Lesson 13 (Debt Financing)

Question 1

to spread the loan payments between interest and principal reduction use an ?

Answer 1

amortization table

Question 2

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 ?

Answer 2

Lease

Question 3

the party that is granted the right to use property under the terms of a lease
what is this ?

Answer 3

Lessee

Question 4

The owner of property that is leased to another party
what is this ?

Answer 4

Lessor

Question 5

When the lease first happens what does the lessee record ?

Answer 5

*leased asset and a leased liability on their balance sheet equal to the present value of the lease payments

Question 6

leased asset is what ?

Answer 6

depreciated

Question 7

lease liability is what ?

Answer 7

amortized (gradually reduced over the lease term down to a zero balance)

Question 8

the depreciation of the leased asset is referred to as ?

Answer 8

amortization

Question 9

amortization expense is usually calculated on a ?

Answer 9

straight line basis
(but any method could work)

Question 10

to record depreciation of the leased asset ?

Answer 10

Debit: amortization expense
Credit: leased asset

Question 11

for the depreciation of the leased asset always assume the residual value is ?

Answer 11

0

Question 12

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 ?

Answer 12

the lease term as the assets life

Question 13

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 ?

Answer 13

the economic life of the asset as the assets life

Question 14

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 ?

Answer 14

0

Question 15

each payment in the amortization of the lease liability is separated into two component ?

Answer 15

1. interest expense
2. principle reduction

Question 16

what are the two financial statement ratios relating to debt ?

Answer 16

1. debt to equity ratio
2. times interest earned ratio

Question 17

measures the percentage of funds being provided by creditors versus stockholders
which financial statement ratio relating to debt is this ?

Answer 17

debt to equity ratio

Question 18

the higher the debt to equity ratio ?

Answer 18

*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

Question 19

measures the companies to meet its interest payments as they come due
what is this ?

Answer 19

times interest earned ratio

Question 20

the higher the times interest earned ratio the ?

Answer 20

*the better
*the more income the company has to pay its interest
*the less likely the company is to default on these payments