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AU / Accounting / ACCT 2110 / If bonds with a face value of $100,000 are sold for $96,000, how must

If bonds with a face value of $100,000 are sold for $96,000, how must

If bonds with a face value of $100,000 are sold for $96,000, how must

Description

School: Auburn University
Department: Accounting
Course: Principles of Financial Accounting
Professor: Elizabeth miller
Term: Fall 2015
Tags: financial accounting
Cost: 50
Name: Final Exam (ch.10) notes
Description: all the ppt notes, in class notes, clicker questions, and in class examples for the final exam
Uploaded: 12/01/2016
15 Pages 195 Views 5 Unlocks
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11/17/15


If bonds with a face value of $100,000 are sold for $96,000, how must this $4,000 difference be accounted for?



Notes for final exam on ch. 10 – analyzing stockholders’ equity

If bonds with a face value of $100,000 are sold for $96,000, how must this  $4,000 difference be accounted for?

- Depreciated

- Amortized over the life of the bond

- Recorded as a loss on issuance

- Ignored

Assets = liabilities + stockholders’ equity Resources = obligations + “equities” or “ownership” Can get rid of, just pay it people who own our  

company

ONLY COMPANY HAS OBLIGATIONS represents  

partners

Owners/partners do NOT (the individual  


A company issues 200 shares of $2 par value common stock for $10 per share. what amount will be credited to the common stock account when recording this transaction?



owners)

[This chapter only deals with corporate structure, only business structure  that has stock]

∙ Corporation

o Organized in under the laws of a particular state

o Corporate charter/Articles of Incorporation

o Separate legal entity

o Rights and privileges as a person

o Classified by purpose and ownership

 Ownership – Publicly held vs. privately held

∙ Public

o Anyone can buy stock for this company

 Most common: NY stock exchange


A company issues 400 shares of %5 par value preferred stock for $12 per share. what amount will be credited to the preferred stock account when recording this transaction?



 All those stocks are publicly traded  

corporations If you want to learn more check out Who benefits from alienated labor?
Don't forget about the age old question of Differentiate genotype and phenotype.

 Governed by securities & exchange  

commission

∙ Dictates what must be done for  

these companies

∙ One is that they must have audited

financial statements (very  

expensive)

o People who are unbiased  

(CPAs) come in & research a  

bunch of things, then they  

write a letter that basically  

says this company is good to

go & can make good  

decisions

∙ Private

o Not traded on exchange  

o Distinguishing Characteristics

 Separate legal “person”

 Limited Liability of stockholders

∙ People trade stock they’ve bought & no longer want

 Transferable ownership rights

 Ability to raise capital Don't forget about the age old question of What are the steps in conducting scientific research?

 Continuous life

∙ If a partner leaves the partnership, its dead (like  

divorce)

∙ Corporation never dies, even if stock is sold

 Corporation management

∙ Boards of directors hire management to dictate  

affairs & general operations

 Government regulations

 Additional taxes We also discuss several other topics like Give a function of carbohydrates.

∙ Stockholders’ equity

o Represents the owners’ claims against the assets of a  

corporation

Assets = Liabilities + Stockholders’ Equity / \

paid in capital retained earnings

(externally generated) (internally generated)

(comes from outside the company (provides capital to  

fund/benefit resources)

in exchange for ownership)

o For a Corporation, most common sources are:

 Paid-in Capital

∙ Common stock

∙ Preferred stock

o Only if we have a separate account of stock  

that is preferred

o Not “better”, just has some preference that we  

have to deal with

∙ Additional Paid-in Capital

o Par value

 Legal capital per share We also discuss several other topics like Jwho is ames vanderzee?

 Set based on state of corporation  

 Goes into legal capital accounts

∙ Par x number of shares goes in  

preferred stock

∙ Usually sold above par, deal with  

excess, used additional paid-in

capital account for this excess If you want to learn more check out Who is sigmund freud’s nephew?

 Retained Earnings or deficit

 Accumulated other comprehensive income

 Treasury Stock

∙ Contra-equity account

o Deduction (subtracted) from total  

stockholders’ equity

∙ Measure of stock that we own bc we went back to the market & repurchased (buy back) previously  

purchased stock

∙ Authorized, issued, & outstanding shares

o Authorized shares – the maximum number of shares allowed to  be sold

 Identified in the corporate charter

 No entry (disclosed on the financial statement or in notes) o Issued shares – the number of shares actually sold to  stockholders

 Go to common stock/preferred stock accounts

∙ “Issued shares” is code word for selling stock, any  

amount above par goes to additional paid-in-capital  

while par value goes to common/preferred stock  

accounts

 Always bigger/equal to authorized shares

 Formation of corporation

 Ongoing

o Outstanding shares – the number of issued shares actually in the hands of stockholders

 Considers shares bought back by the company “Treasury  Stock”

 Difference between Issued and Outstanding shares is the  reacquired shares

 ∙     Determination of share quantities

∙ Common stock

o Stock Certificate – proof of ownership

o Legal Capital Account – par x # shares (preferred/common stock  account)

 Sale above par – additional paid-in-capital account

o Ownership rights

 Voting

 Pro rata participation in dividends

∙ “pro rata” means fair & equal

 Pro rata participation in residual assets

 Preemption – maintaining ownership percentage

∙ You have the right to be able to keep your status in  

terms of percentage of ownership share

∙ Corporation can’t do something that causes one  

owner to have a bigger share than another, would  

have to be extended to all shareholders

o Financial gain from a profitable company (why buy shares)  Stock appreciation (Capital Gain)

∙ Buy low now, sell high later  

 Dividends

∙ Looking for some kind of interest/dividend income,  

stream of cash flow, that they need when they’re 90  

years old with no job

∙ What old grandmas have

∙ Preferred stock

o Stock Certificate

o Separate class of stock- different account

o Less risky than Common Stock

o Par Value x # shares = Preferred Stock

o Sale above par – additional Paid in Capital account

o Preference as to Dividends and Liquidation over Common  Stockholders.

o Preferred stock generally pays regular dividend – typically  expressed in terms of % of par

o Cumulative dividends feature – dividends in arrears plus current  dividends must be paid

 If company says they’re going to pay dividend, they have  to

o Dividends in arrears is NOT a liability since no obligation exists  until dividends are declared

∙ Entries: stock issue

 o Sale at Par Value: 

Cash x, xxx

Common Stock x, xxx

 o Sale above Par value: 

Cash x, xxx

Common Stock x, xxx

Paid-in Capital x, xxx

∙ Ex) 10-25 recording the sale of stock

o Donahue corporation is authorized by its charter from the state  of Illinois to issue 2,000 shares of 7% preferred stock with a par  value of $30 per share, and 125,000 shares of common stock  with a par value of $0.01 per share.

o On Jan 1, 2013, Donahue issues 1,300 shares of preferred stock  for $35 a share and 84,000 shares of common stock for $12.50  per share. Record the stock sale.

 o Issue preferred stock: 

1/1/13 Cash 45,500 (1,300 x $35)

Preferred stock 39,000 (1,300 x $30) par

Additional paid-in-capital 1,600 (1,300 x $5) excess of par

o Issue common stock: 

1/1/13 Cash 1,050,000 (84,000 x $12.50) Common stock 840 (84,000 at $0.01) par

Additional paid-in-capital 1,049,160 (84,000 x $12.49)  excess

∙ Ex) The stockholders’ equity section of Lester company’s balance sheet shows the following:

o Stockholders’ equity

 Common stock, 500,000 shares authorized,  

450,000 shares issued $450,000

 Additional paid-in-capital $4,050,000  Retained earnings $1,425,000  Treasury stock, at cost, 16,000 shares ($480,000)

o Total stockholders’ equity = $5,445,000 o Answer the following:

 Number of shares authorized?

500,000

 Number of shares issued?

450,000

 Number of shares outstanding?

434,000

(450,000 – 16,000)

 Par value per share of common stock? $1  How much has been received from issuance of stock?

$4,500,000

(450,000 + 4,050,000)

 What is the avg. cost of a share of treasury stock?

$30

(480,000/16)

A company issues 200 shares of $2 par value common stock for $10 per  share. What amount will be credited to the common stock account when  recording this transaction?

- $400

- $2,000

- $1,600

- none of the above

After Thanksgiving Break

11/29/16

A company issues 400 shares of %5 par value preferred stock for $12 per  share. What amount will be credited to the Preferred Stock account when  recording this transaction?

- $4,800

- $2,000

- $2,800

- none of the above

A company issues 400 shares of %5 par value preferred stock for $12 per  share. What amount will be credited to the Paid in Capital in Excess of Par Preferred Stock account when recording this transaction?

- $4,800  

- $2,000

- $2,800

- none of the above

A company issues 400 shares of %5 par value preferred stock for $12 per  share. What amount will be debited to the Cash account when recording this  transaction?

- $4,800  

- $2,000

- $2,800

- none of the above

Journal Entry: 

Cash 4,800 (selling price)

Preferred Stock 2,000 (par value)

Addition PIC-PS 2,800 (excess)

∙ Stock Warrants

o Stock warrant – right to purchase a specified number of shares  of its common stock at a stated price and within a stated time  period

 Basically a right that allows that person to buy a certain  number of shares at a certain price during a certain time

 Usually attached as “equity kicker” (attached to allow  

ownership to increase percentage share of ownership in  

company)

 Detachable (can go with shares of stock or debt)

∙ Usually on bonds

∙ Option to be a lender and have an equity (ownership)

position in company

o Two situations:

 Give an “equity kicker” to make the bonds or preferred  stock more attractive. Typical duration of 5+ years.

 Give existing stockholders who have a legal right to  

purchase a specified share of a new stock issue, in order to maintain their relative level of ownership in the  

corporation. Typical duration less than six months

∙ Stock Options

o Stock Options – right to buy stock at a set price

 compensation for employees & executives  

 ex) stock options were how people made big money,  

salaries were good, sales reps made a lot of money

∙ Regional VPs got stock options

∙ Didn’t make big money through salaries and  

incentives, but through stock options

∙ Ability to buy stock in company lower than market,  

everyone wanted it in this company that Cornett  

worked for (Green Tree)

∙ Options are reserved for key employees (people you  

want to attract & retain)

o Exercise Price (aka Strike Price) – price at which stock can be  bought

 Compensation expense depends on the strike price and  market value on the date of the grant

o Why?  

 Allows cash-poor companies to compete for top talent in  the employee market

 Better aligns the incentives of the employee with owners ∙ Treasury Stock

o Treasury Stock – repurchase of company stock previously  issued

o Why?

 Reduced # of shares & increase EPS

 Eliminate hostile shareholders by buying them out

 Signal stock is underpriced

 Reissue to officers & employees as bonus

 Distribute cash to shareholders

 o Cost method is used: 

Treasury Stock x, xxx

Cash x, xxx

Ex) Kellman Co. repurchased 110,000 shares of its own previously issued  shares for $8 per share on September 4, 2014. Record the journal entry: 110,000 x $8 = $880,000 total cost

9/4/14: Treasury Stock 880,000

Cash 880,000

Kellman subsequently resells 60,000 of its treasury shares for $10 per share.  Record the journal entry:

60,000 x $10 = $600,000 (cash)

60,000 x $8 = 480,000 (treasury stock)

Cash 600,000

Treasury Stock 480,000

Addition PIC 120,000

∙ Dividends (company does well, they want to share the fruits of the  labor with the people who invested; given related to how much equity  you own)

o Pro-rata distribution (fair and equitable) to stockholders, usually  quarterly

 Declaration date

∙ intention and dollar amount of dividend

∙ Becomes legally binding; obligation is recognized

∙ Legal requirement prior to payout of dividend

 Record date

∙ Measurement of ownership

∙ Who gets the dividend?

 Payment date

∙ Date dividend is actually paid to the stockholder of  

record

o Dividend policy

 Board of Directors

 Stockholders & potential investors

 Historical records & long-term stability

 Liquidating dividends- dividends are declared when R/E is  zero

o entries for cash dividends

 Declaration date – binding legal obligation

Retained Earnings x, xxx

Dividends Payable x, xxx

  Record date 

∙ Marks the time when ownership of the outstanding  

shares is determined for dividend purposes

∙ No accounting entry

  Payment date – checks are sent to stockholders

Dividends Payable x, xxx

Cash x, xxx

Ex) Wilson Co. declares a cash dividend of $80,000 on Dec. 31, 2013. The  dividend payment date is Feb. 12, 2014 and the date of record is Jan. 20,  2014.

Declaration Date Entry: 

12/31/13: Retained earnings 80,000

dividends payable 80,000

Record date entry: 

1/20/14: NO ENTRY

Payment Date Entry: 

2/12/14: dividends payable 80,000

cash 80,000

∙ Preferred stock dividends

o Current dividend preference – preferred shareholders get  their stated dividend before any dividends go to common  stockholders

 Preference only

 No guarantees of a dividend

o A cumulative feature means the stated dividend can build up in  the event that dividends are not paid in a given year

 Dividends in arrears- Preferred stock dividends remaining  unpaid for one or more years

 Requires payment of all preferred dividends (both  

dividends in arrears and current dividends) before any  

dividends are paid to common stockholders  

Ex) Seashell Co. has 25,000 shares outstanding of 8%, $10 par value,  cumulative preferred stock. In 2011 and 2012, no dividends were  declared or paid to stockholders. In 2013, Seashell had a very profitable year and decided to declare $200,000 in total dividends to be paid out. How much of the dividend would go to each class of stockholders?

25,000 shares @ $10 = $250,000 x 8% = $20,000 (annual preferred stock dividend – annual requirement for dividend)

2011: $20,000

2012: $20,000 2 years of dividends in arrears 2013: $20,000 for this year = $60,000 to preferred stockholders = $140,000 to common stockholders

= $200,000

Declaration date: 

Retained Earnings 200,000

P/S dividends payable 60,000

C/S dividends payable 140,000

BONUS:

Adam Levine has invested $1,000,000 for a 40% stake in a privately held  family corporation. The corporation does not do well and declares  bankruptcy. What amount does Adam stand to lose?

- Up to his total investment of $1,000,000

- Nothing

- The $1,000,000 plus any personal assets claimed by the creditors - $400,000

A company with 4,000 shares of $1 par commons tock and 3,000 shares of  10%, $10 par preferred stock issues a $10,000 cash dividend. How is the  dividend allocated to common and preferred stockholders if there was one  year of dividends in arrears? ONE YEAR (cumulative)

- $6,000 – common; $4,000 – preferred

- $4,000 – common; $6,000 – preferred

- $7,000 – common; $3,000 – preferred

- $3,000 – common; $7,000 – preferred

12/1/16

Assets = Liabilities + Stockholders’  Equity 

Cash Dividend

1. Declared  N/E = increase dividend payable + decrease R/E (increase dividend)

2. Paid  decrease Cash = decrease dividend payable + N/E

Stock Dividend

 N/E = N/E + decrease R/E, increase  PIC

Stock Split

 N/E = N/E + N/E

Assets = Liabilities + Stockholders’ Equity / \

“Paid in Capital” “Retained Earnings” 

+ Common Stock  “ “

+ Preferred Stock  Stock Dividend

+ Paid in Capital in Excess of Par  “ “

– Treasury Stock  “ “

A company with 4,000 shares for $1 par common stock and 3,000 shares of  10%, $10 par preferred stock issues a $10,000 cash dividend. How is the  dividend allocated to common and preferred stockholders? - $6,000 – common; $4,000 – preferred

- $4,000 – common; $6,000 – preferred

- $7,000 – common; $3,000 – preferred

- $3,000 – common; $7,000 – preferred

A company with 4,000 shares for $1 par common stock and 3,000 shares of  10%, $10 par cumulative preferred stock issues a $10,000 cash dividend.  How is the dividend allocated to common and preferred stockholders if there  was one year of dividends in arrears?

- $6,000 – common; $4,000 – preferred

- $4,000 – common; $6,000 – preferred

- $7,000 – common; $3,000 – preferred

- $3,000 – common; $7,000 – preferred

∙ Stock Dividend

o Pro-rata distribution of stock to stockholders

o Decreases retained earnings

o Increases paid-in capital

o Does not decrease stockholders’ equity or total assets like a cash dividend

o Stockholders get more shares of stock, but have the same  ownership interest

∙ Why declare a stock dividend??

o Meet dividend expectations without spending cash

o Increase marketability of stock

 Price per share decreased

 Available to more investors

o Permanent reinvestment of stockholders’ equity – not available  for cash dividends

∙ Impact of Stock Dividends

o Changes composition of stockholders’ equity

 Retained earnings is transferred to paid-in capital

 Total S/E remains the same

o Recording stock dividends

 Small (less than 25% of issued shares)

∙ Fair Market Value per share

 Large (more than 25% of issued shares)

∙ Par or Stated Value per share

Ex) 10-69 stock dividends

∙ Crystal corporation has the following info with regard to its common  stock:

o $10 par

o 500,000 shares authorized (available to sell/issue)

o 213,000 shares issued (what we did sell/issue)

o 183,700 shares outstanding (difference bw authorized & issued –  treasury stock)

∙ On Aug. 22, 2013, Crystal declared & paid a 15% stock dividend when the market price per share was $30

o 15% of outstanding shares (small dividend bc less than 25%) x  183,700 = 27,555 shares (shares in dividend)

o use market price bc small dividend

 27,555 shares x $30 = $826,650 (debit/decrease to  

retained earnings)

 ∙     Prepare the journal entry required on Aug. 22, 2013 

8/22/13 Retained Earnings 826,650

Common Stock 275,550 ($10 par)

Additional Paid in Capital CS 551,100 ($20)

∙ What if Crystal declared a 30% stock dividend instead (large  dividend so use par value)?

o 183,700 x 30% = 55,110 shares

 ∙     Prepare the journal entry required on Aug. 22, 2013 

8/22/13 Retained Earnings 551,100 (55,110 x $10 par value) Common Stock 551,100

∙ Stock Splits (lowering stock price which makes your stock more  sellable – more people who can buy the stock, requires less of an  investment)

o Issues additional shares to stockholders

o Increases marketability

 Reduces the market value of the stock

 Total number of shares increases

 Par value of the shares decreases

o Number of shares increases

o No accounting entry

 No effect on total paid-in capital, retained earnings or total  stockholders’ equity  

∙ Ex) stock split illustration

o Trump Enterprises has 100,000 authorized, issued, and  outstanding shares at $5 par value stock.

o What is the impact of a 4-for-1 stock split?

 If 100,000 before 4-for-1, then it becomes 400,000 after  the split (100,000 x 4)

 Par value is $5 / 4 = $1.25

 Before split: 100,00 shares at $5 each = $500,000  After split: 400,000 shares at $1.25 each= $500,000

Value doesn’t change, just the components that make the value o What if the stock split was 2-for-1?

 Before split: 100,000 shares at $5 = $500,000 ∙ $5 / 2 = $2.50

 After split: 200,000 shares at $2.50 = $500,000

∙ If the market value of each share of $22, what would the anticipated  value at each share of stock be if Trump had 4-for-1 split?

o Before split: 100,000 x $22 = $2,200,000 (pie (market value))  $22 / 4 = $5.50

o After split: $2,200,000 / 400,000 = $5.50 per share

∙ Retained Earnings

o Retained earnings – the accumulated earnings (or losses) over  the entire life of the corporation that have not been paid out in  dividends

Ending Retained Earnings = Beginning Retained Earnings + Net Income –  Dividends

o Restrictions on R/E

 State law

 Upper limit on dividends

 Lenders (Bonds/LTD)

 Board of Directors

o Prior period adjustment – if an error resulted in a misstatement of net income, then correction may require a direct adjustment to  retained earnings

∙ Accounting for accumulated other comprehensive income (NOT ON  FINAL)

o Financial accounting theory suggests that income represents the  changes in the assets and liabilities of the company as a result of transactions with nonowners 

o However, over time the FASB has allowed the gains and losses  from certain nonowner transactions to bypass the income  statement and go directly to stockholders’ equity. 

 Includes estimation errors/change in estimate 

 Includes change in accounting principle 

o Companies are required to include these gains and losses, along  with net income in a measure called comprehensive income. o FASB allows one of 3 methods 

 Include a statement of changes in stockholders’ equity  which includes a column for comprehensive income. 

 A ‘‘second’’ income statement, which begins with net  

income, then shows items such as unrealized gains and  

losses on available-for-sale investments and finally totals to comprehensive income.  

 A combined statement of comprehensive income, which  includes both net income and comprehensive income on  

the same statement. 

o accumulated other comprehensive income is shown in the  stockholders’ equity section of the balance sheet. 

 The final option is to present a combined statement of  

comprehensive income, which includes both net income  

and comprehensive income on the same statement. 

o Regardless of which option is used to disclose comprehensive  income for the period, accumulated other comprehensive  income is shown in the stockholders’ equity section of the  balance sheet. 

∙ Evaluation of S/E

o Stockholder Profitability

 Return on Common Equity

Net income – preferred stock dividends/Average Common Stockholders  Equity

∙ How effectively equity is used to generate more  

equity

 Earnings Per Share

Net Income – preferred stock dividends/Average # Common Shares ownings  per share

∙ Good for year to year comparison

o Stockholder Payout

 Dividend Payout Ratio

∙ Common Dividends/Net Income  

 Dividend Yield Ratio

∙ Dividends Per Common Share/Market Price Per Share

C/S

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