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PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud
Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University
Once you have completed this chapter, you should be able to—
Once you have completed this chapter, you should be able to—
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1. Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.
ObjectivesObjectivesObjectivesObjectives
2. Describe appropriate accounting procedures for contingencies and commitments, including capital leases.
3. Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.
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4. Explain transactions affecting stockholders’ equity and describe how these transactions are reported in a company’s financial statements.
ObjectivesObjectivesObjectivesObjectives
5. Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.
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Liabilities refer to an organization’s
obligations to deliver payments, goods, or
services in the future.
Liabilities refer to an organization’s
obligations to deliver payments, goods, or
services in the future.
Types of ObligationsTypes of ObligationsTypes of ObligationsTypes of Obligations
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Types of ObligationsTypes of ObligationsTypes of ObligationsTypes of Obligations
(1) A present responsibility exists to transfer resources to another entity at some future time.
(2) The organization cannot chose to avoid the transfer.
(3) The event creating the responsibility has already occurred.
Three attributes define a liability for an organization:
Three attributes define a liability for an organization:
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Liabilities of Favorite Cookie Company include obligations to:• lenders (Notes Payable and Interest
Payable)
• suppliers (Accounts Payable)
• employees (Wages Payable)
• customers (Unearned Revenue)
Types of ObligationsTypes of ObligationsTypes of ObligationsTypes of Obligations
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Exhibit 1Exhibit 1Exhibit 1Exhibit 1Balance Sheet Presentation of Liabilities for Favorite Cookie Co.
December 31 2008 2007
Current Liabilities:Accounts payable $ 16,260
$ 9,610Wages payable 3,590Unearned revenue 2,770
4,250Interest payable 810
650Notes payable, current 6,000
5,000Total current liabilities $ 29,430
$19,510Notes payable, long-term 80,200
73,200Total liabilities $109,630
$92,710
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11ObjectiveObjectiveObjectiveObjective
Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.
If Favorite Cookie Company’s bonds are sold to provide the investor with a 9% return, then this actual rate of return is known as the effective rate of interest.
If Favorite Cookie Company’s bonds are sold to provide the investor with a 9% return, then this actual rate of return is known as the effective rate of interest.
How is the issue price of Favorite’s 8% bonds
determined if the effective rate of interest is 9%?
How is the issue price of Favorite’s 8% bonds
determined if the effective rate of interest is 9%?
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Exhibit 3Exhibit 3 Example of the Relationship of Bond Cash Flows to Present Value
When the effective rate of interest on debt is more than the stated rate, the
debt is said to be issued at a discount.
When the effective rate of interest on debt is more than the stated rate, the
debt is said to be issued at a discount.
The borrower receives less for the bonds when they are sold than the
maturity value of the bonds.
The borrower receives less for the bonds when they are sold than the
maturity value of the bonds.
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Exercise 9-6Exercise 9-6Exercise 9-6Exercise 9-6
Click the button to skip this exercise.If you experience trouble making the button work, type 42 and press “Enter.”
Watercrest Company sold 20-year bonds having a face value of $400,000 at a price of $360,728. The bonds pay annual interest at 7% and were priced to yield an effective rate of 8%. (a) Using the format presented in the chapter, record the issuance of the bonds.
Press “Enter” or left click the mouse for solution.
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ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
(a) Cash 360,728Bonds Payable 360,728
Exercise 9-6Exercise 9-6Exercise 9-6Exercise 9-6
(b) Record the first payment of interest.
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On January 1, 2008, Favorite Cookie Company records the present value of lease payments.
On January 1, 2008, Favorite Cookie Company records the present value of lease payments.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
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ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Capital Lease Obligation –7,938Interest Expense –2,062Cash –10,000
On December 31, 2008, Favorite Cookie Company records the $10,000 payment, which includes interest expense.
On December 31, 2008, Favorite Cookie Company records the $10,000 payment, which includes interest expense.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
$25,771 x .08$25,771 x .08
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33Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.
ObjectiveObjectiveObjectiveObjective
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Stockholders’ equity:Common stock, $1 par value,
50,000 shares authorized,20,000 and 10,000 issued $ 20,000 $ 10,000
Paid-in capital in excess of par 190,000 90,000 Retained earnings 130,417 42,990 Treasury stock, 1,000 shares
at cost (12,000) 0Total stockholders’ equity $328,417 $142,990
Exhibit 8Exhibit 8Exhibit 8Exhibit 8 Stockholders’ Equity for Favorite Cookie Company
Click the button to skip this exercise.If you experience trouble making the button work, type 66 and press “Enter.”
The charter of Pelenova, Inc. states that it may issue up to one million shares of common stock. Over the life of the company 255,000 shares have been sold to investors. Total profits over the life of the company have been $876,000, and exactly one-half of that amount has been paid out in dividends. As of today’s balance sheet date, the company holds 13,000 shares that have been bought back from shareholders. What is the number of authorized shares?
Press “Enter” or left click the mouse for solution.
The charter of Pelenova, Inc. states that it may issue up to one million shares of common stock. Over the life of the company 255,000 shares have been sold to investors. Total profits over the life of the company have been $876,000, and exactly one-half of that amount has been paid out in dividends. As of today’s balance sheet date, the company holds 13,000 shares that have been bought back from shareholders. What is the number of issued shares?
Press “Enter” or left click the mouse for solution.
The charter of Pelenova, Inc. states that it may issue up to one million shares of common stock. Over the life of the company 255,000 shares have been sold to investors. Total profits over the life of the company have been $876,000, and exactly one-half of that amount has been paid out in dividends. As of today’s balance sheet date, the company holds 13,000 shares that have been bought back from shareholders. What is the number of outstanding shares?
Press “Enter” or left click the mouse for solution.
Click the button to skip this exercise.If you experience trouble making the button work, type 89 and press “Enter.”
Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (a) What was Fast Start’s total contributed capital at year end?
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$8,900,000 ($700,000 common stock plus $8,200,000 paid-in capital in excess of par value)
Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (b) How many shares of common stock were outstanding at year end?
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1,340,000 shares (1,400,000 issued less 60,000 treasury shares)
Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (c) What dollar amount of treasury stock did Fast Start hold at year end?
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Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (d) What dollar amount of treasury stock did Fast Start repurchase during the year? How much common stock did the company issue?
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Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (e) What was the amount of dividends paid during the year?
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Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (f) How much cash flow came from financing activities associated with shareholders’ equity during the current year, excluding the effect of net income?
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Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (f) What was the source of that cash flow?
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Refer to page 347 of your textbook for the selected portion of the company’s recent financial statements. Use this data to answer questions involving Fast Start Corporation, a manufacturer of automobile ignitions. (g) How much net income came from financing activities associated with stockholders’ equity during the current year?
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$0; financing activities do not create net income
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55Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.