Account 244 1st Edition Final Exam Study Guide Chapter 10 LO 10 3 Explain the accounting for other current liabilities Companies record sales taxes payable at the time the related sales occur The company serves as a collection agent for the taxing authority Sales taxes are not an expense to the company Companies initially record unearned revenues in an Unearned Revenue account As company recognizes revenue a transfer from unearned revenue to revenue occurs Companies report the current maturities of long term debt as a current liability in the balance sheet Current Assets Current Liabilities Working Capital Current Assets Current Liabilities Current Ratio LO 10 4 Explain why bonds are issued and identify the types of bonds Companies may sell bonds to investors to raise long term capital Bonds offer the following advantages over common stock o Stockholder control is not affected o Tax saving results o Earnings per share of common stock may be higher The following types of bonds may be issued o Secured and unsecured o Term and serial bonds o Registered and bearer bonds o Convertible and callable bonds LO 10 5 Prepare the entries for the issuance of bonds and interest expense LO 10 6 When companies issue bonds they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds The account Premium on Bonds Payable shows a bond premium Discount on Bonds Payable shows a bond discount Premium on Bonds Payable Decrease Increase Normal Debit Credit Balance Describe the entries when bonds are redeemed or converted When bondholders redeem bonds at maturity the issuing company credits Cash and debits Bonds Payable for the face value of bonds When bonds are redeemed before maturity the issuing company o Eliminates the carrying value of the bonds at the redemption date o Records the cash paid o Recognizes the gain or loss on redemption When bonds are converted to common stock the issuing company transfers the carrying or book value of the bonds to appropriate paid in capital accounts No gain or loss is recognized LO 10 7 Describe the accounting for long term notes payable Each payment consists of o Interest on the unpaid balance of the load o A reduction of load principal The interest decreases each period while the portion applies to the loan principal increases LO 10 8 Identify the methods for the presentation and analysis of long term liabilities Companies should report the nature and amount of each long term debt in the balance sheet or in the notes accompanying the financial statements Stockholders and long term creditors are interested in a company s long run solvency Total Debt Total Assets Debt to Total Assets Income Before Income Interest Time Interest Taxes and Interest Expense Expense Earned LO 10 11 Apply the straight line method of amortizing bond discount and bond premium The straight line method of amortization results in a constant amount of amortization and interest expense per period Bond Premium Number of Interest Periods Bond Premium Amortization Chapter 11 LO 11 1 Identify the major characteristics of a corporation The major characteristics of a corporation are separate legal existence limited liability of stockholders transferable ownership rights ability to acquire capital continuous life corporation management government regulations and additional taxes Stockholder s have the right to o Vote in election of board of directors at annual meeting and vote on actions that require stockholder approval o Share the corporate earnings through receipt of dividends o Keep the same percentage ownership when new shares of stock are issued preemptive right o Share in assets upon liquidation in proportion to their holdings This is called a residual claim owners are paid with assets that remain after all creditors claims have been paid Comparison of owners equity Proprietorship Corporation Able Capital Common Stock Retained Earnings Normal Balance Normal Balance Normal Balance LO 11 2 Record the issuance of common stock When the issuance of common stock for cash is recorded the par value of the shares is credited to Common Stock The portion of the proceeds that is above or below par value is recorded in a separate Paid In Capital account When no par common stock has a stated value the entries are similar to those for par value stock When no par stock does not have a stated value the entire proceeds are credited to Common Stock LO 11 3 Explain the accounting for treasury stock The cost method is generally used in accounting for treasury stock Under this approach Treasury Stock is debited at the price paid to reacquire the shares The same amount is credited to Treasury Stock when the shares are sold The difference between the sales price and cost is recorded in stockholder s equity accounts not in income statement accounts Treasury shares do not have dividend rights or voting rights LO 11 4 Differentiate preferred stock from common stock Preferred stock has contractual provisions that give it priority over common stock in certain areas Typically preferred stockholders have a preference to o Dividends o Assents in Liquidation Preferred stockholders usually do not have voting rights LO 11 5 Prepare the entries for cash dividends and stock dividends Entries for both cash and stock dividends are required on the declaration date and payment date At the declaration date the entries are cash divided debit Cash Dividends and credit Dividends Payable small stock dividend debit Stock Dividends credit Paid In Capital in Excess of Par or Stated Value and credit Common Stock Dividends On the payment date the entries for cash and stock dividends are cash dividend debit Dividends Payable and credit Cash small stock dividend debit Common Stock Dividends Distributable and credit Common Stock Key Dividend Dates o Declaration Date Board authorizes dividends o Record Date Registered shareholders are eligible for dividend o Payment Date The company issues dividend checks LO 11 7 Prepare and analyze a comprehensive stockholders equity section In the stockholders equity section paid in capital and retained earnings are reported and specific sources of paid in capital are identified Within paid in capital two classifications are shown o Capital stock o Additional paid in capital If a corporation has treasury stock is deducted from total paid in capital and retained earnings to obtain total stockholders equity One measure of profitability is the return on common stockholders equity