Lecture23 2010.12.08 PostClass

Lecture23 2010.12.08 PostClass - Accounting 101 Final Exam...

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Unformatted text preview: Accounting 101 Final Exam Review Announcements Exam #3: 12/17 3-5pm Locations (posted online): Chem 102 A -Gr Cohn G17 Gu - Lia DRL A1 Lie - Pin MEHY B1 Pip - Z Sabbath accommodation exam: 12/17 2-4pm, SHDH 215 Email Profs. to register Other: This is the FINAL week to pickup exams ABSOLUTELY NO requests to pickup exams after this week Last week for Prof. and TA office hours No office hours next week No last-minute emails, last day to email 12/15 Topics Covered since 2 nd Exam Long Term Debt Leases Shareholders Equity Deferred Taxes Inter-corporate Investments Financial Statement Analysis Long Term Debt Present Value Concept is the time value of money Know how to determine present value of: Single dollar amounts Annuities Know how to read present value tables Understanding this is critical to the topic on long term debt and leases Long Term Debt - Concepts There are many and varied types of debt instruments. We focused on: Zero coupon notes Mortgage securities Bonds Bonds issued at par, premium, and discount. Long Term Debt - Concepts Accounting for the debt: Book value at issuance is the present value of future payments. We use the market rate on the day debt is issued. We do not adjust for subsequent changes in interest rates. Book value of debt after issuance can vary from market value due to changes in interest rates and risk characteristics of the firm. Can infer interest rates movement by comparing book value to market value. Long Term Debt - Concepts Accounting for the debt: Current portion. Every fiscal period we take the portion of the debt that is expected to be repaid next fiscal year and put into a current portion. Each cash payment is allocated between interest expense and Principal reduction for premium Principal increase for discount All interest for par Interest expense = historical interest rate * book value of debt at start of period. Accounting for Bonds Bonds (and other long-term monetary liabilities) are accounted for using the effective interest method , which requires that the interest expense each period be based on the effective interest rate implicit in the lending arrangement when it was initiated (i.e. the historical market interest rate ). DO NOT use straight-line amortization method! Bonds Issued at a Premium To illustrate the effective interest method consider the following example: On January 1, 20x1, Three Dog Nite, Inc. issued bonds having an aggregate maturity (face) value of $50,000,000, due (to mature) on December 31, 20x5. The coupon rate is 13% (per annum), with coupon payment due on June30, and December 31 (i.e. semi-annual compounding). Bonds Issued at a Premium This bond obligates Three Dog Nite to make the following future cash payments: 1) Maturity Payment (= Face Value) $50,000,000 due on December 31, 20x5, 10 interest payment...
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Lecture23 2010.12.08 PostClass - Accounting 101 Final Exam...

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