Equity

Question 1

Under the equity method, cash dividends are what?

Answer 1

Liquidating dividends and therefore NOT revenue.
They reduce the investment.

Question 2

for statement of cash flows, current assets and current liabilities are:

Answer 2

Operating section

Question 3

for statement of cash flows, long term assets are

Answer 3

investing section

Question 4

for statement of cash flows, long term liabilities are

Answer 4

financing section

Question 5

for statement of cash flows, stockholder equity is

Answer 5

financing section

Question 6

state interest rates

Answer 6

is the same as nominal interest rate and coupon rate

Question 7

bond payable

Answer 7

are long term liability

Question 8

par value

Answer 8

face value of bond - if no amountis given, assume $1000

Question 9

stated interest rate is used to calculate

Answer 9

interest payment to bondholder- short term liability

Question 10

market interest rate is the same as

Answer 10

effective interest rate

Question 11

market interest rate is used to calculate

Answer 11

interst expense FOR INCOME STATEMENT

Question 12

zero coupon bonds

Answer 12

do not pay interest over the life of thebond, pay a lump sum at the maturity as the bond is sold at a discount

Question 13

if market rate = coupon rate,

Answer 13

bonds are issued at face value

Question 14

if market rate > coupon rate

Answer 14

bonds issued at discount (market more desirable than bonds)

Question 15

if market rate < coupon rate

Answer 15

bonds issued at a premium (bonds more desirable than market)

Question 16

use the Present Value of $1

Answer 16

for future, 1 time payment

Question 17

present value to annuity of $1

Answer 17

used for future (multiple) periodic future payments

Question 18

an ordinary annuity

Answer 18

payment us at the end of the period

Question 19

annuity due

Answer 19

payment is at the start if the period - don’t use for bonds

Question 20

steps in bond issuance

Answer 20

Step 1: calculate # of periods
Step 2: Calculate periodic market rate
Step 3: Calculate periodic coupon rate
Step 4: Calculate periodic coupon payment (interest payment)
Step 5: Calcualte PV of the principal payment
Step 6: Calculate PV of interest payments

Question 21

do NOT use coupon rate to determine the PV factor

Answer 21

ALWAYS use the periodic market rate (years times # of payments)

Question 22

bonds sold at a discount or a premium need to be

Answer 22

amortized over the life of the bond (debt instrument)

Question 23

amortization spreads the discount or premium over

Answer 23

the remaining life of the bond

Question 24

when is straight-line amortization not allowed

Answer 24

1. zero coupon bonds
2. long term bonds greater than 20 years

Question 25

bonds issued at a discount, the carrying value

Answer 25

increases every period

Question 26

in bond amortization, interest EXPENSE

Answer 26

varies every period (carrying value times periodic interest rate)

Question 27

in bond amortization interest PAYMENT

Answer 27

constant every period (par value times periodic coupon rate)

Question 28

in bond amortization, the amortization amount equals

Answer 28

interest expense - interest payment

Question 29

true or false:
retained earnings, with regard to treasury stock, can NEVER be credited

Answer 29

true

Question 30

true or false; reissuing treasury stock can increase either retained earnings or net income

Answer 30

false - a corp is not allowed to record a gain or loss from the sale or purchase of its own stock

Question 31

gem of the question:
STOCK DIVIDENDS

Answer 31

1. owner equity distributed to stockholders
2. no resulting reduction in stockholder equity
3. Reduces RE
4. Increases common stock
5. If FMV > than common stock, Increase APIC
6. Small stock dividend (<20-25%), use FMV

Question 32

dividends are payable and RE is reduced on DECLARATION date

Answer 32

dividends are EXPENSED on payment date

Question 33

shareholder equity:
treasury stock

Answer 33

1. issued BUT not outstanding
2. dividends aren’t pd from treasury stock

Question 34

shareholder equity:
dividends

Answer 34

1. declaration date: DR RE, CR div PAYABLE
2. pmnt date: DR div expense, CR cash