Chapter 9 Flashcards
What is a mixture of liabilities and stockholders’ equity that a business uses?
Capital structure
What occurs when a company is borrowing money?
Debt financing
What occurs when a company is obtaining investment from stockholders?
Equity financing
How do companies obtain external funding?
Debt and equity financing
Which of the following statements is true?
a. Profits generated by a company are a source of external financing.
b. Dividends paid are a tax-deductible expense.
c. Interest paid on debt is a tax-deductible expense.
d. All of the above are true.
c. Interest paid on debt is a tax-deductible expense.
What is one advantage to debt financing?
Interest on borrowed funds is tax-deductible
What is the formula to find interest expense?
Carrying value x market interest rate x fraction of the year
What is the layout for an amortization schedule?
Date, Cash Paid, Interest Expense, Decrease in Carrying Value, Carrying Value
When you borrow money what is your initial carrying value?
The amount of money that you borrow
What is the formula to find the carrying value of the first month?
Initial carrying value - decrease in carry value
Does the cash paid value change?
No
What do you debit and credit when you establish a notes payable?
You debit cash and credit notes payable
When you initially borrow money or take out a loan what do you debit and credit?
You debit cash and credit notes payable
Make the initial journal entry:
Assume a $25,000, 6%, four-year loan for a new delivery truck on January 1, 2018. Payments of $587.13 are required at the end of each month for 48 months.
Cash 25,000
Notes Payable 25,000
When you borrow money or take out a loan what do you debit and credit for the monthly payments?
You debit interest expense and notes payable and credit cash
Make a journal entry for the first 2 monthly payments:
Assume a $25,000, 6%, four-year loan for a new delivery truck on January 1, 2018. Payments of $587.13 are required at the end of each month for 48 months.
25,000 x 6% x (1/12) = 125
587.13 - 125 = 462.13
(D) Interest Expense 125
(D) Notes Payable 462.13
(C) Cash 587.13
25,000 - 462.13 = 24,537.87
24,537.87 x 6% x (1/12) = 122.69
(D) Interest Expense 122.69
(D) Notes Payable 464.44
(C) Cash 587.13
Tropical Paradise borrows $24,000 and agrees to a 5%, five-year installment loan with the bank. Payments of $452.91 are due at the end of each month. How much interest should be recorded for the first month?
a. All $452.91 is attributable to interest.
b. $100.00
c. $352.91
d. $0
b. $100.00
24,000 x 5% x (1/12) = 100
What is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time?
A lease
What type of lease is it when the lessor owns the asset, and the lessee simply uses the asset temporarily?
Operating Lease
What type of lease is it when the lessee buys an asset and borrows the money through a lease to pay for the asset?
Capital Lease
Assume a company has assets of $100 million, liabilities of $60 million, and stockholders’ equity of $40 million. The company then signs a new lease to purchase long-term assets valued at $10 million.
What does total assets equal under a operating lease?
100
Assume a company has assets of $100 million, liabilities of $60 million, and stockholders’ equity of $40 million. The company then signs a new lease to purchase long-term assets valued at $10 million.
What does total assets equals under a capital lease?
110
100 + 10
What is the formula to find a capital lease’s ratio of liabilities to stockholders equity?
(liabilities + purchase of long-term assets) / stockholders’ equity
What is the formula to find an operating lease’s ratio of liabilities to stockholders equity?
Liabilities / stockholders’ equity
