Accounting - Chapter 10

Liabilities

what the company owes, arises from past events and are expected to be paid.

Current Liabilities

liabilities that are due <1 year.

Non-current Liabilities

liabilities that are due >1 year.

Operating Liabilities

liability type that occurs regularly, short-term, NO interest payments.

Debt

i.e. financing liabilities, a type that occurs occasionally, long-term, and are formal contracts with interest payments. Examples are loans and bonds.

Bank Loan Borrowing

the firm receives cash from a bank (principal) and records it as debt on B/S.

Bank Loan Periodically

the firm records and pays interest to the lender.

Bank Loan Maturity Date

the firm pays back principal + interest, reducing cash balance and the debt liability on B/S.

Reclassification

in the last year of a bank loan, reclassify it as a current liability (<1 year).

Interest Calculation

interest rate * principal

Bank Loan Borrowing

Cash (+A), Long-term Debt/Bank Loan/Notes Payable (+L)

Bank Loan Interest Periods

Interest Expense (+E, -SE), Cash (-A)

Bank Loan Pay off Principal

Long Term Debt (-L), Cash (-A); change to current liability

Bonds

an "I owe you" certificate that promises coupons and par value to potential investors. Lists the maturity date, face/par value, and coupon payment.

Coupons

periodic interest payments determined based on the coupon rate.

Face/Par Value

a single payment made only on the maturity date.

Coupon Payment Calculation

coupon rate * face value.

Present Value

the amount investors offer for the bonds, total P.V. = P.V. of face value + P.V. of coupons

Present Value of a Bond's Face Value

face value/(1 + i)N

Present Value of Coupon Payments

coupon/i - coupon/(i*(1 + i)N)

Default Face Value

typically $1000

Bonds JE

Cash (+A), Bonds Payable (+L)

Coupon Payment (Full Period)

Coupon Amount = (Coupon Rate * Face Value) / Number of Coupon Payments in a Year

Market Interest Rate

the rate that investors demand.

Bonds Payable

the amount lent to the company initially.

Interest Expense (Full Period)

Market Interest Rate * Bonds Payable