Chapter 8 11 4 13 Long Term Investments Q1 GAAP requires companies to adjust their available for sale securities to market value as of the balance sheet date Q2 On the balance sheet Available for sale investments in stock are reported at TRUE Their current market value Q3 On January 1 2012 Plymouth Company purchases 100 000 6 bonds at a price of 90 4 and a maturity date of January 1 2016 Interest is paid semiannually on January 1 and July 1 Plymouth Company has a calendar year end The entry to record the purchase of the bond investment on January 1 2012 would include a Debit to L T Investment for 90 400 90 4 X 100 000 90 400 Debit L T investment o Credit Cash Q4 On January 1 2012 Plymouth Company purchases 100 000 6 bonds at a price of 90 4 and a maturity date of January 1 2016 Interest is paid semiannually on January 1 and July 1 Plymouth Company has a calendar year end The entry to record for the receipt of interest on July 1 2012 would include a Debit to cash for 3 000 6 x 100 000 x 6 12 3 000 Debit Cash o Credit Interest Receivable or Int Revenue Time Value of Money Principal is amount borrowed or invested Discounting is process of calculating present value what something is worth TODAY which is less than future value Which table to use PV of 1 o Single payment or cash inflow PV of Annuity o Two or more payments equal months Q5 Unrealized gains and losses from available for sale investments arise from Changes in the market value of the investment Realized gains and losses come from the SALE of the investment Q6 On the maturity date of the bond the bondholder will receive the bond s present value the FUTURE FALSE Present value is what it is worth TODAY maturity value is in Chapter 9 Liabilities 11 08 2013 Contingent Liabilities potential liability that depends on future outcome of past events Interest Rates Bond Prices Bonds always sold at market price o Bonds present value Two interest rates set bond price o Stated interest rate coupon rate Printed on bond certificate Determines cash interest paid to bondholders o Market interest rate effective interest rate Demanded by investors for loaning money Varies minute to minute Bonds always sold at market price Two interest rates set bond price o Stated interest rate coupon rate Printed on bond certificate Determines cash interest paid to bondholders o Market interest rate effective interest rate Demanded by investors for loaning money STATED RATE USUALLY DIFFERES FROM MARKET RATE Q1 A current liability must be paid out of current profits FALSE paid from CASH Q2 Purchasing merchandise inventory on account results in a liability TRUE Q3 A bond with a face value of 1 000 and a quoted price of 102 has a selling price of 1 020 TRUE Q4 If the interest rate on a bond is 8 and the market interest rate isd 7 the bond will be issued at a price above the par value of the bond TRUE Q4 Current maturities of long term debt are reported separately from long term liabilities TRUE Q5 The account Discount on Bonds Payable increases a company s liabilities reported FALSE Discounts on bonds payable DECREASES amount of liabilities Q6 If the market interest rate is greater than the stated interest rate the bonds will sell at a discount TRUE Q7 If 120 000 face value bonds are issued at 104 the proceeds received will be 104 000 FALSE 120 000 X 104 124 800 Q8 If the interest rate on a bond is 8 and the market interest rake is 7 the bond will be issued at a price above the par value of the bond TRUE Q9 If the market interest rate is 6 a 10 000 7 5 year bond that pays interest semiannually would sell at an amount Greater than face value Chapter 10 11 08 2013 1 The purchase of treasury stock by a corporation increases total assets and stockholders equity FALSE FALSE TRUE 2 The purchase of treasury stock has the same effect of issuing stock 3 Treasury stock is a contra stockholders equity account 4 Casey s Computers purchased 4 000 shares of its own 10 par value common stock for 92 000 As a result of this transaction c Casey s Stockholders equity decreased 92 000 5 If treasury stock is sold at a price greater than its reacquisition costs the difference is a debited to Paid in Capital from Treasury Stock b credited to Paid in Capital from Treasury Stock c debited to Retained Earnings d credited to Retained Earnings 6 A debit balance in Retained Earnings indicates that a company s lifetime earnings exceeded its lifetime losses and dividends issued 7 The total stockholders equity remains the same before and after a stock False split TRUE 8 The effect of the declaration of a cash dividend is a n Increase to liabilities and a decrease to stockholders Equity 9 The date when a cash dividend becomes a legal obligation is on the b declaration date 10 If a corporation declares a 100 000 cash dividend the account to be debited on the date of declaration is Retained earnings year are Called dividends in arrears 11 When preferred stock is cumulative preferred dividends not paid in a 12 Before a company can pay dividends to the common stockholders the owners of cumulative preferred stock must receive All dividends in arrears plus the current years dividends 13 A share of 5 preferred stock has a par value of 50 and market value of 75 The owners of the preferred stock will receive a dividend of 2 50 per share 14 When 100 shares of 1 par value Common Stock are issued at 25 per share Paid in Capital in Excess of Par value Common Stock will Increase 2400 15 If stock is issued for an asset other than cash the asset should be recorded on the books of the corporation at Fair market value 16 Wolverine Corporation issued 5 000 shares of its 5 par value common stock in payment for attorney services of 40 000 Wolverine stock has been actively trading at 20 per share This transaction would include a Debit to legal expense 40 000 17 Wolverine Corporation issued 5 000 shares of its 5 par value common stock in payment for attorney services of 40 000 Wolverine stock has been actively trading at 20 per share This transaction would include a Credit to paid in capital in excess of Par 40 000 Chapter 11 Earnings per Share EPS 11 08 2013 1 11 4 15 Wildcat Corporation reported net income for the current year of 700 000 Wildcat had 5 000 shares of 100 par value 10 preferred stock outstanding and 40 000 shares of 1 par value common stock outstanding for the entire year Earnings per share was o 10 5 000 o 7000000 prefered divended 5000 100 10 400000 16 25 2 11 4 16 Plymouth Corporation s net