ACG2021 Chapter 12 (Principles of Financial Accounting)

Are liabilities that do not need to be paid within one year or within the entity's operation cycle, whichever is longer

Mortgage Payables are a type of long-term note that is secured with a specific asset. This would be the borrower's promise to transfer the legal title to a specific asset if the mortgage is not paid on schedule.

“Bonds payable are long-term debts issued to multiple lenders called bondholders, usually in increments of \$1,000 per bond. For example, a company could borrow \$100,000 from one lender (the bank), or it could issue 100 bonds payable, each at \$1,000, to 100 different lenders. “

How much the company will give from a bond at the maturity date. (Usually, does not include interest)
Also called
-Maturity Value
-Par Value
-Principle

The interest rate that determines the amount of interest the borrower pays and the investor receives each year

Also called
-Face Rate
-Coupon Rate
-Nominal Rate

1. Term Bonds: Bonds that mature at a specific time. For example, \$100,000 of term bonds may all mature five years from today.

2. Serial Bonds: Such bonds mature in installments at regular intervals. For example, you get a 20,000 face-value bond, that gives 5,000 of that every year.

3. Secured Bonds: These bonds give the bondholder the right to take specified assets of the issuer if the issuer fails to pay principal or interest.

4. Debentures: Such bonds are unsecured bonds that are not backed by assets. They are backed only by the creditworthiness of the bond issuer.

Discount on Bonds Payable: When the issue price is LESS than the face-value

Premium on Bonds Payable: When the issue price is MORE than the face-value

Recognition that money earns interest over time

This is the present value of a bond, also known as the bond's market price.

You’re making more from the borrowed money than it costs to borrow it.

Bond retirement is when the borrower has enough to pay you back fully, before the maturity date, and does so.

Bond Default is when the borrower doesn't have the money to pay.

Bonds where the issuer can call (pay off) the bond for a specific price whenever they like

(The specific price is usually slightly higher than the face-value)

1)
1. Record partial-period amortization of discount or premium and partial-period interest payment if the retirement date does not fall on an interest payment date.

2. Remove the portion of unamortized Discount or Premium that relates to the bonds being retired.

3. Debit Bonds Payable at face value.

4. Credit a gain or debit a loss on retirement.

5. Credit Cash for amount paid to retire the bonds

Total liabilities / Total Equity

This ratio measures financial leverage. The higher the debt to equity ratio, the greater financial risk.

A stream of equal cash payments made at equal time intervals.

How much money would you pay now, for the bond, to receieve X amount in the future.



For example,

you wouldn't pay \$100, to get \$100 in a year. But, you would pay \$75 to get \$100 in return in a year.

How much money in total would be received, including ALL interest payments.

What is the value today of receiving \$1 from a bond in 1 year, if the required interest rate is 1%?

Step 1:

Use PV Factor Table


-Since interest rate is 1% and the period is 5 years, the PV factor is 0.951 for lump-sum.


-Since interest rate is 1% and the period is 5 years, the PV factor is 4.853 for annuity.
(They came from DIFFERENT TABLES!!!!!!!)

Step 2:
Lump-sum: 1,000 x 0.951 = 951
Annuity: 100 x 4.852 = 485.3
(Do NOT need to multiply annuity by 5, since the PV factor takes that into account)

Step 3:
Lump-Sum + Annuity = Bond Present Value
951 + 485.3 = 1436.3

Quick Answer: The same as finding the present value. Just look at the specific table and find the PV (in this case FV) factor based on the interest and periods, and then just multiply it.

*This method is GAAP

IMPORTANT!
Cash Paid: Face Value x Stated Interest x Time

Interest Expensed: Face Value x Market Interest x Time

Discounted Amortized: Interest Expense - Cash Paid

EVEN MORE IMPORTANT

If Interest Expense > Cash Paid
-You have a discount

-Carrying Value increases


If Cash paid > Interest Expense
-You have a premium
-Carrying Value decreases