Chapter 11 for course website

Chapter 11 for course website - Introduction To Financial...

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Introduction To Financial Accounting HKUST Chapter 11 Reporting and Interpreting Owners’ Equity Slide 1 Chapter Eleven ACCT 101 Fall 2010 Allen Huang Introduction To Financial Accounting HKUST Understanding the Business The mixture of debt and equity used to finance a company’s operations is called the capital structure: Slide 2 Chapter Eleven Debt - funds from creditors Equity - funds from owners
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Introduction To Financial Accounting HKUST Liquidation Rights Liquidation Rights 1. Wages 2. Taxes 3. Secured Creditors including Secured Bonds (backed by the issuer and by specific assets that the corporation owns) 4. General Creditors Including Debentures (back only by the corporation’s good faith and credit) 5. Subordinated Creditors Including Subordinated Slide 3 Chapter Eleven Debentures (unsecured bond that have a junior claim on their assets compared to other unsecured bonds) 6. Preferred Stockholders 7. Common Stockholders Introduction To Financial Accounting HKUST Bond Classifications z Debenture bonds z Not secured with the pledge of a specific asset. z Mortgage bonds z Secured with the pledge of a specific asset. z Callable bonds z May be retired and repaid (called) at any time at the option of the issuer. z Convertible bonds Slide 4 Chapter Eleven z May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder.
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Introduction To Financial Accounting HKUST Measuring Bond Value The issue price of the bond is determined by the market, based on present value of the future cash payments. Present Value of the Principal (a single payment) + Present Value of the Interest Payments (an annuity) = Issue Price of the Bond Slide 5 Chapter Eleven The interest rate used to compute the present value is the market interest rate prevailing at the time of debt issuance. Introduction To Financial Accounting HKUST Reporting Bond Transactions Present Value of the Principal (a single payment) + Present Value of the Interest Payments (an annuity) Accounting for the Difference Stated Market Bond Par Value There is no difference Rate Rate Price of the Bond to account for. Rates Price Interest Bond == = Issue Price of the Bond Slide 6 Chapter Eleven Stated Market Bond Par Value The difference is accounted Rate Rate Price of the Bond for as a bond discount. Stated Market Bond Par Value The difference is accounted Rate Rate Price of the Bond for as a bond premium. < > < >
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Introduction To Financial Accounting HKUST Summary Bonds Payable (L) – Principle (also called par value, face value, maturity value) – Interest • Stated interest rate (or coupon rate, contract rate) Æ determines cash interest payment • Market interest rate (or discount rate, effective rate) Æ determines discount rate Determine whether bonds are issued at premium or a discount Slide 7 Chapter Eleven – Bonds value = Present Value (Interest payment + Principal) Where discount rate equals the market rate prevailing at the time of debt issuance PV of an annuity PV of a lump sum Introduction To
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This note was uploaded on 02/13/2012 for the course ACCT 101 taught by Professor Na during the Fall '10 term at HKUST.

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Chapter 11 for course website - Introduction To Financial...

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