F5 M3

Question 1

what does an ordinary annuity due mean?

Answer 1

it means payments are due at the beginning of the period

Question 1

what does an ordinary annuity mean?

Answer 1

it means payments are due at the end of the period

Question 2

present value formula

Answer 2

future value/(1+ r)^n

r = interest rate
n = number of periods

Question 3

future value formula

Answer 3

present value * (1+r)^n

Question 4

present value of ordinary annuity calc

Answer 4

annuity payment * PV of ordinary annuity of $1

Question 5

future value of ordinary annuity calc

Answer 5

periodic payment * future value of an annuity of $1 for appropriate n and r

Question 6

examples of liabilities that have characteristics of equity

Answer 6

1) financial instruments in form of shares mandatorily redeemable
2) financial instruments where entity obligation to repurchase seller’s equity
3) financial instruments where obligated to sell variable number of shares

Question 7

notes payable

Answer 7

-recorded at PV when sold
-if note is non-interest or interest rate below market, value note at imputed interest rate
-use effective interest method to determine imputed interest rate

Question 8

stated interest rates

Answer 8

-cash payment = face amt of note
-if rights and privileges on note, evaluate separately
-if no rights and privileges on note and rate reflects current rates, record note at face value

Question 9

imputed interest

Answer 9

-determine PV of note at market interest rate
-record payable at face amt
-record difference between face amt and PV of note as discount to be amortized over life of note

Question 10

when imputed interest is not required

Answer 10

1) note arises in ordinary course of business and terms not > 1 yr
2) are paid in property or services (not in cash)
3) represent security deposits
4) bear an interest rate determined by gov agency
5) arise from transactions between parent and subsidiaries

Question 11

amortization of discount

Answer 11

-discount amortized over life of note using effective interest method
-effective interest method is where each payment on note allocated to interest and principal as though note had constant effective stated rate of interest

Question 12

presentation and disclosure of discount

Answer 12

-the discount is added to the note payable to determine its carrying value on B/S
-full description of payable, the effective interest rate, and face amt of note disclosed on F/S or note

Question 13

cash payment

Answer 13

includes principal and interest expense

Question 14

interest expense

Answer 14

carrying value * imputed interest rate

Question 15

principal paid

Answer 15

cash payment - interest expense

Question 16

discount calculation

Answer 16

PV of note - face value of note

Question 17

journal entry to amortize note

Answer 17

Dr. Interest expense (PV of note * imputed interest rate)
Cr. Discount on note payable

Question 18

carrying value of note calc

Answer 18

PV of note payable + amortized discount

Question 19

debt covenants

Answer 19

-used by creditors in lending agreements to protect interest by limiting or prohibiting actions of debtors

Question 20

examples of debt covenants

Answer 20

1) collateral requirements
2) minimum working capital requirements
3) limitations on disposals of certain assets
4) restrictions on payment of dividends
5) limitations on issuing additional debt
6) maintenance of ratios (debt to equity, debt ratio, interest times earned)