Liabilities and Stockholders’ Equity Chapter 8

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.

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

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)

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

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

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

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

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

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

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

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

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

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

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

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

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

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