BMGT 220

EXAM #3 Study Guide

CH-10 Liability
A. Current liability-satisfy 2 Criteria
(Note/account/wage & payroll/payroll taxes payable, unearned
revenue, and BOND INTEREST; the 1st category under liabilities on
balance sheet)
1. Note payable
Loan:
Cash
XXX
Note payable

XXX

Interest not incurred:

Interest expense XXX
Interest payable XXX
Maturity:
Note payable
XXX
Interest payable XXX
Cash
XXX
2. Sales taxes payable
Cash
XXX
Sales
XXX
Sales taxes payable

XXX

(Sale + tax) / (1+tax rate) = sales

Taxes are NOT an expense; companies serves only as a
collection AGENT
3. Payroll and payroll taxes payable
Wages and income taxes payable:
Salaries and wages expense XXX
FICA taxes payable
XXX
Federal income taxes payable XXX
State income taxes payable XXX
Salaries and wages payable XXX
Wage paid:
Salaries and wages payable

XXX

Cash

XXX

Payroll taxes payable (result from hiring works)

Payroll tax expense
XXX
FICA tax payable
XXX
Federal unemployment tax payable XXX
State unemployment taxes payable XXX
Both income and payroll tax include FICA tax
4. Unearned revenue (e.g.: magazine subscriptions)
Revenue unearned:
Cash
XXX
Unearned revenue
XXX
Revenue earned:
Unearned revenue XXX
Revenue
XXX
B. Long-term liabilities
I. Bond-A form of interest-bearing notes payable
1. Advantage & disadvantage
Stockholder control is not affected
Tax saving result
Earnings per share may be higher
Pay interest (contractual, based on face value) on a periodic
basis (semiannual) and pay principal (face value) at the due date
2. Type of bond
a. Secured bonds e.g. mortgage bonds, sinking fund bond
Unsecured bonds (debenture bonds)
b. Term and serial bonds
c. Registered and bearer (coupon) bonds
d. Convertible and callable bonds
3. Determinants of market value
The dollar amounts to be received
The length of time
The market interest rate of interest (investors demand)

 Bonds type affect market rate

4. Issuing bonds
a. At face value
Contractual interest rate = market interest rate; issuance price =
face value
Cash
XXX
Bonds payable
XXX
b. Discount
Additional cost of borrowing, recorded as bond interest expense;
Yield%=discount price/issuance price
Contractual interest rate < market interest rate;
Issuance price < face value;
Cost of borrowing > interest payment
Total cost = interest payment + bond discount
=principal at maturity + interest payment issuance
price
Total liability = bonds payable - discount
Cash

XXX

Discount on bonds payable

from bounds payable
Bond payable
XXX

XXX contra-liability, deducted

c. Premium
A reduction in the cost of borrowing;
Contractual interest rate > market interest rate;
Issuance price > face value;
Cost of borrowing < interest payment
Total cost = interest payment bond premium
=principal at maturity + interest payment issuance price
Total liability = bonds payable + premium
Cash

XXX

Discount on bonds payable XXX contra-liability, deducted

from bounds payable
Bond payable
XXX
d. Incurring Interest (CURRENT LIABILITY)
Accrual of interest:

Bond interest expense XXX

Bond interest payable
XXX
Interest payment (no previous accrual):
Bond interest expense XXX
Cash
XXX
Interest payment (previous accrual):
Bond interest payable XXX
Cash
XXX
5. Redeeming bond
a. At maturity
Regardless discount or premium when issued, book value = face
value
Bond payable XXX
Cash
XXX
b. Before maturity
Eliminate the carrying value; record the cash paid; recognize the
gain and loss
Carrying (book) value = face value - (unamortized) discount/+
(unamortized) premium
Loss/gain = carrying value - cash paid
Cashed paid is based on current market value
I.

Issued with premium:

Bond payable
XXX
Premium on bond payable XXX (unamortized)
(Loss on bond redemption XXX)
Cash
XXX
(Gain on bond redemption) XXX

II.

Issued with discount:

Bond payable
XXX
(Loss on bond redemption XXX)
Cash
XXX
Discount on bond payable XXX (unamortized)
(Gain on bond redemption) XXX

6. Converting bones in to common stock

Convertible bonds feature

Ignore the current market price OF bond and stock;
Transfer the carrying value to paid-in capital account
No gain or loss
Referred to as the carrying (book) value method
Bond payable
XXX
Common stock
XXX
Paid-in capital in excess of par value XXX
II. Long-term note payable-Mortgage loan
Borrow a loan:
Cash
XXX
Mortgage note payable XXX
Pay mortgage & interest:
Interest expense
XXX
Mortgage note payable XXX (cash-interest expense)
Cash
XXX

CH-11 Stockholders equity = Paid-in capital + Retained earning

A. Corporation
Advantage & disadvantage (p511)
Corporation management is BOTH an advantage and a disadvantage
B. Stock
I. Common stock
Common stock is the fundamental stock;
Rights: voting, receive dividends, preemptive right ( )
residual claim;
Issuance of CS ONLY affects paid-in capital account;
Stock transaction DOES NOT involves in income statement.
a. Issuing common stock:
(Price = par/stated value; or stated value not given)
Cash
XXX
Common stock
XXX
(Price > par/stated value)
Cash
XXX
Common stock
XXX
Paid-in capital in excess of par value XXX

b. Issuing for services:

Organization expense
XXX
Common stock
XXX
Paid-in capital in excess of par value XXX
c. Issuing for noncash assets:
Asset (land)
XXX
Common stock
XXX
Paid-in capital in excess of par value XXX
II.

Treasury stock
Reacquire for issued stock, but not retired;
A contra SE account, normal debit balance;
Reduces both asset and SE (deduct RETAINED EARNINGS, NOT
PAID-IN CAPITAL);
Not affects common stock account.
a. Acquisition:
Treasury stock XXX
Cash
XXX

b. Disposal:
Disposal increase assets and RE, but DOES NOT affects income
statement (not a revenue)
Gain or loss is recorded in paid-in capital of treasury stock on
balance sheet, DOES NOT affect asset (stock is not an asset) and RE
Disposal MAY affects RE
i. Above cost:
Cash
XXX
Treasury stock
XXX
Paid-in capital from treasury stock XXX
ii.

III.

Below cost:
When paid-in capital from treasury stock < 0, debit RE
Cash
XXX
Paid-in capital from treasury stock XXX
(Retained earnings
XXX)
Treasury stock
XXX
Preferred stock
Advantages: receive dividends before CS & liquidation preference

 Disadvantages: do not have voting rights

May or may not have a par value
Listed first in SE section on balance sheet, before common stock
Cash
XXX
Preferred stock
XXX
Paid-in capital in excess of par value-preferred stock XXX
C. Dividend
Expressed in two ways: percentage of par/stated value:
Dividend rate x par/stated value x shares
Or a dollar amount of per share (more general)
NOT an expense or a payment obligation
Dividends in arrears is NOT a (current) liability until declared and
becomes dividend payable to balance sheet
Dividends decrease/deduct both assets and SE (RE statement)
a. Cash dividends
i. Declaration:
Cash dividend XXX (or recorded as retained earnings)
Dividends payable XXX (a liability)
ii. Record:
Get dividend as long as purchasing stock before record date, or as
long as sell after record date;
NO ENTRY.
iii. Payment:
Reduces both current assets and current liabilities, no effect on SE
Dividends payable XXX
Cash
XXX
b. Dividend preference of preferred stock
Common stockholders DO NOT receive dividends while any preferred
stock is in arrears
i. Cumulative
Total dividends
= preferred stockholders (in arrears + current years) +
common stockholders
ii.
Non-cumulative
Total dividends

= preferred
stockholders

stockholders

current

years

common

c. Stock dividends
NO CASH IN OR OUT, ONLY changes composition of SE; total SE
DOES NOT CHANGE:
Debit dividends (decrease retained earnings) and credit CS (increase
paid-in capital);
Number of shares owned increases, but ownership interest (% of
company owned) keeps the same;
Value assigned is the fair MARKET VALUE per share;
Dividends distribution is a SE account, NOT a liability.
i. Declaration:
Stock dividends (RE)
XXX (according to market value per
share)
Common stock dividends distributable XXX (according to
par value; NOT a liability)
Paid-in capital in excess of par value XXX
ii.

Issuance:
Common stock dividends distributable XXX
Common stock
XXX
d. Stock split
NO effect on SE (paid-in capital & RE)NO journal entries:
Par or stated value decrease, number of shares increase
e. Compare stock dividend and stock split (p532)

D. Retained earnings
a. Deficit: net loss (negative RE), deducts in SE section on balance sheet
b. Factors increase and decrease RE (p536)

CH-12 Investment
A. Investment Reason
1. Excess cash
2. To generate earning
3. To meet strategic goals
B. Debt Investment

1. Acquisition bond (cost principle)

Debt investments XXX
Cash
XXX
2. Receive interest
I. Payment (not incurred)
Cash
XXX
Interest Revenue XXX
(Brokerage fee included)
II. Receivable
Interest receivable XXX
Interest Revenue
XXX
Interest receivable>>>balance sheet>>>current asset
Interest revenue>>>income statement>>>other revenues and gains
III. Payment (incurred)
Cash
XXX
Interest receivable XXX
3. Sell bonds
Cash
XXX
(Loss on sale of debt investment XXX)
Debt investment
XXX
(Gain on sale of debt investment
XXX)
(Brokerage fee included)
C. Stock
1. Depend on the extent of investor's influence over the operating and
financial affairs of the issuing corporation(investee)
2. Degree of Contorl-presumed influence on investee-accounting
guidelines
I. 0%-20%-insignificant-cost method
i. Acquisition stock-cost method
Stock investment/trading securities XXX
Cash
XXX
(Brokerage fee included)
ii. Gain Dividend
Cash
XXX
Dividend revenue

XXX

iii. Evaluation (0%-20% ONLY)

a. Trading security (short-term investments)
1. Frequent buying and selling
2. Report trading securities at fair value
3. Report changes from cost as part of net income as unrealized gains
or losses (value-cost)
4. Balance sheet: Fair value; Income statement: gain/loss
(Gain)
Market Adjustment-TRADING XXX
Unrealized gain-INCOME
XXX
(Loss)
Unrealized loss-INCOME
XXX
Market Adjustment-TRADING XXX
iv. Sell stock
Cash
XXX
(Loss on sale of stock investment XXX)
Stock investments/trading securities XXX
(Gain on sale of stock investment
XXX)
(Brokerage fee included in the cost when sold, p587)
b. Available-for-sale security
Market Adjustment-A-F-S
XXX
Unrealized gain or loss-EQUITY
XXX
(Loss)
Unrealized gain or loss-EQUITY
XXX
Market Adjustment-A-F-S
XXX
(Adjustment)
p582 DO IT
c. Held-to-maturity security (BOND ONLY)
II. 20%-50%-significant-equity method (long-term investment)
1. Investee company becomes part of investor company(cost->equity)
Stock investment
XXX
Cash
XXX
(if loss, stop equity method)
2. Dividend reduces investment
Cash
XXX
Stock investments
XXX
3. Investment revenue increases investment

Stock investments
XXX
Revenue from investment XXX
III. 50%+-controlling-consolidated financial statements
D. Short-term investments, under current asset (p582)
1. Readily marketable
2. Intent to convert
3. Otherwise, long-term>>>separate section under asset on balance
sheet
E. Presentation
1. Income statement-Other revenue/expense & gain/loss:
Interest revenue
Dividend revenue (0-20%)
Investment revenue (net income, 20%-50% ONLY)
Unrealized revenue-income (trading)
Gain/loss on sale of investment
2. Balance sheet-Stockerholder's equity:
Unrealized revenue-equity (A-F-S)
3. Balance sheet-Asset-Investment:
Dividend revenue(20%-50%), reduce investment
Market adjustment(contra investment)
4. Investment:
0-20%,Trading & short-term A-S-F:
- Short-term investments, at fair value
0-20%, long-term A-S-F:
- Investments in stock of less than 20% owned companies, at fair
value
20%-50%:
- Investments in stock of 20-50% owned company, at fair equity

CH-13 State of Cash Flows

Activity classification(P616) & adjustment(accrual>>>cash basis,
indirect)
A. Operating-Determination of net income, MOST IMPORTANT
-Revenue & expense
-GAINING dividend & interest
i. Noncash expense
Bed debts expense, depreciation/depletion expense, amortization

ii. Gain & losses on sale, investment & finance

Gain
Loss & write off (account receivable +
iii. Current asset & liability
a. Current asset

Inventoryprepaidaccount/interest/dividend/note receivable, allowance f

or doubtful accounts (contra asset)
b. Liability +
Account/tax payableunearned revenue
B. Investing-Investment & long-term assets
-Purchase / disposing OTHER firms' CS & bonds
-Lending / collecting money/loan
-Purchasing / selling property, plant & equipment
Land, Building, Equipment ( book value +gain/-loss>>>cash basis), investment

(ISSUANCE OF BONDS/CS PAYABLE FOR PPE>>>NONCASH!!!)

C. Financing-Long-term liability & SE
-Obtaining/repaying cash/loan
-Selling/requiring CS/TS & issuing/redeeming bonds of MY firm
-PAYING dividends & interests

Treasury stock, dividend PAYMENT(retained earning-net income)

Common stock, interest/note/dividend/bond payable +
D. Noncash-EXCHANGE sth for sth
-Issuing Bonds/common stock for sth
-Conversion of bonds in common stock
-Exchange asset for intangible asset
-Investment revenue (20-50%) through issuance of CS/bond