Chapter 15 Recording and Evaluating Capital Resource Process Activities: Financing McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Three Things to Remember Regarding Stockholders’ Equity Keep contributed capital (capital stock transactions) separate from earnings (retained earnings) Keep legal capital separate from additional paid-in capital. Treasury stock is a deduction from stockholders’ equity. 15-2

What are the Stockholders’ Equity Accounts Used? Common stock Number of common shares issued * amount representing legal capital (par or stated value, if applicable) Preferred stock Number of preferred shares issued * amount representing legal capital (par or stated value, if applicable)

Stockholders’ Equity Accounts Continued Treasury stock Number of shares repurchased * purchase price per share (contra equity account—debit balance) Paid-in capital in excess of par (stated value) common (or preferred) Number of shares issued * (assets received per share – legal capital per share)

Stockholders’ Equity Accounts Continued Paid-in capital from Treasury Stock Transactions Number of shares reissued * (assets received per share reissued – price paid when treasury stock was repurchased) Retained earnings Past net incomes minus past net losses minus past dividends declared

Two Things to Remember Regarding Long-term Notes Payable Record a note payable at its face value. Report a note payable at its carrying value (less discounts; plus premiums) 15-6

What are the Events Associated with Periodic Payment Notes? Initial borrowing Cash increases by present value of the note Installment note payable increases by the face value of the note Periodic payment Interest expense increases by the interest incurred Installment note payable decreases by the principal paid Cash decreases by the amount of the periodic payment

Events Associated with Periodic Payment Notes Continued NOTE: Many installment notes are monthly payments, so the following may not be needed. Adjusting entry (if applicable) Interest expense increases by the interest incurred Interest payable increases by the interest incurred Subsequent entry (if applicable) Interest payable decreases by the obligation being met Installment note payable decreases by the principal payment Cash decreases by the amount of the periodic payment

What are the Events Associated with Lump-sum Payment Notes? Initial borrowing Cash increases by the present value of the note Discount on notes payable increases by the difference between the present value and the face value of the note Noninterest-bearing notes payable increases by the face value of the note Periodic payment none

Events Associated with Lump-sum Payment Notes Continued Adjusting entry Interest expense increases by the interest incurred Discount on notes payable decreases by the interest incurred Retirement Noninterest-bearing note payable decreases by the face value of the note Cash decreases by the face value of the note

What are the Events Associated with Bonds? Initial borrowing Cash increases by the present value of the bond issue Discount or premium on bond payable increases by the difference between the present value and the face value of the bond issue Bond payable increases by the face value of the bond issue

Events Associated with Bonds Continued Periodic payment Interest expense increases by the interest incurred Discount or premium is reduced by the difference between the interest incurred (expense) and the interest paid Cash decreases by the amount of the interest paid

Events Associated with Bonds Continued Adjusting entry Interest expense increases by the interest incurred Discount or premium is reduced by the difference between the interest incurred (expense) and the interest owed Interest payable increases by the amount of interest owed

Events Associated with Bonds Continued Subsequent entry Interest expense increases by the interest incurred Interest payable decreases by the obligation being met Discount or premium is reduced by the difference between the interest incurred (expense) and the additional interest owed Cash decreases by the amount of the interest paid

Events Associated with Bonds Continued Retirement Bonds payable decreases by the face value of the bond issue Cash decreases by the face value of the bond issue What is the entry on 4-1-Y2? DR CR 4-1 Interest expense 5,850.85 Interest payable 6,000.00 Premium on bonds payable 149.15 Cash 12,000.00