CH. 10

times interest earned computation

(net income + interest expense + income tax expense) / interest expense

Contractual interest rate

(stated rate) - rate used to determine the amount of cash interest that the issuing company pays and the investor receives

Notes Payable

-companies use to record obligations -often used instead of accounts payable bc they give lender formal proof of the obligation in -any due within a year go under current liabilities

Payroll & Payroll taxes payable

-deductions -liability: TAXES! (income tax, state tax, FICA)

Balance Sheet Info

-listed in order of magnitude (largest liabilities first) -or notes payable & aacts payable first -

Sales Tax Payable

-selling company collects the tax when sale occurs -periodically the retailer remits the collection to the states department of revenue

Each Payment from the borrower of loan consists of

1) interest on unpaid balance 2) reduction of loan principal

Debt Financing advantages over common stock:

1) stockholder control is not affected 2) tax savings result 3) earnings per share may be higher

3 factors that determine present value

1) the dollar amounts to be received 2) length of time until amounts are received 3) market rate of interest

Unearned Revenues entries 1) receives advanced payment 2) recognizes revenue

1. debit cash, credit current liabilities 2. debits unearned revenue, credits revenue acct

example: football game ticket sales

Aug. 6 Cash 500,000 Unearned Ticket Revenue 500,000 (To record sale of 10,000 season tickets) Sept. 7 Unearned Ticket Revenue 100,000 Ticket Revenue 100,000 (To record football ticket revenue)

Entry for Notes Payable (to record issuance)

Debit cash, credit notes payable (to record issuance)

T/F Use of current & noncurrent classifications makes it difficult to analyze a company's liquidity

FALSE. They make it possible

T/F When the issuing company records a conversion, the company looks at the current market prices of the bonds and stock

FALSE. They transfer the carrying value of bonds to paid-in capital account. NO GAIN OR LOSS.

a corporation makes journal entries only when it ___ or ____

ISSUES or BUYS BONDS BACK

Callable Bonds

Issuing company can redeem (buy back) at a stated dollar amount prior to maturity

employers expense & liability for payroll taxes:

Mar. 7 Payroll Tax Expense 13,850 FICA Taxes Payable 7,650 Federal Unemployment Taxes Payable 800 State Unemployment Taxes Payable 5,400 (To record employer's payroll taxes on March 7 payroll)

Entry for Payroll (To record payroll and withholding taxes for the week ending March 7)

Salaries & wage expense debit FICA, FED income tax, state income tax, salaries & wages payable all credit

Bond prices for new & existing bonds are quoted as ___

a % of the face value of the bond

adjustable interest rate

adjusted periodically to reflect changes in the market rate of interest

Face Value

amount of principal due at maturity date

Mortgage Bond

bond secured by real estate

when the contractual interest & market interest are the same _____

bonds sell at face value

Convertible Bonds

bonds that can be converted into common stock at bondholder's option

Bond Trading

can buy/sell bonds at current market price on NSE

What is the additional expense for discount bonds (compared to other bonds)?

company must pay back the interest AND the discount given on the issuance price when maturity date comes

One disadvantage in using bonds:

company must pay interest periodically & repay the principal at due date

Discount on Bonds Payable is not an asset, it is a ______ This account is deducted from bonds payable on the balance sheet

contra account

In authorizing the bond issue, board of directors must stipulate the number of bonds to be authorized, total face value, & ____________

contractual interest rate

Working Capital Formula

current assets - current liabilities

In the balance sheet, the company reports the reduction in principal for the next year as a ____ and it classifies the remaining unpaid principal balance as a _________

current liability, long term liability

Current Ratio

currents assets / current liabilities

Maturity date

date that final payment is due to the investor from issuing company

Entry for Redeeming Bonds at maturity

debit bonds payable, credit cash (to record redemption of bonds at maturity)

Entry for converting bonds into common stock

debit bonds payable, credit common stock, credit paid-in capital in excess of par-common stock (to record bond conversion)

Entry for Redeeming Bonds Before Maturity

debit bonds payable, debit premium on bonds payable, debit loss on bond redemption, credit cash (to record redemption of bonds at __)

Entry for sale of a bond at face value

debit cash, credit bonds payable (to record sale of bonds at face value)

Entry for premium bonds

debit cash, credit bonds payable, credit premium on bonds payable (to record sale of bonds at a premium)

Entry for mortgage loan

debit cash, credit mortgage payable (to record mortgage loan)

Entry for Sales Tax (to record daily sales and sales tax)

debit cash, credit sales revenue, credit sales tax payable

Entry for Issuing bonds at discount

debit cash, debit discount on bonds payable, credit bonds payable (to record sale of bonds at a discoutn)

Entry for accrueing bond interest

debit interest expense, credit interest payable (to accrue bond interest)

Entry for Notes Payable (accrued interest)

debit interest expense, credit interest payable (to accrue interest for __ months on ___ note)

Entry for installment on mortgage loan

debit interest expense, debit mortgage payable, credit cash (to record annual payment on mortgage)

Entry for interest paid

debit interest payable, credit cash (to record payment of bond interest)

Entry for Notes Payable (to record payment of __ note and accrued interest at maturity)

debit notes payable, debit interest payable, credit cash (to record payment of __ note and accrued interest at maturity)

Entry for payment of payroll

debit salaries & wages payable, credit Cash

Current Liability

debt that a company expects to pay within one year or the op. cycle

Amortizing the premium

decreases the amount of interest expense reported in each period

Computing Sales Tax

divide total receipts by 100% plus the sales tax percentage (110% + 6% sales tax = 1.06)

Bond prices are quoted as a percentage of the ___, which is usually 1000

face value

Computing interest on a note

face value of note x annual interest rate x time in terms of one year = interest

Bonds

form of interest-bearing note payable issued by corporations, universities & governmental agencies

Secured Bond

has specific assets of the issuer that they pledged as collateral for the bonds

Amortizing the discount

increases the amount of interest expense in each period; company will see that interest expense reported will exceed the contractual amount

times interest earned

indicates the company's ability to meet interest payments as they come due

Unsecured Bonds (debenture bonds)

issued against the general credit of the borrowers

The sale of bonds above face value causes the total cost of borrowing to be ______

less than the bond interest paid

A company with more current liabilities than current assets lacks ____

liquidity, or short term debt paying ability

Mortgage notes payable

long-term note is secured by a mortgage that pledges title to specific assets as security for the loan

Debt to assets ratio

measures the % of the total assets provided by creditors

different types of current liabilities:

notes payable, unearned revenues, accrued liabilites (taxes, wages, salaries, interest payable)

Long-term liabilities

obligations that a company expects to pay more than 1 year in the future

zero-interest bond

pays no interest

difference between face value & selling price is called a _________-

premium

Bond Certificates

provides the name of issuer, face value, contractual rate, maturity date

market interest rate

rate investors demand for loaning funds

Market Interest Rate

rate investors demand for loaning funds to the corporation

bond premium is considered to be a ___ in the cost of borrowing

reduction

fixed interest rate

remains the same over the life of the mortgage

Sinking Fund Bond

secured by specific assets set aside to redeem (retire) the bond

Types of Bonds

secured, mortgage, sinking fund, unsecured, debenture, convertible, callable

Issuing Bonds

state laws grant corporations the power to issue bonds. Board of directors stockholders must approve bond issues

Computing carrying (book) value

subtract balance of discount account from balance of bonds payable account

Bond Indenture

terms of the bond are set forth on this legal doc

What does the indenture show?

terms, summarizes rights of the bondholder & trustees, obligations of issuing company

Debt & Equity Financing

to obtain large amounts of long-term capital it is possible to issue additional common stock (equity financing & debt financing) in the form of bonds or notes also. OR a combo of the two

Debt to Assets computation

total liabilities / total assets

time value of money

used to indicate the relationship between time & money

Current Maturities of Long-Term Debt

when long term debt becomes due within a year companies often identify current maturities of long-term debt on the balance sheet as long-term debt due within one year