Original cost of investment Debit balance in allowance to adjust investments to market or credit balance in allowance to adjust investments to market Investor Bond holder Entity that owns corporation stock investment in bonds interest revenue Investee Corporation that issues stock bonds payable interest expense Held to maturity Recorded at amortized cost interest received semi annually issued in 1000 denominations price as percent of par fluctuate with market interest rates Accounting for held to maturity investment Initially recorded at cost Interest revenue recorded at semiannual interest payment date Premium or discount is amortized o Carrying value is adjusted towards face value Face value received at maturity Amortization of held to maturity investment Increases long term investment account as it reaches maturity Records interest revenue earned from carrying amount increases Accounting Methods for Long term Investments Percentage ownership by the investor Less than 20 20 50 Greater than 50 Carrying amount of investment Unrealized Gains and Losses Fair value declines Debits unrealized loss on investments Fair value increases credit unrealized gain on investments Present Value What amount in the future is worth today Often called discounting Single amount or annuity Present Value of Investments in Bonds Market price of bonds equal Present Value of principal received at maturity single amount Present value of interest payments annuity Time Value of Money Prefer payments now vs in future due to interest factor Applicable to both personal and business decisions GAAP accounting method Fair market value Equity Consolidation o o o o Time Value of Money Factors Principal amount p Single lump sum Annuity Number of periods n Interest rate i Accrue recognized o o Interest Rates and Bond Prices Loss probable Amount estimable NEED Issue Price of Bonds Payable Case A Stated interest rate Case B Stated interest rate Case C Stated interest rate S9 1 Date July 31 Account and explanation Inventory Date Account and explanation Market interest rate Therefore Issued at par Market interest rate Therefore Issued at discount Market Interest Rate Therefore Issued at premium Note payable inventory buy issuing a bond payable Debit 11 000 Credit 11 000 Debit Credit Present Value and Future Value PV Interest earned Future Value Contingent Liability Potential Liability that depends on future outcome events Disclose o Loss reasonably possible Bonds are always sold at markets price PV Two interest rates to set bond price o Stated interest rate coupon rate Printed on bond certificate Determines cash interest paid to bond o Market interest rate effective interest Demanded by investors for loaning money Varies minute to minute Stated rate differs from market rate 990 Debit 11 000 990 330 990 Credit 12320 April 30 Interest Expense 11000 x 12 x9 12 Accrued interest expense Date July31 Account and explanation Note payable short term Interest Payable Interest Expense 1100x 12 x 3 12 Cash Paid note payable and Interest maturity Balance sheet April 30 2013 Note payable short term 11000 Interest Payable 990 Income Statement April 30 2013 Interest Expense 990 Chapter 9 Current Liabilities o o Obligations due within one year Two types Known amounts Accounts payable amounts owed for products or services purchased on account Accounts payable turnover cost of goods sold Average accounts payable Days payable outstanding 365 accounts payable turnover Short term notes payable Due within one year Used to borrow cash or purchase asset Accrue interest Date Dec1 Dec 31 Account and explanation Inventory Note payable short term Purchased note payable by issuing a 3 month 9 note Interest expense Debit 30 000 225 Credit 30 000 225 Interest payable Accrued interest on note payable 30 000 x 9 x 1 12 Sales tax payable o o o o o o o o o o o o o Accrued liabilities Levied on retail sales Collected from customers and remitted Cash 105 000 Sale 100 000 Sale tax payable 5 000 Results from expenses incurred but not yet paid Categories Salaries and wages Interest payable Income tax payable Payroll liabilities o Major expense of most companies o Salary wage commission Unearned revenues Current portion of long term debt Longer term debt often paid in installments Amount of principal payable within one year Company reclassifies amount from long term to current Contingent Liabilities Estimated amounts o Potential liability that depends on future outcome from past event Accrue loss probable amount estimable Disclosure Loss reasonably possible A current Liability must be paid out of current profits False paid from CASH Purchasing merchandise inventory on account results in a liability True Bonds Payable Types of Bonds Term Debts of issuing company Bond certificate states Company name principal maturity date interest rate interest payment dates Discount Price below face Debit balance Market price increases towards maturity value Serial Secured Unsecured Quotes as percent of maturity value Bond Prices Premium Prices above face Credit Balance Market Price decreases toward maturity value At maturity date Face value Market Value Interest Rates and Bond prices Bonds always sold at market price Bond s PV Two interest rates set bond price o Stated interest rate coupon rate differs from market value Printed in bond Determines cash interest paid to bondholders o Market interest rate effective interest rate Demanded by investors for loaning money Interest Payment Face Value x Stated interest rate X 1 2 Interest expense Carrying amount x market interest rate x 1 2 Amortization discount or premium of interest payments Interest Expense interest payment amortization Retiring Bonds before Maturity Can relieve high interest payments can borrow at a lower interest rate Callable feature issuer can pay off bonds at a prearranged prices results in loss or gain Convertible Bonds and Notes Bondholders can exchange bonds for stock Investors benefit from o o Guaranteed receipt of principal and interest on bonds Potential for gains on stock Leases Operating o o o Capital o o o Capital Criteria Lessee has right to us the asset Lessor retains risk and rewards of owing Lessee records rent expense Lessee has right to use the asset Lessee assumes risk and rewards of ownership Lessee capitalizes the leased asset and records as a long term liability o o o o Transfer of title at end of lease Bargain purchase option Lease term 75 of useful life Present value of lease payments 90
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