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Lecture Introduction to Accounting: An integrated approach: Chapter 14 - Penne Ainsworth, Dan Deines

Chapter 14 - Planning debt financing. After completing this chapter, students will be able to: Describe and calculate the impact of a periodic payment note payable on the company's budgeted financial statements, discuss and calculate the impact of a lump-sum payment note payable on the company's budgeted financial statements, explain and calculate the impact of a periodic and lump-sum payment note payable on the company's budgeted financial statements. | Chapter 14 Planning Debt Financing Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 14- What are the 3 Basic Types of Notes? Periodic Payment Note Installment note Borrower receives the face value and makes periodic payments of principal and interest PV = amount borrowed, FV = 0, r = annual rate of interest, c = number of payments per year, n = total number of payments, determine ANN = amount of each payment 14- Basic Notes Continued Lump-sum payment note Noninterest-bearing note Borrower receives an amount less than the face value of the note and repays the face value of the note at some point in the future PV = amount received, c = number of compounding periods per year, n = total number of compounding periods, r = annual rate of interest, ANN = 0, determine FV = face value of note 14- Basic Notes Continued Periodic and lump-sum payment note Interest-bearing note Borrower makes 2 promises: (1) repay the face amount of the note at some point in the future and (2) pay interest based on the face amount of the note and the face rate of interest periodically throughout the life of the note Borrower receives more or less than the face value of note depending on the market rate of interest 14- Periodic and Lump-sum Payment Note Continued FV = face value (amount repaid at end), ANN = interest paid periodically (face value * face rate * time), r = market rate of interest (annually), c = number of interest payments per year, n = total number of interest payments, determine PV = amount received 14- How do Notes Impact Budgeted Financial Statements? Income statement Interest expense (also tax expense—beyond the scope of this text) Statement of cash flows Cash paid periodically and at the end Balance sheet Carrying value of the note 14- Budgeted Financial Statements: Installment Notes Income statement Interest expense decreases over time because we are paying principal and interest with every payment, . | Chapter 14 Planning Debt Financing Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 14- What are the 3 Basic Types of Notes? Periodic Payment Note Installment note Borrower receives the face value and makes periodic payments of principal and interest PV = amount borrowed, FV = 0, r = annual rate of interest, c = number of payments per year, n = total number of payments, determine ANN = amount of each payment 14- Basic Notes Continued Lump-sum payment note Noninterest-bearing note Borrower receives an amount less than the face value of the note and repays the face value of the note at some point in the future PV = amount received, c = number of compounding periods per year, n = total number of compounding periods, r = annual rate of interest, ANN = 0, determine FV = face value of note 14- Basic Notes Continued Periodic and lump-sum payment note Interest-bearing note Borrower makes 2 promises: (1) repay the face amount of the note at