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Charges made against the interest received on a debt in order to offset a premium paid for the debt. Thus, with each periodic payment, a debtor is not only paying back interest, but also part of his or her premium. This leads to higher periodic payments than in the case when only interest is paid out. However, a payment schedule which includes premium amortization makes debt management easier, especially if the principal is large. While paying just the interest each period will lead to a low outflow of cash each month, the debtor might not save enough to pay the principal. Thus, amortizing the premium each period also reduces the credit risk of the debt, since the creditor gets some part of the principal each time period, as opposed to allowing a debtor to forfeit on all of it at the maturity of the loan. Amortization of premium is a common feature in cases when a person or company takes on a large amount of debt at one time, such as a mortgage.
What else can I help you with?
What is share premium income or expense?
Share premium refers to the amount received by a company over and above the par value of its shares when they are issued. It represents a form of equity financing and is recorded in the shareholders' equity section of the balance sheet. Share premium is not considered income or expense; rather, it reflects the valuation investors place on the company's shares beyond their nominal value. Changes in share premium can occur during share issuance or buybacks but do not affect the company’s profit and loss statement.
What causes the profit for the year not to equal the net cash inflow?
You have several components that would cause changes in Cash flow and Net income. The first, and usually most intrusive is the way that capital asset (machines, buildings, etc.) are recorded. Purchasing a machine worth $50,000 causes an instant outflow of cash, however, you are able to amortize that same machine over it's useful life on the balance sheet. This means that if the machine has a useful life of 10 years, the amortization expense in the same year your purchased the machine (which remember was a $50,000 outflow of cash) will only be $5,000 (assuming straight-line amortization). This gives you a difference of $4,500 for the year. In subsequent years, the amortization expense will still be present at $5,000 (which counts towards your Net Income), however you did not have any cash transaction associated with the asset. This causes a $5,000 affect in the opposite direction.
How does prepaid expense and accrued expense affect the profit of a business?
it will either increase or decrease profit. Prepaid expense should increase profit as the amount has been overstated.
What is the entry to close the depreciation expense account would include a debit of?
To close the depreciation expense account, the entry would include a debit to the Income Summary account. The corresponding credit would be made to the depreciation expense account, effectively zeroing it out for the period. This entry reflects the transfer of the expense to the Income Summary, where it will ultimately affect the net income calculation for the period.
How do credit and debit affect expense and income?
Credit and debit impact expense and income by determining how transactions are recorded in accounting. A debit increases an expense or asset account and decreases a liability or equity account, while a credit does the opposite. For example, when a business incurs an expense, it debits the expense account, increasing total expenses, and credits its cash or accounts payable, affecting income. Thus, understanding these terms is crucial for accurately tracking financial performance.
How does amortization of the principal balance affect the amount of interest expense recorded each succeeding year?
reduces the amount of interest expense each succeeding year
Is accrued expense a financial liability?
If you are doing adjusting entries, an accrued expense will affect a balance sheet account (payable) and an income statement account (expense). Such as accrued interest at the end of year would be: Interest Expense (Debit) Interest Payable (Credit)
How do extra payments affect the amortization schedule of a loan?
Extra payments on a loan can reduce the total amount of interest paid and shorten the time it takes to pay off the loan. This can change the amortization schedule by accelerating the repayment of the principal balance.
When bonds are issued at a premium what is the affect on interest?
Bonds issued at a premium offer an interest rate that is above the market interest rate. Typically, a bond issuer offers a premium interest rate to offset higher risk associated with a bond offering that has a low credit rating. A purchaser of a bond offered at a premium will receive a higher interest rate but will incur a higher degree of credit risk.
What is the purpose of an interest only mortgage calculator?
The purpose is to help determine the amortization schedule would be for an interest only mortgage. It also helps determine how principal payments made to reduce the mortgage balance will affect the schedule.
What is share premium income or expense?
Share premium refers to the amount received by a company over and above the par value of its shares when they are issued. It represents a form of equity financing and is recorded in the shareholders' equity section of the balance sheet. Share premium is not considered income or expense; rather, it reflects the valuation investors place on the company's shares beyond their nominal value. Changes in share premium can occur during share issuance or buybacks but do not affect the company’s profit and loss statement.
How does an auto loan amortization calculator help me choose the best auto loan for me?
Although a loan amortization is most commonly used for home mortgages it can also be used for auto loans. It uses basic information about the cost of the car, the interest rate, and the loan term. It is important to keep in mind that the interest rates change from lender to lender and that it can affect the total price of the car, the monthly payment, and the amount needed for a down payment.
Increasing interest exspense has what affect on ebit?
Increasing interest expense will decrease EBIT (Earnings Before Interest and Taxes) as it directly reduces the company's profitability by deducting the interest payment from the operating income. This results in lower EBIT margins and reduced earnings available to shareholders.
What is an interest expense?
An interest expense is the cost incurred by a borrower for the use of borrowed funds, typically expressed as a percentage of the loan amount. It represents the interest that must be paid on loans, credit lines, or other forms of debt over a specific period. For businesses, interest expenses are often recorded on the income statement and can affect profitability. This expense is crucial for financial analysis, as it impacts cash flow and overall financial health.
If I get a traffic violations does it affect someones insurance?
It can affect: 1. Your insurance premium (for your own vehicle, or your parents vehicle if you are on their policy. 2. Your employers insurance premium (if you drive for work) It will NOT affect: 1. Your friend's premium, unless you are scheduled as a driver on the policy
What causes the profit for the year not to equal the net cash inflow?
You have several components that would cause changes in Cash flow and Net income. The first, and usually most intrusive is the way that capital asset (machines, buildings, etc.) are recorded. Purchasing a machine worth $50,000 causes an instant outflow of cash, however, you are able to amortize that same machine over it's useful life on the balance sheet. This means that if the machine has a useful life of 10 years, the amortization expense in the same year your purchased the machine (which remember was a $50,000 outflow of cash) will only be $5,000 (assuming straight-line amortization). This gives you a difference of $4,500 for the year. In subsequent years, the amortization expense will still be present at $5,000 (which counts towards your Net Income), however you did not have any cash transaction associated with the asset. This causes a $5,000 affect in the opposite direction.
How does prepaid expense and accrued expense affect the profit of a business?
it will either increase or decrease profit. Prepaid expense should increase profit as the amount has been overstated.
