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)
