Lesson 11 Bonds and Long term Liabilities Know from interest rates when bond will sell at discount, face value, or a premium • Face value if coupon rate = market rate • Discount if coupon rate < market rate • Premium if coupon rate > market rate Make entries for bond issue. Make entry for bond interest payments and amortization Cash Bond Payable Bond Issue Cost Cash Bond Interest Expense $ Cash Bond Issue Expense Bond Issue Cost Face Value $100,000 $ $2,500 $2,500 5,000.00 $ $416.67 $416.67 Sold at Premium Cash $ 105,242.14 Premium on Bond Payable 100,000.00 Bond Payable Bond Issue Cost Cash $2,500 $2,500 4,209.69 790.31 $ $416.67 $416.67 5,000.00
Bond Interest Expense $ Premium on Bonds Payable $ 5,000.00 Cash Bond Issue Expense Bond Issue Cost
Sold at Discount Cash $ 95,082.68 Discount on Bond Payable $ 4,917.32 Bond Payable $ 100,000.00 Bond Issue Cost Cash $2,500 $2,500
Bond Interest Expense $ 5,704.96 Discount on Bond Payable $ Cash $ Bond Issue Expense Bond Issue Cost $416.67
Amortization is the bond issue cost divided the years it will be amortized Financial statement effects of all of the above Balance Sheet decrese in cash Bond Retirement on Dec 31 2007 & decrease in bond payable decrease in cash & decrease in equity decrese in cash & decrease in bond payable Income Statement Gain on bond buy back decrease in net income due to coupon pmt Cash Flow Less CFO due to buy back
Less CFO due to coupon pmt Less CFO due to principal repayment
Repayment of the principal
CFO = cash from operating activities
Definitions of zero-coupon bonds
A zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value.
Lessons 12 Debt Financing - Leases Know 4 criteria to determine if lease is a capital (financing) or operating lease. • Does the title to the asset transfer at the end of the lease term? • Is there a Bargain Purchase Option at any time during the lease term? • Is the length of the lease term greater than 75% of the useful life of the asset? • Is the PV of the minimum lease payments greater than 90% of the FMV of the asset? If one of the questions above has a yes answer it is a capital lease. Make entries for lease issue and payments under both capital and operating leases. (Q c.) Journal entries: Financial (Capital) Lease Debit Credit 2/1/2005 Leased Equipment $ 25,000.42 Lease Obligations $ 25,000.42 31/12/2005 Lease Obligations Interest expense Cash 12/31/2005 Depreciation Expense Accumulated Depreciation $ 5,230.95 $ 3,000.05 $ 8,231.00 $ 6,250.11 $ 6,250.11
(Q b.) Journal entries: Operational Lease Debit Credit 31/12/2005 Lease expense $ 8,231.00 Cash $ 8,231.00 Financial statement effects of capital and operating leases Operational lease: • Only affects income statement and statement of cash flow (operating activities section) Capital lease: • On date asset is acquired, an asset and liability are recorded for the fair market value of the asset (i.e. PV of the lease payments) Lessons 13 and 14 Pro-forma Financial Statements Calculate forecasts for sales, purchases, cost of goods sold, etc. Calculate when a loan is required 1. Calculate cash available 2. Calculate cash disbursements. 3. Subtract cash available and the disbursements. 4. If result is lower than minimum cash required a loan is needed. Extra cash earned from one period goes to the next and it's cumulative. This can be used to cover a cash requirement for one period.
Forecast future cash balances Lesson 15 Intercompany Equity Investments...