BUS103: Introduction to Financial Accounting

9a. Describe the difference between bonds and capital stock

A bond is an example of debt security; capital stock is an example of equity security.

Can you describe at least three ways that bonds and stock differ?

Read Comparison with Stock on page 340 for a review of how bonds differ from stock.

 

9b. Describe par value, discount, and premium as they relate to bonds

Bonds often sell with accrued interest included in the purchase. The bond purchaser pays the accrued interest upfront with the expectation of being reimbursed with the receipt of the first bond interest payment.

What is the journal entry when a bond is issued with accrued interest? What is the journal entry when the first bond interest payment is paid?

Read Selling (Issuing) Bonds on pages 340-348 to review the journal entries for bonds issued with accrued interest.

 

9c. Explain how interest rates affect bond prices

A bond is sold at face value, a discount, or a premium. The price at which a bond is sold depends on the market rate of interest and how it compares to the contract rate of interest.

How do you determine the price of a bond using present value calculations?

Read Bond Prices and Interest Rates on pages 348-376 for help calculating the price of a bond with present value calculations.

 

9d. Account for bonds issued at par, a discount, or a premium

The accounts "Discounts on bonds payable" and "Premium on bonds payable" require amortization.

Before attempting the final exam, practice the journal entries to amortize the Discount on bonds payable and Premium on bonds payable accounts.

For help with amortizing Discount on bonds payable and Premium on bonds payable, read Selling (Issuing) Bonds on pages 348-359.

 

9e. Identify different types of capital stock and discuss differences between common stock and preferred stock

Before attempting the final exam, make sure you are comfortable using the formula for calculating the book value per share of common stock outstanding, which divides total common stockholder equity by the total number of common shares outstanding.

Corporations purchase their own stock for a variety of reasons. The purchased stock is called treasury stock and is considered issued but not counted as outstanding.

What are the reasons a corporation may choose to purchase treasury stock? How is treasury stock reported on the balance sheet?

Read Balance Sheet Presentation of Paid-in Capital in Excess of Par (or Stated) Value – Common or Preferred on pages 198-201 for information on calculating the book value per share. Information on treasury stock can be found on pages 248-253.

 

9f. Prepare a statement of shareholders' equity

A statement of stockholders' equity is presented with the income statement, the balance sheet, and the statement of cash flows. If a company has changes in their stock or paid-in capital, they show them in the columns of the statement of shareholder's equity. Each column reports changes to each of the accounts within the stockholders' equity section. It would be reasonable to expect columns for preferred stock, common stock, additional paid-in capital, retained earnings, and treasury stock.

Each column reports a beginning balance and then reports transactions that affect the beginning balance. Finally, the ending balances are totaled to arrive at a total amount of stockholders' equity.

Read Statement of Stockholders' Equity on pages 247-248 for additional information about the statement of stockholders' equity.

 

9g. Account for paid-in capital, cash dividends, stock dividends, stock splits, and retained earnings appropriations

Paid-in capital is simply the money contributed by stockholders and reported under the balance sheet's Stockholders' Equity section. It includes all classes of stock recorded at par value plus the amount received in excess of par.

Retained earnings are also listed under the Stockholders' Equity section of the balance sheet and represent all the earnings accumulated in the business to date. When retained earnings and cash are sufficient, and the retained earnings have not been appropriated (set aside) for another use, a corporation's board of directors may decide to share the retained earnings with shareholders in the form of a dividend payment.

A cash dividend is the most common form of dividend payment and is paid out of retained earnings, which decreases a corporation's cash. Rather than declare a cash dividend, a corporation may elect to declare a stock dividend which distributes additional shares of stock to common stockholders. A stock dividend also decreases retained earnings but does not decrease cash.

A corporation's board of directors may also vote to declare a stock split, which decreases the par value of stock and increases the number of common shares. A stock split will divide each share of stock into 2 or more shares. For instance, a 4:1 (4 for 1) stock split will turn one share of stock into four shares and simultaneously divide the par value by four. To further illustrate, one share of stock with a par value of $40 that is split 4:1 will now equal four shares of stock with a par value of $10 each.

A corporation's board of directors declares dividends after reviewing the retained earnings and cash of the corporation and a vote.

As practice, name the three significant dates associated with payment of dividends. Know the journal entries associated with each of the significant dates.

Read Paid-in Capital and Retained Earnings on the Balance Sheet on pages 234-344 to review the process of declaring cash and stock dividends.

 

Unit 9 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

• Bond indenture
• Callable bond
• Capital stock
• Carrying value of bonds
• Cash dividends
• Common stock
• Corporation
• Cumulative preferred stock
• Discount on bonds
• Dividend
• Dividends in arrears
• Earnings per share
• Face value
• Market value
• Paid-in capital
• Par value
• Preferred stock
• Premium on bonds
• Present value
• Retained earnings
• Stock dividends
• Stock split
• Trustee
• Underwriter