ACCT 2110 Exam 5

What happens when we sell a bond at a discount?

increase: discount on bonds payable, interest expense decrease: cash bonds, LONG TERM DEBT

What decreases or increases when a bond is issued at a premium?

increases: premium on bonds payable, cash, & interest expense.

Effective interest rate method

interest expense = the yield (effective interest rate) times the carrying (or book) value of the bond at the beginning of the period.

Warranty Liability

liability recorded for the future cost of claims

Outgoing Shares

number of issued shares actually in the hands of stockholders.

Issued Shares

number of shares that have been sold to stockholders

Stated/Coupon/Contract Rate

rate of interest paid on the face (or par) value. For bonds, the borrower pays the interest to the creditor each period until maturity.

Retained Earnings

represents amount of companies profits that have not been distributed as dividends to shareholder.

Withholdings

taxes for the government, taken out before you actually get your paycheck

Payroll Taxes

taxes on wages and salaries ex) social security, medicare

issuance

the cash received when the bonds are issued. (the issue selling price)

Stated Rate

the interest on the face value

Interest

the interest payments

Straight Line Method

equal amounts of premium or discount are amortized to interest expense each period.

Initial Paying Capital

how many shares a par value

Two common ways in which companies can raise capital:

-through the issuance of equity/stocks such as a common preferred stock in exchange for Cash. -through the issuance of debt/bonds in exchange for cash.

In 2019, Drew Company issued $200,000 of bonds for $189,640. If the stated rate of interest was 6% and the yield was 6.73%, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?

189,640 x 6.73%

Times Interest Earned (Cash Basis)

= (cash flows from operations + taxes paid + interest paid)/interest payments

Long-Tern Debt to Equity

= Long-Term Debt/Total Equity

Times Interest Earned (Accrual Basis)

= operating income / interest expense

Debt to Equity Ratio

= total liabilities / total equity

Debt to Total Assets Ratio

= total liabilities/total assets

Treasury Stock

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

Serenity Company issued $100,000 of 6%, 10-year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually

Amortization of the premium for the first interest period will be $613.

Paid-in Capital

Common Stock, Preferred Stock, Additional Paid-in Capital.

Maturity Date

Date on which the borrower agrees to pay the creditor the face (or par) value. End of Bond life.

Notes/Bonds

Debt instruments that require borrowers to pay the lender the face value and usually to make periodic interest payments.

Periodic Interest Payment

Face Value x Interest Rate x Time (in years)

What happens when paying annual interest on a bond?

It comes out of premium

Market/Yield/Effective Rate

Market rate of interest demanded by creditors. This is the function of economic factors and the creditworthiness of the borrower. It may differ from the stated rate.

Common Stock

Sale @ par: Cash XXX Common Stock XXX Sale above par: Cash XXX Common Stock XXX Additional Paid In Capital XXX

Preferred Stock

Sale @ par: Cash XXX Preferred Stock XXX Sale above par: Cash XXX Preferred Stock XXX Additional Paid In Capital XXX

Authorized Shares

The maximum number of shares a corporation may issue as indicated in the corporate charter.

Accumulated Other Comprehensive Income

This account includes the cumulative amount of all previous items reported as other comprehensive income.

The result of using the effective interest method of amortization of the discount on bonds is that

a constant interest rate is charged against the debt carrying value

Face Value/Par Value/Principal

amount of money the borrower agrees to repay at maturity.

Contingent & Current

current: within one year contingent - may or may not happen (depends on something else)