introduction chapters
chapter 1
3Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Be able to account for a simple term note payable.
Understand compound interest concepts and calculations.
Define "future value," and know the related computations and how to use future value tables (for lump sum and annuity situations).
Define "present value, " and know the related computations and how to use present value tables (for lump sum and annuity situations).
Be able to calculate and account for amounts related to notes payable that include level payments of principal and interest over the entire life of the note.
Understand why present value is important to bond pricing calculations.
Describe the basic characteristics of a bond.
Identify the different types of bonds and their key features.
Prepare journal entries for the issuance of a bond.
What factors will generally impact the issue price of a bond?
What is the general relationship between present value and bond price calculations?
Be able to describe when a bond is issued at a discount, and prepare journal entries for its issuance.
Be able to account for a bond (issued at a discount) over its entire life, using both the straight-line and effective-interest methods of discount amortization.
Be able to describe when a bond is issued at a premium, and prepare journal entries for its issuance.
Be able to account for a bond (issued at a premium) over its entire life, using both the straight-line and effective-interest methods of premium amortization.
Determine the appropriate procedures for bonds issued between interest payment dates..
Determine the appropriate year-end accounting for bonds issued at a discount or premium.
Understand the potential impact of a bond retirement.
Differentiate between a liability and a commitment, and understand that significant commitments should be disclosed.
Be able to express an understanding of debt analysis, including cautionary caveats.
Know how to calculate the ratios: debt to total assets and times interest earned.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| annuities | Streams of level (i.e., the same amount each period) payments occurring on regular intervals |
| bonds payable | An obligation divided into transferable units requiring the issuer to make periodic interest payments and an eventual repayment of the face amount |
| callable bond | A bond that provides the issuer an option to reacquire the bonds before scheduled maturity at a preset price |
| commitments | Promises to engage in some future action; not necessarily creating a recordable accounting liability but potentially necessitating enhanced disclosure |
| compound interest | Interest calculations that provide for periodic inclusion of accumulated interest into the base on which interest is calculated; "interest on the interest" |
| convertible bond | A bond that may be converted by the holder into stock of the issuing company |
| coupon bond | A bond that has detachable coupons that are exchanged for interest payments; historically popular but falling into disuse |
| debenture bond | A bond that lacks specific collateral; payment is only assured by the general faith and creditworthiness of the issuer |
| effective-interest amortization | A theoretically preferable method for amortizing premiums and discounts on bonds; interest expense is a constant percentage of the bonds ever-changing carrying value |
| future value | The amount to which an interest-earning amount is expected to grow over a stipulated time period at a given interest rate |
| junk bond | A bond that is issued by a company of low credit worthiness, and entails substantial risk of nonpayment; generally offers a high interest rate to compensate for the high risk |
| nonredeemable bond | A bond that cannot be paid off before scheduled maturity |
| nonrefundable bond | A bond that cannot be paid off with the proceeds of a new debt issue |
| present value | The calculated value today of an amount to be received in the future, based upon an assumed interest rate (the reciprocal of future value) |
| registered bond | A bond for which ownership records are maintained, and interest is paid to the registered owner |
| secured bond | A bond that provides specific assets as collateral to help assure the payment stream |
| serial bond | A bond issue that has multiple repayment dates, rather than the entire issue maturing at one fixed maturity date |
| simple interest | Interest calculations that do not provide for periodic inclusion of accumulated interest into the base on which interest is calculated |
| sinking fund bond | A bond issue that requires periodic setting aside of monies into a separate fund to provide for eventual repayment of the debt at maturity |