Class Notes (839,092)
Canada (511,185)
Management (767)
MGT120H5 (39)

Chapter 8 and 9 lecture notes.docx

7 Pages

Course Code
Catherine Seguin

This preview shows pages 1 and half of page 2. Sign up to view the full 7 pages of the document.
Chapter 8 : liabilities Question #1 On January 1, a company signs a $200,000, 4% 9-month note. Interest is due at maturity. What is the adjusting entry required if the company prepares financial statements on June 30. a. Dr Interest expense; Cr Interest payable, $4,000 b. Dr Interest expense; Cr Cash, $4,000 c. Dr Interest expense; Cr Cash, $6,000 d. Dr Interest expense; Cr Interest payable, $6,000 Soln: 200,000 x 4% x (6/12) = 4000 Question # 2 ABC Company is authorized to issue 50,000 common shares. On Feb. 10, 2009, it issued 10,000 shares at $11 per share. The journal entry to record these facts include a a. Credit to Common shares $110,000 b. Credit to Common shares $550,000 c. Debit to Cash for $550,000 d. Debit to Common shares for $110,000 Soln: 10,000 x 11 = 110,000 Question # 3 XYZ Corporation has 10,000, $2 cumulative preferred shares and 110,000 common shares outstanding. At the beginning of the current year, preferred dividends were 3 years in arrears. The Board of Directors wants to pay a $1.50 cash dividend on each outstanding common share. To accomplish this, what TOTAL amount of dividends must they declare? a. $225,000 b. $165,000 c. $245,000 solution: 10,000 x $2 = 20,000 x 3 years in arrears = 60,000 + 20,000 (current) = 80,000 (amt earned by preffered shareholders) 110,000 CS x 150 = 165000 Therefore 165000+80000 = 245000 Total amt of dividends they must declare Chapter 8 : liabilities Current and Long-Term Liabilities • liabilities are debts • borrowing is one way a company finances its operations • liabilities are classified as current or long-term Learning Objective 1 Account for current liabilities and contingent liabilities. Current liabilities are obligations due within one year or within the company’s normal operating cycle if it is longer Examples: accounts payable, short-term notes payable, taxes payable, current portion of long- term debt, accrued expenses, unearned revenue, etc. Current Liabilities That Must Be Estimated Estimated Warranty Payable Assume that Black & Decker made sales of $200,000 subject to product warranties Black & Decker estimates that 3% of the products it sells this year will require repair or replacement What is the estimated warranty expense? Estimated Warranty Payable $200,000 × 0.03 = $6,000 Warranty Expense 6000 Estimated Warranty Payable 6000 To accrue warranty expense Contingent Liabilities They are a potential liability that depends on a future event arising out of past events Examples: Lawsuits in progress, guarantees of a subsidiary’s debt, audit by Canada Revenue Agency These liabilities are disclosed in the notes to the financial statements (if it is likely that they will become actual liabilities). Bonds: interest bearing long term note payable Bonds are group of notes payable issued to multiple lenders called bondholders. Principle, interest rates, payment date Learning Objective 4 Understand the advantages and disadvantages of borrowing. Issuing Shares (creates no liability or interest exp) Cash xx Capital Stock (Equity) xx Issue Bonds Chapter 8 : liabilities Cash xx Bonds Payable xx Earnings Per Share (EPS) = (Net income – Preffered Stock Dividend)/(Avg # of Common Shares) • measures how much each share is earning Using Debt in Decision Making • liabilities are a popular way to finance operations • managers use ratios to determine how much credit risk it is taking • both creditors and investors worry when a company’s debt grow • there is a risk that the company cannot pay its debts as they become due • 2 ratios to determine how much credit risk the company is taking are: • Times interest earned • Debt ratio • Times Interest Earned = Operating income Interest expense • It measures the number of times that operating income can cover interest expense. • A high ratio indicates ease in paying interest expense • Debt ratio = Total liabilities Total assets • It states the proportion of a company’s assets that is financed with debt Learning Objective 5 : Report liabilities on the balance sheet. Shareholders’ Equity : Chapter 9 Learning Objective 1 : Explain the features of a corporation. Corporations are legal entities apart from their owners Public: shares are traded on stock exchange Private:shares = privately held Chapter 8 : liabilities Advantages 1. Can raise more capital than a proprietorship or partnership can 2. Continuous life 3. Ease of transferring ownership 4. Limited liability of shareholders Disadvantages Separation of ownership 2. Corporate taxation 3. Government regulation Organizing Corporation  articles of incorporations Set Bylaws Authority Structure of a Corporation: shareholders  board of directors  chief executive officer  chief operating officer Shareholder’s rights: right to sell shares, vote, dividends, liquidation, preemption Shareholders’ Equity Assets = Liabilities + Shareholders’ Equ
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.