Liabilities andStockholders’ Equity

Chapter 8

Liabilities Debts owed to others Current liabilities

Will be repaid within one year or less using current assets or performing services Accounts payable, wages payable, unearned revenue,

income taxes payable, short-term notes payable, etc.

Long-term liabilities Will not be repaid within one year, or will be

refinanced with a long-term liability Long-term notes payable, mortgages payable, bonds

payable, etc.

Liabilities

Notes payable Borrowing money, issued to pay an account

payable, financing an asset purchase

Interest-bearing Interest may be paid at maturity, or periodically during

the life of the note

Interest must be accrued if it is unpaid at the end of the year

Record a new liability (interest payable) and record the interest expense

Liabilities

Deferred income taxes Income tax rules are different than accounting

rules Income before taxes may be different than the income

reported to the government Income tax expense is calculated based on the

accounting income before taxes Income tax payable is calculated based on the

income tax rules The difference is the amount of a deferred

expense (liability) or deferred revenue (asset)

Liabilities

Contingent liabilities May or may not occur

The occurrence depends on some future event

Warranty repairs, lawsuits, employee benefits, etc.

Record if it is probable that a liability has been incurred and its value can be reasonably estimated

Otherwise, just disclose in the footnotes to the statements

Liabilities

Bonds Large, long-term liability divided into smaller parts

for sale to numerous investors

Life is typically 5 to 40 years, sometimes longer

Interest is usually paid semiannually or annually

Trade on a bond market

Liabilities

Initial selling price depends on the interest rate paid on the bond (stated rate) and the rate demanded by the market (market rate) If the stated rate = market rate

Bond will sell for its face value

If the stated rate < market rate

Bond will sell at a discount

If the stated rate > market rate

Bond will sell at a premium

Stock

Represents the investors’ ownership of the company Amount received from investors is called

contributed capital or paid in capital

Par value A value assigned to shares when the company

charter is granted Stock may be sold for par value or for more than par

value Additional paid in capital

Stock

Authorized shares Number of shares the company may sell

Issued shares Number of shares the company has sold to

investors

Outstanding shares Number of shares currently held by stockholders’

Difference between issued and outstanding shares is the number of shares repurchased by the company

Stock

Classes of stock Common

Represents ownership and voting rights All corporations must issue some common stock

Preferred Usually gives up voting rights in exchange for some

other rights or preferences Guaranteed dividends Preference on liquidation Call value Conversion feature

Stock

Issuance of stock For cash

Stock must be sold for at least its par value

Amount related to the par value of the shares is recorded in the stock account

Any amounts above the par value are recorded in an additional paid in capital account (APIC)

If the stock does not have a par value, the entire amount is recorded in the stock account

Stock

Non-cash issuance Stock may also be issued for assets other than cash

Either the value of the stock, or the value of the asset received determines the value of the transaction

Accounting is the same as if cash was received except that an asset other than cash is received

Stock

Treasury stock Stock reacquired by the company

Several reasons To support price of remaining outstanding shares

To use as employee compensation

To use as currency in acquisitions of other assets or companies

To remove an undesirable stockholder

To resell if the market price increases

Stock

Accounting for treasury stock When reacquired

Cash is decreased Treasury stock (an equity account) is recorded with a

negative value Reduces stockholders’ equity

If reissued at a later date Cash is increased Treasury stock is reduced by the price paid when it

was acquired Any additional amounts received increase APIC from

treasury stock transactions

Stock

Dividends Return of profits to the stockholders

Not an expense

Important dates Declaration date

Date of record

Payment date

Stock

Cash dividends Cash is decreased

Retained earnings is decreased

Stock dividends Additional shares of stock are distributed instead of cash

Retained earnings is decreased

Stock account and APIC are increased

Stock Stock split

Used to reduce the market price of the stock so that it can be traded more easily

Outstanding shares are replaced with a larger number of new shares Effect on par value and market price is proportional to

the size of the stock split A 4-for-1 stock split will result in 4 times as many shares,

but each will have only ¼ of the original par value and market value

No effect on total stockholders’ equity or total market value of the stock

Earnings Per Share

Calculation of how much profit (or loss) the company earned for each share of common stock outstanding

Required disclosure on all income statements

Calculation

Net income – amounts due to preferred shareholders Number of common shares outstanding