Acct Chapter 10 Liabilities
Bond early retirement example assume 10 years ago general mills issued 100,000 of bonds at face value. If the company retired the bonds now at a bond price of 102, general mills would have to pay 102,000 to retire the bonds
Debit bonds payable 100,000 Debit loss on bond retirement 2000 credit cash 102,000 -loss reported after income form operations subtotal on income statemtn -retirement doe snot invovle removeal of a bond discount or bond rprevioum becuase the bonds were issued at face value -if bonds had been issued below or above face value any premium or discount balance existed at the time or retirement would need ot be removed as welll
Reporting bond liabilities
the total face value of a bond plus any related premium or minus any related discount is reported in teh liabiilites section of the balance sheet
Why would companies be willing to discount a bond
the answer is they must if they want to issue it the discount reduces the initial bond price for investors without changin the stated interest payments and face value paid to them at matuirty. A discount increases the return bondholders earn on initial investment percentage represents both the bondholers rate of return and company cost of borriwng also called- market interest rate
Interest on bonds issued at a discount
the bond issuer receives less cash on the issue date than it repays on the maturity data. General mills receies 93374 on the issue data but reapys 100,000 at maturity. For general mills, teh 6624 disfcount represents an extra cost of borroiwng.
Present value
the current value of an amount to be received in the future. It is calculated by discounting a future amount for compound interest
Deferred Revenue example lyv receives 8 million cash in januaary for two concerts to be held may 12 and 15. Because lyv receives cash before providing concert services, accountants initially record a liability in the account deferred revenue to represent obligation ot provide future services. As the concert services are provided lyv reduces liabilities and reports the concert fees as revenue
1. receive cash and create liability Debit cash 8 credit deferred revenue 8 2. Fulfill part of the liability and report revenue debit deferred revenue 4 credit service revenue 4 --for one concert
On August 1, 2009, CRN Co. loaned $600,000 to FAN Co. at 10% interest. Fan has agreed to pay the note on July 31, 2010. Interest is to be paid semi-annually:Once on January 31th2010 and again when the note matures on July 31st. FAN has a calendar year accounting period. Prepare all journal entries related to the note for FAN.
(1) Record Loan 8/01/09Cash (A+)$600,000Notes Payable (L+) $600,000 (2) Record Year-End Accrual of Interest12/31/09Interest Expense (E+,SE-)$25,000Interest Payable (L+) $25,000$600,000 x 10% x 5/12 = $25,000 (3) Record 1stInterest Paid 1/31/10Interest Payable (L-) $25,000Interest Expense (E+, SE-) $5,000Cash (A+)$30,000$600,000 x 10% x 6/12 = $30,000* Remember, $25,000 of that amount has already been recorded on 12/31/10 (4) Record Repayment of Loan Plus 2ndInterest Payment 7/31/10Interest Expense (E+, SE-) $30,000Notes Payable (L-)$600,000Cash (A-)$630,000$600,000 x 10% x 6/12 = $30,0002/1/10 thru 7/31/10 55% 11 / 13
bonds payable is similar to notes payable but there are some major differences
-bonds involve substantially larger sums of money -bonds can be sold on an exchange -bonds are much longer periods of time -typically require annual of semi annual interest payment
Long term liabilities
-common long term liabilites include0 long term notes payable, deferred income taxes, bond payable. -long term notes payable accounted same way as short
Bond pricing
-company does not determine price at which bonds issue -investors establish issue price -bond price is quotes as a percentage of face value -if investors were willing to pay 107.26 percent of face value, or $1,072.60 for each 1000 bond (107.26x1000)
Employer payroll taxes
-like their employees, all employers are required to pay fica taxes. -employers required to pay unemployment taxes
Unearned revenue M10-1. A local theater company sells 1500 season ticket packages at a price of 250 per package. The first show in the ten show season starts this week. Show the journal entries related to a (a) the sale of the season tickets before the show and (b) the revenue earned after putting on the first show
1 dr cash 375000 cr unearned revenue 375000 2 unearned revenue 37500 service revenue 37500
Here is the bond I am selling you
1 face value one year after date i promise to pay to the order of one and no/100 dollars plus interst at a yearly rate of 15% date-oct 31,2014 We are not doing calcualtiontgs notice you get full value discount or a premium which is more than a face why selling a premium than discount reason why pay premium like a ticket to a football game we might be willing to pay a premium if it offers something attractice like bond paying a higher rate. why companies discount bonds- they might just have to do that- becase market dictate
The early retirement of bonds have three financial effects
1. Company pays cash 2. Eliminates bond liability 3. Reports either a gain or a loss -gain if cash paid to retire is less than carrying value of the bond liability -loss incurred if company pays more than carrying value at time of retirement
Employer Payrol Taxes Employers have other liabilities related to payroll
1. FICA(matching contribution) 2. Federal unemployment tax 3. State unemployment tax
There are 3 elements of a bond
1. Maturity date- date on which the bonds are due to be paid in full 2. Face value- the payment made when the bond matures; used to compute interest payments, amount payable on the matuirty date 3. Stated interest rate- the rate stated on the face of the bond that is used to compute interest payments also called the coupon rate or contract rate, always expressed as an annual rate although could be semi annual -bonds may be priced above or below face value -bonds price does not affect amount of each interest payment -6% bond with face value of 1000 always pays interest of 60 cash each year
two sides of accured payroll
1. Payroll deduction Employee(EE) 2 Employer Payroll Taxes (ER) salaries and wages expense-current liabilites=cash payment or gross earnings-payroll deductions=net pay the reason why they are considered liabitlies is becuase the employer are going to take it on behalf of the employee so its really the employees money but teh employer is going to pay it for the employee the company is goiong to pay for outside party GROSS EARNINGS(HOUR AND HOURLY RATE)-PAYROLL DEDUCTIONS=NET PAY
To calculate present value
1. The amounts ot be received in the future 2. The number of months between now and then 3. The interest rate you expect to earn during that time example Present value of 100,000 face value pricipal paid foru year from now 4%=85480 6%=79210 8%=73503 Present value of 6000 (6% stated interest rate) paid once a year for four year market interest rate 4% 21780 6% 20790 8% 19873 4%-85,480+21780=107260 6%-79210+20,790=100,000 8%-7503-19873=93,376 if stated on bon dis more than investors require then they will be willing to pay a premiun if stated intererest is less than market interest rate then investors pay less thn face value resulting in discount bond price if stated interest rate same as market interest rate then face value
The amount reported for each liability is the result of three factors
1. The initial amount of the liability- company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability 2. Additional amounts owed to the creditor- company increases liabilities whenever obligations arise, by purchasing goods and services, receiving customer deposits or incurring interest charges over time 3. Payments or services provided to the creditor- company decreases liabilities whenever the company makes a payment or provides services to the creditor -liability reocrd at amount initially owed which exludes interest charges -interest arises only when time passes, so no interest is recorded on the day of the company purchases on account or the day the company receives a loan
What is a loan amortization table this is not the same amortizantin table
A loan amortization table is a schedule of the periodic payments to be made over the life of the loan, monthly quarterly, annually each scheduled payment consists partly of repayment of the principal and partly of the interst on the loan balanace 7122 Each scheduled payment consists partly of repayment of the principal and party on interest on the loan balance 7122 the interest portion of the payment is based on the loan balance at the beginning of the payment period
Effective interest method of amortization
Allocates the amount of bond premium or discount over each period of a bonds life in amount corresponding to the bonds carrying value and market interest rate -considered a superior method claculates interest expense by mulitpling true cost of borrwoing times money owed to investorws The ture cost of borrwoing is the market interest rate actual amount owed to investors is carrying value=cash received when bond issued plus interest incurred
Issue price
Amount of money that a lender pays (and the company receives when a bond is issued) -amount investors willing to pay on the issue date in exchange for cash payments company promises to make over the life of the bonds- this amount is called the present value
Payroll Deductions
Amounts subtracted from employees gross earnings to determined their net pay. -Gross earnings are computed by multiplying the time worked by pay rate promised 40 hours x15 per hour=600 gross earnings -from these gross earnings certain payroll deductions are subtracted (fica tax, income tax, chartitable donations) net pay is gross earnings-payroll deductions employer is obligated to remit those deductions to another organization or government agency on your behalf. -payroll deductiosn create current liabilites for employer gross earnings(salaries and wages expense) Payroll deductions(current liabilites) Net pay(cash payment)
Big company was required to contribute 50 for fica, 1 for federal unemployment tax and 4 for state unemployment tax
Assets(non)=Liabilites-Fica payable +50, FUTA payable +1, SUTA payable +4 Stockholder equity Payroll expense -55
Interest on bonds issued at a premium
Bond issuer recieves more cash on the issue date than it repays on the maturity date. General mills received 107,260 but repays only 100,000 at maturity. The 7260 differene isnt free money but rather a reduction in teh companys cost of borrowing
Accrued income taxes
Corporations calculate taxable income by subtracting tax allowed expenses from revenues. This taxable income is then mulitplied by a tax rate which ranges for corporations from about 15 to 35 percent
Accrued payroll
Companies record liabilites for other aspects of payroll two signifciant liabilites relate payrol deductions employer payroll taxes
to illustrate employee payroll deduction on journal entry here it is for 1000 workers who earn same amount
Debit: Salaries and wages expense 600,000 cr Witheld income ta 60900x payable cr Fica payable 45900 cr chartiable contributions payable 10000 cash 483,200
A bond issued for less than face value is said to have been issued at a discount
Discount- The amount by which a bond issue price is less than face value -which is the amount by which the issue price falls short of the bonds face value
Bonds issued at face value
Ex: if general mills receives 100,000 cash in exchange for issuing 100 bonds at their 1,000 face value, the transaction will be analyzed and record as follows Debit Cash 100,000 Credit: bonds payable 100,000
Why would bondholders would be willing to pay a premium
If a bond offers something attractive, such as a high interest rate, bondholders may be willing to pay a premium to acquire it
Sales tax payable example
If best buy sold a television for 1000 cash plus 5 percent sales tax best buy would collect 1050 cash report 1000 in sales revenue and recognize 50 liability (5%x1000) Debit Cash 1050 credit Sales tax payable 50 credit Sales revenue 1000 - in perpetual system the sales transaction would eb accopained by increase in cost of goods sold and decrease in inventory when best buy pays sales tax it reduces sales tax payable and reduce cash
Accoutnt payable (current liabilities)
Increase(credited)-when a company receives goods or services on credit Decreases(debited)-when a company pays on its account
Bonds issued at face value (par) January 1 20x1 100,000, 6% bond with interest payments on 6/30 and 12/31:
Jan 1, 20x1 dr. cash 100,000 cr bonds payable 100000 jan 30, 20x1 dr interest expense 3000 cr cash 3000 december 31 20x1 dr interest expense 3000 cr. Cash 3000
Bonds
Key Elements of a Bond: 1. Maturity data 2 Face value 3. Stated interest rate(coupon) intest computation 1000x.06x12/12=60 face valuex percentage x depending on annula or semi annual use stated rate to calculate cash
Sales Tax Payable
Liability resulting when a company collects sales tax for the state
Sales tax payable
Merchants are required to collect sales tax and remit it to the taxing authority -city county state -payment collected sales tax gernally occur once every 3 months (quarterly) From the time of collection to the time of payment, the sales tax collected is a current liability -payments collected from customers at time of slae create a liability that is due to the state government
Bond Retirement at maturity with example Assuming general mills bonds in our example were retired with a payment equal to their 100,000 face value, the transaction would eb analyzed
Most bodns are retired at matuirty if itnerest has been fully paid at the time of matuirty, the only remainng account to settle will be bonds payable debit cash 100,000 credit bonds payable 100,000
market interest rate
The rate of interest that investors demand for a bond. Also called yield discount rate, or effective interest rate
Unearned revenue
The receipt of cash before goods or services are provided
Cal's Computer Inc. pays its employees every two weeks. For the coming payday Cal has made the following calculations:-Net Pay$120,000-FICA withholdings7,200-Income tax withheld24,800-Federal Unemployment Tax 2,000-State Unemployment Tax1,000-Union dues withheld500Based on the above information, how much totalcompensation expense should Cal record for this pay period?A. $152,500D. $162,700B. $162,500E. $165,700C $152,000
Net pay 120,000 income tax witheld 24800 fica 7200 union dues500 payroll expense 152,500 fica withholdings 7200 federal un tax 2000 state unemployment tax 1000 10200 payroll tax expense or 10200+152,500=162700
Bond issued more than face value is said to have been issued as
Premium- the amount by which a bonds issue price exceeds price value
Bond pricing
Present value computations and is the amount investors are willing to pay on the issue date for the bonds we are not covering bond pricing and using the time value of money calcualtions
the following information was obtained from philo inc trial balance. Determine the amoutn of income taxes owerd and the related period end adjusting journal entry Cost of goods sold 30,000 non operating rev 10,000 no operating expense 60,000 operating expense 150,000 revenue
Revenue 1,500,000 Add: Non operating Revenue10,000 subtract: cost of goods sold 300,000 operating expense 150,000 non operating expense 60000 income before taxes=1,000,000 x35% =income tax expense 350,000 dr income tax expense 350,000 cr. income tax payable 350,000 they are going to accrue then pay at end of fiscal year that is why it is an income tax payable 1,000,000 -350,000=650,000 net income
Compensation Expense
Total employer compensation inlcude -payroll expense (#of housr worked*rate) -Employer payroll tax expense -employer FICA (100% of employer FICA) -FUTA -SUTA payroll expense+employer payroll tax expense
Bond issue costs- what else is different
You may not receive the face value when you sell bonds. Why? there is a potential you coudl get 1000 but you could get more or less and these are sold on an exchange and all depending on market wants
Early retirement
a company may retire them early. -companies with lot of cash often retire their bonds early to avoid the related interest epense. -even companies that do not have extra cash may deicide to retire their bonds early if interest rates have fallen since issuing the original bonds. -in this case companies would issue new bonds at lower interest rate and use money they receive from new bonds to retire old ones before maturity -reduces interest expense and increases future earnings
bonds issued at a premium If general mills issues 100 of its 1,000 bonds at a price of 107.26, the company will receive 107,260=100x1,000x1.0726) which represents the total liability of the issue date. The company's accountants will distinguish the 100,000 total face value from the 7,260 premium by recording them in separate liability as follows
debit Cash 107260 credit bonds payable 100,000 credit premium on bonds payable 7260
Shcillitter baun waterslide company issued 39,000 10 year 7 percent $100 bonds on january at face value. Interest is payable each december 31
a. the issuance of these bonds on january 1- debit cash 3,900,000 credit notes payable 3,900,000 b. debit interest expense 273,000 credit cash 273,000
typical current liabilities
accounts payable accrued liabilites -payrol tax payable -sales tax payable notes payable unearned revenue
there is a amoritztaio table for bonds except what is different is
amort of preium and cash paid
accrued liabilites
an expense is incurred in one accountign period, the cash payment in a later period -payrol tax payable sales tax payroll liabilites that been incurred but not yet paid can include other unpaid expenses, including advertising, corporate income tax, payroll tax and warranties -liabilities for expenses that have been incurred but not paid at the end of the accounting period ex accrued ad 570 accured payroll 390 accrued taxes 110 =sum of these for total accured liabilites
Relationships between interest rates and bond pricing
between stated interest rate on the bond (what the bond pays in cash) and the market interest rate (what return that bondholders require) 6% stated interest-4%market interest-premium 6% stated interest rate-6% market interest rate-face value 6% stated rate 8% market interest rate- discount
When companies issue bonds, they try to offer competitive interest rates. However, changing economic events can cause bonds to
bonds stated rate to differ from market desired rate, which affects the bonds attractiveness and its price. After a bond has issued the markets desired interest rate fluctuates frequently which affects the bond price in the market Daily fluctuations in the market do not direclty involve the company, so they are not considered transactions of the company.
Not only does the employee have to pay taxes on wages they earned
but so does the employer
liabilities are created when a company
buys goods and services on credit obtains short term loans issues long term debt current liabilites are short term obligations that will be paid with current assets within the company's current operating cycle or within one year of the balance sheet date, whichever is long
Sales Tax Payable
just like payroll the tax collected by the company is reported as a current liability until it is forwarded to the government -is not an expense to the retailer
Payroll tax payable
liability resulting when company collects and owes taxes relating to payroll
The amount of the bond liability, after taking into account any premium or discount, is referred to as the bonds
carrying value example bonds payable +premium on bonds payable is carrying value
Bonds issued at a discount example If general mills receives $93,376 for bonds with a total face value for $100,000, the cash equivalent amount of 93,376 represents the liability on the issue date. As shown in the analyze step below, the discount of 6,624(=100,000-93376) offsets the face value, so accoutants will record it in a contra liability account which we identify as xl a contra liability is recorded as a debit -although discount on bonds payable is recorded with a debit, it is not an asset-it Is a contra liability
debit cash 93376 debit bonds payable 6624 credit bonds payable 100,000
Evaluate liabilities two ratios commonly used in business to evaluate these two asepcts of debt management
debts to assets ratio times interest earned ratio
On 1/12017 Company A issued a four year, 100,000, 6% bond, interest is paid anuually. ON that date, the market rate was 4%
do table
employer Payroll tax expense example general mills was required to match 45,900 for fica and contribute 4750 for federal and state unemployment tax- a total of 50650. These payroll taxes are extra costs so they are reported as operating expense until have been paid liabilite in current liability accounht
dr Payroll tax expense 50650 cr: fica payable 45900 cr unemployment tax payable 4750
Sales tax payable: example Franks sporting goods sells a raft for 750 and collects the required 6% sales tax for the state. What journal entry should be made on the date of the sale
dr cash 795 cr sales tax payable 45 cr sales revenue 750
On July 31, 20X1 Jack borrowed $10,000 from Jill and agreed to make yearly payments of $4,163 for 3 years. Jack has a 12/31 year end. What entry would be made by Jack on the payment date?A.dr. Interest expensecr. CashB.dr. Interest expensedr. Interest payablecr. CashC.dr. Interest expensedr. Interest payabledr. Notes Payablecr. CashD.dr. Notes Payablecr. Cash 55% 12 / 13
dr. Interest expensedr. Interest payabledr. Notes Payablecr. Cash At 12/31, Jack would have accrued 5 months of interest expense. On the date of payment, the accrued interest payable would need to be removed, interest expense for the 7 months would need to be recognized, the principal portion of the notes payable would be reduced and cash would be paid.
Payroll deductions are
either required by law or voluntarily requested by employees. requires employers to deduct Federal income tax, fica taxes -voluntarily requested payroll deductions(charitable donations, parking, union dues and retirement savings etcm are accounted for a libailites until paid on behalf of employees for intended payroll deductions as current liabilites becuase they must be paid no more than one month after payroll date
Income before taxes-income tax expense
equals net income
Payroll tax expense
fica unemployment tax
Bonds
financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now. -from company perspective, bond is a long term liability -from bondholder, the bond is an investment -for investor bonds cna be attractive becuase they have higher interest rates than banking savings accounts and after company issues bonds they can be traded on excahnges
you need to understand the big component of it
go on excel spread sheet
Eddie employee works for big company and earned gross pay of 600 in the current payroll period. Based on the 600, eddie owes 60 in federal income tax, 50 for fica and elected to pay 10 for united way EE employee side
gross pay-payroll deductions 600-(60+50+10)=480 you cannot pay gross amount if you are an employee big company-government 110 on behalf of eddie unitded way 10 on behalf of eddie and eddie 480. Cash-480 A Fica payable +50 L United way+10 L FIT withheld +600 L payroll expense-600 so dr wages and salaries expense 600 gorss amount does not change cr withheld income taxes payable60 Fica payable 50 United way payable 10 cash 480(net amount)
Current Portion of long term debt
if a company borrows money with the promise to repay it in two years it is classified as long term debt -the company reports only the accured interest on the loan as a current liability in the balance sheet when that happens borrower must reclassify the as current liabilite section in balance sheet rather than create differnt accounts accoutnants record total loan in just on eaccount adn then reclassify the amount to be reapid in upcoming year as current liabilty (current portion of long term debt) leave the rest as long term debt -the final line item in example borrowed 10000 which si to repaid each year on novemebr 30 principa payments 1000 in 2018 2000 in 2019 3000 in 2020 what is reported on balnce sheet for 2018 and 2017 for 2017 current portion of long term debt 1000 long term debt 9000 total liabilites 10000 for 2018 current portion of long term debt 2000 long term debt 7000
Debts to assets ratio formula
indicating financing risk by computing the proportion of total assets financed by debt, computed as tl /ta -usually calc in 3 deci -importnat becuase liabilites have ot be repaid whether or not company is doing well total liabilities/total assets -the percentage of assets financed by creditors -a higher ratio means greater financing risk
Times interest earned ratio
net income+interest expense+income tax expense/interest expense Divides net income before interest and taxes by intereset expense to determine the extent to which earnings before taxes and financing costs are sufficient to cover interest incurred on debt -fixed charge coverage ratio -analyts want to know whether a company covers its interest expense from earnings before the costs of financing and taxes in general, a high times interest earned ratio is viewed more favorably -high ratio indicates extra marign of protection when the times interset earned ratio is less tahn 1.0 a company is not generating enough operating income to cover its interest expense
Notes payable
occurs when one company borrows money another
Contingent liabilites
potential liabilites that have arisen as a result of past transaction or event their ultimate outcome will not be known until a futur event occurs or fails to occur depends on a future event given the uncertainies of contingent evnets accounting rules require the company to evaluate whether it will proabbly be found liabile and if so wehther the amount of th eliability is reaonsbaly estimatable. If liability is probable and estimable an expense an liability are accrued if liability is reasonbly possible but not probable or its amount cannot be reasonbly estimated- liability not recorded in accouning records but any potential liability and realted loss are described in note probable-yes-record liability and estiamted loss- debit-legal expense credit accounts payable probable-no-describe in financial statement notes-we reasonably possible-describe in notes remote- dont mention it
Interest on bonds issued at face value example: General mills issues bonds on jan 1 2018 at their total face value of 100,000. The bonds carry an annual stated interest rate of 6 percent payable in cash on December 31 on each year. because interest arises as time passes, general mills need to accrue expense for first month ended January 31 2018, assuming no previous accrual of interest, general mills would record on January 31 2018 100000*.06x1/12=500
process of calculating recording interest is similar to that of notes payable debit interest expense 500 credit interest payable 500 when interest paid interest payable will be decreased with a debit and cash will be decreased with a credit
accounts payable
purchase of goods or services on credit -increased when a company receives goods or services on credit and it is decreased when the company pays on its account
payroll deductions are either r
required by the law or voluntarily requested by employees and create a current liability for the comopany Examples include 1 Income tax 2 FICA tax 3 other deductions (charitable donations, union dues. etc) calculation of accured payroll gross pay: 600.000 payroll deductions; -federal income taxes 60.90 -fica tax 45.90 -other 10.00 ------- Total payroll deductions 116.80 Net pay=483.20
Your employees work the march 2018 concert earning 10000 and were paid on april 15 2018. What entry is recorded at the end of march?
salaries and wages expense 10000 dr wage payable 10000 in real life its not that simple because we need to consider payroll deductions by employees did you actually get 10000 no because of taxes
For accounting purposes, we match the extra borrowing cost
to the periods in which interest is recorded this amortization causes interest expense to be mroe than interest paymetn causes discounts on bonds payable to decrease each period. as the disocunt on bonds payable decreases the carrying value of the liability increases until it reaches 100,000 on the maturity date
For accounting purposes, we match the reduced borrowing cost
to the periods in which the interest expense in recorded this process called bond amortization makes the interest expense smaller than the actual interest payment and at the same time causes the balance in premium on bonds payable to decline each period 90 degree triangle and straight top on left
on january 1 2017 duke inc borrowed 30000 at 6% from big bank to purchase a truck. The loan agreement requires duke inc to make five annual payments of 7,122 on december 31 How much interest will duke pay to big bank over the life of the loan? How much interest expense should be record each year?
total cash paid (7122*5)= 35610 -amount borrowed: 30000(principal) =interst 5610
Four key events occur with any note payable
we are the borrower i=pxrxt 1. Establishing the note payable ex dr cash 100,000 cr notes payable 100,000 2. accuring interest incurred but not paid -is not owed day note is established -interest must be recorded as it is incurred over time -amount to record two months of interest 1000=100,000x6%x2/12 dr Interest expense 1000 cr Interest payable 1000 3 recording interest paid -Interest payment is calculated to be 6000(-100,000x6%x12/12) this interest payment includes the 1000 that was accured as interest payable. -dr interest payable 1000 dr interest expense 5000 credit cash 6000 4 recording prinicpal paid 1000 prinipcal payment -dr notes payable 100,000 -credit cash 100,000
Accounting for bond issue
what we need to know is the amount of cash the company receives from investors whne bonds are first issued. This may be above the face value belwo the face value .
compound lending
when borrowing from a bank, the bank utilizes compound interst concepts the bank may require monthly/annual principal and interest payments