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Principles of Accounting II

by: Audie McGlynn

Principles of Accounting II ACCT 2102

Audie McGlynn

GPA 3.69

Lee Taylor

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Lee Taylor
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This 26 page Class Notes was uploaded by Audie McGlynn on Friday October 2, 2015. The Class Notes belongs to ACCT 2102 at Abraham Baldwin Agricultural College taught by Lee Taylor in Fall. Since its upload, it has received 85 views. For similar materials see /class/217661/acct-2102-abraham-baldwin-agricultural-college in Accounting at Abraham Baldwin Agricultural College.


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Date Created: 10/02/15
CHAPTER 13 Bonds Payable and Investments in Bonds Equity Financing vs Debt Financing gt Equity Financing selling stockto the ublic gt Debt financing issuing bonds tothe public 0 Bonds are called debt securities Debt Bonds Financing vs EquityStock Financing gt Debt financing is cheaper for the corporation Equity stockholders demand a greater return because the risk of equity returns is greater gt Debt financing is riskierforthe corporation When profits drop a corp can cease paying dividends However it cannot cease its debt payments CHARACTERISTICS OF BON DS 1 Issued with face values of 1 000 or multiples ot1000 2 Usually pay interest semiannually 3 Prices quoted as a percentage of face value Terms to know gt Face value gt Contract rate or coupon rate gt Effective interest rate or market rate gt Discount gt Premium ISSUIANCE OF A BOND The selling price of a bond is determined by the relationship between the bonds contract interest rate and the market interest rate when the bond is sold It contract ratemarket rate sell at face value It contract rategtmarket rate sell at a premium It contract rateltmarket rate sell at a discount Present Value gt Present vatuer tne yatue today ot tne amount to be recetyed at atuture date gtWnattstne 0L accumutate too tn 2years at 7 gt Wnat ts tne present vatue ot recetytng 100t00010 years trorn now at 7 m 3 PRESENT VALUE tn nts Wth ne teayes nervntn tne tottovnng optton n naye tootooo today or 552004100 tn to years tnterest rates are toa Wntcn snoutd Racnet enooset Annuities y Annut r a settes ot squat payments at squat tntetvats t e Etegvosfevyeavtov 5 Ag PRESENT VALUE OF AN ANNUITY Iva won the lottery with a 5 million grand prize Now she has to choose how to take herwinnings 500000 per year for 10 years or 3 million now It interest rates are 11 which should lva choose The 11 represents the interest you could earn it you invest your money 3 million or 500000 PRESENT VALUE Your aunt Sally is planning for her retirement Sally estimates that after retirement she will spend 20000 per year Sally wants to have enough money for 20 years after retirement What sum of money will Sally need at her retirement to cover her financial needs torthe rest of her life Assume that Sally can earn 6 interest on her money 3 GENERAL STEPS IN COMPUTING THE SELLING PRICE PRESENT VALUE OF 1 Find the present value otthe principal amount Present value of 1 table 2 Find the present value otthe interest payments Present value of annuity table 3 Add the two together Steps in computing the selling price present value of a bond gt When computing the presentvalue of the rincipal and the in rest payments you first must find t e factor from ta es gt In finding the factor remember to always use the market rate v If there are semiannual payments this market rate must be dIVIded by 2 the 2 payments gt In findinithe factor the eriod is always the number of paymen years 0 on x payments per year In finding the factors for both principal and interest a en s you use the same Interest column and period mn v Steps in computing the selling price present value of a bond gt When computing the present value of the interest payments remember that you must first compute the amount of the interest payment Face value x Contract ypayments per year gt Then find the present value of this interest payment don t forget to use the annuity table forthis ISSUANCE OF A BOND PROBLEM On Jan 1 Brandon Jordan Inc issued a 1 million 5year 10 bond that pays interest semiannually The market interest rate then was 12 ISSUANCE OF A BOND PROBLEMS Determine the selling price present value forthe following bonds and make the journal entry to record each bond s issuance 1 A 10000 5year 11 bond is sold when interest rates are 12 The bond pays interest semiannually 2 A 50000 8year 14 bond is sold when market interest rates are 13 The bond pays interest semiannually ZEROCOUPON BONDS gt No periodic interest payments gt Only repays the face value of the bond at aturity gt As a result they sell at a substantial discount gt Bondholder s interest is the difference between the purchase price and the face value gt Selling price is determined by computing present value of face amount at market interest rate ZEROCOUPON BONDS A corporation issues 50000 in zero coupon bonds due in 6 years Assume that the market interest rate is 10 compounded semiannually Amortization of a Bond gt Amortization of a Discount the process of recording a portion of the discount as interest expense each time an interest payment is made gt Uses the straightline method discount of payments gt 7359510 payments semiannual pymts for 5 years 735950 gt 735950 is the amount amortized each payment date Amortization of Bond gt Journal entry to record interest payment and discount amortization for issuance problem REDEMPTION OF BONDS gt The retirement of bonds before they mature gt Usually redeemed by exercising a call feature gt Any GainLoss is reported in Other IncomeExpense section in the income stmt BOND REDEMPTIONS gt Call price a price stated on the bond certificate that the co must pay if it calls the bond usually call price is above the FV Carrying value the book value of the bonds FV less any unamortized discount or plus any unamor 39zed emium When redeeming a bond compare the bonds carrying value to the price the co must pay to redeem the bonds call price If carrying valuegtcost to redeem GAIN If carrying valuelt cost to redeem LOSS v BOND REDEMPTION PROBLEMS 1 Assume that a 500000 bond with an unamortized 7000 premium is called for redemption at 102 2 What it the same bond had been called at 101 Bond Purchased as an Investment gt Recorded in Investment in Bonds gt Interest received from bond is recorded as interest revenue gt Any premium or discount must be amortized INVESTMENT IN BONDS 1 Smith Co purchased a 1000 bond of the Whitney Corp on March 1 at 84 plus a 15 brokerage tee and accrued interest The bond pays 12 interest semiannually on Dec 31 and June 30 Amortization of Discount for Investment gt A discount for an investment in a bond is really extra int erest that you will earn over the life of on gt Therefore the discount must be amortized as interest revenue gt A discount increases interest revenue and a premium decreases interest revenue gt Not recorded in separate discount or premium accts are simply Included In the Investment cct a gt Usually only record amortization once a year Amortization of Discount for Investment Smith Co determines it should amortize 33 of the bond discount at the end of the first year SALE OF A BOND INVESTMENT Assume that Smith Co holds the bond purchased in the previous problem tors years At the end of the 3rd year the bond is sold tor1150 plus accrued interest of 50 The carrying value of the bond is 968 SALE OF A BOND INVESTMENT Assume that Smith holds the bond purchased in the previous problem tors years At the end of the 3rd year the bond is sold for 1 150 plus accrued interest of 50 The carrying value of the bond is 968 Balance Sheet Presentation gt Bonds that are issued are listed under LongTerm Liabilities 0 Long Term Liabilities Bonds Payable 100000 Less Discount 7 000 93000 gt Investments in Bonds are reported under the Assets section Chapter 18 Process Cost Systems Job Order vs Process Costing 0 Job Order Costing Used by coi s that make custom specialorder type goods or produce a high variety of products 0 Process Costing 7 Used by Coi s that mass produce large quantities of identical units in a continuous ow Similarities in Job Order and Process Costing 0 Both determine a product cost by measuring direct materials direct labor and allocating 0 Both allocate OH using a predetermined OH rater Differences in Job Order and Process Costing Job Order 0 Costs are accumulated by jobi Process 0 Costs are accumulated by department for a time period for example one month 0 To find the total cost of a product add the product costs incurred in each dept Process Costing 0 Because costs are accumulated by dept each dept has its own WIP acct and Factory OH accti 0 Costs transferred out of one dept become the costs transferred in to the next dept Cost to Manufacture One Unit 0 Cost per Equivalent Unit 2 Dept s cost for the month Equivalent Units Produced during the Month 0 Equivalent Uni 7 the number of whole units that could have been made in one period 4 Steps of Calculating a Product Cost under Process Costing Determine the units to be assigned costs Calculate equivalent units of production Determine the cost per equivalent uniti gt539 t Allocate costs to transferred and partially completed unitsi Step 1 7 Determine the units to be assigned costs 0 Determine the M of units worked on in the dept during that period 0 Determine the of units in each category I Beginning WIP Inventory I Units Started and Completed during Period I Ending WIP Inventory Step 2 7 Calculate Equivalent Units of Production 0 Equivalent Units 2 of whole units multiplied by Amount of work put into the units during the period month Step 3 7 Detennine the Cost per Equivalent Unit 2 Costs incurred during the month includes the materials and conversion costs EU produced during the month 0 Cost per EU must be calculated separately since materials and conversion costs are added at different times 4 7 Allocate Costs to Completed and Partially Step Transferred Completed Units Allocate the costs separately for each category Beginning WIP 2 Started and Completed 2 Ending WIP 9 1 Cost of Production Report 0 Refer to Exhibit 7 on p 714 Journal Entries for Process Costing 2 differences from Job Order entries 1 Separate WlP acctsi for each dept 2 Separate Factory OH acctsi For each dept 3 You must compute the cost of units transferred from one dept to the next dept or Finished Goods by completing the 4 step problem J ust in Tirne JIT Processing 0 An alternative method of processing 0 Focuses on reducing time and cost and eliminating poor quality 0 Reorganizes the traditional production process by combining processing functions into work centers 7 departments in a traditional might be combined into 3 work centers under J IT 1 EYE OPENERS Each stockholder s liability for corporation debts is limited to the amount invested in the corporation A corporation is responsible for its own obligations and therefore its creditors may not look beyond the assets of the corporation for satisfaction of their claims The large investments needed by large businesses are usually obtainable only through the pooling of the resources of many people The corporation also has the advantages over proprietorships and partnerships of transferable shares of ownership and thus the continuity of existence and limited liability of its owners stockholders No Common stock with a higher par is not necessarily a better investment than com mon stock with a lower par because par is an amount assigned to the shares The broker is not correct Corporations are not legally liable to pay dividends until the dividends are declared If the company that issued the preferred stock has operating losses it could omit dividends first on its common stock and later on its preferred stock Factors influencing the market price of a corporation s stock include the following a Financial condition earnings record and dividend record of the corporation b lts potential earning power c General business and conditions and prospects No Premium on stock is additional paidin capital a Sufficient retained earnings sufficient cash and formal action by the board of directors b February 6 declaration date March 9 record date and April 5 payment date The company may not have had enough cash on hand to pay a dividend on the com mon stock or resources may be needed for plant expansion replacement of facilities payment of liabilities etc economic 613 No change Total equity is the same Current liability Stockholders equity Unissued stock has never been issued but treasury stock has been issued as fully paid and has subsequently been reacquired b As a deduction from the total of other stockholders equity accounts It has no effect on revenue or expense It reduces stockholders equity by 120000 a It has no effect on revenue b It increases stockholders equity by 158000 The primary advantage of the combined income and retained earnings statement is that it emphasizes net income as the connecting link between the income statement and the retained earnings portion of stockholders equity The three classifications of restrictions on retained earnings are legal contractual and discretionary Appropriations are normally reported in the notes to the financial statements Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings The statement of stockholders equity is normally prepared when there are significant changes in stock and other paidin capital accounts The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more in vestors to buy the company s shares 9579579 57 PRACTICE EXERCISES PE 11 1A 3 Amount distributed Preferred dividend 10000 shares Common dividend 25000 shares Dividends per share Preferred stock Common stock PE 11 1B 3 Amount distributed Preferred dividend 5000 shares Common dividend 10000 shares Dividends per share Preferred stock Common stock PE 11 2A 3 th Common Hnrk Aug PaidIn Capital in Excess of Stated Value 45000 shares x 128 Sept 22 Cash Preferred Stock 2000 shares x 75 NOV 4 Pash Preferred Stock PaidIn Capital in Excess of Par 3000 shares x 80 614 Year 1 40000 15000 25000 150 100 Year 1 20000 Year 2 10000 10000 0 100 None Year 2 4000 4000 080 None 5760000 150000 240000 Year 120000 15000 105000 150 420 4500000 1260000 150000 225000 15000 PE 11 23 July 6 Pash Common Hnrk 800000 shares x 120 Aug 30 Pash Preferred Stock 10000 shares x 50 Oct 14 Pash Preferred Stock Paidln Capital in Excess of Par 7500 shares x 54 PE 11 3A July 16 Cash F quot Cash r quot Aug 15 No entry required Sept 30 Cash Dividends Payable Cash Payahln PE 11 3B Oct 1 Cash r quot Cash r quot Nov 1 No entry required Dec 24 Cash Dividends Payable Cash Payahln PE 11 4A Feb 13 Stock Dividends 300000 x 3 x 63 Stock Dividends Distributable 9000 x 40 Paidln Capital in Excess of Par Common Stock 567000 360000 Mar 14 No entry required Apr 30 Stock Dividends Distributable Common Hnrk 615 960000 500000 405000 48000 48000 90000 90000 567000 360000 960000 500000 375000 30000 48000 48000 90000 90000 360000 207000 360000 PE 11 4B May 10 Stock Dividends 250000 x 2 x 60 Stock Dividends Distributable 5000 x 50 PaidIn Capital in Excess of Par Common Stock 300000 250000 June 9 No entry required Aug 1 Stock Dividends Distributable Common Hnrk PE 11 5A Jan 24 Treasury Stock 6000 x 18 Cash Mar 15 Cash 4500 x 21 Treasury Stock 4500 x 18 PaidIn Capital from Sale of Treasury Stock 4500 x 21 18 June 2 Cash 1500 x 17 PaidIn Capital from Sale of Treasury Stock 1 500 x 18 17 Treasury Stock 1500 x 18 PE 11 53 Oct 2 Treasury Stock 12000 x 6 Cash Nov 15 Cash 8400 x 9 Treasury Stock 8400 x 6 PaidIn Capital from Sale of Treasury Stock 8400 x 9 6 Dec 22 Cash 3600 x 5 PaidIn Capital from Sale of Treasury Stock 3600 x 6 5 Treasury Stock 3600 x 6 616 300000 250000 108000 94500 25500 1500 72000 75600 18000 3600 250000 50000 250000 108000 81000 13500 27000 72000 50400 25200 21600 PE 11 6A Stockholders Eguity Paidin capital Common stock 80 par 30000 shares authorized 25000 shares issued 2000000 Excess of issue price over par 315000 2315000 From sale of treasury stock 33000 Total paidin capital 2348000 Retained earnings 1112000 Total 3460000 Deduct treasury stock 2000 shares at cost 180000 Total stockholders equity 3280000 PE 11 GB Stockholders Eguity Paidin capital Common stock 75 par 50000 shares authorized 45000 shares issued 3375000 Excess of issue price over par 485000 3860000 From sale of treasury stock 18000 Total paidin capital 3878000 Retained earnings 1452000 Total 5330000 Deduct treasury stock 5000 shares at cost 420000 Total stockholders equity 4910000 PE 11 7A DYNAMIC LEADERS INC Retained Earnings Statement For the Year Ended July 31 2008 Retained earnings August 1 2007 988500 Net income 325000 Less dividends 39 125000 Increase in retained earnings Retained earnings July 31 2008 617 200000 g 1188500 PE 11 7B MAXIMA RETRACTORS INC Retained Earnings Statement For the Year Ended October 31 2008 Retained earnings November 1 2007 2906000 Net income 553000 Less dividends 39 300000 Increase in retained earnings 253000 Retained earnings October 31 2008 g 3159000 618 CHAPTER 20 Variable Conting for Management Analynin 2 Methods of Reporting Net Income lo Uning Abnorption Coating 2c Uning Variable Conting Abnorption Contingi the cont of the product manufactured includen all Hm Absorption Costing manufacturing variable fixed r connidered a cont of the product they are junt connidered period expennen Van39ableCosting ariable Conn g7 another approach to compute aproduct s cost Only variable costs are included in the con oflhepmrirnl nnlnrie llll ill and variable 0H All fixed costs are m enpensen VARIABLE COSl39ING ontninn on Margnn Format Income Statement Sale s Variable Costol Goods Sold Manufacturing Margn VarialoleSelling andAnlnninistIa ve E nses ontnilnn on Margnn ane n s FixedSellinganrlArlnninistra veEmses IneonnefronnOperations INCOME SFATEMENTFORAMANUFACI URER Lannrens Ineorporaledloegan operations nis yearnTlne eonnpany nmnnnfaeunronl 2L000 units olits pnorlnnetanrl sold 10000 units follows Mannnfaeunring costs Variable 31100000 350 per unit Fixed 330000 315 alloealenlto eaeln unit Selling and alnninistra ve expenses Varialole 40000 SZper nnnitsolnl E0 000 a Pnepane an income stalennnentlorLannrenns Ineorponaterl s nstyearol operations Absorption vs Variable Costing The 30000 difference in the net income in the fixed cont of the 2000 unitn produced but not noldt Under abnorption thin 30000 in allocated tounitn in ending inventory no nhown on balance nheet Under variab e thin 030 000 in reported on the US an a period enpenne Absorption vs Variable Costing Under abnorption increaning inventory leve n increanen net income Under variab e producing more unitn han no effect on net income Absorption vs Variable Costing lonen Mfg Rewardn the companv n plant manageryi lta a J L increane in the plant n net income For purponen of determining the manager n bonun nhould net income be calculated uningvariable conting or abnorption conting Support your recommendation Evaluating Profitability of Sales Territories Products or Salespersons Done by computing the CM and CM Ratio by each of these items Analyzing Contribution Margins 39 Used to evaluate the differences between actual andplanned CM 39 The difference can always be explained by a difference in guantity sold price change or m 39 When computing difference in quantity always use the planned price 39 When computing difference in price always use the actual quantity Analyzing Contribution Margins Assume your mfg cor hadbudgeted sales of 120000 l0000units 12 Actua sales Were 103500 9000units 01150 Explain the 016500 difference Analyzing Contribution Margins Your mfg not had budgeted itn variable cont of goodn nold at 50000 l0000 unitn at 0500 Actual variable mfg contn totaled 46080 9000unitn at 0512 Exp 3920 difference ain the


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