1. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO3 Identify the components of a loan application. LO4 Journalize transactions related to long-term financing.

2. © 2014 Cengage Learning. All Rights Reserved. Applying for a Business Loan ●The assets or other financial resources available to a business are called capital. ●Purchases of plant assets used in the operation of a business are called capital expenditures. ●Assets pledged to a creditor to guarantee repayment of a loan are called collateral. SLIDE 2 LO3 Lesson 18-2

3. © 2014 Cengage Learning. All Rights Reserved. Applying for a Business Loan Section TitleQuestions of Interest to Bank Officers Use of fundsWhat portion of the funds will be used for revenue expenditures and capital expenditures? Business experience What experience do the primary owners and managers have in the industry? Do the decision makers understand how to operate the business? Can they anticipate problems and react to ensure success? Market demand Is there a proven consumer demand for the product or service? What competition does the business face? Financial projections When will the project become profitable? What assumptions is the business using to make its projections? CollateralWhat assets will be offered as collateral that could be claimed if the business is unable to pay the loan? How easy will it be to resell those assets? Capital profile What is the business risking in the project? Does the business have an adequate stake in the project to ensure management is motivated to succeed? SLIDE 3 LO3 Lesson 18-2

4. © 2014 Cengage Learning. All Rights Reserved. Signing a Long-Term Note Payable SLIDE 4 April 1. Signed a 5-year, 8.0% note for $120,000.00. Receipt No. 628. LO4 Lesson 18-2 120,000.00 Cash 120,000.00 Long-term Notes Payable 1 1 Account Title 2 2 Amount Borrowed 3 3 Cash Received

5. © 2014 Cengage Learning. All Rights Reserved. Making a Monthly Payment on a Long-Term Note Payable SLIDE 5 LO4 Lesson 18-2 Amount Borrowed Term of Note (Months) Annual Interest Rate Monthly Payment $120,000.00 60 8% $2,433.17 Payment Number Payable 1st day of Beginning BalanceInterestPrincipal Ending Balance 1May$120,000.00$800.00$1,633.17$118,366.83 2June$118,366.83$789.11$1,644.06$116,722.77 3July$116,722.77$778.15$1,655.02$115,067.75 4August$115,067.75$767.12$1,666.05$113,401.70 5September$113,401.70$756.01$1,677.16$111,724.54 6October$111,724.54$744.83$1,688.34$110,036.20 7November$110,036.20$733.57$1,699.60$108,336.60 8December$108,336.60$722.24$1,710.93$106,625.67 4August$115,067.75$767.12$1,666.05$113,401.70

6. © 2014 Cengage Learning. All Rights Reserved. Making a Monthly Payment on a Long-Term Note Payable SLIDE 6 August 1. Paid cash for monthly loan payment, $1,666.05, interest, $767.12; total, $2,433.17. Check No. 673. LO4 Lesson 18-2 1,666.05 Long-term Notes Payable 767.12 Interest Expense Cash 2,433.17 1 1 Account Title 2 2 3 3 Principal Amount 5 5 Cash Paid 4 4 Interest Amount

7. © 2014 Cengage Learning. All Rights Reserved. Issuing Bonds ●A long-term promise to pay a specified amount on a specified date and to pay interest at stated intervals is called a bond. ●All bonds representing the total amount of a loan are called a bond issue. ●The process of selling bonds is commonly referred to as issuing bonds. ●The face value is the amount to be repaid at the end of the bond term. ●The interest rate used to calculate periodic interest payments on a bond is called the stated interest rate. SLIDE 7 LO4 Lesson 18-2

8. © 2014 Cengage Learning. All Rights Reserved. Issuing Bonds SLIDE 8 July 1. Issued 20-year, 6.5%, $5,000.00 bonds, $180,000.00. Receipt No. 766. LO4 Lesson 18-2 180,000.00 Cash 180,000.00 Bond Payable 1 1 Account Title 2 2 Amount Borrowed 3 3 Cash Received

9. © 2014 Cengage Learning. All Rights Reserved. Paying Interest on Bonds SLIDE 9 December 31. Paid cash for semiannual interest on bonds, $5,850.00. Check No. 892. LO4 Lesson 18-2 5,850.00 Interest Expense 5,850.00 Cash 1 1 Account Title 2 2 Interest Amount 3 3 Cash Payment Face Value× Stated Interest Rate × Time as Fraction of a Year = Interest Payment $180,000.00×6.50%×180/360=$5,850.00

10. © 2014 Cengage Learning. All Rights Reserved. Lesson 18-2 Audit Your Understanding 1.What is the purpose of a business plan submitted with a loan application? SLIDE 10 ANSWER To convince the bank that it can repay the loan Lesson 18-2

11. © 2014 Cengage Learning. All Rights Reserved. Lesson 18-2 Audit Your Understanding 2.What can happen to collateral if a borrower is unable to repay a bank loan? SLIDE 11 ANSWER The bank can take the collateral and sell it to pay off the debt. Lesson 18-2

12. © 2014 Cengage Learning. All Rights Reserved. Lesson 18-2 Audit Your Understanding 3.Identify the primary sections of a business plan. SLIDE 12 ANSWER Use of funds Business experience Market demand Financial projections Collateral Capital profile Lesson 18-2

13. © 2014 Cengage Learning. All Rights Reserved. Lesson 18-2 Audit Your Understanding 4.Investor A sells a bond to investor B just days before the interest payment is made. Which investor receives the interest payment? SLIDE 13 ANSWER Investor B Lesson 18-2

14. © 2014 Cengage Learning. All Rights Reserved. Lesson 18-2 Audit Your Understanding 5.What are two common differences between notes payable and bonds? SLIDE 14 ANSWER Bonds generally have extended terms such as 5, 10, or 20 years. Also, bonds payable tend to be issued for larger amounts than notes payable. Lesson 18-2