Times interest earned indicates the company’s ability to meet

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(1) (2) (3)

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Candlestick AG records the accrual of interest and

For the second interest period, at December 31, Candlestick

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Candlestick AG records the accrual of interest and

Interest is payable on January 1. Prepare the journal entry to

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Interest is payable on January 1. Prepare the journal entry to

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