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Flashcards in long term debt Deck (59)
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1

What is the definition of a short term liability?

short-term notes payable generally have a term of at least 30 days and bear interest. Short-term notes are typically reported at face value, rather than at present value

2

What is the definition of a long term liability?

Long-term notes are a major source of significant debt financing, especially for smaller firms. Long-term borrowing with notes involves one or a small number of creditorsLong-term notes are reported at present value and are noncurrent liabilities if they meet that definition.

3

How do you treat a simple interest note?

Simple interest notes have a face value that is also the maturity amount, the amount the debtor pays when the note matures (end of note term). The stated interest rate and face value determine the annual interest to be paid

4

What is an installment note?

each payment includes principal and interest - have no maturity value because the last payment reduces the note payable balance to zero.

5

What is the stated rate on a note?

The stated rate is the rate stated in the note and determines the cash interest due on the note each period.

6

What is a yield or market rate for a note?

The yield rate for the note (also called effective or market rate) is the rate on notes of similar risk and term. If the note is to be reported at present value, the yield rate is used for that computation.

7

What happens when the yield rate exceeds the stated rate?

When the yield rate exceeds the stated rate at time of borrowing, the note is issued at a discount which is recorded in a contra account to the note

8

What happens when the yield rate is less than the stated rate?

When the yield rate is less than the stated rate, the note is issued at a premium and recorded in an adjunct account to the note

9

What happens with the discount or premium on a loan?

The discount or premium is amortized over the note term with the discount amortization increasing the net note liability and the premium amortization decreasing the net note liability

10

How do you account for noncurrent notes payable?

Noncurrent notes payable are issued for the present value of all future cash flows, including principal, and interest payments computed using the stated rate. The computation of present value uses the yield rate at the date of issuance.

11

What is the balance of a note payable account at balance sheet dates?

notes are reported at the present value of remaining payments, again using the yield rate at the date of issuance

12

How do you calculate periodic interest expense? (using the effective interest method)

the product of the yield rate at the date of issuance, and the beginning net note liability (present value). The difference between cash interest paid and interest expense recognized at each payment date is the amortization of discount or premium

Loan origination fees and points are amortized

13

How do you calculate periodic interest expense? (using the straight line interest method)

amortizes the discount or premium equally each period. This approach is allowed only if it results in interest expense amounts not materially different from the effective interest method.

14

What's the equation for present value of future cash flows

Value * (PV, N, I) + Interest amount *(PV of annuity, N, I)

15

What is a non-interest bearing notes payable?

A non-interest-bearing note payable is one in which the interest element is not explicitly stated but rather is included in the face amount of the note. These notes are recorded at the present value of future cash flows, using the market rate of interest as the discount rate

16

What is a bond?

A bond is a financial debt instrument that typically calls for the payment of periodic interest (although a zero coupon bond pays no interest), with the principal being due at some time in the future. The bondholder (creditor or investor) pays the issuing firm an amount based on the stated and market rates of interest and receives interest and the face amount in return, over the bond term

17

What are the 7 pieces of info that need to be known to account for a bond?

Face value, stated interest rate, interest payment dates, market interest rate, bond date, issuance date, maturity date

18

What is the face value of a bond?

The amount paid to the bondholder at maturity

19

What is the stated (coupon) interest rate for a bond?

The rate at which the bond pays cash interest

20

What is the market interest rate for a bond?

The rate equating the sum of the present values of the cash interest annuity and of the face value single payment, with the bond price.

21

What items are included in bond issue costs?

The cost of printing, registering, and marketing the bonds

22

What is a secured bond?

A secured bond issue has a claim to specific assets

23

What is an unsecured bond?

the bondholders are unsecured creditors and are grouped with other unsecured creditors

24

How do you determine the selling price of a bond? (initial book value)

The selling price of a bond is equal to the present value of future cash flows related to the bond financial instrument (principal and cash interest). The discount rate used for this calculation is the market rate of interest on the date the bonds are issued.

25

When will a bond issue yield a premium?

Stated Rate > Market Rate

26

When will a bond issue yield a discount?

Stated Rate < Market

27

How is the premium or discount on a bond issue treated?

Amortized over the bond term.

28

What two types of amortization can be used on a bond premium and discount?

effective interest rate and straight line amortization

29

How doe the effective interest method for bonds work?

This method first computes interest expense based on the beginning book value of the bond and the market rate at issuance. The difference between interest expense and the cash interest paid is the amortization of the discount or the premium. The market rate at issuance is always used. The rate is not changed after issuance because it represents the true interest rate over the bond term. The amortization of discount or premium is a "plug" figure.

30

How does the straight line method work for amortization of bond premium or discount?

This method recognizes a constant amount of amortization each month of the bond term. The straight-line method should not be used when (a) the term to maturity is quite long and there is more than a minor difference between the market and stated rates, or (b) when there is a very significant difference between the market and stated rates regardless of the length of the term.