Exam3 Study Guide

1. Authorized shares > Issued Shares> Outstanding shares

Issued shares
Outstanding shares = # of Issued shares - # of treasury shares
2. Stockholders’ equity = Paid-in capital (=# shares issued x issue price) + Retained earnings –
Treasury stock (=# treasury shares x purchase price)
3. Stock issuance for cash journal entry
Dr. Cash
Cr. Common stock (= par value x # shares issued)
Paid-in capital in excess of par-common stock
3. Issuing common stock for services or non-cash assets: Fair value more clearly determinable
Dr. Service Expense or non-cash asset (Fair value)
Cr. Common stock
Paid-in capital in excess of par-common stock
4. Treasury stock – Contra stockholders’ equity, Cost method
(1) Purchase (ex: 4,000 shares at $ 8 per share)
Dr. Treasury stock 32,000
Cr. Cash 32,000
(2) Sale of treasury stock above cost (ex: Sale of 1,000 shares of TS for $10/share)
Dr. Cash ($10 X 1,000) 10,000
Cr. Treasury stock (=$8 X1,000) 8,000
Paid-in capital from treasury stock 2,000
(3) Sale of treasury stock below cost (ex: Sale of 3,000 shares of T/S for $7/share)
Dr. Cash (=$7 X 3,000) 21,000
Paid-in capital from treasury stock 2,000
Retained earnings 1,000

Cr. Treasury stock (=$8 X 3,000) 24,000

5. Cash dividends
(1) Declaration date (Retained earnings: Liability: )
Dr. Cash dividends
Cr. Dividends payable
(2) Record date: No entry
(3) Payment date (Liability: Assets:
Dr. Dividends payable
Cr. Cash
6. Stock Dividends: Small stock dividend (less than 20%,25% : Fair market value), Large stock
dividend (par value) EX)
(1) Declaration date
Dr. Stock dividends
Cr. Common stock dividends distributable (par value)
Paid-in capital in excess of par- Common stock
(2) Distribution date
Dr. Common stock dividends distributable
Cr. Common stock
*Effects of stock dividend: Total stockholders’ equity Composition
Retained earnings Paid-in capital
Outstanding shares
7. Stock split: Issuance of additional share to stockholders
(ex: 50,000 shares 10$ par value per share 2 for 1 stock split)
No entry
*Effects of stock split: Total stockholders’ equity, Par value, Outstanding shares
(EX) PSH Co. began business in 2022.
a. Jan 5: Issued 100,000 shares of its $1 par value common stock at $5 per share for cash.
b. Feb 12: purchased 10,000 shares of its own common stock at a cost of $6 per share
(Treasury stock).
c. Mar 28: sold for $7 per share 2,000 of the 10,000 shares of its treasury stock
previously acquired at $6 per share.
d. Dec 31: Declared a cash dividend of $0.25 per share to the common stockholders.
(Hint: Outstanding shares)
e. Cash dividend has been paid in January 10, 2023.

REQUIRED – Part A: Prepare the necessary journal entries to record transactions below. You may
abbreviate “Paid in Capital” as “PIC” and omit journal explanations.

Account Title Dr. Cr.

a. Cash ( =$5 x 100,000) 500,000

Common stock (=$1 x 100,000) 100,000

PIC-in excess of par-C/S 400,000

b. Treasury Stock (= $6 x 10,000) 60,000

Cash 60,000

c. Cash (= $7 x 2,000) 14,000

Treasury stock (=$6 x 2,000) 12,000

PIC from treasury stock 2,000

d. Cash dividends (=$0.25 x 92,000) 23,000

Dividends payable 23,000

e. Dividends payable 23,000

Cash 23,000
* Types of Bonds payable: Secured bonds (EX: Mortgage Bonds), Unsecured Bonds (Debenture
bonds)
8. Bond price quotation: (ex: 95: 95% of face amount 105: 105% of face amount)
9. Interest rates and Bond Prices: Face value, Discount, Premium
Bond contractual interest rate vs. Market interest rate
10. Issuing Bonds at a discount
Ex) Issue 100,000 of bonds 5 year 8% bonds 97 on January 1, 2021. The bonds pay interest
annually.

Account titles Debit Credit

Cash (= 97% x100,000) 97,000
Discount on Bonds payable 3,000
Bonds payable 100,000

Total cost of borrowing? = Total cash interest payment + Discount

= 100,000 x 8% x 5 + 3,000 = $43,000
11. Issuing Bonds at a premium
Ex) Issue 100,000 of bonds 5 year 8% bonds 103 on January 1, 2021. The bonds pay interest
annually.

Account titles Debit Credit

Cash (=103% x 100,000) 103,000
Bonds payable 100,000
Premium on bonds payable 3,000
Total cost of borrowing? = Total cash interest payment – Premium
= 100,000 x 8% x 5 - 3,000 = $37,000
12. Redeeming Bonds before maturity (Gain or loss on redemption)
EX) Retires bonds at 103. Carrying value of the bonds at the redemption date is $100,400 (Face
amount: $100,000) (1) Cash paid: 103% of 100,000 = $103,000
(2) Carrying (Book) value = 100,400
(3) Diff: Loss of 2,600
13. Format of the Statement of Cash Flows
14. Classification of Cash Flows: Operating, Investing, Financing
EX: Interest received, Interest paid, Dividend received: Cash flows from operating activities
Dividend paid: Cash flows from financing activities
EX) Jean’s Vegetable Market had the following transactions during 2021:
a. Issued $50,000 of par value common stock for cash.
b. Repaid a 6 year note payable in the amount of $22,000.
c. Acquired land by issuing common stock of par value $50,000.
d. Declared and paid a cash dividend of $7,000.
e. Sold a long-term investment (cost $3,000) for cash of $6,000.
f. Acquired an investment in IBM stock for cash of $10,000.
(1) Net cash provided by financing activities?
50,000-22,000 -7,000 = $21,000
(2) Net cash provided by investing activities?
6,000 – 10,000 = (4,000)
15. Net cash provided by operating activities using indirect method
EX) Net income $200,000
Depreciation expense 60,000
Dividends paid 90,000
Loss on sale of land 15,000
Decrease in accounts receivable 30,000
Decrease in accounts payable 45,000

*Cash flows from Operating Activities

Net income 200,000
Adjustments:
Depreciation expense (+) 60,000
Loss on sale of land (+) 15,000
Decrease in accounts receivable (+) 30,000
Decrease in accounts payable (-) (45,000)
Net cash provided by operating activities 260,000