accounting lect 6

how to increase equity in 2 ways

1. contributions by investors in exchange for share capital 2. retention of profits by corporation aka RE

2 factors that affect market value

1. investors expectation of future profits 2.risk of not achieving the expected level of profits

advantages of a corporation

1. separated legal existence 2. shareholders has limited personal liability 3. ability to raise more capital (more than partnerships even) 4.continuous life 5.transferable ownership rights 6.professional management

disadv of a corporation

1.greater regulation 2. heavy taxation 3. cost of formation 4. separation of ownership and management

when u see the word purchase shares what do u think of

A- and OE- shrinks assets and OE

how to calculate RE?

Beg RE +Rev-exp-div =ending RE

JE when a company issues 10k shares for $25 per share in exchange for cash

DR Cash (A+) 250k CR ordinary shares (OE+) 250k

Estimated liability a dealer sells a car for $100,0000 on 1 dec with warranty for parts and labour for 12 months, or 12,000 miles. the dealership experiences an average warranty cost of 3% of the selling price of each car. JE?

DR Warranty expense (E+)(OE-) CR estimated warranty liability (L+)

qn. assume company X reacquired 5000 shares at $20 per shares * when u see reacquired u must think of TS

DR treasury shares (OE-) 100k CR Cash (A-) 100k

From longterm creditor POV, the lower coverage ratio, the better? T/F?

FALSE. higher ratio is better cos it means ability of company to meet interest payments as they come due

qn. when a corporation fails to pay div one year on its OS it is said to be " in arrears" T/F?

False because OS do not have cumulative rights to div

qn. because they have no voting right, ordinary shareholders rcv priority over preference shareholders in the distribution assets in the event corporation is dissolved. T/F?

False, ordinary shareholders are the lasy to be paid in the distribution of assets in the event the corporation is dissolved

If a long term debt is to be paid off in monthly instalments over a 5 year period, the entire principal should be classified as a long term debt? T/F?

False. the portion that is due within 1 yr shld be classified under current liability

GST payable company X rcv 10700 form customer compromising of 10,000 for goods sold and 7% GST payable to gov

For receipt of sales, this is show u record: DR Cash (A+) CR GST payable CR sales revenue For payment to tax authority, this is show u record: DR GST Payable (L-) 700 CR cash (A-) 700

kathay corporation borrows 60k by issuing a 12% per annum, 6 month note payable all due at the maturity date. after 1 month, company's total liability for the lan amounts to:

L= principle + 1 months interest L= 60k + (12% x 60k x1/12) L=60,600

A +B =total share capital

OS and PS outstanding an preference shares

Assume on 1 jan'10, company X issues a 50k, 10% 5 year bonds at par taht pay interest semi-annually on 1 jan and 1 july JE?

T0 record issued bonds at par: DR cash (A+) 50k CR bonds payable (L+) 50k to record interest paid to bondholders: DR interest expense (E+)(OE-) 2,500 CR cash (A-) (50k x 0.1 x 1/2=2500) *bonds payable unaffected

if contingent liability is probable but non estimable, disclose in notes? T/F?

True

which of the following isnt a characteristic of the ordinary shares of a public listed company? a) voting rights in AGM b)shares may be bought or sold at the discretion of shareholder c)cumulative right to dividends d)the market value of the shares @ any time may not be equal to the issuance price of the share

c. ordinary shareholders are entitled to div in the year the board of directors declares a div so they have no cumulative rights to div

TS is a ______ account

contra equity account (OE-)

diff of cumulative preference shares and non cumulative

cumulative: div in arrears must be paid before div may be paid on ordinary shares (must be disclosed on FS) noncumulative: undeclared div from current and prior years do not have to be paid in future years *in arrears means have not been paid yet

difference between current and non current liabilities

current is less than a year and non current is more than one year

issuance of share capital: no par shares. all proceeds is debited/credited to share capital account

debited

what is short term and long term bank loans, notes payable and bonds classified under? Debt or equity financing?

debt financing

what effect does payment of cash div have on B/S? aka ALOE

decrease A decrease L no effect on

under which equity financing or debt financing, no legal obligation to pay div unless declared by board of directors?

equity financing

what is issuance of ordinary shares, issue of preference shares and RE classified under? Debt or equity financing?

equity financing

on 5th march, the dealership(customer) paid 200 for parts and 250 for labour covered by warranty . JE?

for parts: inventory (A-) labour: Salaries payable (L-) DR estimated warranty liabilty (L-) 450 CR Inventroy (A-) 200 CR Salaries payable (L-) 250

facts about ordinary shares

have voting rights residual owners during liquidation entitled to share in the company's profits thru div but company has no obligation to pay div to ordinary shareholders

Interest Coverage Ratio (NOT % but is times)

income before income taxes and interest expense/ interest expense

advantage of issuing bonds instead of stock:

interest is tax deductible whereas div arent

what is treasury shares TS

issues capital reacquired by the company but not retired (means the company purchase their own shares)

A Ltd has 3,000,000 shares outstanding. The board of directors declared a tax exempt cash div of $1 per share payable as follows: div declaration date: 30 june'14 book closure date: 31st july'14 ex--div date: after 31st july '14 div payment date: 15th aug'14

june 30 DR dividend (OE-) CR dividend payable (L+) aug 15 DR Dividend payable (L-) CR Cash (A-)

formula for earnings per share (EPS)

net income/no. of outstanding shares

Sue and guy each own 10k shares of S&G corporation shares which they purchased for 438 per share direcrlt from the corporation. If sur sells her share to guy for 475000, what happens?

no accounting happens when theres a transfer of shares between shareholders in a corportion

what effect does declaration of cash div have on B/S? aka ALOE

no effect on asset increase L decrease OE

facts about preference shares

no voting rights typically rank before ordinary shareholders during liquidation entitled to div and have priority over ordinary shareholders for div payment

do shares splits change total equity?

nope, doesnt change. no acccounts are affected eg. u split shares by half, but the price of each single share is doubled, so in the end the total value will still be the same before or after the split

what is deferred revenues or unearned revenue

obligations arising when cash is rcv prior to the related revenue being earned

whats accrued liabilities/expenses

obligations related to expense that have been incurred but will not be paid until subsequent period (eg. interest payable, notes payable)

2 types of share capital?

ordinary shares and preference shares

Shares that have been sold and are in the hands of stockholders are called:

outstanding

failure to record a liability relating to an expense results in: overstatement and understatement of ______?

overstatement of net $Y and understatement of L

in accounting got a contingent liability, if the likelihood of the obligation is probable and the amount can be estimated, a company must:

recognise L and report on the balance sheet as L

why do companies prefer to classify under non current liabilities instead of current on balance sheet?

seem less risky since current means the L are due payable v soon and qn arises as to if they hv suff recourses to settle them

when TS are sold for less than its cost, entry should include debit to:

share hodler capital or OS no gain/loss recognised for TS

short term notes payable

slide 10

Formula for Debt Ratio(%)

total liabilities/total assets

lower share price = more active/liquid market. T/F?

true

the higher the % of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. T/F?

true

when u see the word reissue or issuing shares what do u think of

u think of A+ from cash , and OE+ from TS and OE+ from OS

on B/S under shareholders equity, where is TS shown?

under RE eg. less TS *recall TS is OE- so will have Dr balance

failure to record a liability often results in an

understatement of an expense or asset

on maturity on 1 jan'15, company x will have to pay the bond holders the face value of the bonds JE for paid bonds at maturity?

when u see face value at maturty date, rmb decrease A and L JE for paid bonds at maturity: DR bonds payable (L-) 50k CR cash (A-) 50k

is a bond is issued at par on interest payment date, will the cash rcv by corporation be same as face value of bond?

yes