BTA 112. Exam 1 Review

Retained earnings is also known as

"Earned surplus"

Entry: To record declaration of cash dividends to preferred stock and common stock)

Cash dividends debit Dividends Payable credit (Explanation) Note: Notice how we don't segregate preferred stock and common stock, but instead we put both of those account under dividends payable.

Entry: To record issuance of shares in a stock dividend

Common stock dividends distributable debit Common stock credit (Explanation)

Entry: To record payment of cash dividends

Dividends Payable debit Cash credit (Explanation)

Gross profit. Formular

GP= Sales revenue - COGS

Entry: To allocate gain to partners' capital accounts

Gain on realization debit Owner #1, capital credit Owner#2, capital credit Owner#3, capital credit (To allocate gain to partners' capital accounts

Entry: To close Income summary and transfer net income to retained earnings

Income Summary debit Retained earnings credit (Explanation)

Retained earning, to what account does it gets lose

Income Summary.

Entry: To record income taxes for the year

Income Tax expense debit Income Tax Payable credit (Explanation)

Entry: To close income summary to capital in a partnership when both owner share net income/loss

Income summary debit Owner #1 credit Owner #2 credit (To transfer net income to partner's capital accounts)

Income ratio. What it is used for?

It is used to identify the basis for dividing net income and net loss.

A business, where it is formed

a business is form at the county level.

The admission of a partner by purchase of an interest is _

a personal transaction between one or more existing partners and the new partner due to the fact that the new partner is being admitted into the partnership, so the transaction is only between the existing partners and the new partners.

Each partner, is what in a partnership

an agent.

Each partner initial investment is recorded

at fair value at the date the assets are transfer into the partnership.

Partnership agreement, can it be what

can be written or oral. It forms a partnership. Example: a hand shake can be a example of an oral agreement.

Entry: To record the sale of shares of treasury stock above cost

cash debit Treasury stock credit Paid-in Capital from treasury stock credit (Explanation) Note: Treasury stock is not an asset.

Limited partnership

consists of one or more partners who have unlimited liability and one or more partner who have limited liability for the debts of the firm.

Organization costs

costs incurred in the formation of a corporation

A debit balance in retained earning, what it is called

deficit.

Board of directors, what do they developed

developed policies and procedures for the day to day operations.

In a limited liability company, what happens to each member

each member is not liable for the actions of the company debts. NOTE: A limited liability company is formed at the state level.

In a partnership

each partner has co ownership of the assets. In other words, they share all of the partnership assets.

In a limited liability partnership,

each partner liability is limited to his/her own actions.

No capital deficiency. Definition.

happens when partnership is liquidated, and all partners have credit balances in their accounts.

Capital deficiency. Definition

happens when partnership is liquidated, and one or more partners have debit balances in their accounts which means that they own money.

Earning per share. What it indicates

indicates the net income earned by each share of outstanding common stock. Note: Companies only report earnings per share only for common stock.

Liquidation. What it involves?

involves selling the assets of the firm, paying liabilities, and distributing any remaining assets

Retained earning, definition

is a capital account, normally with a credit balance. It keeps tract of a company net income and loss from the first day the company was formed.

Dividend. definition

is a corporation's distribution of cash or stock to its stockholders on a pro rata (proportional to ownership) basis.

Cash dividend. definition

is a pro rata distribution of cash to stockholders. For a corporation to pay a cash dividend, it must have 1. Retained earnings 2. Adequate cash 3. A declaration of dividends Note: cash dividends is like an expense account which decreases retained earnings

Stock dividend. definition

is a pro rata distribution to stockholders of the corporation's own stock. Whereas a company pays cash in a cash dividend, a company issues shares of stock in a stock dividend. Note: Stock dividend decreases retained earnings.

Paid in capital in excess of par

is also a owner's equity account.

Par Value stock

is capital stock to which the charter has assigned a value per share. Remember: A charter indicates the amount of stock that a corporation is authorized to sell

No-par value stock. Definition

is capital stock to which the charter has not assigned a value

Legal entity

is how the law sees the business.

Retained earning . definition

is net income that a company retains in the business Note: A debit balance in retained earning is identified as a deficit because it shows that our retained earning is getting reduce. Remember that retained earnings usually has a credit balance.

Controller

is the chief accounting.

General council

is the chief lawyer of the organization

Prior period adjustment. definition

is the correction of an error in previously issued financial statements

Retained earnings. definition

is the net income that a corporation retains for future use.

Paid-in capital. Definition

is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

Total paying capital

is the total of the equity accounts: 1. Common stock account 2. PICIEP- C/S.

A partnership, what happens at far as taxes goes

it does not pay taxes.

Charter. What it indicates

it indicates the amount of stock that a corporation is authorized to sell

How is a corporation form?

it is formed by grant of a state charter. Note: The charter is a document that describes the name and purpose of the corporation, the types and number of states of stock that are authorized to be issued, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase.

Publicly held corporation. What happens as far as the number of stockholders goes?

it may have thousands of stockholders

Retained earnings statement. What it shows

it shows the changes in retained earnings during the year.

Mutual agency. What it means

means that each partners acts on behalf of the partnership when engaging in partnership business.

IPO (Initial public offering)

means that they list the company shares on a stock exchange.

Outstanding stocks. definition

means the number of shares of issued stocks that are being held by stockholders-owners

Liquidation of a partnership

means to terminate a partnership business. It could end by mutual agreements of the partners, death of the partner or bankruptcy. Liquidation ends both the economic and legal life of a partnership. Economic life refers to the fact that there is no more journal entries.

Partnership dissolution. When does it occurs

occurs whenever a partner withdraws or a new partner is admitted. Note: remember, in a partnership, each partner has unlimited liability.

Common stock, what type of account it is

owner's equity also know as capital account.

Schedule of cash payment is also known as _

safe cash payments

Partner's Capital Statement

shows the changes in the owner's capital for each partner, and for the partnership as a whole.

Schedule of cash payments. What it shows?

shows the distribution of cash to the partners in a partnership liquidation.

In the content of liquidation, realization means

the sale of noncash assets for cash.

The balance sheet for a partnership looks

the same like the balance sheet for a sole proprietorship. The only difference is shown in the equity section due to the number of owners.

For non par value, what does the board of directors does

they assigned a "state value."

Limited liability company

usually has limited life. The owners, called members, have limited liability like owners of a corporation, but members of a limited liability company can assume an active management.

Privately held corporation. What happens as far as the number of stockholders goes?

usually has only a few stockholders, and does not offer its stock for sale to the general public.

When issuing shares in exchange for non-cash asset or services

we record the transaction at 1. Fair market value in which is given 2. Fair market value of what is received. We use the one that is more clearly determine.

Note: Before the liquidation process, what must you do

you must do the closing entries.

Organizational cost

Any cost associated with the formation of a corporation. It should be expense in the period in which it is incurred. Examples of this costs: include legal fees and accounting fees.

In the charter, we find two main things

1. The type of capital stock that a corporation issues. 2. The par value for capital stock.: the par value is an assigned value given to each share of capital stock.A company cannot sell their capital stock below that assigned value.

Characteristics of a partnership: 8 main characteristics

1. A legal entity: this means that the partnership operates as its own name. It can buy and sell assets in its own name, it can borrow money in its own name, it can enter into contracts in its own name. 2. It can sued and be sued. 3. The partnership does not pay taxes, the individuals partners pay taxes on their share of the partnership income on their individual tax return-Form1040. The only thing that the partnership does is to file a information return known as Form 1065 with the IRS. 4. Mutual agency: partners act on behalf of the partners when engaging in partnership business. For a act of a partner to be binding , the partnership has to be appropriate within the scope of the partnership. 5. Limited life: this means that the partnership can end voluntarily, or Involuntarily. 6. Unlimited Liability. 7. Partnership assets: Once assets are place into the partnership, they are own by the partnership, and not by the individual owners. An individual claim to the partnership assets in based on the individual capital account balance. 8. Sharing of income or losses: is in accordance with the partnership agreement if you have one. If you dont have one, then it is share equally.

Fair value of stock is determined either

1. By the value per share traded at the stock exchange 2. An agree value between the individuals in the transaction.

Name one key features associated with the issuance of preferred stock.

1. Dividend Preference: these holders receive payment before common stockholders. Also for owners of preferred stock, there is a cumulative dividend features. This means that preferred stockholders must be paid both current-year dividend and any unpaid prior year dividends before common stockholders receive dividends.

Disadvantages 3 main points:

1. Double taxation. corporation pays and stockholders as well: stockholders pay taxes on the dividends income they receive. 2. Strict government regulations.. 3. Corporate management: from the point of view that there is a gap that exist between management and owners due to the fact that in a corporation, stockholders are not always there present when decision are being made.

Forming a corporation, Steps

1. File an application with the state in which you would like to incorporate. Step #2: The application is approved and the corporation is issue a charter( is like a birth certificate). Step #3: The corporation develops bylaws(policies and procedures of operations) that will regulate the corporation.

In exchange for stocks, you could give a corporation the following, 3 things

1. cash 2. Noncash assets 3. Provide service.

Entry: To record the sale of shares of treasury stock belowcost

Cash debit Paid-in Capital from treasury stock debit Treasury stock credit (Explanation)

Major types of partnership :4 types

1. General; partnership: all partners have unlimited liability, all partners engage in management, and all partners are general partners: they are involve in the day to day activities. 2. Limited partnership: partnership that has at least one general partner and at least one limited partner: limited partner :criteria a. Are not involve in the day to day operations of the partnership b. They have limited liability: creditors cannot go after their personal assets. 3. Limited Liability Partnership-LLP: all partners are limited partners. Main point: partners are protected against the negligence that may result from the act or actions of other partners. Example: Doctors. 4. Limited liability company - LLC: owners are known as members. This is a hybrid(mixed, meaning that it has some form of partnership and some form of corporation features) form of business organization. Under this partnership, you could have a single member LLC. Partnership features: it is tax like a partnership, meaning that it is a pass through entity ( meaning that the partnership does not pay the taxes, but the owners do) . Corporate features: the owners (members) have limited liability.

Corporation (4 Main points)

1. It has to pay taxes and obey all laws. It cannot vote or run for public office. 2. Can operate for profit or non-profit organization. Not for profit : example: Red Cross. For-profit: Example: Mcdonalds 3. Can be publicly trade or privately owned. 4. It is refer to as an artificial being.

Advantages 6 Main points :

1. Limited liability. 2. Corporate management 3 Perpetual or continous life 4. Ability to raise capital by selling more shares. 5. Transfer of ownership. 6 Separate legal existence.

Special forms of partnerships, involve :3 types of partnerships

1. Limited partnership. 2. Limited Liability company. 3. Limited liability partnership.

Temporary accounts. What do they involve? 4 accounts

1. Revenue account 2. Expenses account 3. Income Summary 4. Owner's drawing

4 Steps to Liquidation

1. Sale non-cash assets for cash also known as realization: a gain or loss may result from realization 2. Any gain or loss on realization must be allocate to the individual capital account based on the income ratio 3. Pay off liabilities 4. Distribute any remaining asset(cash) to partners based on their balances in the capital account.

Characteristic of a Corporation:7 main characteristics

1. Separate legal existence: a corporation is an entity separate and distinct from its owner. The corporation can own assets, borrow and lend money, can sued and be sued all in its own terms. 2. Limited liability of stockholders. 3. Transferability of ownership rights 4. Ability to raise capital: if they want to raise more money, they could issued more shares . 5. Perpetual life: corporations have continues life. Unless otherwise stated in the charter ( a legal document), the corporation life is continues 6. Corporate management: The stockholders run the operation of a corporation through the board of directors. 7. Government regulations: Corporations must comply with strict government regulations in order to protect stockholders. Example: With public traded corporation, they are required to make certain filing with the SEC (Security and Exchange Commission). This implies that every quaters, these organization must file a form 10Q with SEC. These organization must file a form 10K with SEC annually.

Partnership Financial Statement: 3 key points

1. The financial statement of a partnership are the same of a sole proprietorship. The only difference are due to the number of owners involve. 2. The income statement of a partnership is identical to that of a sole proprietorship except for that net income is shown as divided to each partner. 3. The owner equity statement is refer to as "A partner capital statement".

Partnership definition

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.

Partnership. Name one advantage and one disadvantage

Advantage: 1. In a partnership, partners get to combine the skills and resources to run the business more smoothly. Disadvantage: 1. Unlimited liability: this means that the owners must pay all business debts even if that means losing their assets. Note: Even though partnerships have their advantages and disadvantages, it is always better if it is in writing.

Partnership: advantages and disadvantages

Advantages: 1. Easy to form. 2. Free from government regulations. Disadvantages: 1. Limited life 2. Unlimited liability 3. Mutual agency

When do corporations file the 10K?

Annually. .

When do corporation file 10Q?

At the end of every quater: following a calendar year.

Entry: To record realization of non-cash assets Note: Realization means the sale of non-cash assets for cash

Cash debit Accumulated depreciation - equip debit Accounts receivable credit Inventory credit Equipment credit Gain on realization credit (To record realization of non-cash assets) Note: All the credit accounts are assets, but they are non- cash, and we are cr. them because we are selling them.

Entry: To record issuance of stock shares

Cash debit Common stock credit (Explanation) Note: Notice that common stock is getting reduce because the corporation is selling them therefore we credit that account, and that is also the reason why cash is debited due to the fact that we are getting cash.

Entry: To record declaration of cash dividend

Cash debit Dividends payable credit (Explanations) Note: Dividends payable is a current liability.

Entry: To record owner investment in the firm in the form of money and an equipment

Cash debit Equipment debit Owner, Capital (To record investment of Owner)

Entry: To record the admission of a new partner by investment

Cash debit New Owner, Capital credit

Entry: To record payment of capital deficiency by one of the owner

Cash debit Owner, Capital credit (To record payment of capital deficiency by owner) Note: We credit owner's capital to bring his balance down to zero because this owner in the partnership owns money, so we have to clear his account in order to be able to liquidate the business.

Formula: Accounts receivable - Accounts for doubtful account =

Net realizable value

Entry: To record Organizational cost

Organization expense xx (Cash) (xx)

Entry: To close Owner's drawing to capital

Owner #1, Capital debit Owner #2, Capital debit Owner #1, Drawings Owner #2, Drawings (To close drawing accounts to capital accounts)

Entry: To record distribution of cash to partners when we are liquidating the business

Owner#1, Capital debit Owner#2, Capital debit Owner#3, Capital debit Cash credit (To record distribution of cash to partners)

Owner's equity statement for partnership is called

Partner's capital statement

To liquidate a partnership, it is necessary to do the following four steps

Recall: Liquidation of a business involves selling the assets of the firm, paying liabilities, and distributing any remaining assets. Steps to liquidate a partnership, 1. You must sell noncash assets for cash and recognize a gain or loss on realization. 2. Allocate gain/loss on realization to the partners based on their income ratios. 3. Pay partnership liabilities in cash. 4. Distribute remaining cash to partners on the basis of their capital balances.`

Entry: To adjust for understatement of depreciation in a prior period

Retained Earnings debit Accumulated depreciation- Equipment credit (Explanation) Note: We credit accumulated depreciation because since it was understated, it needs to be increased. On the other hand, we debit retained earning to reduce it because it was overstated since accumulated depreciation was understated.

Stock split. Purpose

The purpose of a stock split is to increase the marketability of the stock by lowering its market value per share.