intermediate 2 exam 1

long term debt

consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within the operating cycle of the business or one year, whichever is longer

coupon bonds

bonds are not issued in the name of the owner. they have a coupon for interest payable to the bearer for each interest period attached to the bond. when interest for each period is due, the bondholder detaches a coupon and presents it for collection at the bank

commodity backed bonds

bonds that are redeemable in a measure of a commodity, such as barrels of oil, tons of coal, or ounces of rare metal

treasury bonds

bonds that have been reqacquired by the issuing company and have not been canceled. they should be shown on the balance sheet at their par value as a deduction from bonds payable.

equity

the residual interest in the assets of an entity that remains after deducting its liabilities. ___ represents the ownership interest. (how much of a claim do we have on those assets)

corporation

an artificial person created by law and having a distinct existence separate and apart from the persons who are responsible for its creation and operation

separate legal entity

can do anything a person can legally do; eg. acquire assets, be used (pro)

limited liability

the amount the stockholders has invested in the corporation is the extenet of the possible loss; personal assets are protected (pro)

transferability of ownership

shares are bought and sold among stockholders without interruprting operations (pro)

unlimited life

the corp continues in existence and is not dependent on the lives of its owners (pro)

capital raising capability

can raise large amounts of capital because of the attractiveness to investors of limited liability and the liquidity available because of the ease of transfer of ownership (pro)

taxation

earnings of a corp are subject to federal income tax whether the earnings are distributed to stockholders or not (con)

tax twice or multiple times (@ corp level and @ personal level)

govt. regulation

more govt. regulation for corp than for sole proprietorship or partnership (con)

authorized stock

max # of stock you charter states

issued stock

the amount of stock you sell

outstanding stock

shares of the company that are currently owned by all stockholders

par value stock

no relationship to its FV; very low; helps with APIC (any excess over par paid in by stockholders in return for the shares issued)

no par stock

CS with no par; helps clear confusion of par value and FV; levy a high tax

stated value stock

a minimum value; creates same issue as par

legal capital

pay yourself a dividend up to a certain point; can’t pay more until you pay back
par value of all your O.S or stated value or entire proceeds from your no par stock

C.S rights: voting

right to vote in election of board of directors and those that reacquire stockholder approval

C.S rights: residual claim

owners are paid with an asset that remain after all other claims have been paid

C.S rights: preemptive rights

current can preempt a # of shares proportional to their interest (ex: owner has 1000 shares of 2000 shares outstanding = 50% → increase S.O by 2000 so his is now 1000/4000 = 25%; must be at 50%)

C.S rights: dividends

right to receive a dividend when approved by the board of directors

preferred stock: cumulative

preferred shareholders receive a dividend before C.S.; if dividend is not paid each year, it is required to be paid in the future before CS receives any before dividend

preferred stock: participating

shared ratably with CS in any profit distribution beyond the prescribed rate

preferred stock: convertibile

allows SH, at their option, to exchange PS for CS at a predetermined ratio

employ BV method when converting

preferred stock: callable

permits corporations to call or redeem the outstanding PS at specified future date

preferred stock: redeemable

allows SH to redeem at any time; return to corporation and be paid a set amount for the return; reported as neither debit or equity; reported between debt & equity in a temporary section
reported as a liability and mandatory by FASB

debit to APIC (decrease)

sale of TS below cost; declaration of a liquidating dividend

credit to APIC (increase)

sale of stock at above par or stated value; sale of TS above cost; conversion of convertible bonds; declaration of small stock dividend

retained earnings

summarizes the stockholder’s share of assets resulting primarily from earnings not distributed as dividends; claim against total asset earnings

date of declaration

establish record date, payment date, and how much they’re going to pay, becomes a liability,

date of record

stop the trading on this day, whoever owns it on this date

date of payment

when the dividend gets paid out; require a JE

property dividend

form of some asset other than cash. the dividend is recorded at the market value of the asset given up. the dividend is viewed as a simultaneous sale of the asset at market value and distribution of the proceeds. therefore, on the date of declaration, the asset should be revalued to the market value and any gain or loss recorded

form as stock in another company/ giving away stock of another company for our financing reason

liquidating dividends

declared when the company is terminating or reducing operations. the dividend reduces contributed capital (PIC) rather than RE
not intending to give them excess but the original investment

stock dividends

occur when the company issues additional shares of its own stock. each stockholder receives additional shares at a % of the number of shares owned before the dividend
PIC increases and RE decreases = no change to SHE

small stock dividend

less than 20-25% of CS outstanding; viewed as the same way as property dividend, that is, the simultaneous sale of the stock at market value and payment of the dividend with the proceeds. therefore, the dividend is recorded at market value
intended like cash/property

large stock dividend

greater than 20-25%; viewed as a stock split rather than a dividend, so it is recorded at par
reduce market price per share of stock to make it more affordable

stock split

occurs when a proportionate number of additional shares are issued based on the number of shares currently issued while simultaneously, the corresponding par value is reduced proportionately.
purpose: decrease the market price of the company’s stock in order to make it more marketable. no JE usually recorded by a memo entry

appropriation of (restriction on) RE

formal restriction on equity; doesn’t involve cash; won’t pay them a dividend and will hold it for a purpose, disclosed by a note

reasons why a corporation might want to reacquire shares

• maintain control: concerns over a hostile takeover

• dilution issues: help prevent dilution of ownership of existing SH

• stock undervalued: time for it to pay less than the stocks intrinsic value

• dividend commitment: gives more flexibility in making distributions or divis

• changes performance metric: increase financial metrics like EPS and ROE

antidilutive

• actions that maintain or increase shareholders’ EPS or voting power by reducing outstanding shares or allowing additional share purchases during new issuances

watered stock

• the overstatement of stockholder’s equity through intentional overevaluation by the board of directors of the property or the services received

• water may be eliminated by writing down the assets to their actual market value

secret reserves

• results from undervaluing the property or services received in exchange for the company’s stock

dilutive securities

• securities that, although they are not in the form of common stock, enable their holders to obtain common stock upon exercise or conversion

convertabile bonds

• bonds that can be exchanged for other securities ofthe issuing corporation after a specified time after issuance

conversion of stock using the book value approach

• update bond discount or premium

• zero out bond payable and updated bond discount or bond premium

• credit common stock at par value

• credit the remainder to PICIEPV

convertible preferred stock

• preferred stock that can be exchanged for other securities of the issuing corporation after a specified time after issuance

contigent issue agreement

• an arrangement that occurs in business combinations when the acquirer promises to issue additional shares of stock if certain conditions, such as the attainment of a certain earnings level, are met

stock warrants (options)

• a certificate that entitles the holder to acquire shares of stock

• specifies the type and number of shares that may be acquired, purchase price, exchange ratio of warrants for stock, and the experiation evidence

why are stock warrants issued

• improve the attractiveness of another security

• to give existing stockholders their preemptive right

• to employees

compensatory stock option plan

• one that offers compensation in the form of stock options instead of all-cash compensation

date of grant

• date on which the option is given to the employee (no JE)

measurement date

• the first date on which is known the number o fshares an employee is entitled to receive and the option price

vesting date

• the date on which the employee’s right to receive or retain shares of stock is no longer contigent on remaining in the service of the employer (no JE)

service period

• one or more years in which the company receives the benefit of the employee’s services; specified by the stock option plan

• unless otherwise specified, the ____ is the vesting period - the time between the grant date and thevesting date

• JE

intrinsice value method

• accounting for stock compensation (GAAP from 1972-2004) compensation cost is measured as the excess of the market price of the stock over the exercise price of the option at the grant date

• used to record 0 salary exp

par value method

• accounting for stock compensation plan (GAAP started in 2004) requires recognition of the compensation cost based on the fair value of the stock options on the grant date using an acceptable option pricing model

restricted stock unit plans

• form of stock-based compensation to exmployees that is an alternative to a stock optioin plan

• employee receives a restricted stock unit that represents the right of the employee to receive a specified number of shares of stock of the company when the employee meets the vesting conditions set by the company

arguments against expensing stock options

• cost of employee options is dilution of existing SHE and therefore should not be reported as an expense

• existing models for measuring the actual compensation are inaccurate and therefore misleading

• expensing stock options will distort the company performance because it is a noncash charge

• forcing companies to expense stock options will lead companies to eliminate these forms of compensation, which will hinder innovations and economic growth

arguments for expensing stock options

• not expensing stock options has led to a lack of transparency in the stock market as executives try to hide their total compensation from the public

• options are an expense just as cash compensation is an expense. goods/services received in exchange for stock options results in a cost

• although some uncertain in measurement will always be present, sufficiently reliable estimates can be determined

• neutrality is fundamental to the standard setting process. to adjust financial standards for possible economic consequences undermines the foundations of financial reporting

simple capital structure

• includes no potentially dilutive securities, options, or other rights that upon conversion or exercise could in the aggregate dilute EPS

complex capital structure

• exists when a corporation has convertible securities, options, or other rights that upon conversion or exercise could in the aggregate dilute EPS

treasury stock (is/is not) an asset because

• is not

• a company cannot own a piece of itself as an economic resource or investment

treasury stock does not ___, has no ___, is not ____, has no ____, but DOES _____

• vote

• preemptive rights

• not paid dividends

• participate in stock splits

treasury stock transactions (do/do not) result in gains or losses

• do not

• corporation cannot manipulate income by treasury stock dealing

treasury stock transactions may _____ RE but not ____ RE

• reduce

• increase

the amount that may be paid to acquire TS is limited to ____ so that legal capital is not impaired

• the balance in RE

the amount of RE available for dividends is restricted by _____ so that payment of dividends will not reduce contributed capital

• the cost of TS

treasury stock may be reissued at _____ or ____ because legal capital requirements were met at the original issue

• above par

• below par

TS _____ the number of shares of stock outstanding, but the number of shares issued _____ the same

• reduces

• remains

the retirement of stock ____ the number of share issued and outstanding. neither TS nor retirement affects _____

• reduces

• number of shares authorized

there are two methods to account for TS: _____ SHE is the same under either method

• par value method

• cost method

secured bonds

• specific property is pledged as security for meeting the terms of the bond agreement

debenture bonds

• have no specific property pledged as security for their repayment but rely on the borrower’s general credit reputation

registered bonds

• bonds are issued in the name of the owner and interest payments are mailed directly to the registered owners

term bonds

• bonds that mature on a single date

serial bonds

• bonds with maturity dates that are staggered over a series of years

commodity bonds

• bonds that are redeemable in measure of a commodity, such as barrels of oil, tons of coal, or ounces of rare metals

deep discount

• bonds that are sold at a discount that provides the buyer’s total interest payment at maturity