Will's Notes

Chapter Seven

Introduction to Financial Accounting Home

Chapter Nine

Payments of Interest and Principal for Notes Payable and Mortgages:

• You must separate the amount paid into interest and principal for each payment
• Interest = Principal * Rate * Time
• Rate is quoted as an annual amount (unless otherwise told)
• Subtract the interest amount from your total payment to find out how much your principal (liability) goes down
• E.g. Buy a $15,000 car, pay $290 per month over 60 months at a 6% rate of interest
• First Payment:
• Interest = $15,000 * 6%/12 = $75
• Principal Reduction = $290 – 75 = $215
• Second Payment
• Interest = ($15,000 – 215) * 6%/12 = $74 (rounded)
• Principal Reduction = $290 – 74 = $216

Recording a Note Payable/Mortgage:

• Bank gives you $100,000 after you sign a 3 yr note at 8%:
• Debit Cash                         $100,000
•  Credit Note/Mortgage Payable       $100,000
• Your company uses the cash …asset exchange, payment of expense, ect.
• You have to make your first payment of $38,803.35 at end of year 1
• First Calculate interest:
• You had $100,000 outstanding at 8% for a yr = $8,000
• Second Calculate reduction in loan:
• You are paying $38,803.35, of which $8,000 is interest
• Reduction of principal = $38,803.35 – 8,000 = $30,803.35
• Make Journal Entry
• Debit Interest Expense                    $  8,000.00
• Debit Note/Mortgage Payable        $30,803.35
• Credit Cash                                                $38,803.35
• You are now ready for the next year.
• Your new Note/Mortgage Payable Balance is:
•  $100,000 – 30,803.35 = 69,196.65
• Interest = $69,196.65 * 8% = $5,535.73
• Reduction to Note/Mortgage Payable = $38,803.35 – 5,535.75 = $33,267.60

Terminology:

• Net Bond Payable or Carrying Value
• Bond Payable + Premium on Bond Payable, or
• Bond Payable – Discount of Bond Payable
• Market Rate or Yield or Effective Rate or True Rate
• The current rate offered by the market
• Stated Rate or Coupon Rate
• The rate of interest on the face value offered to be paid by the corporation

Terminology:

• Net Bond Payable or Carrying Value
• Bond Payable + Premium on Bond Payable, or
• Bond Payable – Discount of Bond Payable
• Market Rate or Yield or Effective Rate or True Rate
• The current rate offered by the market
• Stated Rate or Coupon Rate
• The rate of interest on the face value offered to be paid by the corporation

Bonds:

• Creditor loans money for a series of interest payments and one bulk principal payment at the end
• Bonds are typically issued in $1,000 denominations (FACE VALUE)
• Prices are quoted in percentages of the $1,000, therefore:
• If the quote is 100, then the price is $1,000 which is PAR
• If the quote is 105, the price is $1,050 which is a PREMIUM
• If the quote if 95, the price is $950, which is a DISCOUNT

Chapter Seven

Introduction to Financial Accounting Home

Chapter Nine