Which of these is NOT a major advantage of a corporation?
Government Regulations
Which one of the following is a major DISADVANTAGE of a corporation?
Additional Taxes
Which of the following is NOT a stockholder's right?
The right to participate in management decisions.
Which of the following represents the maximum number of shares a corporation can issue?
Authorized shares
Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance?
Credit to Common Stock for $2,000
Which one of the following is not a right of preferred stockholders?
Priority voting rights
For what reason might a company acquire treasury stock?
To reissue the shares to officers and employees under bonus and stock compensation plans
On which date are entries for cash dividends required?
Declaration date and the payment date
Which one of the following decreases when a corporation purchases treasury stock?
Outstanding shares
What method is normally used to account for treasury stock?
Cost method
Corporate Form of Business:
Classified by Purpose:
*Not-for-Profit
*Profit
Classified by Ownership:
*Publicly Held
*Privately Held
Advantage of Corporations:
1.) Separate Legal Existence
�An entity separate and distinct from its owners and management
� The corporation acts under its own name
o May buy, own, and sell property; May borrow money
o May enter into legally binding contracts in the name of the corpor
Disadvantage of a Corporation:
1.) Corporation Management
� Separation of ownership and management
2.) Government Regulations
�Subject to numerous state and federal regulation
o Requirement for issuing stock
o Distributions of earnings, acceptable methods for buying back and retiring s
Forming a Corporation
1. File application with Secretary of State
2. State grants a charter.
a. Charter indicates amount of stock that a corporation is authorized to sell
3. Corporation develops by-laws.
4. Usually incorporate in a state whose laws are favorable to the corpora
Stockholder Rights
1.) Vote in election of board of directors and on actions that require stockholder approval.
2.) Share the corporate earnings through receipt of dividends.
3.) Keep the same percentage ownership when new shares of stock are issued (preemptive right).
4.)
A corporation is an entity separate and distinct from its owners.
True
As a legal entity, a corporation has most of the rights and privileges of a person
True
Most of the largest U.S. corporations are privately held corporations
False
Corporations may buy, own, and sell property; borrow money; enter into legally binding contracts; and sue and be sued
True
The net income of a corporation is not taxed as a separate entity
False
Creditors have a legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts
False
The transfer of stock from one owner to another requires the approval of either the corporation or other stockholders
False
The board of directors of a corporation legally owns the corporation
False
The chief accounting officer of a corporation is the controller
True
Corporations are subject to fewer state and federal regulations than partnerships or proprietorships
False
Stock Issue Considerations
Authorized Stock
Issuance of Stock
Par and No-Par Value Stocks
Paid-in Capital
Retained Earnings
Authorized Stock
The Charter indicates amount of stock that a corporation is authorized to sell
Issuance of Stock
� Could sell (issue) directly to investors or
� Indirectly through an investment banking firm
Par and No-Par Value Stocks
How a company sets a price for the new issue of stock
Par Value Stock
� Par value stock has been assigned a value per share
� Historically, par value determined legal capital per share that a company must retain in business for protection of corporate creditors
No-Par Value Stock
Is fairly common now since states have eliminated the "par value" concept
No-par value stock - stated Value:
In many states, the board of directors assigns a stated value to their no-par shares
Paid-in Capital
Is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock
� Common Stock and Preferred Stock
� Paid-in Capital in Excess of Par - Common
Paid-in Capital in Excess of Par - Preferred
Retained Earnings
Is net income that a corporation retains for future use.
At the end of the year:
� Revenue accounts (increases Retained Earnings)
� Expense accounts (decreases Retained Earnings) are closed to the Retained Earnings account.
� Dividends (decreases Retained Earnings) are also closed to the Retained Earnings account.
Accounting for Preferred Stock
� Typically, preferred stockholders have a priority as to:
� Distributions of earnings as dividends
� Assets in event of liquidation.
� Generally do not have voting rights.
� Accounting for preferred stock at issuance is similar to that for common stock
�
Treasury Stock
Is a corporation's own stock that it has been reacquired from shareholders but not retired. It has been purchased from the stock market.
� Corporations acquire treasury stock for various reasons:
� To reissue the shares to officers and employees under bon
Accounting for Dividends
� Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis.
� Types of Dividends:
� Cash
� Property
� Stock
�Scrip (A promissory note)
Accounting for CASH Dividends
For a corporation to pay a cash dividend, it must have:
� Retained earnings
� Payment of cash dividends from retained earnings is legal in all states.
� Adequate cash
� A declaration of dividends by Board of Directors.
� Three dates are important in conne
Accounting for Preferred Dividend Preferences
� Right to receive dividends before common stockholders.
� Per share dividend amount is stated as a percentage of preferred stock's par value or as a specified amount.
� Example: $100 par value, 8%; would mean that the dividend when declared would be $8.0
Accounting for Retained Earnings
� Retained earnings is
� Net income that a company retains in the business.
� Net income increases Retained Earnings and a net loss decreases Retained Earnings.
� Part of the stockholders' claim on the total assets of the corporation
� Debit balance in Re
Authorized -
The total amount of shares authorized by the state issued.
Issued -
The total amount sold to the public through the stock exchange (Outstanding + treasury stock = issued)
Outstanding -
Shares still held by the public
Treasury Stock -
Shares purchased by the corporation and used for later use (Issued - Outstanding = Treasury Stock).
To be classified as a current liability, how or when must a debt be expected to be paid?
Either out of existing current assets or by crediting other current liabilities
Which one of the following is not a typical current liability?
Bonds payable
Which of the following is a criterion for the classification of a liability as current?
I. It is a debt that can be paid from existing current assets.
II. It is a debt that can be paid through the creation of other current liabilities.
III. It must be pai
I and II
A corporation issued a $50,000, 9%, 4-month note on July 1. The corporation's year-end is September 30. Which one of the following is the adjusting entry for interest on September 30?
Interest Expense 1,125
Interest Payable 1,125
Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue?
$4,300
When recording payroll,
payroll deductions are recorded as liabilities.
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Revenue at December 31?
$4,500
The cash register tape indicates cash sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information?
Cash 2,155
Sales 2,000
Sales Taxes Payable 155
On December 30, 2017, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet?
$10,000 current liability; $40,000 long-term liability
A corporation issues $1,000,000 of 8%, 5-year bonds. The 8% rate of interest is called the __________ rate.
contractual
In what denomination are bonds typically issued?
$1,000
What term is used for bonds that have specific assets pledged as collateral?
Secured bonds
Which statement describes the market interest rate?
It is the rate investors demand for loaning funds.
Cuso Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate?
The contractual interest rate exceeds the market interest rate.
In a recent year, Day Corporation had net income of $150,000, interest expense of $30,000, and tax expense of $20,000. What was Day Corporation's times interest earned for the year?
6.67
Which is the most common way to present current liabilities on the balance sheet?
Notes payable are listed first.
Corristan Company purchased equipment and incurred these costs:
Cash price $24,000
Sales taxes $1,200
Insurance during transit 200
Annual maintenance costs ____400
Total costs $25,800
What amount should be recorded as the cost of the equipment?
$25,400
Which of the following is not a depreciable asset?
Land
Coronado Company purchased land for $80,000. The company also paid $12,000 in accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in t
$95,000
Which of the following costs should not be included in the cost of a building?
Broker's commission
Which of the following is not a way to express the useful life of a depreciable asset?
Cost of acquisition
What is depreciation?
A cost allocation method
When using the straight-line depreciation method, which of the following is not a factor affecting the computation of depreciation?
Book value
A purchase of equipment for $18,000 also involves freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and 4 years, respectively. Under the straight-line method, how much is annual depreciation e
$4,750
Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2017. The machine was purchased for $80,000 on January 1, 2013, and was depreciated on a straight-line basis over a 10-year life assuming no salvage value. If the m
$18,000 loss
A company sold for $3,000 a plant asset that had a cost of $10,000 and accumulated depreciation of $7,500. What gain or loss did the company experience?
Gain of $500
A company has the following asset account balances:
Buildings and equipment $9,200,000
Accumulated depreciation 1,200,000
Patents 750,000
Land Improvements 1,000,000
Land 5,000,000
How much will be reported on the balance sheet under property, plant, & eq
$14,000,000
A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net sales total $250,000. What is the asset turnover?
1.25 times
Oahu Industries' average total assets for the year are $4,000,000, its net income is $800,000, and its net sales are $10,000,000. What is the return on assets?
20%
Which of the following measures provides an indication of how efficient a company is in employing its assets?
Asset turnover ratio
Plant Assets:
- Have Physical Substance
- Used in the operations of the business
- NOT intended to be sold
- Provides services to the business over a number of years
- Accounting Theory ~ That the asset's "revenue producing" ability declines over its useful life - This
Historical Cost Principle
- Requires that companies record plant assets at cost
- Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
- Revenue Expenditure - Costs incurred to maintain a plant asset are expended immediately.
- Cap
Four Areas of Property, Plant and Equipment
- Land
- Land Improvement
- Buildings
- Equipment
All necessary costs incurred in making land ready for its intended use ______.
Increase (debit) the Land account.
Land Costs typically include:
1) cash purchase price,
2) closing costs such as title and attorney's fees,
3) real estate brokers' commissions, and
accrued property taxes and other liens on the land assumed by the purchaser.
Land Improvement
Includes all expenditures necessary to make the improvements ready for their intended use.
- Examples: driveways, parking lots, fences, landscaping, and underground sprinklers.
- Limited useful lives.
Buildings
Includes all costs related directly to purchase or construction of the building.
Purchase costs:
- Purchase price, closing costs (attorney's fees, title insurance, etc.) and real estate broker's commission.
- Remodeling and replacing or repairing the roof
Equipment
- Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
- Cash purchase price.
- Sales taxes.
- Freight charges.
- Insurance during transit paid by the purchaser.
- Expenditures required in assembling, in
Depreciation
Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.
- Process of cost allocation, not asset valuation.
- Applies to land improvements, buildings, and equipment, not land.
- Depreciable, beca
Cost
All expenditures necessary to acquire the asset and make it ready for intended use
Useful Life
Estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence.
Salvage Value
Estimate of the asset's value at the end of its useful life
Where is Depreciation reported?
Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets
Depreciation Methods:
Management selects the method it believes best measures an asset's contribution to revenue over its useful life:
- Straight-line method.
- Declining-balance method.
- Units-of-activity method.
Under the Straight Line Method:
- Expense is same amount for each year under the straight line method.
- Depreciable cost = Cost less salvage value.
- Salvage Value is an estimate of the asset's value at the end of its useful life for the owner.
- Useful life is an estimate of the expec
Declining Balance Method:
-Accelerated method.
- Decreasing annual depreciation expense over the asset's useful life.
- Double declining-balance rate is double the straight-line rate.
-Rate applied to book value.
Units of Production Method:
Cost
Expected Salvage Value
Estimated useful life (in years)
Estimated useful life (in miles)
-Companies estimate total units of activity to calculate depreciation cost per unit.
- Expense varies based on units of activity.
- Depreciable cost is cost less
Retirement of Plant Assets:
- No cash is received.
- Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset.
-Decrease(credit) the asset account for the original cost of the asset.
Asset Turnover
Indicates how efficiently a company uses its assets to generate sales. A profitability ratio; desire a higher than last year's or competitors'
Net Sales/ Average Total Assets
Return on Assets
Indicates the amount of net income generated by each dollar of assets. A profitability ratio; desire a higher number than last year'/ competitors'
Net Income / Average Total Assets
What is a Current Liability?
A debt that a company expects to pay:
1. from existing current assets or through the creation of other current liabilities, and
2. within one year from the balance sheet date or the operating cycle, whichever is longer.
3. Debts that do not meet both crit
Notes Payable:
o Written promissory note.
o Usually require the borrower to pay interest.
o Frequently issued to meet short-term financing needs.
o Issued for varying periods of time.
o Those due for payment within one year of the balance sheet date are usually classifi
Sales Taxes Payable
- Sales taxes are expressed as a stated percentage of the sales price.
- Selling company
? collects tax from the customer.
? remits the collections to the state's department of revenue.
Unearned Revenues
Revenues that are received before goods are delivered or services are performed.
Current Maturities of Long-Term Debt
o Portion of long-term debt that comes due in the current year.
o No adjusting entry required.
Payroll and Payroll Taxes Payable
The term "payroll" pertains to both:
Salaries - managerial, administrative, and sales personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and manual laborers (rate per hour).
Determining the payroll involves computing three amount
Payroll tax expense results from three taxes that governmental agencies levy on employers.
These taxes are:
- FICA tax
- Federal unemployment tax
- State unemployment tax
Long-Term Liabilities
Definition: Long-Term Liabilities are obligations that a company expects to pay more than one year in the future.
1. Notes Payable - principal and interest are paid to the creditor over a long period of time
2. Bonds Payable - a form of interest-bearing n
BONDS PAYABLE: A LONG-TERM LIABILITY
1. Bonds are sold in small denominations usually $1,000 or multiples of $1,000.
2. When a corporation issues bonds, it is borrowing money from the investor (the bondholder). The corporation will pay back the principal with interest to the bondholder.
3. T
Secured Bonds
Have specific assets of the issuer pledged as collateral for the bonds.
Unsecured Bonds
Are issued against the general credit of the borrower.
Convertible Bonds
Can be converted into common stock at the bondholder's option
Callable Bonds
Can be redeemed (bought back), by the issuing company, at a stated dollar amount prior to maturity
Bond Certificate
A contract from the corporation (the issuer) to the bondholder.
Issuing Procedures
- Bond certificate
? Issued to the investor (bondholder).
? Provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest rate.
- Face value - principal due at the maturity.
- Maturity date - date final payment i
Issuing Bonds At Face Value
A corporation records bond transactions when it:
- issues (sells) or redeems (buys back) bonds and
- when bondholders convert bonds into common stock.
Bonds may be issued at
- face value,
- below face value (discount), or
above face value (premium).
Five
Issuing Corporations must pay
o Contractual interest rate over the term of the bonds (10%) not the market interest rate
-Face value at maturity ($100,000), not the issuance price of $98,000
� Bond premium is considered to be a reduction in the cost of borrowing
The borrower (Candlestick Inc.) is not required to pay the bond premium amount ($102,000) at the maturity date of the bonds, only the face value of $100,000
Redeeming Bonds at Maturity
Redemption on bonds at maturity is to pay the bondholder the face value of the bond not the discount or premium amount paid by the bondholder.
Current Liabilities:
Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
Current ratio: current assets = current ratio
Current liabilities
"For every one dollar of current liabilities the company
Long-Term Liabilities:
Solvency ratios measure the ability of a company to survive over a long period of time.
1. Debt to Assets Ratio - taught in chapter 2 this ratio indicates the extent to which a company's assets are financed with debt.
Debt to Assets Ratio:
Total Liabiliti
Contingencies
Events with uncertain outcomes that may represent potential liabilities that have not yet been realized. A common type of contingency is lawsuits, product warranties and environmental cleanup obligations that are pending.
a. Tobacco Companies cancer causi
Off-Balance Sheet Financing
- is an intentional effort by a company to structure its financing arrangements so as to avoid showing all liabilities on its balance sheet.
� Enron Corporation - hid its liabilities by creating partnerships. When a company engages in a partnership, even