Chapter 12 Flashcards
A liability that does not need to be
paid within one year or within the
entity’s operating cycle, whichever
is longer
Long-term liability
A schedule that details each loan
payment’s allocation between
principal and interest and the
beginning and ending loan balances.
amortization
Long-term debts that are backed
with a security interest in specific
property
Mortgages payable
Formula for calculating interest on payments
Beginning balance x interest rate x time
What’s the difference in a long term notes payable amortization schedule and a mortgage schedule
Long term notes payable have a stable principle payment and varying interest which means the total payment changes. Mortgages principal and interest payments change so the total payment stays the same.
A long-term debt issued to multiple lenders called bondholders, usually in increments of $1000 per bond
Bonds Payable
The amount a borrower must pay
back to the bondholders on the
maturity date.
Face value
The interest rate that determines
the amount of cash interest the
borrower pays and the investor
receives each year
Stated interest rate
Bonds that all mature at the same
time.
Term Bonds
Bonds that mature in installments at
regular intervals.
Serial Bonds
Bonds that give bondholders the
right to take specified assets of
the issuer if the issuer fails to pay
principal or interest.
Secured Bonds
Unsecured bonds backed only by
the creditworthiness of the bond
issuer
Debentures
Occurs when a bond’s issue price is
less than face value
Discount on bonds payable
Occurs when a bond’s issue price is
more than face value.
Premium on Bonds Payable
Recognition that money earns
interest over time.
Time Value of Money
The value of an investment today.
Present value
The value of an investment at the
end of a specific time frame.
Future value
The interest rate that investors
demand in order to loan their
money
Market Interest Rate
Occurs when a company earns
more income on borrowed money
than the related interest expense.
Financial leverage
A bond payable minus the discount
account current balance or plus the
premium account current balance.
Carrying Amount of Bonds
An account that is directly related to
another account. Adjunct accounts
have the same normal balance as
the related account and are added
to the related account.
Adjunct account
Bonds that the issuer may call
and pay off at a specified price
whenever the issuer wants.
callable
A ratio that measures the
proportion of total liabilities
relative to total equity.
Total liabilities/Total equity
Debt to equity ratio
What are the 5 steps to retiring bonds before maturity
- Record partial-period amortization of discount or premium and partial-period interest payment if the retirement date does not fall on an interest payment date
- Remove the portion of unamortized discount or premium that relates to the bonds being retired
- Debit bonds payable at face value
- Credit a gain or debit a loss on retirement
- Credit cash for amount paid to retire the bonds
A stream of equal cash payments
made at equal time intervals
Annuity
Interest calculated only on the
principal amount
Simple interest
Interest calculated on the principal
and on all previously earned
interest.
Compound interest
An amortization model that
calculates interest expense based
on the current carrying amount of
the bond and the market interest
rate at issuance, and then amortizes
the difference between the cash
interest payment and calculated
interest expense as a decrease to
the discount or premium
effective-interest amortization method
