Accounting Chapter 9

debt financing

borrowing money from creditors (liabilities)

equity financing

Obtaining investment from stockholders (stockholders’ equity)

capital structure

The mixture of liabilities and stockholders’ equity in a business.

installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the carrying value

amortization schedule

Allocation of the cost of an intangible asset over its service life.

carrying value

the amount for which a liability is reported in the balance sheet

installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the carrying value

record payment of monthly installment on note

debit interest expense, debit notes payable, credit cash

lease

a contractual arrangement by which the lessor(owner) provides the lessor(owner) provides the lessee(user) the right to use an asset for a specified period of time

why do companies lease rather than buy

leasing reduces the upfront cash needed to use an asset, lease payments often are lower than installment payments, leasing offers flexibility and lower costs when disposing of an asset, leasing may offer protection against the risk of declining values

recording a lease

debit lease asset, credit lease payable

bond

A formal debt instrument issued by a company to borrow money. The issuing company (borrower) is obligated to pay back to the investor (lender): (1) a stated amount, referred to as the principal or face amount, at a specified maturity date and (2) periodic interest payments over the life of the bond

issue bonds at face amount

debit cash and credit bonds payable

states interest rate

The rate specified in the bond contract used to calculate the cash payments for interest

record paying semiannual interest

debit interest expense and credit cash

secured bond

bonds are backed by collateral

unsecured bond

bonds are not backed by collateral

term bond

bond issue matures on a single date

requires payment of full principal amount at a single maturity date

serial bond

bond issue matures in installments

require payment of principal amount of the bond over a series maturity dates

callable bond

issuing company can pay off bonds early

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price

convertible bond

investor can convert bonds to common stock

debt to equity ratio

total liabilities/stockholders equity

return on assets

net income/average total assets

time interest earned ratio

net income+interest expense+income tax expense/interest expense

record bonds issued at a discount

debit cash, debit discount on bonds payable, credit bonds payable

record interest with bond discount

debit interest expense, credit discount on bonds payable, credit cash

issue bonds at premium

debit cash, credit bonds payable, credit premium on bonds payable

pay interest on bonds payable

debit interest expense, debit premium on bonds payable, credit cash

retire bonds at maturity

debit bonds payable, credit cash

retire bonds before maturity

debit bonds payable, debit premium on bonds payable, debit loss, credit cash