Survey of accounting 6e chapter 8

Liabilities and Stockholders’
Equity

Chapter
8

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Learning Objectives
After studying this chapter, you should be able to:
•

Describe how businesses finance their operations.

•

Describe and illustrate current liabilities, notes payable, taxes,
contingencies, and payroll.

•

Describe and illustrate the financing of operations through
issuance of bonds.

•

Describe and illustrate the financing of operations through
issuance of stock.

•

Describe and illustrate the accounting for cash and stock
dividends.

•

Describe the effects of stock splits on the financial statements.

•

Describe financial statement reporting of liabilities and
stockholders’ equity.

•

Analyze the impact of debt or equity financing on earnings per
share.

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Learning
Objective 1
Describe how businesses finance
their operations

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Financing Operations

Businesses must finance operations through one of
the two ways:

• Debt Financing – includes all ___________.
• Equity Financing – includes _____________
________________________.

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Learning
Objective 2
Describe and illustrate current liabilities,
notes payable, taxes, contingencies, and
payroll

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Liabilities
•
•
•
•

Debts owed to others
Current liabilities – due ________
Long-term liabilities – due _________
Some liabilities are contingent on the outcome of
future events.

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Notes Payable
• Longer and more formal than accounts payable
• Usually bear interest
• Issued to ___________ when merchandise or other
assets are purchased

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Assume that a business issues a 90-day, 6%
note for $1,000, dated August 1, 2012 to
satisfy an account payable

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Income Taxes
• Includes _________ and possibly _______
• Most corporations are required to pay federal
income taxes in _______ installments throughout
the year.

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Taxable Income vs. Income

Before Taxes
• Taxable Income – determined according _________
• Income Before Taxes – determined according to
___________________________
• Differences between the two may need to be
allocated between various financial statement
periods
Exhibit 1: Taxable Income and Income Before Taxes

_________

___________________________

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Accounting for Temporary
Differences

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Contingent Liabilities

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Payroll
• The amount paid to _______ for services they provide
during a period

• Salary – payment for ___________
• Wages – payment for ___________
• Payroll and related taxes significantly impact the net
income of most businesses

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Recording Payroll

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Payroll Taxes
Employer Taxes

Employee Taxes

• _____
• ______________
______________

• ________
• ______________
___________

Payroll taxes become a ___________ when the
related payroll is paid to employees. The ________
is relieved when the taxes are paid to the

appropriate agencies.
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Learning
Objective 3
Describe and illustrate the financing of
operations through issuance of bonds

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Bonds
• A form of _______-bearing note
• Bonds include ______ that must be paid on a
regular basis
• Bonds face value must be repaid at _____.
• Bond indenture – contract between the __________
and the __________
• A bond issue is normally divided into several
individual bonds. The most common face value is
$1,000 per bond.

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Calculating the Bond Issue
Price
• The price that buyers are willing to pay for the bonds
depends on three factors:

• The _______ of the bonds due at the maturity
date.
• The _______ to be paid on the bonds – stated
in the bond indenture. This is called the
____________.
• The market (effective) rate of interest

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Recording Bond Issuance
Assume that a business issues $100,000 of 6%, 5year bonds, with interest of $3,000 payable
semiannually. The market rate of interest at the
time the bonds are issued is 6%.
Issuance of bonds payable at face amount on January 1.

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Additional Bond Entries

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Bonds Not Issued at Face Value
• Discount on Bonds Payable

• Market rate of interest ______ contract rate
• Buyers are only willing to pay less than the

face value for the bonds
• Premium on Bonds Payable

• Market rate of interest ________ contract rate
• Buyers are willing to pay more than the face
value for the bonds

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Learning
Objective 4
Describe and illustrate the financing of
operations through issuance of stock

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Stock
• Major means of equity financing
• Shares

• Authorized – ___________
_______________________
• Issued – ______________
_______________________
• Outstanding – __________
_______________________

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Shares of Stock
• Can be issued with or without assigning a monetary
amount:

• Par: __________________
• No-par: some states might require a stated
value
• Legal Capital

• ___________ stockholder contribution
required by some states

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Stock Rights
• ________ in matters concerning the
corporation
• ________ in distributions of earnings
• ________ in assets on liquidation

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