AUTO Generated Financing Liabilities Overview

Comprehensive vocabulary flashcards covering the accounting for notes payable, bonds payable, amortization methods, and associated financial statement classifications.

Notes payable

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

Principal

The face amount of a note, also referred to as the par, face, or maturity value.

Short-Term Notes Payable

Notes reported as current liabilities on the balance sheet because they are due and payable within 1 year from the balance sheet date or operating cycle, whichever is longer.

Interest Accrual Entry

An adjusting entry made by firms preparing financial statements between interest payment dates, consisting of a debit to interest expense and a credit to interest payable.

Long-Term Notes Payable

Notes reported as noncurrent liabilities because they are due and payable within a period greater than 1 year or one operating cycle.

Term loans

Type of long-term note that typically requires the borrower to pay interest each period, with the principal due only at maturity.

Installment loans

Type of long-term note that requires a fixed payment each period including both interest and principal, where the portion applied to each varies over time.

Excel PMT Formula

Used to decide the fixed payment for installment loans: $PMT(i, n, PV, FV, 0or1)$.

Effective Interest Method

A method used to amortize the discount on notes or bonds payable where the discount amortization equals the computed effective interest expense minus the cash interest paid.

Discount on Notes Payable

A contra-liability account representing the difference between the face value and the lower present value of a note.

Bond Payable

A debt instrument typically issued for a period greater than a year requiring the repayment of principal at a specified maturity date.

Bond Indenture

A contract between the corporation and bondholders, represented by a trustee, that outlines debt covenants, enforcement, and terms of the bond.

Debt Covenants

Debt compliance agreements that place restrictions on the corporation to protect bondholders' interests and ensure cash is available for repayment.

Compensating balances

Restricted deposits that a debtor is required to maintain to support existing lending arrangements.

Technical default

Occurs when a debtor violates one or more terms of its debt covenants.

Actual default

Occurs when a debtor misses interest and/or principal payments.

Debenture bonds

Unsecured bonds that are not backed by collateral.

Serial bonds

Bonds that have multiple maturity dates.

Term bonds

Bonds that have a single maturity date.

Callable bonds

Bonds that can be called (retired) at the corporation's option at specified dates.

Convertible bonds

Bonds that bondholders may convert into capital stock (common or preferred shares).

Stated interest rate

The annual rate used to determine the amount of cash interest the bond issuer will pay, also called the nominal, coupon, or face rate.

Market rate

The actual return investors receive on a bond, also called the yield or effective interest rate.

Bond issued at a Discount

Occurs when the bond price is less than the face value because the stated interest rate is less than the market rate.

Bond issued at a Premium

Occurs when the bond price is greater than the face value because the stated interest rate is greater than the market rate.

Carrying value of bonds payable (Discount)

Calculated as $\text{Bonds payable (par value)} - \text{Discount on Bonds Payable}$.

Carrying value of bonds payable (Premium)

Calculated as $\text{Bonds payable (par value)} + \text{Premium on Bonds Payable}$.

Zero-coupon bonds

Bonds that do not pay periodic cash interest because the coupon (stated) rate is zero, and are typically issued at a significant discount.

Bond issue costs

Costs that are deducted from the carrying value of the bond by increasing the discount or decreasing the premium, effectively increasing the borrowing cost.

Debt extinguishment

The retirement of debt before its maturity date, generally resulting in a gain or loss.

Gain on Early Extinguishment

Occurs when the retirement price of the debt is less than the net carrying value.

Stock warrants

Long-term options to acquire a stated number of common stock shares for a stated price, sometimes issued with bonds.

Detachable warrants

Warrants that can be removed by the holder and sold separately on the secondary market.

Sinking fund

Cash or other assets held in a separate account used to repay debt at maturity.

Instrument-specific credit risk

The risk related specifically to the security itself rather than general market or interest rate risk.