Liabilities and Stockholders’ Equity

1. Liabilities andStockholders’ Equity Chapter 8

2. Liabilities • Debts owed to others • Current liabilities • Will be repaid within one year or less using current assets or performing services • Accounts payable, wages payable, unearned revenue, income taxes payable, short-term notes payable, etc. • Long-term liabilities • Will not be repaid within one year, or will be refinanced with a long-term liability • Long-term notes payable, mortgages payable, bonds payable, etc.

3. Liabilities • Notes payable • Borrowing money, issued to pay an account payable, financing an asset purchase • Interest-bearing • Interest may be paid at maturity, or periodically during the life of the note • Interest must be accrued if it is unpaid at the end of the year • Record a new liability (interest payable) and record the interest expense

4. Liabilities • Deferred income taxes • Income tax rules are different than accounting rules • Income before taxes may be different than the income reported to the government • Income tax expense is calculated based on the accounting income before taxes • Income tax payable is calculated based on the income tax rules • The difference is the amount of a deferred expense (liability) or deferred revenue (asset)

5. Liabilities • Contingent liabilities • May or may not occur • The occurrence depends on some future event • Warranty repairs, lawsuits, employee benefits, etc. • Record if it is probable that a liability has been incurred and its value can be reasonably estimated • Otherwise, just disclose in the footnotes to the statements

6. Liabilities • Bonds • Large, long-term liability divided into smaller parts for sale to numerous investors • Life is typically 5 to 40 years, sometimes longer • Interest is usually paid semiannually or annually • Trade on a bond market

7. Liabilities • Initial selling price depends on the interest rate paid on the bond (stated rate) and the rate demanded by the market (market rate) • If the stated rate = market rate • Bond will sell for its face value • If the stated rate < market rate • Bond will sell at a discount • If the stated rate > market rate • Bond will sell at a premium

8. Stock • Represents the investors’ ownership of the company • Amount received from investors is called contributed capital or paid in capital • Par value • A value assigned to shares when the company charter is granted • Stock may be sold for par value or for more than par value • Additional paid in capital

9. Stock • Authorized shares • Number of shares the company may sell • Issued shares • Number of shares the company has sold to investors • Outstanding shares • Number of shares currently held by stockholders’ • Difference between issued and outstanding shares is the number of shares repurchased by the company

10. Stock • Classes of stock • Common • Represents ownership and voting rights • All corporations must issue some common stock • Preferred • Usually gives up voting rights in exchange for some other rights or preferences • Guaranteed dividends • Preference on liquidation • Call value • Conversion feature

11. Stock • Issuance of stock • For cash • Stock must be sold for at least its par value • Amount related to the par value of the shares is recorded in the stock account • Any amounts above the par value are recorded in an additional paid in capital account (APIC) • If the stock does not have a par value, the entire amount is recorded in the stock account

12. Stock • Non-cash issuance • Stock may also be issued for assets other than cash • Either the value of the stock, or the value of the asset received determines the value of the transaction • Accounting is the same as if cash was received except that an asset other than cash is received

13. Stock • Treasury stock • Stock reacquired by the company • Several reasons • To support price of remaining outstanding shares • To use as employee compensation • To use as currency in acquisitions of other assets or companies • To remove an undesirable stockholder • To resell if the market price increases

14. Stock • Accounting for treasury stock • When reacquired • Cash is decreased • Treasury stock (an equity account) is recorded with a negative value • Reduces stockholders’ equity • If reissued at a later date • Cash is increased • Treasury stock is reduced by the price paid when it was acquired • Any additional amounts received increase APIC from treasury stock transactions

15. Stock • Dividends • Return of profits to the stockholders • Not an expense • Important dates • Declaration date • Date of record • Payment date

16. Stock • Cash dividends • Cash is decreased • Retained earnings is decreased • Stock dividends • Additional shares of stock are distributed instead of cash • Retained earnings is decreased • Stock account and APIC are increased

17. Stock • Stock split • Used to reduce the market price of the stock so that it can be traded more easily • Outstanding shares are replaced with a larger number of new shares • Effect on par value and market price is proportional to the size of the stock split • A 4-for-1 stock split will result in 4 times as many shares, but each will have only ¼ of the original par value and market value • No effect on total stockholders’ equity or total market value of the stock

18. Earnings Per Share • Calculation of how much profit (or loss) the company earned for each share of common stock outstanding • Required disclosure on all income statements • Calculation Net income – amounts due to preferred shareholders Number of common shares outstanding