ACCT20200 Chapter Notes - Chapter 9: Amortization Schedule, Internal Financing, Interest Expense
Ch. 9 Long-Term Liabilities
● Internal financing: sourced from generated profits
● External financing: funds coming from outside of the company
● Liabilities and stockholder’s equity reveal debt financing and equity financing
○ Debt financing: borrowing money from creditors (L)
○ Equity financing: obtaining investment from stockholders (E)
● Capital structure: the mixture of liabilities and equity a business uses
● Interest expense incurred when borrowing money is tax-deductible, whereas dividends
paid to stockholders are not tax-deductible
○ Debt can be a less costly source of external financing
○ Interest expense incurred on debt reduces taxable income
● Installment payments: include both an amount that represents interest and an amount that
represents a reduction of the outstanding balance
○ Amortization schedule: a table format detailing the cash payments each period,
interest portion, carrying value charge and the balance of the carrying value.
○ Installment note payable = interest is recorded as interest expense
○ * = omitted periods
○ Elements of an amortization schedule:
■ Date (end-of-the-month payments)
■ Cash paid (same every month)
■ Interest expense (prior month’s carrying value times interest)
■ Decrease in carrying value (cash paid in excess of interest expenses reduced
the remaining loan balance)
■ Carrying value: remaining balance of the loan after each monthly payment
○ Monthly amortization payment record:
■ Debit interest expense for the interest and debit notes payable for the
difference in the monthly payment
■ Credit cash for the full monthly payment amount.
● Credit the account that the note was used to purchase (either cash or
a non cash asset)
● Lease: contractual agreement by which the owner provides the user the right to use an asset
for a specified period of time.
○ Benefits of leasing instead of buying:
■ Reduces upfront cash needed to use an asset
■ Payments are lower than installment payments
■ Offers flexibility and lower costs when disposing of an asset
■ May offer protection against the risk of declining asset values
○ Recording a lease:
■ User: acquire an asset(lease) and get a lease payable
● Initial record: debit lease asset and credit lease payable at the present
value of the lease payments.
■ Lease payment annuity calculation: need to know future value, lease
payment, number of payments, interest rate.
● Bond: formal debt instrument issued by a company to borrow money
○ The issuer received cash by selling the bond to an investor.
○ Issuer promises to pay back:
■ Stated amount (principal/face amount) at a specific maturity date
■ Periodic interest payments over the life of the bond.
○ Underwriting services: bonds are sold by specific investment houses
■ Creates a service fee for issuing company
○ Private placement: sale of debt securities directly to a single investor
○ Bonds have a lower interest rate than a bank loan
○ Secured bonds: are backed by collateral
○ Unsecured bonds: are not backed by a specific asset
○ Term bonds: full principal amount payment mat a single maturity date
■ Sinking fund: an investment fund used to set aside money to be used to pay
debts as they come due
○ Serial bonds: require payments in installments over a series of years
○ Callable bonds: issuing company can pay off bonds early at a specific price
○ Convertible bonds: investor can convert bonds to common stock
○ Most bonds pay interest semiannually
