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