Accounting II- Midterm Study Guide

What are the advantages and disadvantages of tasing capital through the issuance of stock?

Advantages: - Cash to grow the business - No debt repayments Disadvantages: - Giving away ownership - dividend payments

Callable Bond

also known as a redeemable bond, is a bond that the issuer may redeem before it reaches the stated maturity date.

Times interest earned ratio

A ratio that measures creditor margin of safety for interest payments, computed as income before interest and taxes divided by interest expense.

Articles of Incorporation

A see of formal documents filed with a government body to legally document the creation of corporation.

Stock Split

A process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares.

What are the dates for cash dividends?

- Ex-dividend date - Record date - Payment date

What is the journal entry for the purchase and sell of treasury stocks?

- on the purchase treasury stock will be debited and the cash account will be credited - on the sale the cash account will be debited and the treasury account will be credited.

Corporate Charter

A corporate charter, also known as a "charter" or "articles of incorporation," is a written document filed with the Secretary of State (or registrar in Canada) by the founders of a corporation. It details the major components of a company, such as its objectives, structure, and planned operations. If approved by the state, the company becomes a legal corporation.

Stock Dividends

A distribution of additional shares of stock to existing stockholders.

Par Value

A dollar amount assigned to each share of stock.

What are the advantages and disadvantages of a sole proprietorship?

Advantages: - Easy to create - decision making freedom - tax advantage. to owner - all profits to owner Disadvantages: - Unlimited liability - difficulty in raising money - death of owner= death of business

What are the advantages and disadvantages of raising capital through the issuance of bonds?

Advantages: - Faster - Tax benefits - No dilution of control - Repeat as often as needed Disadvantages: - Riskier - Interest payments - debt on the books

What are the advantages and disadvantages of a corporate form of business?

Advantages: - personal liability protection - business security and continuity - easier access to capital Disadvantages: - time-consuming - subject to double taxation - strict protocols

Bond

An interest-bearing note that requires periodic interest payments, with the face amount to be repaid at the maturity date.

Paid-in Capital

Capital contributed to a corporation by the stockholders and others

Paid-in capital in excess of par

Capital in excess of par is the amount paid by investors to a company for its stock, in excess of the par value of the stock. Par value is the legal capital per share, and is usually printed on the face of the stock certificate.

Bonds with a face value of $90,000 were issued at 97.

Cash account will be debited with $87,300 and loss on issue of bond payable will be debited with $2,700 whereas the bond payable account will be credited with $90,000

Operating activities

Cash receipts and cash disbursements from revenues and expenses. - Involve current assets and current liabilities

Financing activities

Cash receipts and disbursements from long-term debt and equity transactions.

Investing activities

Cash receipts and disbursements that result from purchasing or selling long-term assets or investments in other firms.

Dividends

Distribution of a corporation's earnings to stockholders.

What is the entry to record the issuance of 600 shares of $5 par value common stock for $15?

Here, the cash account will be debited with the amount of $9,000 whereas the common stock account will be credited by $3000 and remaining $6000 will be credited as a Paid-In capital in Excess of Par - Common Stock.

A corporation paid $105,000 to retire bonds with a face value of $98,000 and an unamortised premium balance of $3000.

In the journal entry, bonds payable will be debited with a face value of $98,000 and premium on bonds payable will be debited by $7,000; and a cash account will be credited by $102,000 whereas an unamortized bond premium will be credited with $3,000.

Payment of bond interest and amortization of premium semiannually.

Interest expenses debited, premium on bonds payable debited and cash account will be credited.

Retained Earnings

Net income retained in a corporation

How does one report stock holders equity?

Paid-in Capital Preferred stock Common Stock Paid-in capital in excess of par value - preferred stock Paid-in capital in excess of par value - common stock Paid-in capital from treasury stock Retained earnings Accumulated other comprehensive income Less: treasury stock Total stockholders' equity

Treasury Stock

Stock that a corporation has issued and then reacquired.

Bond indenture

The contract between a corporation issuing bonds and the bondholders

Bonds with a face value of $100,000 were issued at 102.

The journal entry for the issuance of bond will be a cash account debited by $102,000 whereas bond payable will be credited by $100,000 and premium on bond payable will be credited with $2,000.

Bonds payable has a balance of $1,000,000 and a discount on bonds payable of 15,500. The issuing corporation redeems the bonds at 99. (Journal Entry)

The journal entry for the redemption of bonds - bond payable will be debited $1,000,000 and premium on bond payable will be debited by $5,500; and cash account will be debited by $990,000 and game on redemption of bond payable will be debited by $10,000.

What is the formula to calculate par value after a stock split?

The original par value is divided by the ratio of the stock split.

Stockholders' Equity

The owners' equity in a corporation.

contract rate

The periodic interest to be paid on the bonds that is identified in the bond indenture; expressed as a percentage of the face amount of the bond.

Amortization of bind discount and bond premium

The periodic transfer of the cost of an intangible asset to expense. A portion of a bind discount or bond premium transferred to interest expense over time.

Earnings per share (EPS)

The profitability ratio that measures the share of profits that are earned by a share of common stock, computed. by dividing net income, reduced by preferred dividend requirements, by the shares of common stock outstanding.

What does bond discount do to interest expense over the life of the bond and why?

When a discounted bond is sold, the amount of the bond's discount must be amortized to interest expense over the life of the bond.

Serial Bond

a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment

Public Corporation

a company whose shares are traded freely on a stock exchange.

Face Value

a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. (original cost of the stock)

Convertible bond

a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares.

Bylaws

a rule made by a company or society to control to control the actions of its members.

Limited Liability

a type of legal structure for an organization where a corporate loss will not exceed the amount invested in a partnership or limited liability company (LLC). In other words, investors' and owners' private assets are not at risk if the company fails.

Cumulative Preferred dividends

a type of preferred stock with a provision that stipulates that if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first.

Term Bond

bonds from the same issue with the same maturity dates.

What is the entry to record common stock is issued for 100, and par value is 90?

cash account will be debited by 100 where as the common stock will be credited by 90 remaining 10 will be credited as a Paid-In capital in Excess of Par - Common Stock.

Payment of bond interest and amortization of discount semiannually

interest expense debited; discount on bonds payable will be credited and the cash account will be credited.

Board of Directors

is an elected group of individuals that represent shareholders. The board is a governing body that typically meets at regular intervals to set policies for corporate management and oversight.

Principal

refers to the amount of debt excluding interest.

Payment date

the date on which the dividend is paid to shareholders. On this date the general entry needs to be recorded as the investor account debited and cash account will be credited. Further, dividend payable accounts will be credited and income statement accounts will be debited.

Record date

the date on which the investor must be on the company's books in order to receive a dividend. The company records its Liability towards the investor for the payment of dividend and hence, passes the journal entry as investor account credited and dividend payable account debited by the amount of dividend as stipulated and announced by the board of directors on the declaration date.

Ex-dividend date

the first day that a stock traded without dividend. This date is set by the stock exchange, not the company itself. It's a decision making process for the stock exchange and therefore requires no journal entry.

Effective rate

the interest rate on a loan or financial product restated from the nominal interest rate and expressed as the equivalent interest rate if compound interest was payable annually in arrears.