The document discusses project financing, categorizing funding sources into debt and equity. It outlines various types of debt financing, including borrowing, corporate bonds, trade debt, and customer deposits, detailing processes and accounting entries related to bond issuance and payments. Additionally, it covers equity financing through the sale of shares, highlighting the tax implications of each financing method.

1. 1
Chapter four: project financing

2. Project Financing
 There are two categories of sources for funding: debt
(borrowing) and equity.
Debt Financing
 There are essentially four types of debt financing: (1)
borrowing, (2) corporate bonds, (3) trade debt, and (4)
customer deposits.
1. Borrowing
 The most common type of debt financing is borrowing from
financial institutions, such as banks or leasing companies.
 Borrowing from financial institutions can be quick and
relatively inexpensive.

3. 2. Corporate Bonds
• Issuing Procedures
 Government laws grant corporations power to issue bonds.
 Board of directors and shareholders must approve bond
issues.
 Board of directors must specify number of bonds to be
authorized, total face value, and contractual interest rate.
 Issuing company arranges for printing of bond certificates.
 A bond certificate is a document that states the details of the
bond including the bond issuer's name, the bond par value
or face amount, the interest rate, and the maturity date.

4. Cont.…
 Represents a promise to pay:
►Face value at designated maturity date, plus
►Periodic interest at a contractual (stated) interest
rate on the maturity amount (face value).
 Interest payments usually made semiannually.

5. Maturity
Date
Contractual
Interest
Rate
Face or
Par Value
DUE 2017 DUE 2017
2017
Issuer of
Bonds

6. Accounting for Bond Issues
• Corporation records bond transactions when it
 issues (sells),
 retires (buys back) bonds and
 when bondholders convert bonds into ordinary shares.
• NOTE: If bondholders sell their bond investments to
other investors, the issuing firm receives no further money
on the transaction, nor does the issuing corporation
journalize the transaction.

7. Issue at Par, Discount, or Premium?
Accounting for Bond Issues
Illustration 10-10
Bond
Contractual
Interest Rate
of 10%
When the cost of borrowing money rises
(when interest rates rise), bond prices usually
fall, and vice-versa.

8. Illustration: On January 1, 2014, Candlestick Inc. issues
€100,000, five-year, 10% bonds at 100 (100% of face value).
The entry to record the sale is:
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 100,000
Bonds payable 100,000
Issuing Bonds at Face Value
Accounting for Bond Issues

9. Illustration: On January 1, 2014, Candlestick Inc. issues
€100,000, five-year, 10% bonds at 100 (100% of face value).
Assume that interest is payable semiannually on January 1 and
July 1. Prepare the entry to record the payment of interest on
July 1, 2014, assume no previous accrual.
LO 5 Prepare the entries for the issuance of bonds and interest expense.
July 1 Interest expense 5,000
Cash 5,000
Issuing Bonds at Face Value
(€100,000 x 10% x 6/12)

10. LO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration: On January 1, 2014, Candlestick, Inc. sells
€100,000, five-year, 10% bonds for €92,639 (92.639% of face
value). Interest is payable on July 1 and January 1. The entry
to record the issuance is:
Jan. 1 Cash 92,639
Bonds payable 92,639
Accounting for Bond Issues
Issuing Bonds at a Discount

11. The issuance of bonds below face value—at a discount—causes the
total cost of borrowing to differ from the bond interest paid.
The reason: Borrower is required to pay the difference between the
issuance price and face value—the discount—at the maturity date.
Thus, the discount is considered to be an additional cost of
borrowing.
Statement Presentation
LO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration 10-11
Issuing Bonds at a Discount
Carrying value or
book value

12. LO 5 Prepare the entries for the issuance of bonds and interest expense.
Total Cost of Borrowing
Illustration 10-12
Illustration 10-13
Issuing Bonds at a Discount

13. LO 5 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 108,111
Bonds payable 108,111
Illustration: On January 1, 2014, Candlestick, Inc. sells
€100,000, five-year, 10% bonds for €108,111 (108.111% of
face value). Interest is payable on July 1 and January 1. The
entry to record the issuance is:
Accounting for Bond Issues
Issuing Bonds at a Premium

14. Statement Presentation
LO 5 Prepare the entries for the issuance of bonds and interest expense.
The sale of bonds above face value causes the total cost of borrowing
to be less than the bond interest paid.
The reason: The borrower is not required to pay the bond premium at
the maturity date of the bonds. Thus, the bond premium is considered
to be a reduction in the cost of borrowing.
Illustration 10-14
Issuing Bonds at a Premium

15. LO 5 Prepare the entries for the issuance of bonds and interest expense.
Total Cost of Borrowing
Illustration 10-15
Illustration 10-16
Issuing Bonds at a Premium

16. 3. Trade Debt
Trade debt financing is a fancy phrase for
extending accounts payable.
The objective here is to delay payment of the
payables beyond the sales and accounts
receivable collection cycles.
This method of financing appears to be a
cheap source of money.

17. 4. Customer Deposits (Retainers)
Customer deposits (retainers) are similar in concept
to financing the project with trade debt.
The difference is that instead of extending trade debt,
the project is financed through customer deposits (a
type of liability).
One example of this type of debt financing would be
today’s small residential building contractors.
Typically, such contractors require a payment before
beginning work and subsequent payments as
construction progresses.

18. 2. Equity
Equity financing is the process of raising capital
through the sale of shares.
Companies raise money because they might
have a short-term need to pay bills or have a
long-term goal and require funds to invest in
their growth.
By selling shares, a company is effectively selling
ownership in their company in return for cash.

19. Income Tax Effect
The costs of raising and securing common or
preferred stock are not tax deductible; they
reduce the organization’s equity but not net
income.
Interest paid on loans or bonds is tax deductible.
A company’s assets are financed with either debt
or equity.
In today’s world of finance, almost all companies
have debt.

20. Individual assignment
• Which source of Finance is
cheap? And why

21. Q & A