intermediate II ch 13-15

Whats is the difference between a note payable and bond payable?

Note payable has a single lender/investor that loans money to a company

Bonds Payable has multiple lenders/investors and the loan amount varies in 1000 increments to a company

Stated Rate (coupon or nominal rate)

the interest rate written in terms of the bond; represents the amount of interest that will paid and this rate does not change

Market (effective or effective yield rate)

–The prevailing interest rate in the investing markets for bonds with similar characteristics

•This interest rate fluctuates up or down depending on the risk of the company, government policy, central bank interest rates, and the state of the economy

•This is the rate of return actually earned by bondholders (per interest period)

factors that influence the selling price of bonds

–Supply/demand of buyers and sellers

–Relative risk

–Market conditions and the state of the economy

if stated rate is lower than the market rate…

sell at a discount (dr)

if stated rate is greater than market rate..

the bonds sell at a premium (cr)

Extinguishment of debt

Refers to a company paying off their debt

Two dissimilarities between notes and bonds

1. notes don’t trade as readily as bonds in the organized, public-securities markets

2. notes typically are issued to only one party

Zero-interest bearing note

A zero-interest bearing note is a note that is issued without an explicit interest rate. any implied interest to be expected is deducted from the face value of the note when it is issued (issued at present value)

special note payables

mortgage notes payable

•A mortgage note payable is a promissory note secured by a document called a mortgage that pledges title to property as security for the loan.

The borrower makes payments, called installments, that consist of both principal plus interest

mortgage note payable j/e

dr.asset

dr/cr. prem/discounr

cr. note payable

cr. cash

stockholders equity

•Rearranging the accounting equation reveals that stockholders’ equity is “net assets”: Assets – Liabilities = Equity

•Stockholders’ Equity generally consists of the following:

–Common Stock, Preferred Stock, and Additional Paid-In Capital

–Retained Earnings

–Treasury Stock

–Accumulated Other Comprehensive Income

contributed capital

money/assets owners put into the company

earned capital

profits the company earned and kept

market issue price determines

cash

par value determines

common stock

Cumulative preferred stock

If the company skips your preferred dividend, you don't just lose it.

It becomes dividends in arrears.

noncumulative preferred

Missed dividends do not carry forward.

treasury stock

A corporation issues its stock...

Then later the corporation buys some of its OWN shares back. a contra-equity account

preferred stock

a special class of shares that posses certain preferences and characteristics not possessed by common stock

date of declaration

à the date the board of directors approves the payment of a dividend. At this time a liability to pay out a dividend is recorded and retained earnings is reduced

Dr. Retained Earnings
Cr. Dividends Payable

date of record

The corporation considers a list of stockholders that will receive that dividend on the date of record. No journal entry is needed on the date of record

date of payment

Dividend payments are distributed to the stockholders who were on record on the date of record. A journal entry is needed to record the cash payment and the reduction of the liability recorded on the date of declaration

Dr. Dividends Payable
Cr. Cash

stock dividend

company distributes additional shares to existing shareholders..

stock split

company splits existing shares into more shares.

lump sum stock issuance

This happens when a company issues different kinds of stock together for one total price.

participating vs. non participating

can share in additional dividends

generally receives only the stated dividend preference

treasury stock sold at below cost

debit- APIC T/S

treasury stock sold at above price

credit- APIC T/S