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Chapter 10
Liabilities
Current vs non-current
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Non-current if it matures in more than one year
But if a 30 year Note Payable is in its 29th year then it needs to be
classified as a Current Liability
Interest:
Formula:
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Example:
Dwight Schrute Inc. borrows $1,000,000 for 3 months (to buy beet
fertilizer) at an interest rate of 10%. Make the journal entries for the
loan period.
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What if the question had said that the payments were made monthly?
Just apply the equation…
Present value
• We are going to receive $1,000 one year from today. Would this
be worth more than, less than, or equal to $1,000 for us TODAY?
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Formula: PVt = FV
(1+i)t
Discount rate = the interest rate at which we will discount our cash flows
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Bonds
Issuing bonds is a major way to raise money for a company (many big
companies do this instead of taking out a bank loan). Basic idea:
Types of Bonds:
Callable Bonds: Can be retired and repaid at any time at the discretion of
the issuer
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Here is what a bond looks like:
Now, find the PRICE of the bond if the current market rate is 10%…….
*Rule
Always use the Market Rate at the issue date when discounting cash
flows to find bond price. Use the Coupon Rate only to find the cash
interest payments.
What if the market, on average, was paying 12% and our bond have a
stated rate of 10%. Will price of this bond be greater than, equal to, or
less than the $100,000 FV?
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What if the market, on average, was paying 8% and our bond has a
stated rate of 10%? Will price of this bond be greater than, equal to, or
less than the $100,000 FV?
If the bond was issued at 95, the issuer would receive 95% of the face
value of the bond in cash when the bond is issued. This means that the
bond was issued at a discount.
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EXAMPLE: We are given the following information about a bond our
company is issuing:
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EXAMPLE: We are given the following information about a bond our
company is issuing:
Amortization:
As a bond gets closer to maturity, the carrying value will get closer and
closer to the face value
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Effective Interest Method:
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Example:
On 1/1/01 Martha Fokker Inc. issues a 5 year annual bond with a Face
Value of $30,000. The Stated Rate is 10% and the market rate is 12%.
Issued at 93
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EXAMPLE: On 1/1/01 Initech Inc. issued a 5 year, annual bond with a
face value of $200,000 and a stated rate of 10%. The market rate is 8%.
Issued at 108
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What is the carrying value of the bond at 1/01/02?
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Chapter 11: Stock
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Corporation Characteristics
Benefits
Drawbacks
- increased taxes
o corporations pay tax on their NI AND shareholders pay
taxes on dividends
DOUBLE TAXATION
- increased government regulation
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Other Stuff
When people buy and sell our stock in the stock market, it has NO
ACCOUNTING EFFECT for us, the company.
Debt vs Equity
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Stock
2 Types of Stock
1) Common Stock
- Basic voting stock
2) Preferred Stock
- Stock with no voting rights, but certain advantages
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Common Stock
Stock Terms
Authorized Shares – Maximum number of shares a company can issue.
Issued Shares – Shares that have been issued by the company at some
point in time
Unissued Shares – Shares that have never ever been issued by the
company
Treasury Stock – Stock that had previously been issued, but was then
repurchased by the company (no longer outstanding)
EX: Fah Q, Inc. authorized 200,000 shares of stock. There are 100,000
shares outstanding and 30,000 unissued shares. How many shares are in
the treasury?
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Other Terms
IPO (Initial Public Offering) – The first time a company sells shares to
the public
Cash XX
Common stock (# of shares x Par value) XX
*APIC – the excess of cash received from the sale of stock above Par
value (your book
also calls this Capital in Excess of Par)
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EX: Stacey Rhect Inc. sells 300 shares of common stock for $6,000.
Par value is $5 per share. Give the journal entry to record the
transaction.
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Treasury Stock
When the company repurchases its own stock, it is called Treasury Stock
- Treasury Stock is a contra-equity account (a reduction in
Stockholder’s Equity)
To record the purchase of the treasury stock bought at the market price
we paid:
Treasury Stock XX
Cash XX
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If the company decides to sell the stock that they repurchased, and the
market price at the time that the stock is being sold is more than the
price that the company bought it for, the entry would be:
Cash XX
Treasury Stock XX
APIC – Treasury Stock XX
If the market price at the time that the stock is being sold is less than the
price that the company bought it for, the entry would be:
Cash XX
APIC – TS XX
Treasury Stock XX
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EX: On 7/1/05, Haywood Jablowme, Inc. bought back 4,000 shares of
their own stock when the market price of the shares was $25.00. Record
the entry made on 7/1/05.
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Dividends
Cash dividends are only recorded when the Board of Directors declares
a dividend. At that point in time, the entry made would be:
Dividends Declared XX
Dividends Payable XX
When the company actually pays the dividend, the entry would be:
Dividend Payable XX
Cash XX
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EX: On 4/30/05, Café Divorcé Inc. declares a dividend of $5,000 to
only its single middle age mom shareholders (which happens to be all of
them). What is the necessary journal entry on 4/30/05?
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Preferred Stock
Sale of Stock
The sale of preferred stock is the same as it is for common stock, with
one minor account difference:
Cash XX
Preferred Stock (# of shares x Par value)
XX
APIC – Preferred Stock
XX
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Dividends- Preferred Stock
Dividends for preferred stockholders are determined by a fixed
percentage of the par value per year.
EX: 6% preferred stock, with a par value of $10.00 will have pay a
dividend
per share of 6% of $10.00
- 6% * 10.00 = $0.60 dividend per share
Cumulative
Dividends that have not been paid to preferred stockholders are called
dividend in arrears (dividend owed from a previous year). These
dividends in arrears must be paid to cumulative preferred stockholders
before any dividends may be distributed to non-cumulative preferred
stockholders and common stockholders. (If we NEVER pay dividends,
then no liability.)
Non-Cumulative
Dividends in arrears are not paid to non-cumulative preferred
stockholders. However, they still receive dividends before common
stockholders.
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EXAMPLE: Yerma Wildo, Corp. has the following classes of stock:
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Other Issues
Stock Splits
When a company decides to increase the total amount of shares in the
company (i.e. 2-1 stock split); the effects are:
1) Proportionate change of total shares of stock (2-1 stock split
1,000 shares to
2,000 shares)
2) Proportionate change in par value per share (2-1 stock split
Par value from $6 to $3)
EX: Grog Inc. declares a 3-1 stock split on its common stock. Before
the split, Grog had 6,000 common shares outstanding with a par value
of $12. What is the par value and the total number of shares outstanding
after the split?
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Stock Dividends
A stock dividend is where the company issues additional stock to its
shareholders in lieu of cash. The effects of a stock dividend are:
1) No change in equity
2) No change in par value
3) No change in ownership interests.
Small (<20 to 25%) - record at market
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