University:
Maryville University
Course:
ACCT 210 | Financial Accounting
Academic year:

2021
Views:

96

Pages:

2
Author:

Kyuwon J.

Capital structure: mixture of liabilities and stockholders’ equity a business uses ● Debt financing: borrowing money ● Equity financing: obtaining investment from stockholders Monthly installment payments include amounts that represent both: 1. Interest on borrowed amount 2. Reduction in outstanding loan balance ***Debit interest expense (amount for interest) Debit interest payable (difference in carrying value) Credit cash (should equal monthly payment) Leases: contractual agreement by which the lessor (seller) provides the lessee (buyer) the right to use an asset for a specified period of time ● Operating leases: lessor owns the asset, and the lessee uses the asset temporarily ● Capital leases: lessee buys an asset and borrows the money through a lease to pay for the asset (long term) Why companies lease over buy 1. Leasing improves cash flows through up to 100% financing 2. Leasing improves the balance sheet by reducing long-term debt 3. Leasing can lower income taxes Bonds: formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principle or face amount, at a specified maturity date ● Secured bonds- backed by collateral ● Unsecured bonds- not backed by collateral ● Term bond- matures on a single date ● Serial bond- matures on installments ● Callable bond- borrower can pay off bonds early ● Convertible bond- lender can convert bonds to common stock Interest expense = current carrying value X (adjusted) market price Cash interest payment = face value (principle) X (adjusted) stated rate of interest PV of principal = PV X PvF USE THE PV of interest payment = payment X PvaF (table 4) MARKET RATE DISCOUNT Stated rate < market rate FACE VALUE Stated rate = market rate PREMIUM Stated rate > market rate