Download Chapter 15

Chapter 15
The Road Traveled
Key Points
Chapters 11 – 14 examined the role of
accounting information in planning business
investing and financing activities. Chapter
11 introduced the time value of money and
showed how it is used to make financial
decisions. Chapter 12 used the time value
of money concept to determine if business
investment activities should be undertaken.
Chapters 13 and 14 explored the issues
surrounding business financing decisions.
Chapter 13 examined equity financing while
Chapter 14 examined debt financing.
In a corporation, legal capital is maintained
separate from additional paid-in capital.
In a corporation, retained earnings are
maintained separate from contributed
capital.
All notes, regardless of type are recorded at
face value but reported at carrying value.
You Are Here
Now that we understand the process of
planning for investing and financing
activities, we explore the role of the
accounting system during the performing
phase of business. That is, after planning,
the company must begin to operate. So, it
must raise capital and then invest the
capital. Chapters 15 and 16 examine the
process of recording and evaluating
financing and investing activities. Chapter
15 considers the recording and evaluating of
financing activities.
The Road Ahead
Chapter 16 examines the recording and
evaluating of investing activities.
1
DISCUSSION OUTLINE
Chapter 15’s discussion should focus on the different types of accounts used corporations to
record equity financing activities. This discussion should tie back to Chapter 13 when we
planned corporate ownership. Then we switch gears as we focus on recording and
communicating debt financing. This discussion should tie back to Chapter 14 when we planned
debt financing activities.
In Chapters 13 and 14 we planned financing activities. How does Chapter 15 add to that
discussion?

Chapter 15 adds another piece to the puzzle as we learn how financing activities are
recorded and reported.
2
Lecture Examples
1.
XYZ Company is authorized to issue 500,000 shares of $1 par value common stock and
100,000 shares of 8 percent, $10 par value cumulative preferred stock. The events listed below
occurred during the first 2 years of the corporation’s life. How are these events recorded and
reported?
Year 1 Events:
Issued 25,000 shares of common stock for $15 each.
Issued 1,000 shares of preferred stock for $100 each.
Issued 10,000 shares of common stock in exchange for a building valued at
$200,000.
Earned revenues of $150,000, incurred expenses of $80,000.
Declared no dividends.
Year 2 Events:
Repurchased 2,000 shares of common stock at $15 per share to be held as treasury
stock.
Earned revenues of $150,000, incurred expenses of $120,000. Declared and then
later paid dividends of $5,000
Year 1 Events:
Cash
375,000
Common stock
Paid-in capital in excess of par value (CS)
Cash
100,000
Preferred stock
Paid-in capital in excess of par value (PS)
Building
Common stock
Paid-in capital in excess of par value (CS)
Revenues
Retained earnings
Retained earnings
Expenses
Income Statement: Net income, $70,000
Balance Sheet (owners’ equity):
Common stock
Preferred stock
Paid-in capital in excess of par value (CS)
Paid-in capital in excess of par value (PS)
Retained earnings
Total stockholders’ equity
Statement of Cash Flows: Financing cash
Cash received from stock issuances
25,000
350,000
10,000
90,000
200,000
10,000
190,000
150,000
150,000
80,000
80,000
$ 35,000
10,000
540,000
90,000
70,000
$745,000
$475,000
3
Year 2 Events:
Treasury stock
Cash
Revenues
Retained earnings
Retained earnings
Expenses
Retained earnings
Dividends payable (PS)
Dividends payable (CS)
(PS: 1,000 * $10 * .08 * 2)
(CS: $50,000 - $16,000)
Dividends payable (PS)
Dividends payable (CS)
Cash
30,000
30,000
150,000
150,000
120,000
120,000
5,000
1,600
3,400
1,600
3,400
5,000
Income Statement: Net income, $30,000
Balance Sheet (owners’ equity):
Common stock
$ 35,000
Preferred stock
10,000
Paid-in capital in excess of par value (CS)
540,000
Paid-in capital in excess of par value (PS)
90,000
Retained earnings
95,000*
Less: Treasury stock
(30,000)
Total stockholders’ equity
$740,000
*$70,000 + $150,000 - $120,000 - $5,000 = $95,000
Statement of Cash Flows: Financing cash
Cash paid for treasury stock
$ 30,000
Cash paid for dividends
5,000
4
2.
Periodic Payment Note (see amortization table). Assume a December 31 Year-End
On October 1, your company borrows $100,000 cash at 12 percent interest for 5 years. You will
make monthly payments of interest and principal. Make journal entries for the first year and
indicate how these events affect the financial statements.
PV = 100,000, FV = 0, r = 12, c = 12, n =60, PMT = $2,224.44
10-1
Cash
Installment note payable
11-1 Interest expense
Installment note payable
Cash
12-1 Interest expense
Installment note payable
Cash
12-31 Interest expense
Installment note payable
Cash*
*Payment made 1 day early
100,000.00
100,000.00
1,000.00
1,224.44
2,224.44
987.76
1,236.68
2,224.44
975.39
1,249.05
2,224.44
Income Statement: Interest expense, $2,963.15
Balance Sheet: Installment note payable, $96,289.83
Statement of Cash Flows: Financing cash, + $100,000; - $3,710.17;
Operating cash, - $2,963.15
5
3.
End
Lump-sum Payment Note (see amortization schedule). Assume December 31 Year-
On April 1, your company issues a 5-year noninterest-bearing note payable with a face value of
$200,000. The market rate of interest is 9 percent. Make journal entries for the first year and
indicate how these events affect the financial statements.
FV= 200,000, PMT = 0, r = 9, c= 1, n = 5, PV = $129,986.28
4-1
Cash
Discount on notes payable
Noninterest-bearing note payable
12-31 Interest expense (11,698.77 *9/12)
Discount on notes payable
129,986.28
70,013.72
200,000.00
8,774.07
8,774.07
Income Statement: Interest expense, $8,774.07
Balance Sheet: Noninterest-bearing note payable, $138,760.35
Statement of Cash Flows: Financing cash, + $129,986.28
Note: Entry on 12-31-Y2
Interest expense
Discount on notes payable
12,488.43
12,488.43
($11,698.77 * 3/12 = $2,924.69 and $12,751.65 * 9/12 = $9,563.74; $2,924.69 + $9,563.74 =
$12,488.43)
6
4.
Bonds (see amortization schedule). Assume December 31 Year-End
Your company issues 20-year bonds with a face value of $200,000 on April 1. The face rate of
interest of 12 percent is paid semiannually on April 1 and October 1. The market rate of interest
is 10 percent when the bonds are issued. Make journal entries for the first year and indicate how
these events affect the financial statements.
PMT = 200,000 * .12 * ½ = 12,000, FV = 200,000, c = 2, r = 10, n = 40,
PV = $234,318.17
4-1
Cash
10-1
Premium on bonds payable
Bonds payable
Interest expense
Premium on bonds payable
Cash
234,318.17
34,318.17
200,000.00
11,715.91
284.09
12,000.00
12-31 Interest expense (11,701.70 * 3/6)
5,850.85
Premium on bonds payable
149.15
Interest payable
Income Statement: Interest expense, $17,566.76
Balance Sheet: Interest payable, $6,000.00
Bonds payable, $233,884.93
Statement of Cash Flows: Financing cash, + $234,318.17
Operating cash, - $12,000.00
6,000.00
Note: Entry on 4-1-Y2
Interest expense
Interest payable
Premium on bonds payable
Cash
5,850.85
6,000.00
149.15
12,000.00
7