Unformatted text preview: Financial and Managerial Accounting Long-Term Liabilities
McGrawHill/Irwin Advantages of Bonds
Bonds do not affect stockholder control. stockholder Interest on bonds is Interest tax deductible. tax Bonds can increase Bonds return on equity. return
10-2 Disadvantages of Bonds Bonds require payment of both periodic interest and par value at maturity. maturity. Bonds can decrease return on Bonds equity when the company pays more in interest than it earns on the borrowed funds. the
10-3 Bond Issuing Procedures A company sells the bonds to. . . . . .an investment firm called an underwriter. The underwriter sells the bonds to. . . A trustee monitors the bond issue.
10-4 . . . investors Basics of Bonds
Bond Interest Payments Corporation Bond Interest Payments Investors Bond Issue Date Interest Payment = Bond Par Value × Stated Interest Rate
10-5 Bond Discount or Premium
Contract rate is: Bond sells: Above market rate At a premium Equal to market rate At par value Below market rate At a discount 10-6 Types of Bonds Secured and Unsecured Term and Serial Registered and Bearer and Convertible Convertible and Callable and 10-7 Long-Term Notes Payable
Cash Company Note Payable Lender When is the repayment of the principal When and interest going to be made? and
Note Date Note Maturity Date
10-8 Long-Term Notes Payable
Single Payment of Single Principal plus Interest Principal
Company Lender Single Payment of Single Principal plus Interest Interest
Note Date Note Maturity Date
10-9 Long-Term Notes Payable Regular Payments of Principal plus Interest Company Lender Regular Payments of Principal plus Interest Note Date Payments can either be equal principal payments plus interest or equal payments. Note Maturity Date
10-10 Installment Notes with Equal Principal Payments
$16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Annual Annual payments decrease. decrease.
Interest Principal The principal payments are $10,000 each year. Interest expense decreases each year.
10-11 Installment Notes with Equal Payments
$14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Annual Annual payments are constant. constant.
Interest Principal The principal payments increase each year. The Interest expense decreases each year. Interest
10-12 Exercise A On January 1, 2008, Eagle borrows $100,000 cash by signing a four-year, 7% installment note. The note requires four equal total payments of accrued interest and principal on December 31 of each year from 2008 through 2011. Amortization Table #1 – Calculate the Payment Amount Amount of each payment = Initial note balance / Table B.3 value = $100,000 / 3.3872 = $29,523 #2 – Prepare the Amortization Table Exercise B Use the information in Exercise A to prepare the journal entries for Eagle to record the loan on January 1, 2008, and the four payments from December 31, 2008, through December 31, 2011. Journal Entries Mortgage Notes and Bonds A llegal agreement that helps protect the egal
lender if the borrower fails to make the required payments. required Gives the lender the right to be paid out of Gives
the cash proceeds from the sale of the borrower’s assets specifically identified in the mortgage contract. 10-19 Debt-to-Equity Ratio
Total Liabilities Total Equity Debt-toEquity Ratio = This ratio helps investors determine the risk of This investing in a company by dividing its total liabilities by total equity. by Exercise C Montclair Company is considering a project that will require a $500,000 loan. It presently has total liabilities of $220,000, and total assets of $610,000. #1 - Compute Montclair's (a) present debtto-equity ratio and (b) the debt-to-equity ratio assuming it borrows $500,000 to fund the project. #2 - Evaluate and discuss the level of risk involved if Montclair borrows the funds to pursue the project. Current Debt to Equity Ratio Debt to Equity Ratio Post-Loan
End of Chapter 10 10-24 ...
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