Debt financing

Debt financing

1. notes payable

2. mortagege payable

3. bonds payable

4. amount to be recorded present value of future payment to be made to settled the debts

5. a) form of interest payments

   • nature : a regular amount to be paid at a regular periodic time
     • regulaly made on periodical basis (table 4)
     • ordinary anuity table

6. b) principal amount

   • a single sum amount payment on the maturity date (table 2)
     • PV of single sum table

7. issuance price : a+b

   • > par value : debt issued at premium
     • dt cash cr premium bonds payable cr bonds payable
   • < par value : issued at discount
   • at par : dt cash cr bond payable
     • dt cash cr discount on bond payable cr bonds payable

8. amortization of premium and discount -different between interest expense and cash interest

   • straight line method
   • effective interest mathod
   • stated intrest rate vs market interest rate
     • premium : stated > market
       • when stated is higher compared in other alternative available investment return found in market so demand will increase for the bond so more investors will buy the bond so cash interest > interest expense
         • dt interest ex, premium on bond payable cr cash
       • reduce the CA to reach the Principle amount on the maturity date
       • CA : CA as at the beginning - amortization
     • discount : interest ex > cash interest
       • dt interest expense cr cash, discount on bond payable
       • CA : CA as at beginning + amortization

9. settlement of debt

   • i) CA=Par value
   • ii) b4 maturity date : identify any gain or loss that arise form the settlement of debts
     • compare CA and cash paid to settle debt
     • cash paid < CA : gain
     • cash paid > CA : loss