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Lecture Fundamental financial accounting concepts (8/e): Chapter 10 - Edmonds, McNair, Olds

Chapter 10 - Accounting for long-term debt. After you have mastered the material in this chapter, you will be able to: Show how an installment note affects financial statements, show how a line of credit affects financial statements, describe bond features and show how bonds issued at face value affect financial statements,. | Accounting for Long-Term Debt Chapter Ten McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. This chapter explains accounting for interest and principal with respect to the major forms of long-term debt financing. Long-term notes are liabilities that usually have terms from two to five years. Each payment covers interest for the period and a portion of the principal. With each payment, the interest portion gets smaller and the principal portion gets larger. Principal Company Lender Payments Long-Term Notes Payable 10- Part I Long-term notes are liabilities that usually have terms from two to five years. Part II The principal balance is repaid with a series of equal payments. Each payment includes some payment on the principal and some payment for interest. Most car loans and home loans are set up with installment payments. Part III For each payment that is made, the amount applied to the principal increases and the amount of the interest decreases. Applying payments to principal and interest Identify the unpaid principal balance. Amount applied to interest = Unpaid principal balance × Interest rate. Amount applied to principal = Cash payment – Amount applied to interest in . Unpaid principal balance = Unpaid principal balance in – Amount applied to principal in . Long-Term Notes Payable 10- To determine the portion of each payment that is interest and the portion to apply to the principal, follow these four steps: Identify the unpaid principal balance. Multiply the unpaid principal balance times the interest rate to find the portion of the payment that is interest. Subtract the portion of the payment that is interest in from the total cash payment to find the portion of the payment to apply to the principal. The updated unpaid principal balance equals the unpaid principal balance in minus the portion of the payment applied to the principal in . Let’s look at an example. . | Accounting for Long-Term Debt Chapter Ten McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. This chapter explains accounting for interest and principal with respect to the major forms of long-term debt financing. Long-term notes are liabilities that usually have terms from two to five years. Each payment covers interest for the period and a portion of the principal. With each payment, the interest portion gets smaller and the principal portion gets larger. Principal Company Lender Payments Long-Term Notes Payable 10- Part I Long-term notes are liabilities that usually have terms from two to five years. Part II The principal balance is repaid with a series of equal payments. Each payment includes some payment on the principal and some payment for interest. Most car loans and home loans are set up with installment payments. Part III For each payment that is made, the amount applied to the principal increases and the