Chapter 10 Financial Accounting

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Bond Certificate
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a legal document that indicates the name of the issuer, the face value of the bonds, and other data such as the contractual interest rate and the maturity date of the bonds.
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Bonds
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a form of interest-bearing notes payable issued by corporations, universities, and governmental entities.
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Callable Bonds
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bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity.
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Capital Lease
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a contractual agreement allowing one party (the lessee) to use the assets of another party (the lessor); accounted for like a debt-financed purchase by the lessee.
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Contingencies
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events with uncertain outcomes that may represent potential liabilities.
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Contractual (stated) interest rate
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rate used to determine the amount of interest the borrower pays and the investor receives.
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Convertible bonds
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bonds that can be converted into common stock at the bondholder’s option.
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Current liability
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a debt that a company reasonably expects to pay from existing current assets or through the creation of other current liabilities, and within one year or the operating cycle, whichever is longer.
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Discount (on a bond)
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the difference between the face value of a bond and its selling price when a bond is sold for less than its face value.
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Effective-interest method of amortization
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a method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds.
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Effective-interest rate
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rate established when bonds are issued that maintains a constant value for interest expense as a percentage of bond carrying value in each interest period.
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Face value
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amount of principal due at the maturity date of the bond.
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Long-term liabilities
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obligations that a company expects to pay more than one year in the future.
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Market interest rate
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the rate investors demand for loaning funds to the corporation.
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Maturity date
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the date on which the final payment on a bond is due from the bond issuer to the investor.
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Notes Payable
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an obligation in the form of a written note.
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Off-balance-sheet financing
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the intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet.
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Present value
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the value today of an amount to be received at some date in the future after taking into account current interest rates.
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Secured bonds
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bonds that have specific assets of the issuer pledged as collateral.
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Straight-line method of amortization
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a method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period.
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Times interest earned
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a measure of a company’s solvency, calculated by dividing income before interest expense and taxes by interest expense.
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Time value of money
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the relationship between time and money. a dollar received today is worth more than a dollar promised at some time in the future.
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Unsecured bonds
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bonds issued against the general credit of the borrower.
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Interest
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Face Value x Rate x Time
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Debt to Asset Ratio
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Total Liabilities/Total Assets
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Working Capital
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Current Assets- Current Liabilites
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Times Interest Earned
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(Net Income+ Interest Expense+ Tax Expense)/Interest Expense
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Bond Discount
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Bond Discount/ Number of Interest Periods = Bond Discount Amortization
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Bond Premium
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Bond Premium/ Number of Interest Periods = Bond Premium Amortization
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Bond Interest Expense
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Carrying Value of Bonds at Beginning of Period x Effective Interest Rate
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Bond Interest Paid
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Face Amount of Bond x Contractual Interest Rate
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Amortization Amount
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Bond Interest Expense – Bond Interest Paid
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Debt to Asset Ratio
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Total Liabilities/ Total Assets

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