Download - Lecture Slides Video07!02!1
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Long-term Liabilities
Current Liabili ties (due within less than one year)
Initially booked at nominal value (not present value)
Long-term Liabil ities (due in periods beyond one year)
Initially booked at present value of future cash payments
After initial recognition, some liabilities can be marked to fair value,while most are recorded at amortized cost
As a result, liabilities can be a mix of fair value and amortized cost
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Common Types of Debt
Bank loan
Borrow principal; make periodic interest payments; repay principal at end of loan
Mortgage
Borrow principal; make periodic interest and principal payments over the loanperiod
Corporate bonds
Company promises to pay periodic cash flows ( coupons ), plus a lump sum
( principal ) at maturity.Investors offer the company the present value of coupons and principal
Investors can then trade the bonds freely unti l maturi ty.
Zero-coupon : company only pays lump sum at maturity
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bank Loan
On 1/1/2010, KP Inc. borrows $10,000 from a bank for a 3-year loan.The bank charges the firm 5.0% interest per year on the loan.
Borrow$10,000
Pay interest($500)
Pay interest($500)
Pay interest + principal($500 + $10,000)
1/1/10 12/31/10 12/31/11 12/31/12
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bank Loan
On 1/1/2010, KP Inc. borrows $10,000 from a bank for a 3-year loan.The bank charges the firm 5.0% interest per year on the loan.
Borrow$10,000
Pay interest($500)
Pay interest($500)
Pay interest + principal($500 + $10,000)
1/1/10 12/31/10 12/31/11 12/31/12
Issuance
1/1/10 Dr. Cash (+A) 10,000
Cr. Notes Payable (+L) 10,000
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bank Loan
On 1/1/2010, KP Inc. borrows $10,000 from a bank for a 3-year loan.The bank charges the firm 5.0% interest per year on the loan.
Borrow$10,000
Pay interest($500)
Pay interest($500)
Pay interest + principal($500 + $10,000)
1/1/10 12/31/10 12/31/11 12/31/12
Periodic interest payments
12/31/10 Dr. Interest Expense (+E) 500
Cr. Cash (-A) 500
12/31/11 Dr. Interest Expense (+E) 500
Cr. Cash (-A) 500
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bank Loan
On 1/1/2010, KP Inc. borrows $10,000 from a bank for a 3-year loan.The bank charges the firm 5.0% interest per year on the loan.
Borrow$10,000
Pay interest($500)
Pay interest($500)
Pay interest + principal($500 + $10,000)
1/1/1012/31/10 12/31/11 12/31/12
Repayment
12/31/12 Dr. Notes Payable (-L) 10,000
Dr. Interest Expense (+E) 500
Cr. Cash (-A) 10,500
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
PV calculation to get payment:
PV = 10,000, FV = 0, r = 0.05, n = 3, PMT = ? (use Excel/calculator/PV table to solve)
PMT = $3,672
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8/13/2019 Lecture Slides Video07!02!1
8/20
KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
PV calculation to get payment:
PV = 10,000, FV = 0, r = 0.05, n = 3, PMT = ? (use Excel/calculator/PV table to solve)
PMT = $3,672
Payment = (3672)
Principal Interest Principal PrincipalBeg Bal (Beg Bal * .05) (3672 - Interest) End Bal
12/31/10 10,000 (500) (3,172) 6,828
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
PV calculation to get payment:
PV = 10,000, FV = 0, r = 0.05, n = 3, PMT = ? (use Excel/calculator/PV table to solve)
PMT = $3,672
Payment = (3672)
Principal Interest Principal PrincipalBeg Bal (Beg Bal * .05) (3672 - Interest) End Bal
12/31/10 10,000 (500) (3,172) 6,82812/31/11 6,828 (341) (3,331) 3,497
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
PV calculation to get payment:
PV = 10,000, FV = 0, r = 0.05, n = 3, PMT = ? (use Excel/calculator/PV table to solve)
PMT = $3,672
Payment = (3672)
Principal Interest Principal PrincipalBeg Bal (Beg Bal * .05) (3672 - Interest) End Bal
12/31/10 10,000 (500) (3,172) 6,82812/31/11 6,828 (341) (3,331) 3,49712/31/12 3,497 (175) (3,497) 0
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
Borrow$10,000
Pay interest ($500) +principal ($3172)
Pay interest ($341) +principal ($3331)
Pay interest ($175) +principal ($3497)
1/1/10 12/31/10 12/31/11 12/31/12
Issuance
1/1/10 Dr. Cash (+A) 10,000
Cr. Mortgage Payable (+L) 10,000
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage
On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-yearmortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
Borrow$10,000
Pay interest ($500) +principal ($3172)
Pay interest ($341) +principal ($3331)
Pay interest ($175) +principal ($3497)
1/1/10 12/31/10 12/31/11 12/31/12
2010 payment
12/31/10 Dr. Mortgage Payable (-L) 3,172
Dr. Interest Expense (+E) 500
Cr. Cash (-A) 3,672
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-year
mortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
Borrow$10,000
Pay interest ($500) +principal ($3172)
Pay interest ($341) +principal ($3331)
Pay interest ($175) +principal ($3497)
1/1/10 12/31/10 12/31/11 12/31/12
2011 payment
12/31/11 Dr. Mortgage Payable (-L) 3,331
Dr. Interest Expense (+E) 341
Cr. Cash (-A) 3,672
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Mortgage On 1/1/2010, KP Inc. borrows $10,000 from a bank on a 3-year
mortgage. The bank charges KP 5.0% interest/year on the mortgage.The required payment is $3,672 per year.
Borrow$10,000
Pay interest ($500) +principal ($3172)
Pay interest ($341) +principal ($3331)
Pay interest ($175) +principal ($3497)
1/1/10 12/31/10 12/31/11 12/31/12
2012 payment
12/31/12 Dr. Mortgage Payable (-L) 3,497
Dr. Interest Expense (+E) 175
Cr. Cash (-A) 3,672
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Bonds Payable Bonds Payable
Coupon bonds require semi-annual coupon payments plus payment of face value atmaturity
Elements and TerminologyPrice or proceeds (PV)
Face value or par value (FV)
Market interest rate or effective rate or yield-to-maturi ty (r)
Coupon rate (stated in bond agreement)Coupon payment (PMT) = face value * coupon rate
Number of periods (n)
Because bonds are semi-annual, double the number of periods and divide rates by 2
Bond PricePrice = Present value of FV + Present Value of PMT
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bond On 1/1/2010, KP Inc. issues a 3-year, 5% coupon, $10,000 face value
bond. Investors price the bond using an effective (market) interestrate of 5.0%. KP receives proceeds from the bond of $10,000.
PV calculation to get bond price:Double the number of periods and divide the interest rate by 2!
Present value of face value
PV = ?, FV = 10,000, r = 0.025, n = 6, PMT = 0 (use Excel, calculator, or PV table to solve)
PV = $8,623
Present value of payment
PV = ?, FV = 0, r = 0.025, n = 6, PMT = 250 (10,000 x 0.025)
PV = $1,377
Price = $10,000 (8,623 + 1,377)
Can also get price by putting in all elements PV = ?, FV = 10,000, r = 0.025, n=6, PMT = 250
PV = $10,000
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bond On 1/1/2010, KP Inc. issues a 3-year, 5% coupon, $10,000 face value
bond. Investors price the bond using an effective (market) interestrate of 5.0%. KP receives proceeds from the bond of $10,000.
Receive$10,000
Pay coupon($250)
Pay coupon($250)
Pay coupon ($250)+ principal ($10,000)
1/1/10 6/30/10 6/30/11 12/31/12
Pay coupon($250)
12/31/10
Pay coupon($250)
12/31/11
Pay coupon($250)
6/30/12
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bond On 1/1/2010, KP Inc. issues a 3-year, 5% coupon, $10,000 face value
bond. Investors price the bond using an effective (market) interestrate of 5.0%. KP receives proceeds from the bond of $10,000.
Issuance
1/1/10 Dr. Cash (+A) 10,000
Cr. Bonds Payable (+L) 10,000
Receive$10,000
Pay coupon($250)
Pay coupon($250)
Pay coupon ($250)+ principal ($10,000)
1/1/10 6/30/10 6/30/11 12/31/12
Pay coupon($250)
12/31/10
Pay coupon($250)
12/31/11
Pay coupon($250)
6/30/12
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bond On 1/1/2010, KP Inc. issues a 3-year, 5% coupon, $10,000 face value
bond. Investors price the bond using an effective (market) interestrate of 5.0%. KP receives proceeds from the bond of $10,000.
Periodic coupon payments
Dr. Interest Expense (+E) 250
Cr. Cash (-A) 250
Receive$10,000
Pay coupon($250)
Pay coupon($250)
Pay coupon ($250)+ principal ($10,000)
1/1/10 6/30/10 6/30/11 12/31/12
Pay coupon($250)
12/31/10
Pay coupon($250)
12/31/11
Pay coupon($250)
6/30/12
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8/13/2019 Lecture Slides Video07!02!1
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KNOWLEDGE FOR ACTION
Accounting for a Bond On 1/1/2010, KP Inc. issues a 3-year, 5% coupon, $10,000 face value
bond. Investors price the bond using an effective (market) interestrate of 5.0%. KP receives proceeds from the bond of $10,000.
Payment at maturity
12/31/12 Dr. Bonds Payable (-L) 10,000
Dr. Interest Expense (+E) 250
Cr. Cash (-A) 10,250
Receive$10,000
Pay coupon($250)
Pay coupon($250)
Pay coupon ($250)+ principal ($10,000)
1/1/10 6/30/10 6/30/11 12/31/12
Pay coupon($250)
12/31/10
Pay coupon($250)
12/31/11
Pay coupon($250)
6/30/12