1Chapter 16Non-current liabilitiesPowerPoint presentation by Dr Anne Abraham University of Western Sydney 2009 John Wiley $5000 x 10) $50 000 Add: Bond discount ($100 000 - $92 639) 7 361 Total cost of borrowing$57 361 Balance sheet (end 1st yr) Balance sheet (end 2nd yr)Non-current liabilitiesBonds payable $100 000Less: Unamortised discount 4 416.60 $95583.403rd yr, 4th yr, so on so forthBalance sheet (beginning 6th yr)Non-current liabilitiesBonds payable $100 000Less: Unamortised discount 0 $100 000Non-current liabilities Bonds payable $100 000 Less: Unamortised discount 5 888.80 $94111.20Issuing Bonds at a Discount (contd)Issuing bonds at a premiumExample On 1 January 2010 Candlestick Ltd sells $100 000 5-year 10% bonds for $108 111 Interest payable on 1 July and 1 January Entry to record issue:PowerPoint presentation by Dr Anne Abraham, University of Western Sydney18Jan 1 Cash 108 111Bonds Payable 100 000Unamortised Premium 8 111 (To record sale of bonds at a premium) Issuing bonds at a premium continued Statement of financial position (partial) Total cost of borrowingPowerPoint presentation by Dr Anne Abraham, University of Western Sydney19Non-current liabilities Bonds payable $100 000 Add: Unamortised premium 8 111 $108 111Bonds issued at a premium Semi-annual interest payments ($100 000 x 10% x = $5000; $5000 x 10)$50 000 Less: Bond premium ($108 111 - $100 000) 8 111 Total cost of borrowing $41 889 20Class Ad hoc Exercise 1Base on the Candlestick Ltd as examplePlease complete a 5 yr Balance Sheet (Non current liability section) with Bonds issued at premium of $8111 (based on straight line method) ref. to ppt slide 17ACCOUNTING FOR BONDS RETIREMENTSRedeeming bonds at maturity Regardless of the issue price of bonds, the book value of the bonds at maturity will equal their face valuePowerPoint presentation by Dr Anne Abraham, University of Western Sydney21LO3Redeeming bonds at maturityExample Assuming that interest for last interest period is paid and recorded separately, entry to record redemption of Candlestick Ltd bonds at maturity is:PowerPoint presentation by Dr Anne Abraham, University of Western Sydney22LO3Jan 1 Bonds Payable 100 000Cash 100 000(To record redemption of bonds at maturity) Redeeming bonds before maturity An entity may decide to redeem bonds early to reduce interest cost and remove debt from its statement of financial position Entity must Eliminate carrying amount of bond at redemption date Record cash paid Recognise gain or loss on redemptionPowerPoint presentation by Dr Anne Abraham, University of Western Sydney23Redeeming bonds before maturity continuedExample Journal entry to record redemption on Candlestick Ltd bonds before maturity at 103% of face valuePowerPoint presentation by Dr Anne Abraham, University of Western Sydney2011 Jan 1 Bonds Payable 100 000Unamortised Premium on Bonds 1 623Loss on Redemption of Debentures 1 377Cash 103 000(To record redemption of bonds at 103) 25Class Ad hoc Exercise 2 Re the Candlestick Ltd. bonds were issued at discount of $7361 and the bonds are redeemed before maturity (end of the 4th year) at 103% of face value (based on straight line method) Please complete journal entry for an early redemption at end of 4th year ref. to ppt slide 23How about if the bonds were issuedat face value and redeem at 103?Converting bonds into ordinary shares continued In recording the conversion of bonds into common stock the current market prices of the bonds and the stock are ignored Instead, the carrying value of the bonds is transferred to paid-in capital accounts No gain or loss is recognisedPowerPoint presentation by Dr Anne Abraham, University of Western Sydney26Converting bonds into ordinary shares continuedExample Assume that on 1 July Andrews Associates converts $100 000 bonds sold at face value into 10 000 shares of $10 issue price ordinary shares Both the bonds and the ordinary shares have a market value of $130 000 Entry to record the conversion is:PowerPoint presentation by Dr Anne Abraham, University of Western Sydney27Jul 1 Bonds Payable 100 000Share Capital100 000(To record bond conversion) ACCOUNTING FOR OTHER NON- CURRENT LIABILITIES Other common types of non-current obligations are Notes payable Lease liabilitiesPowerPoint presentation by Dr Anne Abraham, University of Western Sydney28LO4Non-current notes payable Similar to short-term interest-bearing notes payable except that the term of the note exceeds one year Mortgage notes payable Widely used by individuals to purchase homes and to acquire plant assets by many small and some large companies Recorded initially at face value Subsequent entries required for each instalment paymentPowerPoint present