ACCT 200 FINAL

stock issue considerations

(1) AUTHORIZED STOCK-- we need to decide how many shares of stock we want to sell at most-- this is called AUTHORIZED STOCK (authorized number of shares) and it is the number of shares allowed to sell (per the entity's charter) also reported in the stockholder's equity section of the balance sheet (2) ISSUANCE OF STOCK-- corporation can issue common stock directly to investors or indirectly through an investment company (3) PAR AND NO-PAR VALUE STOCK-- Par value (assigned a value per share in the corporation charter) No par value (not assigned a value per share in the corporation charter)

top 5 exchanges by value of shares traded

(1) New York Stock Exchange (2) nasdaq Stock Market (3) London Stock Exchange (4) Tokyo Stock Exchange (5) Euronext

dividends as expressed:

(1) as a percentage of the par or stated value (2) as a dollar amount per share

types of dividends:

(1) cash dividends (2) property dividends (3) stock dividends

paid-in-capital is divided in 2 things:

(1) common stock (account) (2) preferred stock (account)

typically, preferred stockholders have a priority in relation to

(1) dividends (2) assets in the event of liquidation however, they often DO NOT have VOTING RIGHTS

steps to forming a corporation

(1) file application with the secretary of state (2) state grants charter (3) corporation develops by-laws

(cash dividends) for a corporation to pay a cash dividend, it must have...

(1) retained earnings (2) adequate cash (3) declaration by board of directors (after declaration, company has a binding legal obligation to pay dividend)

reasons why corporatoons issue stock dividends:

(1) satisfy stockholder's dividend expectations without spending cash (2) increase the marketability of the corporations stock (3) emphasize that a portion of stockholder's equity has been permanrently reinvested in the business

why do corporations purchase their outstanding stock?

(1) to reissue shares to officers and employees as compensation (2) to have additional shares available for use in acquiring other companies (3) to increase trading of the company's stock on the market (4) to increase earnings per share (5) to eliminate hostile shareholders

stockholder rights

(1) vote in election of board of directors and on actions that require stockholder approval (2) share the corporate earnings through receipt of dividends (3) keep the same percentage ownership when new shares of stock are issued (preemptive right)(when new shares of the corporation are issued, stockholders have the first right of refusal to buy those shares)(protects stockholder ownership percentage from no longer having a significant ownership) (4) share in assets upon liquidation in proportion to their holdings. this is called RESIDUAL CLAIM (if the company goes out of business, the stockholders get what's left. lender's and creditor's are paid first and stockholder's get whatever money is left over)

· PV (PRESENT VALUE) OF A BOND

*Bonds are a liability—essentially a loan *Bonds are different than notes payable *They are much larger amounts usually (millions and billions of dollars) *Big corporations and government entities deal with bonds *They are for long periods of time—not like short-term notes payable *Ex: I loan you $100 million for 50 years *It could be shorter periods of time, but it could be very long periods of time

*Two interest rates:

*Contract rate *Market rate

Two cash flows:

*Periodic interest payments (annuity) *Principal paid at maturity (single sum)

· Present Value of 1 and Present Value of an Annuity of 1 are Tables 3 &4

*They work the exact same way as Future Value of 1 (Table 1) and Future Value of an Annuity (Table 2) except with present values instead of future values *It is asking for the value today, not the value in the future *Annuity is a series of amounts

Difference between notes payable and bonds is long time period

*We do not wait to pay interest at the end of the bond (I don't want to wait 50 years to get paid), we pay interest every year, sometimes twice a year * This creates 2 cash flows

what is a current liability?

*a debt that a company expects to pay (1) from existing current assets or through the creation of other current liabilities (2) within one year

types of business taht would have unearned revenue are..

*airline tickets *magazine publisher *hotel *football tickets

purchase of treasury stock...

*generally accounted for by the cost method *journal entry: Debit Treasury Stock (for the price paid), Credit Cash (for the price paid)

discount on bonds payable...

*has a debit balance *is a contra account *is subtracted from bonds payable on the balance sheet *decreases over the term of the bonds

long-term notes/mortgages payable:

*may be secured by a mortgage that pledges title to specific assets as security for a loan *typically, the terms require the borrower to make installment payments over the term of the loan. each payment consists of both (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal

what impacts retained earnings?

*net income increases retained earnings *net loss decreases retained earnings *dividends (cash & stock) decrease retained earnings

stock splits

*no journal entry recorded for a stock split *decreases the market value per share and the par value per share *increase the number of shares outstanding *no affect on any of the stockholder's equity account balances

(current liability) current maturities of long-term debt

*portion of long-term debt that comes due in the current year *no adjusting entry required (we just move money around when we prepare the balance sheet)

characteristics of a corporation

*separate legal existence (advantage) *limited liability of stockholders (advantage) *transferable ownership rights (advantage) *ability to acquire capital (advantage) *continuous life (advantage) *corporation management (advantage or disadvantage) *government regulations (disadvantage) *additional taxes (disadvantage)

characteristics that distinguish corporations from proprietorships and partnerships

*separate legal existence (corporations acts under own name, not that of the shareholder) *limited liability of stockholders (limited to their investment) *transferable ownership rights (stockholder's may sell their stock) *ability to acquire capital (by issuing stock & financial institutions are more likely to lend to a corporation) *continuous life (continues, despite any one person leaving) *corporate management (separate ownership & management) *government regulations (state & federal laws, SEC & stock exchange rules) *additional taxes (corporations pays tax and shareholders pay tax on cash dividends)

treasury stock may be repurchased...

*to reissue the shares to officers and employees under bonus and stock compensation plans *to signal to the stock market that management believes the stock is underpriced *to have additional shares available for use in the acquisition of other companies

current liabilities: notes payable

*written promissory note *usually require the borrower to pay interest *those due for payment within ONE YEAR of the balance sheet date are usually classified as current liabilities

ABC Corp. issues 1000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:

Common Stock--$10,000 and Paid-In-Capital In Excess of Par Value--$2,000

when cash is received before earned...

Debit: Cash Credit: Unearned Revenue (a current liability)

when revenue is later earned...

Debit: Unearned Revenue Credit: Revenue

journal entry for amounts we owe to our employees

Dr. Wages Expense Cr. Wages Payable

what is true about stock dividends?

a stock dividend has no effect on total stockholder's equity

a major disadvantage of a corporation is...

additional taxes

authorized..

amount of shares we are allowed to sell

the reason there are 3 different dates (declaration, record, and payment) is because there is constant trading

at the end of any given business day, all the trading transactions havent been officially recorded so the company wouldnt know who to write the checks to

term for the number of shares a company is allowed to sell/give

authorized shares

Dividends require information concerning three dates:

declaration record payment

entries for cash dividends are required on the

declaration date and payment date

cumulative dividend:

holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends

(contingencies) if the outcome of a lawsuit is both (1) probable (you will probably lose the lawsuit) and (2) there is a reasonable estimate of the expected loss then the company should RECORD the liability & loss

if both of these conditions are not met, then the company DISCLOSES this contingency in notes to the financial statements

each payment on a mortgage note payable consists of...

interest on the unpaid balance (not the original balance) of the loan and reduction of loan principal

retained earnings...

is net income that a corporation retains for future use in the business

paid-in-capital...

is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership

term for the number of shares a company has sold/given

issued shares

a corporation is an entity separate and distinct from its owners

it is classified by purpose ((1) not-for-profit (2) for profit) and classified by ownership ((1) publicly held (2) privately held)

· Explain how to account for bond transactions

o A corporation records bond transactions when it § Issues (sells) or redeems (buys back) bonds § When bondholders convert bonds into common stock

· Describe the major characteristics of bonds

o Bonds are a form of interest-bearing notes payable issued by corporations, universities, and governmental agencies o Sold in small denominations (usually $1000 or multiples of $1000) § They can sell to a bunch of different people each in $1000 incriments o The bond issuer (the company issuing the bonds) is borrowing money o The bondholder is the investor that is providing the money to the borrower o A bond is a type of liability o It is a very specific note payable

· Future Value of a Single Amount

o Future value of a single amount is the value at a future date of a given amount invested, assuming compound interest o Necessary to know the: § Interest rate § Number of compounding periods § Amount of the payment or receipt

· 2 future value concepts:

o Future value of a single sum (Table 1) o Future value of an annuity (Table 2)

· Future Value of an Annuity

o Future value of an annuity is the sum of a series of future amounts plus the accumulated compound interest on them o You compound the money you put in PLUS THE INTEREST because you never take the money out o Necessary to know the: § Interest rate § Number of compounding periods § Amount of the periodic payments or receipts o When the periodic payments (receipts) are the SAME in each period, the future value can be computed by using a future value of an annuity of 1 table

· Summary of Time Value Concepts

o In all cases we need to know the: § Interest rate § Number of payments (receipts) · It is either a loan or an investment § Amount of the periodic payments or receipts

appendix G is about the basic question—would we rather have $1000 today or $1000 in the future?

o In normal circumstances, your answer to that is always that you would rather have $1000 today o Because generally currency is going up in time that is just inflationary which is more of an economics topic. Or because we assume that we could invest it in a business sense and grow it. o $1000 doesn't stay $1000. If I have it today, I could invest it and buy inventory and make sales and make money o So we always would rather have the money today o The time value of money topic deals with future values and present values o We are gonna start by talking about future values which raises the question—we have x amount today, what is it going ton be worth in the future under these assumptions?

· We always need to know:

o Interest rate (annual) o Timing of the payments (receipts) o Amount of the payments (receipts)

· On the bond, you will see...

o Issuer of bonds o Maturity date o Face or par value o Contractual (or stated) interest rate

· Annuity is a series of payments—it is not just one payment

o It is going to be a payment every period (in our practice problems written on paper)

· Nature of interest

o Payment for the use of money o Difference between the amount borrowed or invested (principal) and amount repaid or collected

2 present value concepts

o Present value of a single sum (Table 3) o Present value of an annuity (Table 4)

· Types of bonds

o Secured bonds have specific assets pledged as collateral § If the bond holder doesn't repay the bond, then the investor can claim those assets in exchange to get paid off § Lower interest rate than an unsecured bond because there is less risk in a secured bond o Unsecured bonds are issued against the general credit of the borrower § No specific asset if the borrower doesn't pay o Convertible bonds can be converted into common stock at the option of the bondholder § They set a rate at which it can be converted § Ex: for every $1000 bond, you get 2 shares of stock § When you buy the bond, the convertibility factor is preset § May or may not have a higher or lower interest rate depending on if people are interested in having the convertibility factor o Callable bonds can be redeemed (bought back) prior to maturity at the option of the bond issuer (the borrower) § Also at a set rate § Ex: if I invest in a callable bond, I know that if the bond price gets below or azbove a certain point, they might want to call it and pay it back

· Sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid

o The borrower is not required to pay the bond premium at the maturity date of the bonds (only has to pay the face value). Thus, the bond premium is considered to be a reduction in the cost of borrowing. o The contract rate is higher than the market rate

· Determining the market price of bonds (how much can we sell it for?)

o The current market price (present value) of a bond is a function of three factors: § The amounts to be received (principal & interest) § The length of time until the amounts are received § The market rate of interest o The process of finding the present value is referred to as discounting the future amounts

· Sale of bonds below face value causes the total cost of borrowing to be more than the bond interest paid

o The issuing corporation not only must pay the contractual interest rate over the term of the bonds but also must pay the face value (rather than the issuance price) at maturity o The contract rate is less than the market rate

· Present Value of an Annuity

o The value NOW of a SERIES of future amounts, discounted assuming compound interest o Necessary to know the: § Discount rate § Number of payments (receipts) § Amount of the periodic payments or receipts

· Basic time value concept

o Time value of money o Would you rather receive $1000 today or in one year from now? o Today (because of interest) o If you take $1000 and invest it, you will have more than $1000 in a year o If you receive it in a year from now, you have lost the opportunity to earn interest (more money) on it

· Present Value (PV) of a Bond

o Two cash flows: § Periodic interest payments (annuity) § Principal paid at maturity (single sum) o Two interest rates: contract and market

term for the number of shares a company has issued less the number of shares they have reacquired

outstanding shares

preferred stock leads to...

paid-in-capital in excess of par-- PS

common stock leads to...

paid-in-capital in excess of par--CS

treasury stock..

shared that are reacquired from shareholders

issued...

shares actually sold or given in total ever

outstanding shares

shares that are currently held net by shareholders. it is the issued shares less any reacquired treasury shares

sales taxes are expressed as a stated percentage of the sales price

the selling company (1) collects tax from the customer (2) remits the collections to the state's department of revenue (3) does NOT record as an expense

(current liabilities) Payroll and Payroll Taxes Payable

the term "payroll" pertains to both (1) SALARIES- managerial, administrative, and sales personnel (monthly or yearly rate) and (2) WAGES--store clerks factory employees, and manual laborers (rate per hour)

term for the number of its own shares a company has reacquired

treasury stock

treasury stock is when the corporation buys back its own shares

treasury stock is debited and cash is credited when this happens

(STOCK DIVIDENDS) *pro rata distribution of the corporations own stock *results in decrease in retained earnings and increase in paid-in capital

true

(contingencies) events with uncertain outcomes that may represent potential liabilities (example: lawsuits)

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(long-term notes/mortgages payable) you are paying interest on the unpaid balance of the loan and then you are reducing the loan

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a debit balance in retained earnings is also called a deficit

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a dividend is a distribution to stockholder's on a pro rata (proportional to ownership) bias

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appendix G is an appendix

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carrying value is higher in a premium case, so it is going down

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carrying value is lower in a discount case, so it is going up

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current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries & wages, and interest

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declaration date and payment date have accounting specifics, record date

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declaration date is the date that the board of directors authorizes dividends

true

every other equity account has a normal credit balance (besides treasury stock)

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ex: if i am making a car payment, each payment has both principal and reduction in it

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long-term notes/mortgages payable is the type of loan you would have with a car payment or a house payment

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mortgage is secured by the title of an asset such as a house or car

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o Bond prices are quoted as a percentage of face value

true

o Bonds may be issued at § Face value · When market rate and contract rate are the same § Discount (below face value) · When contract rate is lower than market rate · Below face value § Premium (above face value) · When contract rate is higher than market rate · Above face value

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o Different types of bonds hace different interest rates

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o When a company has bonds, there are 4 accounting transactions to record. A journal entry is needed: § When the bond is issued (sold)—need to record cash received (as the issuer) and liability § When interest is accrued at the end of a period · This is usually a day apart from when the interest is paid § When the interest is paid · This is usually a day apart from when the interest is accrued at the end of the period § When the bond is retired (paid off)

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once dividends are declared, it becomes a legally binding obligation

true

payment date is the date that the company issues dividend checks

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per share dividend amount is usually stated as a percentage of the preferred stock's par value

true

preferred stock is only seen in certain industries, but it is seen a lot in the industries that use it

true

preferred stock may have a par value or a no-par value

true

preferred stockholders have the right to receive dividends before common stockholders

true

record date is the date that registered stockholders are eligible for dividend

true

retained earnings has a normal CREDIT balance

true

retained earnings is net income that a company retains for use in the business

true

retained earnings is part of the stockholders claim on the total assets of the corporation

true

sales tax payable is a current liability

true

treasury stock is a contra stockholder's equity account (normal DEBIT balance)

true

treasury stock is not an asset, it is a reduction of equity

true

treasury stock is when a corporation reacquires its own stock from shareholders

true

two primary sources of equity are paid-in-capital and retained earnings

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unearned revenues (current liabilities) are cash that is received before goods are delivered or services are performed (before revenue earned)

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usually there is a gap between record date and payment date so that dividends could get sent to the right people

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we subtract treasury stock from the total equity

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§ The contractual rate is often referred to as the stated rate

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· Appendix G is all about the time value of money

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· Bond prices VARY INVERSELY with changes in the market interest rate. As market interest rates decline, bond prices increase. When a bond is issued, if the market interest rate is below the contractual rate, the bond price is higher than the face value.

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· Bonds are issued at a discount if contract rate < market rate o Journal entry: § Dr. Cash for the amount of the present value of the bonds § Dr. Discount on B/P for the amount of the present value of the bonds MINUS the original amount (given to you in the problem) · Cr. Bond Payable for the original amount (given to you in the problem)

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· Bonds are issued at premium if contract rate > market rate o Dr. Cash for the amount of the present value of the bonds § Cr. Premium on B/P for the amount of the present value of the bonds MINUS the original amount (given to you in the problem) § Cr. Bonds Payable for the original amount (given to you in the problem)

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· Bonds are issued with single future principal amount to be repaid to the lender (ex: face value) and a stated interest rate from which future periodic interest payments are calculated. In order to properly record the liabilities associated with a bond, the PV of the principal and the interest payment must be calculated.

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· Discount on bonds payable is a contra account because it is subtracted from the bonds payable on the balance sheet

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· Laurel Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that the contractual interest rate exceeds the market interest rate

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· Money grows over time

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· The carrying value of the bonds is the face value of the bonds less unamortized bond discount balance or plus unamortized bond premium balance

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· The market interest rate is the rate investors demand for loaning funds

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preferred stock may have priority over common stock except in...

voting

o Compound interest

§ Computes interest on: · The principal AND · Any interest earned that has not been paid or withdrawn § Most business situations use compound interest § Banks and financial institutions prefer compound interest

o Maturity date

§ Date final payment is due

o Bonds may be issued at:

§ Face value § Discount (below face value) § Premium (above face value)

o 4 concepts:

§ Future value of a single sum (Table 1) · If I put money in an account today, how much will I get paid back in the future? § Future value of an annuity of 1 (Table 2) · I put some money in an investment annually, what will that investment be worth in the future? § Present value of a single sum (Table 3) · I have some amount of money that I am going to get in the future, and I want to know what its really worth today § Present value of an annuity of 1 (Table 4) · I have some stream of cash coming in. my uncle promised me $1000 per year for the next 7 years and I want to know what that is worth if I were to get it all in a lump sum today

o Simple interest

§ Interest computed on the principal only

o Bond certificate

§ Issued to the investor § Provides name of the company issuing bonds (the borrower), face value, maturity date, and contractual (stated) interest rate

o A corporation records bond transactions when it

§ Issues (sells) or redeems (buys back) bonds § When bondholders convert bonds into common stock

o Elements involved in financing transaction:

§ Principal (p): amount borrowed or invested § Interest rate (I): an annual percentage § Time (n): number of years or portion of a year that the principal is borrowed or invested

o Face value

§ Principal due at the maturity'

o Market/effective interest rate

§ Rate that investors are currently demanding and receiving on similar investments § Not listed on bond certificate! § However, it is used in valuing the bond § It is part of how the financial markets use the interest rate to value the bond as interest rates change

o Contractual/stated interest rate

§ Rate to determine cash interest paid, stated as an annual rate

· Present value variables

· Present value variables o The present value is the value now of a given future amount, discounted assuming compound interest o We want to remove the compound interest to find out what its worth now o Present value variables: § Dollar amount to be received (future amount) § Length of time until amount is received (number of periods) § Interest rate (the discount rate)

§ Market rate (also called effective or discount rate)

· Rate of interest currently demanded by investors (the market) on similar investments · Used with tables to calculate present value o If you pay less interest, you get less money for your bond. o If you pay more interest, you get more money for your bond o The way we value the bonds is by going to the table and looking at the MARKET RATE o The only thing you use contract rate for is to determine your interest payments

§ Market rate (also called effective or discount rate)

· Rate of interest currently demanded by investors on similar investments o This is how we value the cash stream o The contract rate tells me how much cash I have to pay but the market rate tells me how I value the stream of cash payments

§ Contract rate (also called stated or coupon rate)

· Rate on the bond itself o It is written on the bond itself · Used to calculate the interest payments o Used to calculate the cash value of the interest payments o It is the cash amount that is paid

§ Contract rate (also called stated or coupon rate)

· Rate on the bond itself (written on the contract) o bond issuer (party who is borrowing the money) gets to choose this rate—2%, 5%, 10%, etc. · Used to calculate the interest payments · Presents an issue—if you get to choose your own interest rate, you are probably going to choose a very low rate. However, if you pay a much lower rate than everyone else, nobody is going to want to loan to you. So we have to compare your interest rate (the contract rate) to the market rate