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

2. 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

3. 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)

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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