ACTIVE Flashcards EXAM 1

ACTIVE flashcards for EXAM 1 of flashcards that I have Learned

Notes Payable

Formal credit arrangements between a creditor (lender) and a debtor (borrower) that require the payment of a specified face amount, i.e., the principal, at a fixed maturity date.

Maturity date

A future date the debtor or borrower is required to pay the principal amount of a loan and interest back to the creditor or the person who loaned the money

Principal

The face amount of a note payable is the amount of money the debtor is borrowing from the creditor, also referred to as the par, face, or maturity value.

Current Liabilites

Short-term notes payable reported on the balance sheet because they are due and payable within $1$ year from the balance sheet date or operating cycle, whichever is longer.

Reasons to use short-term notes payable (comma form)

Lower interest rate and less costly compared to long-term notes payable, small businesses or firms will lower credit scores cannot finance or obtain a long-term note payable to raise their capital, the debt can help temporarily fill in the gaps when cash flows are not sufficient to help meet the business's current liquidity needs, and the term (life) of the note matches well within the firm’s operating cycle

Record the Issuance of a short-term note payable

Dr. Cash

Cr. Short-term Notes Payable

Record the accrued interest on a short-term note payable

Dr. Interest expense

Cr. Interest payable

Recording the payment of a short-term note’s payable including interest that’s accrued

Dr. Interest expense (interest accrued in the year of maturity)

Dr. Interest payable (interest accrued from previous year of maturity)

Dr. Short-term notes payable (principal amount of loan)

Cr. Cash (principle + interest)

What is a Accrued

Something Accumulating or increasing over time

Formula for finding the interest expense amount

Principle of note * Interest rate * Time (to end of operating cycle or maturity date)

2 types of loans for long-term notes payable

Term loans and Installments Loans

What is a Term loans

Long-term notes that typically require the borrower to pay interest each period, with the principal due only at maturity.

What is a Installment loans (long-term notes payable)

Long-term notes that require a fixed payment each period that includes both interest and principal.

Record JE for issuance of long-term notes payable

Dr. Cash

Cr. Long-term Notes Payable

Record JE for accrued interest on a long-term notes payable account

Dr. Interest expense

Cr. Interest Payable

Record JE for the cash payment for interest for each term with interest that’s accrued

Dr. Interest expense

Dr. Interest payable

Cr. Cash

Record JE for payment of long-term notes principle (principle + interest) with interest that’s accrued

Dr. Interest expense

Dr. Interest payable

Dr. Long-term notes payable

Cr. Cash

How do you calculate interest that is periodic (for an Installment Loan)

Beginning or previous Carrying value of long-term notes payable multiplied by the period interest rate (annual interest rate/number of payment periods in a year)

How do you calculate the Principal payment (for a Installment Loan)

Interest amount and subtract it from the fixed total cash payment

How to you calculate the ending balance of a long-term notes payable

Beginning balance or previous year balance of long-term notes payable and subtract the principal payment made during the period

What information is needed to make a Amortization Table that is needed to help get the amounts needed with an Installment loan long-term notes payable

Pay period, date, total cash payment, interest amount, principle amount, carrying value of long-term notes payable

How do you calculate “Total cash payment” for a Installment loan on a long-term note payable (What is the Excel formula)

=-PMT(rate, nper, pv, fv, type). rate is the periodic interest rate, nper is the total number of payment periods thoruhgout the whole life of the note, pv is present value which its always the principle amount, fv is the future value and its always 0, and type is when each payment is due (0 is when payment is due at the end of the period and 1 is each payment is due at the beginning of the period

How do you calculate periodic interest rate (for a installment loan on a long-term note payable)

Annual interest rate (rate given in problem) / number of payments periods in a year (annual is 1, semiannual is 2, Quarterly is 4, and monthly is 12)

Record JE for issuance of long-term notes payable with an Installment loan

Dr. Cash

Cr. Long-term notes payable

Record JE for cash payment at maturity of a long-term note payable of a Installment loan

Dr. Interest expense

Dr. Long-term notes payable

Cr. Cash

(get amounts from amortization table)

What is a Bond Payable

A debt contract between a borrower/bond issuer and a lender/bond holder that is usually longer than 1 year, which requires the bond issuer to repay the principal at a future date (maturity date) and make periodic fixed interest payments thorughout the life of the bond

What is a Credit Rating

An opinion on a company's credit quality (a borrower’s ability to pay back principal and interest at maturity) given by agencies expressed as a letter grade.

What is a Bond Indenture

A contract between a firm and the bondholders/lenders that outlines the debt covenants, enforces it, and the type and terms of the bond

Debt Covenants

A debt appliance agreement that puts restrictions on the firm or borrower to protect the bondholder/lender and ensure cash is available to repay the face value/principal and interest at maturity (final date to repay debt) to the bondholder.

What is a Compensating Balance (bond payable)

Restricted deposits the borrower is required to maintain to support the lending agreements

What is a technical default

Occurs when the bond issuers/borrowers violate one or more of the terms and conditions of the bond loan or debt covenants

What is a actual default

When the bond issuer/borrower misses a principle/face value and or a interest payment

What are the types of bonds

Secured bonds, Debenture bonds, Term bonds, Serial Bonds, Callable bonds, convertible bonds, bonds with stock warrants asttached

What is a Secured Bonds

Bonds that use a specific asset as collateral

What is a Debenture bond

Unsecured bonds that do NOT use a specific asset as collateral

What is a Serial Bond

A bond that has multiple fixed maturity dates that includes the principle and interest (Similar to a installment loan for a long-term notes payable)

What is a Term Bond

A bond that has a single maturity date to pay for the principle/face value at the end of the bond (SImilar to a term loan for a long-term note payable)

What is a Callable Bond

A bond that allows the bond issuer/borrower the choice to pay the principle/face value of the bond before the maturity date

What is a Convertible Bond

A bond that a bondholder/lender can convert their bond into common stock in the company (Equity)

What is a Bond with Stock Warranty Attached

A bond that has long-term options for the bondholder/lenders if they later want to acquire stock in the company (Equity)

What are the 4 details for the Terms of the future cash payment from the bond issuer to bond holders

Face value, stated interest rate, interest payment period, maturity date

What is a Face value for a term for a Bond

The amount the bond issuer/borrower will have to pay the bondholder/lender at maturity for the amount of money they borrowed (Also called par value or principal)

What is a Stated interest rate (Bonds)

The amount of interest the bond issuer/borrower will make cash payments to the bondholder/lender is shown as an annual % (Also called nominal rate and face rate)

What is the interest payment period (Bonds)

The amount of time the bond issuer/borrower will make interest payments to the bond holder/lender (common examples are annual, semiannual, and quarterly)

What is the stated interest rate for pricing bonds

The % of interest the bond issuer/borrower will pay the bond holder expressed as the annual rate (also called nominal or coupon rate)

What is the Bond Price and how do you calculate it

The present value of the par value/principle + the present value of the interest payment based on the market rate

What is when Bonds are issued at Discount (for issuance of bond pricing)

Occurs when the bond price is below the face value/principle of the bond because the stated interest rate is < than the market interest rate

What is it when the bond is issued at Premium (issuance of bond for bond pricing)

Occurs when the bond price is higher than the fair value/principle of the bond because the stated interest rate is > than the market rate

What is it when the bond is issued at Par (issuance of bond for bond pricing)

How do you calculate the discount or premium amount for the Bond price

What is a yield or market rate or effective interest rate (bond payable)

What is the par value quote

A bond price is 100%, meaning the bond price (stated interest rate) is = to the par value/prinicple (market interest rate)

Record the JE for issuing a bond at par (bond payable, “at par” is stated interest rate = market interest rate)

Dr. Cash, Cr. Bonds Payable. For the par value/face value/principle amount of the bond

Record the JE for a interest payment of a bond that’s issued at par (Bond payable, “at par” is stated interest rate = market interest rate)

Dr. Interest expense, Cr. cash

What are the 2 ways to calculate the interest amount for a Bond issued at par (Bond payable, “at par” is stated interest rate = market interest rate)

First, par value/principle of bond*stated interest rate / the payment period (annual, semiannual, quarterly, etc.). Second, par value/principle of bond *(Stated interest rate / 12) * number of months in a payment period in a year.

Record the JE for interest that is accrued for a Bond that’s issued at par (Bond payable, “at par” is stated interest rate = market interest rate)

Dr. Interest expense, Cr. Interest payable. This entry records the interest that has accumulated but has not yet been paid yet

Record the JE at the maturity (final date of the bond) of the Bond that’s issued at par with NO accrued Interest (Bond payable, “at par” is stated interest rate = market interest rate)

Dr. Interest expense = interest amount earned for this period, Dr. Bond Payable = par value/face value/principal amount of the bond, Cr. Cash

Record the JE at Maturity date (final date of the bond) of the Bond issued at par with accrued interest

Dr. Interest expense = interest amount earned for the period, Dr. Interest Payable = amount of calculated interest that was earned and recorded at the end of the period but not yet recorded, Dr. Bond Payable = par value/face value/principal amount of the bond, Cr. Cash for the sum amount of other accounts