Explain the types and payment patterns of notes. Notes repaid over a period of time are called installment notes and usually follow one of two payment patterns: (1) decreasing payments of interest plus equal amounts of principal or (2) equal total payments. Mortgage notes also are common.

Explain and compute the present value of an amount(s) to be paid at a future date(s). The basic concept of present value is that an amount of cash to be paid or received in the future is worth less than the same amount of cash to be paid or received today. Another important present value concept is that interest is compounded, meaning interest is added to the balance and used to determine interest for succeeding periods. An annuity is a series of equal payments occurring at equal time intervals. An annuity's present value can be computed using the present value table for an annuity (or a calculator).

Describe the accrual of bond interest when bond payments do not align with accounting periods. Issuers and buyers of debt record the interest accrued when issue dates or accounting periods do not coincide with debt payment dates.

Describe accounting for leases and pensions. A lease is a rental agreement between the lessor and the lessee. When the lessor retains the risks and rewards of asset ownership (an operating lease), the lessee debits Rent Expense and credits Cash for its lease payments. When the lessor substantially transfers the risks and rewards of asset ownership to the lessee (a capital lease), the lessee capitalizes the leased asset and records a lease liability. Pension agreements can result in either pension assets or pension liabilities.

Compare bond financing with stock financing. Bond financing is used to fund business activities. Advantages of bond financing versus stock include (1) no effect on owner control, (2) tax savings, and (3) increased earnings due to financial leverage. Disadvantages include (1) interest and principal payments and (2) amplification of poor performance.

Assess debt features and their implications. Certain bonds are secured by the issuer's assets; other bonds, called debentures, are unsecured. Serial bonds mature at different points in time; term bonds mature at one time. Registered bonds have each bondholder's name recorded by the issuer; bearer bonds are payable to the holder. Convertible bonds are exchangeable for shares of the issuer's stock. Callable bonds can be retired by the issuer at a set price. Debt features alter the risk of loss for creditors.

Compute the debt-to-equity ratio and explain its use. Both creditors and equity holders are concerned about the relation between the amount of liabilities and the amount of equity. A company's financing structure is at less risk when the debt-to-equity ratio is lower, as liabilities must be paid and usually with periodic interest.

Prepare entries to record bond issuance and bond interest expense. When bonds are issued at par, Cash is debited and Bonds Payable is credited for the bonds' par value. At bond interest payment dates (usually semiannual), Bond Interest Expense is debited and Cash credited; the latter for an amount equal to the bond par value multiplied by the bond contract rate.

Compute and record amortization of bond discount. Bonds are issued at a discount when the contract rate is less than the market rate, making the issue (selling) price less than par. When this occurs, the issuer records a credit to Bonds Payable (at par) and debits both Discount on Bonds Payable and Cash. The amount of bond interest expense assigned to each period is computed using either the straight-line or effective interest method.

Compute and record amortization of bond premium. Bonds are issued at a premium when the contract rate is higher than the market rate, making the issue (selling) price greater than par. When this occurs, the issuer records a debit to Cash and credits both Premium on Bonds Payable and Bonds Payable (at par). The amount of bond interest expense assigned to each period is computed using either the straight-line or effective interest method. The Premium on Bonds Payable is allocated to reduce bond interest expense over the life of the bonds.

Record the retirement of bonds. Bonds are retired at maturity with a debit to Bonds Payable and a credit to Cash at par value. The issuer can retire the bonds early by exercising a call option or purchasing them in the market. Bondholders can also retire bonds early by exercising a conversion feature on convertible bonds. The issuer recognizes a gain or loss for the difference between the amount paid and the bond carrying value.

Prepare entries to account for notes. Interest is allocated to each period in a note's life by multiplying its beginning period carrying value by its market rate at issuance. If a note is repaid with equal payments, the payment amount is computed by dividing the borrowed amount by the present value of an annuity factor (taken from a present value table) using the market rate and the number of payments.