ACC 131 ch 9 and 10

Ames Corporation repurchases 10,000 shares of its common stock for $12 per share. The shares were originally issued at an average price of $10 per share. Later it resells 6,000 of the shares for $15 per share and the remaining 4,000 shares for $17 per share. How much gain or loss should Ames report on its income statement as a result of these transactions?

$0

Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period?

$1,600

capital lease characteristics

(essentially a purchase) -a transfer of the leased asset to the lessee occurs at the end of the lease at no cost or a bargain -the term for the lease is at least 75% of the economic life of the leased asset -the present value of the lease payments is at least 90% of the fair value of the leased asset

ratio analysis

-Although long-term creditors are concerned with a company's short-term liquidity, they are primarily concerned with its long-term solvency. -As such, long-term creditors focus on ratios that are used to analyze a company's debt load and ability to cover interest payment (coverage).

reasons corporations purchase treasury stock

-to buy out the ownership of one or more stockholders -to reduce the size of corporate operations -to reduce the number of outstanding shares of sock in an attempt to increase earnings per share and market value per share -to acquire shares to be transferred to employees under stock bonus, stock option, or stock purchase plans -to satisfy the terms of a business combination in which the corporation must give a quantity of shares of its stock as part of the acquisition of another business -to reduce vulnerability to an unfriendly takeover

ethical decisions

-when evaluating a company's solvency, a major concern is whether all debt was properly recorded

2 ways corporations can distribute cash to stockholders

1. the corporation can repurchase the shares from owners 2. the corporation can pay dividends

Installment bonds differ from typical bonds in what way?

A portion of each installment bond payment pays down the principal balance.

face value

Amount of principal due at the maturity date of the bond; also called par value or principal

(notes) installment debt

Instead of paying off the principal at maturity, some debt requires a portion of the principal to be paid off each period (usually monthly), along with some interest. Classic installment debt payments are home mortgages or car payments. Installment debt payments are the same each period, but the portion that is considered interest changes because the outstanding principal balance is changing.

Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)

Interest Expense -->Discount on Bonds Payable -->Cash

When a company declares a cash dividend, which of the following is true?

Liabilities are increased.

date of record

The date that determines which stockholders are to receive dividends

Which of the following statements regarding bonds payable is true?

The entire principal amount of most bonds mature on a single date.

Rights for Owners of Common Stock

Voting in the election of the board of directors. You will recall that the board controls the operating and financial policies of the company. Sharing in the profits and dividends of the company. We will talk more about this below. Keeping the same percentage of ownership if new stock is issued (preemptive right). Sharing in the assets in liquidation in proportion to their holdings. This is referred to as the ''residual claim'' because common stockholders are only paid after all creditors and preferred stockholders are paid in full (which is very rare in liquidation).

If bonds are issued at 101.25, this means that

a $1,000 bond sold for $1,012.50.

If a company purchases treasury stock for $6,000 and then reissues it for $5,000, the difference of $1,000 is:

a decrease in stockholder's equity

capital lease

a non-cancelable agreement that is in substance a purchase of the leased asset

bond

a type of note that requires the issuing entity to pay the face value of the bond to the holder when it matures and to pay interest periodically. breaks down a large debt into smaller pieces

amortization methods: effective interest rate method

based on compound interest calculations. interest expense for the period is always the effective interest rate times the carrying value of the bonds at the beginning of the period

Bonds are a popular source of financing because

bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

notes

can also be issued in exchange for a noncash asset such as equipment

common stock

can vote in management decisions

preferred stock

cannot vote in management decisions; generally pays a regular dividend

stockholder's equity sources

capital stock -preferred stock -common stock -additional PIC retained earnings or deficit accumulated other comprehensive income treasury stock

When a company retires its own common stock, the company must:

decrease the Common Stock account balances by the original issue price.

selling new debt securities (discount or premium): state interest rate

determined by the company when the bonds are issued; may not match up with what the market is paying; market rates fluctuate daily

Which of the following is not a component of stockholders' equity? retained earnings net income loss on sale of equipment dividends payable

dividends payable

Thornwood Partners began business on January 1, 2019. The corporate charter authorized issuance of 75,000 shares of $1 par value common stock and 8,000 shares of $3 par value, 10% cumulative preferred stock. On July 1, Thornwood issued 20,000 shares of common stock in exchange for 2 years' rent on a retail location. The cash rental price is $3,000 per month, and the rental period begins on July 1. What is the correct entry to record the July 1 transaction?

ebit to Prepaid Rent, $72,000; credit to Common Stock, $20,000; credit to Additional Paid-In Capital—Common Stock, $52,000

no-par stock

have a stated (legal) value), set by the corporation in order to establish the corporation's stated or legal capital

When bonds are issued by a company, the accounting entry typically shows an

increase in assets and an increase in liabilities.

DAE Parts Shop began business on January 1, 2019. The corporate charter authorized issuance of 20,000 shares of $5 par value common stock and 5,000 shares of $10 par value, 5% cumulative preferred stock. DAE issued 12,000 shares of common stock at $25 per share on January 2, 2019. What effect does the entry to record the issuance of stock have on total stockholders' equity?

increase of $300,000

With regard to preferred stock,

its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared.

Bonds are sold at a premium if the

market rate of interest was less than the stated rate at the time of issue.

accounting for capital stock: authorized

maximum number can issue

authorized stock represents the:

maximum number of shares that can be issued

accounting for capital stock: outstanding

number of shares in hands of shareholders

accounting for capital stock: issued

number sold to shareholders

long-term debt

obligations that extend beyond one year, based on a formal agreement or contract (ex. bonds, long-term notes, debentures, and capital leases liabilities)

when debt is sold at ______ there is no premium or discount to amortize

par

dividends

payments to a company's shareholders from earnings; usually in the form of cash or stock

pros and cons of debt financing, rather than stock

pros -interest expense on debt is deductible for income tax purposes -it fixes the amount of compensation to the lender (firm's stockholders can keep excess money- leverage) -in inflation, debt permits the borrower to repay the lender in dollars that have declined in purchasing power cons -inflexibility of payment schedule could force borrowers into bankruptcy

amortization methods: straight-line method

represents a simple approximation of effective interest amortization; equal amounts of premium or discount are amortized to interest expense each period

dividends reduce _____

retained earnings

princpal

some contracts require the principal to be repaid in installments; typically require equal payments to be made each period

stated capital

the amount of capital that, under law, cannot be returned to the corporation's owners unless the corporation is liquidated; recorded separately in the common (preferred) stock account

paid in capital (PIC)

the amount received in excess of the par value

Which of the following should be considered when a company decides to declare a cash dividend on common stock?

the cash available and the retained earnings balance

three basic cash flows: issuance

the cash received when the bonds are issued

When a company purchases treasury stock, which of the following statements is true?

the cost of the treasury stock reduces stockholder's equity

Off-balance-sheet financing

the intentional effort by a company to hide debt

three basic cash flows: interest

the interest payments

operating lease

the lessor retains substantially all of the risks and obligations of ownership, while the lessee uses the asset during the term of the lease

three basic cash flows: repayment

the repayment of the principal

accounting for capital stock: difference

treasury stock, retired stock

Installment Debt

type of loan repaid with equal payments, or installments, over a specific period of time; initial monthly payments have a high interest and the last few payments have a low interest because the outstanding loan balance is relatively low

stock dividend

transfers shares of stock from the corporation to its stockholders -- additional shares of the corporation's own stock - for each share outstanding, a fixed number of new shares is issued, and an amount of retained earnings is transferred to contributed capital accounts in a process known as capitalization of retained earnings

Shea Company has 100,000 shares of 6%, $50 par value, cumulative preferred stock. In 2018, no dividends were declared on preferred stock. In 2019, Shea had a profitable year and decided to pay dividends to stockholders of both preferred and common stock. If they have $750,000 available for dividends in 2019, how much could it pay to the common stockholders?

$150,000

RVR Enterprises shows net income of $100,000 for 2019 and retained earnings of $500,000 on its December 31, 2019 balance sheet. During the year, RVR declared and paid $60,000 in dividends. What was RVR's retained earnings balance at December 31, 2018?

$460,000

Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

$60,000

McKean Corporation authorized 500,000 shares of common stock in its articles of incorporation. On May 1, 2019, 100,000 shares were sold to the company's founders. However, on October 15, 2019, McKean repurchased 20,000 shares to settle a dispute among the founders. At this date, how many shares were issued and outstanding, respectively?

100,000 and 80,000

Harvey Corporation shows the following in the stockholders' equity section of its balance sheet: The par value of its common stock is $0.25 and the total balance in the Common Stock account is $50,000. Also noted is that 15,000 shares are currently designated as treasury stock. The number of shares outstanding is:

185,000

What best describes the discount on bonds payable account?

A contra liability

treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

The premium on bonds payable account is shown on the balance sheet as

addition to a long-term liability.

Stockholders' Equity

also called equity; represents the owners' claims against the assets of a corporation after all liabilities have been deducted -recorded in balance sheet

interest rate

also goes by stated rate, coupon rate, and contract rate

Which of the following statements is true? a) The outstanding number of shares is the maximum number of shares that can be issued by a corporation. b) The shares that are in the hands of the stockholders are said to be outstanding. c) It is very unlikely that corporations will have more than one class of stock outstanding. d) Preferred stock is stock that has been retired.

b) The shares that are in the hands of the stockholders are said to be outstanding.

A company would repurchase its own stock for all of the following reasons except: a) it wishes to prevent unwanted takeover attempts. b) it wishes to increase the earnings per share. c) it believes the stock is overvalued. d) it needs the stock for employee bonuses.

b) it believes the stock is overvalued

large stock dividends

increase the number of outstanding shares by 25% or more and are capitalized at par

small stock dividend

increase the number of outstanding shares by less than 25%; they are capitalized using the stock's market value just before the dividend

When bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period

minus the premium amortization for the period.

par value

monetary amount printed on each share of stock that establishes a minimum price for the stock when issued, but does not determine its market value

When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period

plus the discount amortization for the period.