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Lecture 17
Spring 2009
Accounting for Long Term Debt
Notes Payable and Mortgages
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View Full Document Accounting for Long Term Debt
•
While the specific terms of a longterm obligation may vary substantially, an
essential feature of most is that they require the borrower (debtor) to make a
(contractual) series of one or more cash payments to the lender (creditor) in
the future.
•
Note
 A noninterest bearing note requires that the borrower make a single payment
(to the lender) on the maturity date of the note (i.e. the date when the note agreement
expires)
•
Mortgage
 A typical mortgage note requires that the borrower make a series of equal
periodic (monthly, quarterly, semiannually, annually) payments over the term of the
mortgage.
•
Bond
 A typical bond (interest bearing note) is a combination of a noninterest bearing
note and a mortgage.
As such, it requires that the borrower make a series of equal
periodic payments over the term of the bond agreement (i.e. equivalent to mortgage
payments), and a single relatively larger lumpsum, "balloon", payment on maturity
date of the bond (i.e. equivalent to the noninterest bearing note payment).
•
In each of these cases, the borrower's obligation is to make payments in
accordance with the contractual agreement.
Moreover, each of the
payments to be made by the borrower may include amounts representing:
–
a (partial) repayment of the original amount borrowed –
principal
;
–
a payment for the cost of using the lenders funds –
interest
.
Accounting for a Note
– 3 Dog Inc.
•
On January 1, 20x1, Three Dog Inc. issued a
noninterest bearing note for $50,000,000, due
(to mature) on December 31, 20x5.
The note
was issued to yield (i.e. at an interest rate of)
10% compounded semiannually.
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View Full Document Note: Interest rates are stated on a per annum (annual) basis (i.e. an
interest rate of 10% means 10% per annum (year)). The compounding
period determines how frequently interest will be computed and, if not paid,
added to the amount of the outstanding loan. For example, an interest rate
of 10% compounded semiannually means that every six months interest
will be computed on the amount of the loan as follows:
Amount of interest
=
Amount of loan
*
Interest rate
*
Compounding interval (months)
per compounding period
(per annum)
12 months
=
Amount of loan
*
10%
*
6
12
=
Amount of loan
*
5%
(per compounding interval)
Accounting for a Note
– 3 Dog Inc.
•
How much did 3 Dog Inc. receive in exchange
for the note?
•
By examining the time line it is clear that the question
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This note was uploaded on 02/02/2012 for the course ACCT 101 taught by Professor Armstrong during the Spring '09 term at UPenn.
 Spring '09
 Armstrong
 Accounting

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