Category Archives: Financial Accounting Review

Equity Transactions

STOCKHOLDERS’ EQUITY

Accounting for Equity Transactions
1. Issuance of common stock: Par value portion is recorded in common stock. Price over the par value is recorded in the “Paid-in capital in excess of par value of common stock.”

2. Issuance of preferred stock: Par value portion is recorded in preferred stock. Price over the par value is recorded in the “Paid-in capital in excess of par value of preferred stock.”

3. Purchase of treasury stock: Purchase amount is recorded as treasury stock on debit side. Treasury stock is not recorded as an asset, but subtracted from stockholders’ equity.

4. Declaration of cash dividends: When cash dividends are declared, cash dividends (or retained earnings) are recorded on debit side. Dividends payable is recorded on credit side.

5. Payment of cash dividends: Debit to dividends payable and credit to cash.

6. The effects of cash dividends: Decrease in retained earnings, total stockholders’ equity and cash.

7. Stock dividends: Current shareholders receive additional shares in proportion to the number of shares held.

8. Stock dividends increase common stock and total paid-in capital. Stock dividends decrease retained earnings. Stock dividends do not change total stockholders’ equity.

9. 2-for-1 stock split: Number of shares doubles and the par value becomes half.

10. Stock split increases the number of shares outstanding, decreases par value. Stock split does not change paid-in capital, retained earnings and total stockholders’ equity.


 

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Liabilities

CURRENT LIABILITIES

Accounting for Current Liabilities
1. Current liabilities: Liabilities that are expected to be paid within a year or normal operating cycle, whichever is longer.
2. Accounts payable, notes payable, salaries payable, interest payable, current maturities of long-term debt.
3. Sales taxes payable, payroll taxes payable, income taxes payable.

Classification of Liabilities
1. Current liabilities
2. Non-current liabilities

NONCURRENT LIABILITIES

Accounting for Bonds Payable
1. Types of bonds: Callable bonds, convertible bonds, secured bonds.
2. Issuance of bonds at face value (at 100): No discount or premium on bonds payable is recorded.
3. Issuance of bonds at a discount (e.g. at 95): Discount on bonds payable is recorded on debit side.
4. Issuance of bonds at a premium (e.g. at 105): Premium on bonds payable is recorded on credit side.
5. Amortization of discount and premium on bonds payable: Straight-line method, effective interest method
6. Retirement of bonds payable


 

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Noncurrent assets

Noncurrent assets are the assets that are expected to be converted into cash after a year or normal operating cycle, whichever is longer.
Noncurrent assets include property, plant and equipment (PP&E), intangible assets and long-term investments.
Property, plant and equipment include land, buildings, equipment, vehicles, furniture and fixtures.
Intangible assets do not have physical substance, so that they are not tangible. Intangible assets include goodwill, patents, trademarks and copyrights.
Noncurrent assets also include long-term investment assets that are expected to be converted into cash after a year.

Property, Plant and Equipment (PP&E)
In the property, plant and equipment section, the following assets are presented:
1. Land
2. Buildings
3. Machinery and equipment
4. Vehicles
5. Furniture and fixtures

[Note]
Accumulated depreciation is a contra-asset account that is subtracted from property, plant and equipment.

Intangible Assets
The following assets are the examples of intangible assets:
1. Goodwill
2. Patents
3. Trademarks
4. Copyrights

Long-term Investments
If the entity has the intention to keep the investments in debt and equity securities for more than a year from the end of the reporting period, such investments are presented as long-term investments.

Review Questions
1. What is a noncurrent asset?
Noncurrent asset is an asset that is expected to be converted into cash after a year.

2. What are the examples of noncurrent assets?
Property, plant and equipment, intangible assets and long-term investments are the examples of noncurrent assets.

3. What are the examples of property, plant and equipment?
Land, buildings, machinery, equipment, vehicle, furniture and fixtures are the examples of property, plant equipment.

4. What are the examples of intangible assets?
Goodwill, patents, trademarks and copyrights are the examples of intangible assets.

 

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