1. Electronic Presentation by Douglas Cloud Pepperdine University
Survey of Accounting
Electronic Presentation by Douglas Cloud Pepperdine University
Carl S.Warren

2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. Chapter 8
Liabilities and Stockholders’ Equity

4. After studying this chapter, you should be able to:
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

5. 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

6. 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.

7. Learning Objective 1
Describe how businesses finance their operations.

8. Long-term liabilities
Financing Operations
Debt
Current liabilities
Long-term liabilities
Equity
Owners’ investments

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

10. 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.

11. 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.

12. Payment of Income Taxes
At year-end, the actual taxable income and the related taxes are determined. If additional taxes are owed, the additional liability is recorded.
Most corporations are required to pay estimated federal income taxes in four installments throughout the year.

13. 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.

14. Allocation of Income Taxes
A corporation has $300,000 of income before income taxes, a 40% tax rate, and $100,000 of taxable income.

15. Allocation of Income Taxes
In the second year, $48,000 of the deferred tax reverses and becomes due.

16. Some past transactions will result in liabilities if certain events occur in the future. These potential liabilities are called contingent liabilities.

17. Recording Payroll
Employers are required to withhold federal income tax from each employee based on the withholding table and information provided by the employee’s 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.

18. 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.

19. Liability for Employer Payroll Taxes
FICA Tax
Employers are required to contribute to the social security and Medicare programs for each employee.

20. Liability for Employer Payroll Taxes
FICA Tax
Also, the employer must match the employee’s contribution to each program.

21. Liability for Employer Payroll Taxes
Federal Unemployment Compensation Tax
FUTA provides for temporary payments to those who become unemployed as a result of layoffs due to economic causes beyond their control.

22. 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.

23. 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.

24. Employees’ Fringe Benefits
Fringe benefits include such items as vacation time off, medical benefits, and pension plans.

25. Retirement and savings plans Social security and Medicare
Benefit Dollars as a Percent of Total
24%
Vacation and sick pay
25%
Medical
12%
Other
18%
Retirement and savings plans
21%
Social security and Medicare
Source: U.S. Chamber of Commerce

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

27. A bond is simply a form of long-term interest-bearing note
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.

28. A corporation that issues bonds enters into a contract, called a bond indenture or trust indenture with the bondholders.

29. 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.

30. 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).

31. 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.

32. Bonds Issued at Face Amount
At the maturity date, the payment of the principal of $100,000 is recorded.

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

34. Sources of Paid-In Capital
Authorized
Issued
Outstanding
Number of Shares

35. 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.

36. 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

37. 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.

38. 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.

39. Cumulative Preferred Stock
On March 7, 2005, the board of directors declares dividends of $22,000.

40. Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2005
Total dividends paid, $22,000
$4,000
2003
(In arrears)
$4,000
$10,000
$4,000
2004
(In arrears)
$4,000
$4,000
2005
(Current dividend)
$4,000
Preferred Stock
Common Stock

41. Premium on Stock
Caldwell Company issues 2,000 shares of $1 par common stock for cash at $55.

42. 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.

43. Learning Objective 5
Describe and illustrate the accounting for cash and stock dividends.

44. 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

45. Accounting for Cash Dividends
There are three important dates relating to dividends.

46. Accounting for Cash Dividends
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend.

47. Accounting for Cash Dividends
Date of Declaration

48. Accounting for Cash Dividends
The second important date is the date of record. For Hiber Corporation, this would be December 10.

49. Accounting for Cash Dividends
On this date, ownership of shares determines who receives the dividend. No entry is required.

50. Accounting for Cash Dividends
The third important date is the date of payment. On January 2, Hiber issues dividend checks. 2

51. Accounting for Cash Dividends
Date of Payment

52. Accounting for Stock Dividends
A distribution of shares to stockholders is called a stock dividend.

53. 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.

54. Learning Objective 6
Describe the effect of stock splits on the financial statements.

55. 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.

56. Stock Splits 20 shares, $20 par AFTER 5-1 STOCK SPLIT
BEFORE STOCK SPLIT
4 shares, $100 par
$400 total par value
$400 total par value

57. Learning Objective 7
Describe financial statement reporting of liabilities and stockholders’ equity.

58. Current Maturities of Long-Term Debt
Long-term liabilities that mature within the coming year must be classified as current liabilities.

59. Most corporations report changes in retained earnings by preparing a separate “retained earnings” column in the statement of stockholders’ equity.

60. Make a note to examine Exhibit 3 in the textbook
Make a note to examine Exhibit 3 in the textbook. It shows a statement of stockholders’ equity.

61. Learning Objective 8
Prepare an income statement reporting earnings per share data.

62. Earnings per Common Share
No preferred stock outstanding
EPCS =
Net income
Number of common shares outstanding
Preferred stock outstanding
EPCS =
Net income – Preferred stock dividend
Number of common shares outstanding

63. Alternative Financing Plans – $800,000 Earnings
Plan 1 Plan 2 Plan 3
12 % bonds — — $2,000,000
Preferred 9% stock, $50 par — $2,000,000 1,000,000
Common stock, $10 par $4,000,000 2,000,000 1,000,000
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
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

64. 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.

65. Number of times interest charges are earned
Income before income tax + Interest Expense
Interest Expense
SBC Communications, Inc.
$12,888 million + $1,592 million
$1,592 million
= 9.1

66. Number of times interest charges are earned
The creditors of SBC have their interest receipts protected by over nine times earnings.

67. Ratio of Total Liabilities to Total Assets
SBC Communications, Inc.
$68,188 million
$98,651 million
= 69%

68. Ratio of Total Liabilities to Total Assets
SBC’s debt at 69% of total assets is slightly higher than other companies in the industry.

69. Chapter 8
The End