FINAL EXAM: Financial Accounting
Corporate Disadvantages
-Government regulation -Corporate taxation
factors that influence market value
-future income -dividends -growth -economic factors
Determine which of the statements below is correct regarding the future value concept.
We want to know how much an amount invested today would equal at some specified date in the future.
Determine which of the statements below is correct regarding the present value concept.
We want to know how much we must invest now in order to have a certain sum of money some time in the future.
transfer agent
assists with purchases and sales of shares
Most bonds require par value to be repaid _______ and interest to be paid _________.
at the maturity date; semiannually
Bilos Co. enters into a 6-year finance lease for a copy machine. The lease requires six annual payments of $25,000. Interest expense is recorded with a credit to the following account:
cash
The ________ rate is the interest rate specified in the indenture—sometimes referred to as the coupon rate, stated rate, or nominal rate.
contract
Dividend payment has three important dates:
declaration, record, and payment.
Paid-in-capital
the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.
Winn Co. enters into a 6-year finance lease for a copy machine with an interest rate of 8% (the present value of its $1,298 annual lease payments is $6,000). Winn will record the beginning-year (first-period) lease payment with a debit to Lease Liability in the amount of?
$1,298
Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is being sold at 93 would be trading at $
$930
A finance lease is a long-term lease which meets one or more of the following criteria:
- has a purchase option that lessee is reasonably certain to exercise - transfers ownership to lessee - lease term is for major part of asset's remaining economic life
Corporate Advantages
-Separate legal entity -Limited liability -transferable ownership rights -Continuous life -No mutual agency for stockholders -Easier capital accumulation
Common stock holders usually have the right to:
-Vote at stockholder's meetings (or register proxy votes) -Sell or dispose of their stock -Purchase their proportional share of any common stock later issued. This preemptive right protects stockholders' proportionate interest. -Receive the same dividend, if any, on each common share. -Share in any assets remaining after creditors and preferred stockholders are paid if the corporation is liquidated. Each common share receives the same amount.
There are two main disadvantages of bond financing
1) Bonds can decrease return on equity 2) Bonds require payment of both periodic interest and the par value at maturity
There are three major advantages of bond finance
1) Bonds do not affect owner control 2) Interest on bonds is tax deductible 3) Bonds can increase return on equity
There are two common ways to retire bonds before maturity
1) Exercise a call option 2) Open market purchase
Stock dividends are given for at least two reasons:
1) stock dividends keep the market price of the stock affordable. 2) a stock dividend shows management's confidence that the company is doing well and will continue to do well.
A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $
8179
stockholders' equity
A corporation's equity; also classed shareholders' equity or corporate capital.
The journal entry for a right-of-use asset to record the periodic amortization includes a credit to:
Accumulated Amortization-Right-of-Use Asset
Effective interest method
Allocates interest expense over the bonds life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method.
paid-in capital in excess of par value
Amount received from issuance of stock that is in excess of the stock's par value.
Review the following statements and select the one which is true regarding an ordinary annuity.
An ordinary annuity is a series of equal payments occurring at the end of the period at equal intervals.
A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $84,000 for the bonds, the issuer will record the sale with a (debit/credit) to (Discount/Premium) on Bonds Payable in the amount of $4,000.
Credit Premium
Retained earnings
Cumulative net income (and loss) not distributed as dividends to its stockholders.
Date of record
Date the directors specify for identifying stockholders to receive dividends.
Date of declaration
Date the directors vote to pay a dividend.
A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?
Debit to Cash $500,000; and credit to Bond Payable $500,000.
Premium on bonds
Difference between a bond's par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium.
Discount on bonds payable
Difference between a bond's par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate.
Bond certificate
Document containing bond specifics such as issuer's name, bond par value, contract interest rate, and maturity date.
Which of the following agreements would require amortization expense?
Finance lease
Capital Stock
General term referring to a corporation's stock used in obtaining capital (owner financing)
Review the statements below and choose the one which is correct regarding interest as it relates to money.
Interest is payment by the borrower to the owner of an asset for its use.
Contract rate
Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate.
Market rate
Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers' risk level.
Bond
It's issuers written promise to pay the par value of the bond with interest.
Bilos Co. enters into a 6-year finance lease for a copy machine. The lease requires six annual payments of $25,000. Interest expense is recorded with a debit to the following accounts:
Lease Liability Interest Expense
Short-term lease
Lease with a term of 12 months or less that does not have a long-term purchase option; the lessee records such lease payments as expenses.
Proxy
Legal document giving a stockholder's agent the power to exercise the stockholder's voting rights.
Mortgage
Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the mortgage.
Installment note
Liability requiring a series of periodic payments to the lender.
Finance lease
Long-term lease where the lessee receives substantially all remaining benefits of the asset (one or more of five criteria must be met); a finance lease is similar to the financing of an asset purchase.
Straight-line bond amortization
Method allocating an equal amount of bond interest expense to each period of the bond life.
Carrying (book) value of bonds
Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value.
Stated value stock
No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued.
The bond carrying value can be determined by which of the following formulas?
Par value - discount on bonds payable
Show your understanding of how "periods" can be expressed in time value of money computations by selecting the correct statements below. (Check all that apply.)
Periods can be expressed in one-month periods. Periods must equal one year or less. Periods represent the number of times that interest is compounded within one year.
Operating lease
Short-term (or cancelable) lease in which the lessor retains risks and rewards of ownership.
No-par value stock
Stock class that has not been assigned a par (or stated) value by the corporate charter.
small stock dividend
Stock dividend that is 25% or less of a corporation's previously outstanding shares.
large stock dividend
Stock dividend that is more than 25% of the previously outstanding shares.
Identify the required components needed to determine the present value of a sum. (Check all that apply.)
The interest rate charged The number of periods the sum will be earning interest The future amount of money needed
sell stock indirectly
a corporation pays a brokerage house (investment banker) to sell its stock.
Par value
amount assigned per share by the corporation in its charter.
A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to (Discount/Premium) ______ on Bonds Payable in the amount of $5,000.
credit premium
Date of payment
date when the corporation makes payment.
Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at:
discount
Interest is the amount of money (earned, owed) by the owner of an asset and (paid, earned) by the borrower of the asset for its use.
earned paid
Total bond interest (blank) is the sum of the interest payments plus the bond discount.
expense
A company borrows $60,000 from a bank to purchase equipment. It signs an 8% note requiring six annual payments of principal plus interest. This is an example of a(n) (BLANK) note
installment
A(n) _____ note is an obligation requiring a series of payments to the lenders.
installment
A bond discount increases __________ at each semi-annual interest payment.
interest expense
sell stock directly
it offers its stock to buyers. This type of sale is common with privately held corporations.
registrar
keeps a list of stockholders for stockholder meetings
The _____ is the owner of a lease and the _____ is the tenant of a lease.
lessor; lessee
Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) (mortgage/installment/bond) note payable, which allows the bank to be paid by the cash proceeds of the sale of the building if Brown fails to pay on the note.
mortgage
Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a(n) (BLANK) payable
note
A _____ _____ is similar to a bond payable but is normally transacted with a single lender such as a bank.
note payable
Retained earnings deficit
occurs when a company has cumulative losses and/or pays more dividends than total earnings from current and prior years.
Premium on stock
occurs when a corporation sells its stock for more than par (or stated) value.
discount on stock
occurs when it is sold for less than the par value.
A(n) _____ lease is a long-term lease in which the present value of the lease payments is less than the asset's fair value.
operating
Par value of a bond
or face value; paid at a specified future date known as the bond's maturity date
The bond carrying value can be determined by taking the bond (black) value minus the discount on bonds payable.
par
The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate.
par
Most bonds require (interest/par) value to be repaid at maturity and (interest/par) to be paid semiannually.
par interest
When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a (discount/premium
premium
Bond issue
sale of bonds -usually in denominations of $1000 or $5000
Outstanding stock
stock held by stockholders
Organization Expenses(or organization costs)
the costs to start a corporation; they include legal fees, promoters' fees, and payments for a charter.
Stock Split
the distribution of additional shares to stockholders according to their percent ownership.
minimum legal capital
the least amount that the buyers of stock must contribute to the corporation or be at risk to pay creditors at a future date.
Authorized Stock
the number of shares that a corporation's charter allows it to sell.
Market value per share
the price at which a stock is brought and sold.
The present value or future value of a sum of money can be calculated as long as we know the number of (days, times, years) that interest will be compounded within one (year, month, day).
times year
A person can use the present value concept to calculate how much money he has to invest (today, tomorrow) in order to have a specific sum of money in the (present, future).
today future
A person can use the future value concept to calculate how much money she will have (today, tomorrow) if she invests a specific sum of money in the (present, future).
tomorrow present
liquidating cash dividend
where a corporation returns a portion of the capital contributed back to stockholders.
Common stock
Corporation's basic ownership share; also generically called capital stock.
stock dividend
Corporation's distribution of its own stock to its stockholders without the receipt of any payment.
Corporation
Business that is a separate legal entity under state or federal laws; its owners are referred to as; shareholders or stockholders.
A company issues $100,000 of 5%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If the bonds are sold at par value, the issuer records the sale with a debit to (blank) in the amount of $ (blank)
Cash $100,000
Par value stock
Class of stock assigned a par value by the corporate charter.
Bond indenture
Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations.
Lease
Contract specifying the rental of property.
Pension plan
Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred.
Double taxation
Corporate income is usually taxed a second time as part of stockholders' personal income when they receive cash dividends.
