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Lecture17 spring 2009 v2

Lecture17 spring 2009 v2 - Lecture 17 Spring 2009...

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Lecture 17 Spring 2009 Accounting for Long Term Debt Notes Payable and Mortgages
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Accounting for Long Term Debt While the specific terms of a long-term 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 non-interest 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, semi-annually, annually) payments over the term of the mortgage. Bond - A typical bond (interest bearing note) is a combination of a non-interest 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 lump-sum, "balloon", payment on maturity date of the bond (i.e. equivalent to the non-interest 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 .
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Accounting for a Note – 3 Dog Inc. On January 1, 20x1, Three Dog Inc. issued a non-interest 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 semi-annually.
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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 semi-annually 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)
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Accounting for a Note – 3 Dog Inc.
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