Question & Answer

Satchel Inc. purchases 10,000 shares of its own previously issued $10 par common stock for $290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?

List possible sources of additional paid-in capital.

Where in the financial statements is preferred stock normally reported?

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

What features or rights may alter the character of preferred stock?

Discuss the propriety of showing:

(a) Treasury stock as an asset.

(b) “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.

(c) Dividends received on treasury stock as income.

For what reasons might a corporation purchase its own stock?

Explain how underwriting costs and accounting and legal fees associated with the issuance of stock should be recorded.

What are the different bases for stock valuation when assets other than cash are received for issued shares of stock?

Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.

Describe the accounting for the issuance for cash of nopar value common stock at a price in excess of the stated value of the common stock.

What is meant by par value, and what is its significance to stockholders

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.

Why is the distinction between paid-in capital and retained earnings important?

Distinguish between common and preferred stock.

Why is a preemptive right important?

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

The following article appeared in the Wall Street Journal.

Bond Markets

Giant Commonwealth Edison Issue Hits Resale Market With $70 Million Left Over new york—Commonwealth Edison Co.’s slow-selling new 9¼% bonds were tossed onto the resale market at a reduced price with about $70 million still available from the $200 million offered Thursday, dealers said.

The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about $5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.

Instructions

(a) How will the development above affect the accounting for Commonwealth Edison’s bond issue?

(b) Provide several possible explanations for the markdown and the slow sale of Commonwealth Edison’s bonds.

Instructions

Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.

(a) Compute the debt to assets and the times interest earned ratios for these two companies. Comment on the quality of these two ratios for both Coca-Cola and PepsiCo.

(b) What is the difference between the fair value and the historical cost (carrying amount) of each company’s debt at year-end 2011? Why might a difference exist in these two amounts?

(c) Both companies have debt issued in foreign countries. Speculate as to why these companies may use foreign debt to finance their operations. What risks are involved in this strategy, and how might they adjust for this risk?

Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line.

As part of the expansion plan, Wie is contemplating a borrowing on a note payable or issuance of bonds. In the past, the company has had little need for external borrowing so the management team has a number of questions concerning the accounting for these new non-current liabilities. They have asked you to conduct some research on this topic.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

(a) With respect to a decision of issuing notes or bonds, management is aware of certain costs

(e.g., printing, marketing, selling) associated with a bond issue. How will these costs affect Wie’s reported earnings in the year of issue and while the bonds are outstanding?

(b) If all goes well with the plant expansion, the financial performance of Wie Company could dramatically improve. As a result, Wie’s market rate of interest (which is currently around 12%) coulddecline. This raises the possibility of retiring or exchanging the debt, in order to get a lower borrowing  rate. How would such a debt extinguishment be accounted for?

Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and related amortization on July 1, 2014, and (c) the accrual of interest and the related amortization on December 31, 2014. (Round to the nearest dollar.)

Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2014, at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and the related amortization on July 1, 2014, and (c) the accrual of interest and the related amortization on December 31, 2014. (Round to the nearest dollar.)

Assume the bonds in IFRS14-3 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. (Round to the nearest dollar.)

On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Assume an effective-interest rate of 8%.