Southwest Airlines and Bond Accounting — Long-Term Liabilities, Debt Ratios, and Lease Reporting | Chapter 9 of Financial Accounting

How do corporations like Southwest Airlines finance major assets and manage long-term obligations? Chapter 9 of Financial Accounting (12th Edition) applies bond and liability accounting in a real-world context, exploring how companies issue, amortize, and report bonds — along with leases, taxes, and debt ratios. This blog post breaks down the chapter using Southwest Airlines as the featured case study.

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How Companies Finance Long-Term Assets

Chapter 9 begins by illustrating how firms like Southwest Airlines fund large investments—such as aircraft and infrastructure—using bonds payable. These bonds may be issued at:

• Par – face value
• Discount – below face value when the market rate exceeds the stated rate
• Premium – above face value when the stated rate exceeds the market rate

Two amortization methods are discussed in depth:

• Straight-line method
• Effective-interest method

Both methods affect the bond’s carrying value and reported interest expense over time.

Types of Bonds and Their Features

The chapter also explains various types of bonds:

• Term vs. Serial Bonds – all mature at once vs. staggered maturities
• Secured Bonds vs. Debentures – collateral-backed vs. unsecured
• Callable Bonds – issuers can repay early
• Convertible Bonds – bondholders can convert to stock

It explores the role of an underwriter, who markets or guarantees bond issuance, and covers accounting for partial-period interest and bond retirement.

Non-Bond Liabilities: Leases and Deferred Taxes

Beyond bonds, companies carry other long-term obligations like:

• Deferred income taxes – future tax liabilities
• Lease obligations – either capitalized (finance lease) or disclosed (operating lease)

Under updated rules, finance leases are capitalized on the balance sheet, while operating leases were traditionally only disclosed in footnotes.

Debt and Solvency Ratios

To evaluate financial health, the chapter introduces three solvency ratios:

• Debt ratio = Total Liabilities / Total Assets
• Leverage ratio (Equity Multiplier) = Avg. Total Assets / Avg. Equity
• Times-interest-earned = Operating Income / Interest Expense

Using these tools, students compare the financial positions of Southwest Airlines and United Continental, highlighting how each manages risk through leverage.

Financial Reporting and Cash Flow Implications

The chapter ends with a review of how long-term liabilities are presented in financial statements:

• Liabilities appear on the balance sheet
• Supporting details are provided in footnotes
• Related debt repayments are tracked in the financing section of the statement of cash flows

This comprehensive approach gives students a working knowledge of debt instruments and corporate strategy behind long-term borrowing.

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