Chapter 9
____ financing includes borrowing money from creditors while _____ financing includes obtaining investments from stockholders
Debt, Equity
Capitalization occurs when...
A company records an expense as an asset on the balance sheet
Method of depreciation based on actual usage
Activity-based method
What benefits do corporations offer? What are the disadvantages?
Pros: Voting, dividends, limited liability, share of distribution of assets, raise capital/transfer ownership
Cons: Limited liability, more paperwork
How is interest on bonds calculated?
Interest = face value * stated rate * time
_____ and _____ have indefinite legal lives
Trademarks and goodwill
Depreciation expense under the straight-line method (equation)
= (Cost-residual value)/useful life
How does paid-in capital differ from earned capital?
Paid-in is put into the company by outside investors, earned in created by earning profit and increasing retained earnings
Free!
Yay!
Which of the following expenses would be capitalized?
a. Purchase of new equipment
b. Setup costs for new equipment
c. Routine maintenance on equipment
d. Replacement of a key component of the equipment
A, B, D
True or false: land is depreciated if the owner has a probable estimate of when they will sell the land
False
Costco has 5 million shares of authorized stock. At the beginning of the year, 2 million shares were unissued and 1 million were treasury stock. During the year, Costco issued and sold 500,000 previously unissued shares and repurchased 200,000 shares. Calculate the number of issued, treasury, and unissued shares at the end of the year.
UI = 2 - .5m = 1.5m
I = 2 + .5m - .2m = 2.3m
TS = 1 + .2m = 1.2m
On November 1, 2020, Fred borrowed $15,000 from the bank to purchase a fleet of riding lawnmowers. He signed an 8%, 8-month note for the amount borrowed plus accrued interest due June 30, 2021. The accounting in year 1 was done properly including necessary accruals. Prepare the journal entries to record the interest and principal payments on April 30, Year 2.
DR Interest Expense 600
DR Interest Payable 200
DR Note Payable 15,000
CR Cash 15, 800
Costco acquires Sam's Club for $1 million. Sam's Club has FMV net assets of $600,000. Calculate goodwill.
400,000
Costco's equipment is depreciated using the activity-based method. They purchased the equipment for $200,000 and expect to receive $30,000 at disposal. It is estimated that they will get 10,000 uses out of the equipment. In year 2, equipment was used 400 times. Record depreciation.
($170k)/10k = $17/unit, 400*17 = $6.8k
DR Depreciation Expense 6.8k, CR AD 6.8k
Costco declares a $30,000 cash dividend on 11/1. Payment is made on 11/31. Record the journal entry on the declaration date.
If there are 3,000 shares of 5%, $10 par preferred stock, how much of the cash dividend will be paid to common stockholders?
11/1 DR Dividends 30k, CR Dividends Payable 30k
300 shares * $10 par * 5% = 1,500 to preferred stockholders, $28.5k to common shareholders
on January 1, 2026, California Coasters decides to raise money for the development of its new roller coaster by issuing $100,000 of bonds, paying interest of 7% each year. The bonds are due in 10 years, with interest paid quarterly on March 31, June 30, September 30, and December 31 each year. Record the journal entries for bond issuance and the first semiannual payment.
1/1/26: DR Cash 100k, CR Bonds Payable 100k
3/31/26: DR Interest Expense 1,750, CR Cash 1,750
Costco purchased land and a building for $400,000 cash. The appraised values are the building ($325,000) and the land ($175,000). Record the journal entry for the basket purchase.
325/500 = .65 * 400k
175/500 - .35 * 400k
DR Building 260k
DR Land 140k
CR Cash 400k
Costco, Inc decides to sell one of their warehouses. The warehouse has FMV of 150,000 and BV of 90,000. It was originally purchased for 200,000 and was sold for 80,000. Record the gain or loss.
DR Cash 80,000
DR AD 110,000
DR Loss 10,000
CR Building 200,000
(AD = Purchase price - BV)
Costco repurchases 100 shares of its $1 par stock for $20/share. The following month, Costco resells 80 shares for $12/share. Record the journal entries for the repurchase and resale of stock.
Repurchase: DR Treasury Stock 2k, CR Cash 2k
Resale: DR Cash 960 ($12*80), DR APIC 640, CR Treasury Stock 1,600 ($20*80)