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TAMU ACCT 209 - Long-term Liabilites finished and Corporations
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ACCT 209 1nd Edition Lecture 12 Outline of Last Lecture I. Long- lived assetsa. AcquisitionI. Exampleb. Use over multiple yearsI. MethodsII. ExampleII. Disposala. ExampleIII. Natural resourcesa. ExampleIV. Intangible assetsV. Current Liabilities OverviewVI. Short Term notes payablea. ExamplesVII. Discounted Notes PayableVIII. CommitmentsIX. Contingent Liabilitiesa. ExampleX. Quick RatioXI. Compound InterestXII. Compound interest and present value of an annuityXIII. Debt-financing Vs. Equity-financing (Borrowing Vs. Ownership)a. ExampleXIV.Bondsa. ExampleXV. Pricing Bonds Payablea. Exampleb. Second ExampleOutline of Current Lecture c. Example continuedXVI. Retirement of bondsXVII. Other long-term liabilitiesI. Comparison of organizationsII. Bonds compared to capital stockThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.III. Stock TermsIV. Stock Holder rightsV. Issuing stocka. ExampleCurrent LectureCompound Interest and Long-term Liabilities continuedExample 7b. What is the total amount of cash that must be repaid over the life of the bonds? Given that total interest is the difference between the amount borrowed and the amount repaid, how much interest expense should Longhorn report over the life of the bond issue?At the carrying value: Face Value – Discount Price = 100,000 – 6,463 = 93,537c. How much cash interest will the corporation pay each 6 months?Increases total expenseExample #8 BONDS ISSUED AT A PREMIUMOn January 2, 2010, Longhorn Company issued 5-year, $250,000 bonds with a stated rate of 8%. The bonds pay interest annually on December 31. At the time of the issue, the market rate of interest was 6%. Longhorn Company uses the effective interest method to amortize any premium or discount.a. What is the selling price of the bonds?Interest payments = 250,000 * 0.08 * 1 = 20,000N = 5 I = 6%PV of promises - > 20,000 * PVOA factor + 250,000 * PV factor = 271,062RETIREMENT OF BONDSIf callable: Issuer pays call price. Compare CV to cash paid; Record at gain or lossIf not callable: Purchase on bond market (Would want to do this if rates go down)Note: No calculations for this. Just know concept.Other long-term liabilitiesPensions and post-retirement benefitsDefined Benefit plan (When retire pay x amount for rest of life) v.s. defined contribution plan (matches contribution up to certain %)Note most companies are using defined contribution plan b/c with the other plan the company does not know the total amount they will have to pay (Don’t know how long you will live)Capital leases (vs. operating leases)There are 4 conditions. (Not given) If you met any of them you are in effect buying it so you must record a capital lease. Must record as an increase in asset and an increase in liabilities.This is expensed as incurred. Chapter 11 CORPORATIONSCOMPARISON OF BUSINESS ORGANIZATIONSSOLE PROPRIETORSHIPPARTNERNSHIP CORPORATIONFormation Easy to establish Easy; written contractnot required but HIGHLY RECOMMENDEDMust meet state requirements to obtain corporate charterSeparation of ownership and entitySeparate accounting entity only Separate accounting entity onlySeparate entity for legal, tax, and accounting purposesLiability of ownersUnlimited liability for the debts of the businessUnlimited liability for the debts of the business; mutual agencyLiability limited to investment in stockEase of raisingadditional capitalMay be difficult basedon resources of ownerMay be difficult basedon resources of partnersAbility to issue bonds or stockBONDS COMPARED TO CAPITAL STOCKBONDS STOCKBondholders are creditors. Stockholders are owners.Bondholders do not have voting rights. Stockholders have voting rights. (Some classes of stock may have voting rights withheld.)Bondholders have a primary claim at liquidation.Stockholders have a residual claim at liquidation.Get what is left overInterest is typically fixed, and it must be paid.Dividends are not fixed, and are paid only if income is sufficient and dividends are declared by the board of directors.Don’t have to pay!Interest is an expense on the income statement (that is, it reduces taxable income.Dividends are not expenses; they are distributions of profit to the owners. (Thatis, they are not included on the income statement and do not reduce taxable income.) Called Double taxationFORMING A CORPORATIONFile articles of incorporation with state (more than 1/2 of US corporations in Delaware)When articles approved, hold meeting to approve by-laws and elect directorsIssue stockStock terms:Common stock – type of capital stock issued by every corporation; All Companies have stockThese are the four types of stock:Authorized shares – maximum number of shares that a corporation can issue based on articles of incorporation approved by state governmentIssued shares – number of shares that have been sold to stockholdersOutstanding shares – number of shares of stock that are currently held by public; shares issued less treasury sharesTreasury stock –issued shares of a corporation’s own stock that the corporation has bought backand not retired; shown as a reduction of total stockholders’ equityTotal # shares issued = #outstanding + # treasury sharesPar value – arbitrary amount assigned to share of stock; generally represents required legal capitalPreferred stock: capital stock that has one or more preferences (advantage) over common; usually preferred as to dividends (preferred stockholders receive dividends before common)Cumulative – unpaid dividends from prior years “accumulate”, must be paid in full beforecommon stockholders can receive dividendCallable – issuing corporation can “call” or buy back issued shares at predetermined priceConvertible – stockholders have the right to exchange preferred shares for a specified number of the corporation’s common sharesStockholders’ Rights: stockholders generally have four basic rights, unless specifically withheld1. voting right – 1 share = 1 vote2. dividend right – If dividends are declared, you have a right to a share3. liquidation right – You have the right to share in assets remaining if liquidation4. preemptive right (often withheld in new stock issues) – Protects owners from dilution ofownership when new shares are declared. Have the right to BUY % of the new sharesISSUING STOCKExample 1 Stock issuesLockhart Company is authorized to issue 100,000


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