BMGT 220

EXAM #3 Study Guide

CH-10 Liability

A. Current liability-satisfy 2 Criteria

(Note/account/wage & payroll/payroll taxes payable, unearned revenue, and BOND INTEREST; the 1st category under liabilities on balance sheet)

1. Note payable

Loan:

Cash XXX

Note payable XXX

Interest not incurred:

Interest expense XXX

Interest payable XXX

Maturity:

Note payable XXX

Interest payable XXX

Cash XXX

2. Sales taxes payable

Cash XXX

Sales XXX

Sales taxes payable XXX

(Sale + tax) / (1+tax rate) = sales

Taxes are NOT an expense; companies serves only as a collection AGENT

3. Payroll and payroll taxes payable

Wages and income taxes payable:

Salaries and wages expense XXX

FICA taxes payable XXX

Federal income taxes payable XXX

State income taxes payable XXX

Salaries and wages payable XXX

Wage paid:

Salaries and wages payable XXX

Cash XXX

Payroll taxes payable (result from hiring works) ：

Payroll tax expense XXX

FICA tax payable XXX

Federal unemployment tax payable XXX

State unemployment taxes payable XXX

Both income and payroll tax include FICA tax

4. Unearned revenue (e.g.: magazine subscriptions)

Revenue unearned:

Cash XXX

Unearned revenue XXX

Revenue earned:

Unearned revenue XXX

Revenue XXX

B. Long-term liabilities

I. Bond-A form of interest-bearing notes payable

1. Advantage & disadvantage

Stockholder control is not affected

Tax saving result

Earnings per share may be higher

Pay interest (contractual, based on face value) on a periodic basis (semiannual) and pay principal (face value) at the due date

2. Type of bond

a. Secured bonds e.g. mortgage bonds, sinking fund bond

Unsecured bonds (debenture bonds)

b. Term and serial bonds

c. Registered and bearer (coupon) bonds

d. Convertible and callable bonds

3. Determinants of market value

The dollar amounts to be received

The length of time

The market interest rate of interest (investors demand)

Bond’s type affect market rate

4. Issuing bonds

a. At face value

Contractual interest rate = market interest rate; issuance price = face value

Cash XXX

Bonds payable XXX

b. Discount

Additional cost of borrowing, recorded as bond interest expense;

Yield%↓=discount price↓/issuance price↑

∵Contractual interest rate < market interest rate;

Issuance price < face value; ∴

Cost of borrowing > interest payment∴

Total cost = interest payment + bond discount

=principal at maturity + interest payment – issuance price

Total liability = bonds payable - discount

Cash XXX

Discount on bonds payable XXX （ contra-liability, deducted from bounds

payable）

Bond payable XXX

c. Premium

A reduction in the cost of borrowing;

∵Contractual interest rate > market interest rate;

Issuance price > face value; ∴

Cost of borrowing < interest payment∴

Total cost = interest payment – bond premium

=principal at maturity + interest payment – issuance price

Total liability = bonds payable + premium

Cash XXX

Discount on bonds payable XXX （ contra-liability, deducted from bounds

payable）

Bond payable XXX

d. Incurring Interest (CURRENT LIABILITY)

Accrual of interest:

Bond interest expense XXX

Bond interest payable XXX

Interest payment (no previous accrual):

Bond interest expense XXX

Cash XXX

Interest payment (previous accrual):

Bond interest payable XXX

Cash XXX

5. Redeeming bond

a. At maturity

Regardless discount or premium when issued, book value = face value

Bond payable XXX

Cash XXX

b. Before maturity

Eliminate the carrying value; record the cash paid; recognize the gain and loss

Carrying (book) value = face value - (unamortized) discount/+ (unamortized) premium

Loss/gain = carrying value - cash paid

Cashed paid is based on current market value

I. Issued with premium:

Bond payable XXX

Premium on bond payable XXX (unamortized)

(Loss on bond redemption XXX)

Cash XXX

(Gain on bond redemption) XXX

II. Issued with discount:

Bond payable XXX

(Loss on bond redemption XXX)

Cash XXX

Discount on bond payable XXX (unamortized)

(Gain on bond redemption) XXX

6. Converting bones in to common stock

Convertible bonds’ feature

Ignore the current market price OF bond and stock;

Transfer the carrying value to paid-in capital account

No gain or loss

Referred to as the carrying (book) value method

Bond payable XXX

Common stock XXX

Paid-in capital in excess of par value XXX

II. Long-term note payable-Mortgage loan

Borrow a loan:

Cash XXX

Mortgage note payable XXX

Pay mortgage & interest:

Interest expense XXX

Mortgage note payable XXX (cash-interest expense)

Cash XXX

CH-11 Stockholder’s equity = Paid-in capital + Retained earning

A. Corporation

Advantage & disadvantage (p511)

Corporation management is BOTH an advantage and a disadvantage

B. Stock

I. Common stock

Common stock is the fundamental stock;

Rights: voting, receive dividends, preemptive right (优先购股)，residual claim;

Issuance of CS ONLY affects paid-in capital account;

Stock transaction DOES NOT involves in income statement.

a. Issuing common stock:

(Price = par/stated value; or stated value not given)

Cash XXX

Common stock XXX

(Price > par/stated value)

Cash XXX

Common stock XXX

Paid-in capital in excess of par value XXX

b. Issuing for services:

Organization expense XXX

Common stock XXX

Paid-in capital in excess of par value XXX

c. Issuing for noncash assets:

Asset (land) XXX

Common stock XXX

Paid-in capital in excess of par value XXX

II. Treasury stock

Reacquire for issued stock, but not retired;

A contra SE account, normal debit balance;

Reduces both asset and SE (deduct RETAINED EARNINGS, NOT PAID-IN CAPITAL);

Not affects common stock account.

a. Acquisition:

Treasury stock XXX

Cash XXX

b. Disposal:

Disposal increase assets and RE, but DOES NOT affects income statement (not a revenue)

Gain or loss is recorded in paid-in capital of treasury stock on balance sheet, DOES NOT affect asset (stock is not an asset) and RE

Disposal MAY affects RE

i. Above cost:

Cash XXX

Treasury stock XXX

Paid-in capital from treasury stock XXX

ii. Below cost:

When paid-in capital from treasury stock < 0, debit RE

Cash XXX

Paid-in capital from treasury stock XXX

(Retained earnings XXX)

Treasury stock XXX

III. Preferred stock

Advantages: receive dividends before CS & liquidation preference

Disadvantages: do not have voting rights

May or may not have a par value

Listed first in SE section on balance sheet, before common stock

Cash XXX

Preferred stock XXX

Paid-in capital in excess of par value-preferred stock XXX

C. Dividend

Expressed in two ways: percentage of par/stated value:

Dividend rate x par/stated value x shares

Or a dollar amount of per share (more general)

NOT an expense or a payment obligation

Dividends in arrears is NOT a (current) liability until declared and becomes dividend

payable （to balance sheet）

Dividends decrease/deduct both assets and SE (RE statement)

a. Cash dividends

i. Declaration:

Cash dividend XXX (or recorded as retained earnings)

Dividends payable XXX (a liability)

ii. Record:

Get dividend as long as purchasing stock before record date, or as long as sell after record date;

NO ENTRY.

iii. Payment:

Reduces both current assets and current liabilities, no effect on SE

Dividends payable XXX

Cash XXX

b. Dividend preference of preferred stock

Common stockholders DO NOT receive dividends while any preferred stock is in arrears

i. Cumulative

Total dividends

= preferred stockholders’ (in arrears + current year’s) + common stockholders’

ii. Non-cumulative

Total dividends

= preferred stockholders’ current year’s + common stockholders’

c. Stock dividends

NO CASH IN OR OUT, ONLY changes composition of SE; total SE DOES NOT CHANGE:

Debit dividends (decrease retained earnings) and credit CS (increase paid-in capital);

Number of shares owned increases, but ownership interest (% of company owned) keeps the same;

Value assigned is the fair MARKET VALUE per share;

Dividends distribution is a SE account, NOT a liability.

i. Declaration:

Stock dividends (RE) XXX (according to market value per share)

Common stock dividends distributable XXX (according to par value; NOT a

liability)

Paid-in capital in excess of par value XXX

ii. Issuance:

Common stock dividends distributable XXX

Common stock XXX

d. Stock split

NO effect on SE (paid-in capital & RE)，NO journal entries:

Par or stated value decrease, number of shares increase

e. Compare stock dividend and stock split (p532)

D. Retained earnings

a. Deficit: net loss (negative RE), deducts in SE section on balance sheet

b. Factors increase and decrease RE (p536)

CH-12 Investment

A. Investment Reason

1. Excess cash

2. To generate earning

3. To meet strategic goals

B. Debt Investment

1. Acquisition bond (cost principle)

Debt investments XXX

Cash XXX

2. Receive interest

I. Payment (not incurred)

Cash XXX

Interest Revenue XXX

(Brokerage fee included)

II. Receivable

Interest receivable XXX

Interest Revenue XXX

Interest receivable>>>balance sheet>>>current asset

Interest revenue>>>income statement>>>other revenues and gains

III. Payment (incurred)

Cash XXX

Interest receivable XXX

3. Sell bonds

Cash XXX

(Loss on sale of debt investment XXX)

Debt investment XXX

(Gain on sale of debt investment XXX)

(Brokerage fee included)

C. Stock

1. Depend on the extent of investor's influence over the operating and financial affairs of the issuing corporation(investee)

2. Degree of Contorl-presumed influence on investee-accounting guidelines

I. 0%-20%-insignificant-cost method

i. Acquisition stock-cost method

Stock investment/trading securities XXX

Cash XXX

(Brokerage fee included)

ii. Gain Dividend

Cash XXX

Dividend revenue XXX

iii. Evaluation (0%-20% ONLY)

a. Trading security (short-term investments)

1. Frequent buying and selling

2. Report trading securities at fair value

3. Report changes from cost as part of net income as unrealized gains or losses (∑value-∑cost)

4. Balance sheet: Fair value; Income statement: gain/loss

(Gain)

Market Adjustment-TRADING XXX

Unrealized gain-INCOME XXX

(Loss)

Unrealized loss-INCOME XXX

Market Adjustment-TRADING XXX

iv. Sell stock

Cash XXX

(Loss on sale of stock investment XXX)

Stock investments/trading securities XXX

(Gain on sale of stock investment XXX)

(Brokerage fee included in the cost when sold, p587)

b. Available-for-sale security

Market Adjustment-A-F-S XXX

Unrealized gain or loss-EQUITY XXX

(Loss)

Unrealized gain or loss-EQUITY XXX

Market Adjustment-A-F-S XXX

(Adjustment)

p582 DO IT

c. Held-to-maturity security (BOND ONLY)

II. 20%-50%-significant-equity method (long-term investment)

1. Investee company becomes part of investor company(cost->equity)

Stock investment XXX

Cash XXX

(if loss, stop equity method)

2. Dividend reduces investment

Cash XXX

Stock investments XXX

3. Investment revenue increases investment

Stock investments XXX

Revenue from investment XXX

III. 50%+-controlling-consolidated financial statements

D. Short-term investments, under current asset (p582)

1. Readily marketable

2. Intent to convert

3. Otherwise, long-term>>>separate section under asset on balance sheet

E. Presentation

1. Income statement-Other revenue/expense & gain/loss:

Interest revenue

Dividend revenue (0-20%)

Investment revenue (net income, 20%-50% ONLY)

Unrealized revenue-income (trading)

Gain/loss on sale of investment

2. Balance sheet-Stockerholder's equity:

Unrealized revenue-equity (A-F-S)

3. Balance sheet-Asset-Investment:

Dividend revenue(20%-50%), reduce investment

Market adjustment(contra investment)

4. Investment:

0-20%,Trading & short-term A-S-F:

- Short-term investments, at fair value

0-20%, long-term A-S-F:

- Investments in stock of less than 20% owned companies, at fair value

20%-50%:

- Investments in stock of 20-50% owned company, at fair equity

CH-13 State of Cash Flows

Activity classification(P616) & adjustment(accrual>>>cash basis, indirect)

A. Operating-Determination of net income, MOST IMPORTANT

-Revenue & expense

-GAINING dividend & interest

i. Noncash expense

Bed debts expense, depreciation/depletion expense, amortization ＋

ii. Gain & losses on sale, investment & finance

Gain －

Loss & write off (account receivable ↓）+

iii. Current asset & liability

a. Current asset ↑／－ ↓／＋　

Inventory，prepaid，account/interest/dividend/note receivable, allowance for doub

tful accounts (contra asset)

　　b. Liability ↑／+ ↓／－　

　　　 Account/tax payable，unearned revenue

B. Investing-Investment & long-term assets

-Purchase / disposing OTHER firms' CS & bonds

-Lending / collecting money/loan

-Purchasing / selling property, plant & equipment

Land, Building, Equipment (book value +gain/-loss>>>cash basis), investment ↑／－ ↓／＋

(ISSUANCE OF BONDS/CS PAYABLE FOR PPE>>>NONCASH!!!)

C. Financing-Long-term liability & SE

-Obtaining/repaying cash/loan

-Selling/requiring CS/TS & issuing/redeeming bonds of MY firm

-PAYING dividends & interests

Treasury stock, dividend PAYMENT(retained earning-net income) ↑／－ ↓／＋

Common stock, interest/note/dividend/bond payable ↑／+ ↓／－　

D. Noncash-EXCHANGE sth for sth

-Issuing Bonds/common stock for sth

-Conversion of bonds in common stock

-Exchange asset for intangible asset

-Investment revenue (20-50%) through issuance of CS/bond