notes_6_17_18.docxnotes_6_17_18.docx, Study notes of Principles of Accounting

Download notes_6_17_18.docxnotes_6_17_18.docx and more Study notes Principles of Accounting in PDF only on Docsity! Chapter 10 • Bond- an issuer’s written promise to pay an amount identified as the par value of the bond with interest • Par value of a bond/ face amount/ face value- amount paid at a bond’s maturity date • Three main advantages of bond financing 1. Bonds do not affect owner control 2. Interest on bonds is tax deductible 3. Bonds can increase return on equity • Return on equity increases when the expected rate of return on the new assets is higher than the rate of interest expense on the debt financing • Two main disadvantages of bond financing 1. Bonds can decrease return on equity 2. Bonds require payment of both periodic interest and the par value at maturity • Authorization of bond issuances includes the number of bonds authorized, their par value, and the contract interest rate • Bond indenture- the legal document identifying the rights and obligations of both the bondholders and the issuer; the legal contract between the issuer and bondholders • Bond certificate- includes specifics such as the issuer’s name, the par value, the contract interest rate, and the maturity date; evidence of a company’s debt • Contract rate- interest rate specified in the indenture • Market rate- the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level • When contract rate and market rate are equal, a bond sells at par value • Premium- market % < stated % Discount- market % > stated % • Total bond interest expense = total amount repaid – amount borrowed • Bond carrying value= par value – discount • Straight-line bond amortization- allocates an equal portion of the total bond interest expense to each interest period • Bond discounts are actually added interest expenses • Note selling price= face value – discount + premium • Note carrying value = face value – unamortized discount + unamortized premium • Installment note- an obligation requiring a series of payments to the lender • Note principal = total payment – interest expense • Mortgage- a legal agreement that helps protect a lender if a borrower fails to make required payments on notes or bonds • Secure bonds- have specific assets of the issuer pledged as collateral • Unsecured bonds- backed by the issuer’s general credit standing • Large stock dividend- a distribution of more than 25% of previously outstanding shares • Stock split- the distribution of additional shares to stockholders according to their percent ownership • Preferred stock- stock with priority over common stock in one or more areas • Cumulative preferred stock- gives its owners a right to be paid both the current and all prior periods’ unpaid dividends before any dividend is paid to common stockholders • Dividend in arrears- unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock • Noncumulative preferred stock- preferred stock on which the right to receive dividends is lost for any period when dividends are not declared • A liability for a dividend does not exist until directors declare a dividend • Nonparticipating preferred stock- limits dividends to a maximum amount each year • Participating preferred stock- allows preferred stockholders to share with common stockholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock • Convertible preferred stock- gives holders the option to exchange their preferred shares for common shares at a specified rate • Callable preferred stock- gives the issuing corporation the right to purchase/retire stock from its holders at specified future prices and dates • Call price- the amount paid to call and retire a preferred share, set when the stock is issued • Financial leverage- the use of preferred stock to increase return to common stockholders • Reasons corporations acquire shares of their own stock 1. To use their shares to acquire another corporation 2. To purchase shares to avoid a hostile takeover of the company 3. To reissue them to employees as compensation 4. To maintain a strong market for their stock or to show management confidence in the current price • Treasure stock- a corporation’s reacquired shares; can be sold at less than par without a liability; reduces assets and equity by equal amounts • Restricted retained earnings- retained earnings not available for dividends because of legal or contractual limitations • Appropriated retained earnings- retained earnings separately reported to inform stockholders of funding needs • Prior period adjustments- corrections of material errors in prior period financial statements • Changes in accounting estimates- change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods • Statement of stockholder’s equity- lists the beginning and ending balances of key equity accounts and describes the changes that occur during the period • Stock options- rights to purchase common stock at a fixed price over a specified period • Earnings per share- the amount of income earned per share of a company’s outstanding common stock • Basic earnings per share = (net income – preferred dividends) / weighted- average common shares outstanding • Price-earnings ratio= market value (price) per share / earnings per share • Dividend yield- shows the annual amount of cash dividends distributed to common shares relative to their market value • Dividend yield= annual cash dividends per share/ market value per share • Book value per common share- the amount of equity applicable to common shares on a per share basis • Book value per common share = stockholders’ equity to applicable common shares / number of common shares outstanding • Book value per preferred share = stockholders’ equity applicable to preferred shares / number of preferred shares outstanding • Equity applicable to preferred shares = preferred share’s call price (or par value) + cumulative dividends in arrears