Lesson 13 (Debt Financing) Flashcards
to spread the loan payments between interest and principal reduction use an ?
amortization table
a contract that specific the terms under which the owner of an asset agrees to transfer the right to use the asset to another party
what is this ?
Lease
the party that is granted the right to use property under the terms of a lease
what is this ?
Lessee
The owner of property that is leased to another party
what is this ?
Lessor
When the lease first happens what does the lessee record ?
*leased asset and a leased liability on their balance sheet equal to the present value of the lease payments
leased asset is what ?
depreciated
lease liability is what ?
amortized (gradually reduced over the lease term down to a zero balance)
the depreciation of the leased asset is referred to as ?
amortization
amortization expense is usually calculated on a ?
straight line basis
(but any method could work)
to record depreciation of the leased asset ?
Debit: amortization expense
Credit: leased asset
for the depreciation of the leased asset always assume the residual value is ?
0
if the lease agreement calls for the asset to be returned to the lessor at the end of the lease, the lessee uses what as the assets life ?
the lease term as the assets life
if the lease agreement calls for the ownership of the asset to be transferred to the lessee at the end of the lease, the lessee uses what as the assets life ?
the economic life of the asset as the assets life
the amortization of the lease agreement, reduces the liability each time a payment is made, so at the end of the lease term, the liability balance must be ?
0
each payment in the amortization of the lease liability is separated into two component ?
- interest expense
- principle reduction
what are the two financial statement ratios relating to debt ?
- debt to equity ratio
- times interest earned ratio
measures the percentage of funds being provided by creditors versus stockholders
which financial statement ratio relating to debt is this ?
debt to equity ratio
the higher the debt to equity ratio ?
*the higher the risk to creditors
*the higher the likelihood an individual creditor would not be paid in full if the company is unable to meet its obligations
*higher rate of interest charged by lenders to accommodate for the added risk
measures the companies to meet its interest payments as they come due
what is this ?
times interest earned ratio
the higher the times interest earned ratio the ?
*the better
*the more income the company has to pay its interest
*the less likely the company is to default on these payments