Electronic Presentation by Douglas Cloud Pepperdine University

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Survey of Accounting
Electronic Presentation by Douglas Cloud
Pepperdine University
Carl S.Warren
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Task Force Clip Art included in this electronic
presentation is used with the permission of New
Vision Technology of Nepean Ontario, Canada.
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Chapter 8
Liabilities and Stockholders Equity
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Learning Objectives
1. Describe how businesses finance their
operations. 2. Describe notes payable, and
illustrate current liabilities, taxes,
contingencies, and payroll. 3. Describe and
illustrate the financing of operations through
issuance of bonds. 4. Describe and illustrate the
financing of operations through issuance of
stock.
After studying this chapter, you should be able
to
Continued
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Learning Objectives
5. Describe and illustrate the accounting for
cash and stock dividends. 6. Describe the effects
of stock splits on the financial
statements. 7. Describe financial statement
reporting of liabilities and stockholders
equity. 8. Analyze the impact of debt or equity
financing on earnings per share.
Continued
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Learning Objectives
9. Analyze and interpret long-term liability
position with the number of times interest
charges are earned and total liabilities to total
asset ratio.
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Learning Objective
1
Describe how businesses finance their operations.
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Financing Operations
Debt Current liabilities Long-term liabilities
Equity Owners investments
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Learning Objective
2
Describe and illustrate current liabilities,
notes payable, taxes, contingencies, and payroll.
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Short-Term Notes Payable
A firm issues a 90-day, 12 note for 1,000,
dated August 1, 2004 to Murray Co. for a 1,000
overdue account.
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Short-Term Notes Payable
When the note matures, the liability is cancelled
and the payment, including interest (1,000 x 12
x 90/360) is recorded.
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Payment of Income Taxes
Most corporations are required to pay estimated
federal income taxes in four installments
throughout the year.
At year-end, the actual taxable income and the
related taxes are determined. If additional
taxes are owed, the additional liability is
recorded.
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Temporary Differences

• Revenues or gains are taxed after they are
  reported in the income statement.
• Expenses or losses are deducted in determining
  taxable income after they are reported in the
  income statement.
• Revenues and gains are taxed before they are
  reported in the income statement.
• Expenses or losses are deducted in determining
  taxable income before they are reported in the
  income statement.

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Allocation of Income Taxes
A corporation has 300,000 of income before
income taxes, a 40 tax rate, and 100,000 of
taxable income.
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Allocation of Income Taxes
In the second year, 48,000 of the deferred tax
reverses and becomes due.
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Some past transactions will result in liabilities
if certain events occur in the future. These
potential liabilities are called contingent
liabilities.
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Recording Payroll

• Employers are required to withhold federal income
  tax from each employee based on the withholding
  table and information provided by the employees
  W-4 form.
• Federal income tax and FICA tax must be withheld
  from the pay of each employee.
• Deductions for other purposes may be withheld by
  mutual agreement.

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Payroll and Payroll Taxes
McDermott Co. had a gross payroll of 13,800 for
the week ending April 11. Assume that the FICA
tax was 7.5 of the gross payroll, and that
federal and state withholding was 1,655 and
280, respectively.
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Liability for Employer Payroll Taxes
FICA Tax
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Liability for Employer Payroll Taxes
FICA Tax
Also, the employer must match the employees
contribution to each program.
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Liability for Employer Payroll Taxes
Federal Unemployment Compensation Tax
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Liability for Employer Payroll Taxes
State Unemployment Compensation Tax
SUTA also provides for payments to unemployed
workers.
Both FUTA and SUTA are, for the most part, levied
upon employers only.
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Recording and Paying Payroll Taxes
On April 11, the payroll information for
McDermott Co. indicates that the amount of FICA
tax that the company must pay to match the
employees deduction is 1,035. The SUTA and
FUTA taxes are 145 and 25 respectively.
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Employees Fringe Benefits
Fringe benefits include such items as vacation
time off, medical benefits, and pension plans.
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Benefit Dollars as a Percent of Total
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Learning Objective
3
Describe and illustrate the financing of
operations through issuance of bonds.
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A bond is simply a form of long-term
interest-bearing note. It requires periodic
interest payments, and the face amount must be
repaid at maturity.
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A corporation that issues bonds enters into a
contract, called a bond indenture or trust
indenture with the bondholders.
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The price that buyers are willing to pay for the
bonds depends upon

• The face amount of the bonds, which is the amount
  due at the maturity date.
• The periodic interest to be paid on the bonds.
• The market rate of interest.

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The percentage or rate of interest that is
expressed as a percentage of the face amount of
the bond is the contract rate or coupon rate.
If the market rate is higher than the contract
rate, the bonds will sell at a discount (or less
than their face amount).
The market rate or effective rate of interest is
determined by transactions between buyers and
sellers of similar bonds.
If the market rate is lower than the contract
rate, the bonds will sell at a premium (or more
than their face amount).
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Bonds Issued at Face Amount
On January 1, 2004, a corporation issues for cash
100,000 of 12, five-year bonds, with interest
of 6,000 payable semiannually.
Every six months after the bonds have been
issued, interest payments of 6,000 are made.
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Bonds Issued at Face Amount
At the maturity date, the payment of the
principal of 100,000 is recorded.
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Learning Objective
4
Describe and illustrate the financing of
operations through issuance of stock.
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Sources of Paid-In Capital
Authorized
Issued
Outstanding
Number of Shares
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Major Rights that Accompany Ownership of a Share
of Stock
1. The right to vote in matters concerning the
corporation. 2. The right to share in
distribution of earnings. 3. The right to share
in assets on liquidation.
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Classes of Stockholders
The two primary classes of paid-in capital are
common stock and preferred stock. The primary
attractiveness of preferred stocks is that they
are preferred over common as to dividends.
Preferred stockholder
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Classes of Stockholders

• Common Stock the basic ownership of stock with
  rights to vote in election of directors, share in
  distribution of earnings, and purchase additional
  shares.
• Preferred Stock A class of stock with
  preferential rights over common stock in payment
  of dividends and company liquidation.

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Cumulative Preferred Stock
So, preferred dividends are two years in arrears.
Assume 1,000 shares of 4 cumulative preferred
stock and 4,000 shares of common stock. No
dividends have been paid in the preceding two
years.
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Cumulative Preferred Stock
On March 7, 2005, the board of directors declares
dividends of 22,000.
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Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2005
Total dividends paid, 22,000
4,000
4,000
4,000
Preferred Stock
Common Stock
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Premium on Stock
Caldwell Company issues 2,000 shares of 1 par
common stock for cash at 55.
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No-Par Common Stock
Also, no-par stock may be assigned a stated value
per share. The stated value is recorded like a
par value.
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Learning Objective
5
Describe and illustrate the accounting for cash
and stock dividends.
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Accounting for Cash Dividends

• Cash dividends are declared and paid on shares
  outstanding with three conditions
• 1. Sufficient retained earnings

2. Sufficient cash
3. Formal action by the board of directors
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Accounting for Cash Dividends
There are three important dates relating to
dividends.
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Accounting for Cash Dividends
First is the date of declaration. Assume that on
December 1, Hiber Corporation declares a 42,500
dividend.
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Accounting for Cash Dividends
Date of Declaration
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Accounting for Cash Dividends
The second important date is the date of record.
For Hiber Corporation, this would be December 10.

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Accounting for Cash Dividends
On this date, ownership of shares determines who
receives the dividend. No entry is required.
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Accounting for Cash Dividends
The third important date is the date of payment.
On January 2, Hiber issues dividend checks.
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Accounting for Cash Dividends
Date of Payment
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Accounting for Stock Dividends
A distribution of shares to stockholders is
called a stock dividend.
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Treasury Stock Transactions
Occasionally, a corporation buys back its own
stock for the purpose of later reissuing it.
This stock is referred to as treasury stock.
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Learning Objective
6
Describe the effect of stock splits on the
financial statements.
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Stock Splits
A corporation sometimes reduces the par or stated
value of its common stock and issues a
proportionate number of additional shares. This
is called a stock split.
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Stock Splits
BEFORE STOCK SPLIT
4 shares, 100 par
400 total par value
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Learning Objective
7
Describe financial statement reporting of
liabilities and stockholders equity.
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Current Maturities of Long-Term Debt
Long-term liabilities that mature within the
coming year must be classified as current
liabilities.
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Most corporations report changes in retained
earnings by preparing a separate retained
earnings column in the statement of
stockholders equity.
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Make a note to examine Exhibit 3 in the textbook.
It shows a statement of stockholders equity.
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Learning Objective
8
Prepare an income statement reporting earnings
per share data.
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Earnings per Common Share
No preferred stock outstanding
Preferred stock outstanding
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Alternative Financing Plans 800,000 Earnings
Plan 1 Plan 2 Plan 3 12 bonds 2,000,000 P
referred 9 stock, 50 par 2,000,000 1,000,000
Common stock, 10 par 4,000,000 2,000,000 1,000,0
00 Total 4,000,000 4,000,000 4,000,000 Earnings
before interest and income tax 800,000
800,000 800,000 Deduct interest on
bonds 240,000 Income before income tax
800,000 800,000 560,000 Deduct income
tax 320,000 320,000 224,000 Net income
480,000 480,000 336,000 Dividends on
preferred stock 180,000 90,000 Available for
dividends 480,000 300,000 246,000 Shares
of common stock ??400,000 ??200,000 ??100,000

• Earnings per share 1.20 1.50 2.46

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Learning Objective
9
Analyze and interpret long-term liability
position with the number of times interest
charges are earned and total liabilities to total
asset ratio.
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Number of times interest charges are earned
SBC Communications, Inc.
9.1
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Number of times interest charges are earned
The creditors of SBC have their interest receipts
protected by over nine times earnings.
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Ratio of Total Liabilities to Total Assets
SBC Communications, Inc.
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Ratio of Total Liabilities to Total Assets
SBCs debt at 69 of total assets is slightly
higher than other companies in the industry.
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Chapter 8
The End
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