The Jolly Corporation has $400,000 of 6 percent bonds outstanding. There is $20,000 of unamortized discount remaining on these bonds after the July 1, 2011, semiannual interest payment. The bonds are convertible at the rate of 20 shares of $5 par value common stock for each $1,000 bond. On July 1, 2011, bondholders presented $300,000 of the bonds for conversion.
1. Is there a gain or loss on conversion, and if so, how much is it?
2. How many shares of common stock are issued in exchange for the bonds?
3. In dollar amounts, how does this transaction affect the total liabilities and the total stockholders' equity of the company? In your answer, show the effects on four accounts.

• The accounting disclosure requirements in non-U.S. countries and IFRS are not as comprehensive as those in the United
States, partially because the information needs of the major capital providers (i.e., banks) are satisfied in a relatively straightforward way—through personal contact and direct visits .
• A second way in which the heavy reliance on debt affects non-
U.S. accounting systems is that the required disclosures and regulations tend to be designed either to protect the creditor or to help in the assessment of solvency.

• Improved credit ratings can lead to lower borrowing costs
• Management has strong incentive to manage the balance sheet by using
“off-balance-sheet financing” i.e., operating leases

How to Finance the Corporation?
• Borrow
– Notes, Bonds, Leases
– The debt holders are legally entitled to repayment of their principal and interest claims
• Issue Equity
– Common and Preferred Stock
– The shareholders, as owners, have voting rights, limited liability, and a residual interest in the corporate assets
• Retained Earnings

Debt
Formal legal contract
Fixed maturity date
Fixed periodic payments
Security in case of default
No voice in management
Interest expense deductible
Equity
No legal contract
No fixed maturity date
Discretionary dividends
Residual asset interest
Voting rights - common
Dividends not deductible
Double taxation

Interested Party
Investors /
Creditors
Management
Accountants/
Auditors
Debt
Lower investment risk
Fixed cash receipts
Contractual future cash payments
Effects on credit rating
Interest is tax deductible
Liabilities section of the balance sheet
Income statement effects from debt
Equity
Higher investment risk
Variable cash receipts
Dividends are discretionary
Effects of dilution/ takeover
Dividends are not tax deductible
Shareholders’ equity of the balance sheet
No income statement effects from equity

Preferred Stock Common Stock
Advantages Preference over common in liquidation
Stated dividend
Preference over common in dividend payout
Disadvantages Subordinate to debt in liquidation
Stated dividend can be skipped
Debt or Equity?
No voting rights (versus common)
Components of both
Usually classified as equity
Voting Rights
Rights to residual profits
(after preferred)
Last in liquidation
No guaranteed return

Prepare entries for each event:
1. Authorized to issue: (a) 100,000 shares of $100 par value , 8% preferred stock (b) 150,000 shares of no-par, $5 preferred stock; and (c) 250,000 shares of $5 par value common stock.
2. Issued 10,000 shares of $5 par value common stock for $30 per share.

Prepare entries for each event:
3. Issued 25,000 shares of the $100 par value preferred stock for $150 per share.
4. Issued 50,000 shares of no-par preferred stock for $50 each.

• Created when a company buys back shares of its own common stock.
• Reasons for buyback?
• The debit balance account called “Treasury Stock” is reported in shareholders’ equity as a contra account to SE.
– Note: Treasury Stock is not an asset.
• The stock remains issued, but is no longer outstanding.
– does not have voting rights
– cannot receive cash dividends
• May be reissued (to the market or to employees) or retired.
• No gains or losses are ever recognized from these equity transactions.

Company was incorporated on 4.1.12 and was authorized to issue 100,000 shares of $5 par value common stock and 10,000 shares of $8, no-par preferred stock. a. T accounts:
1.
Issued 25,000 shares of common stock in exchange for $500,000 cash.
2.
3.
4.
5.
Issued 5,000 shares of preferred stock in exchange for $60,000 cash.
Purchased 3,000 common shares for $15 per share and held them in the treasury.
Sold 1,000 treasury shares for $18 per share.
Issued 1,000 treasury shares to executives who exercised stock options for a reduced price of $5 per share.
b. Assume company generated $500,000 in net income in 2012 and did not declare any dividends.
Prepare the stockholders’ equity section of the balance sheet as of
12.31.2012.

12.31.2011 Shareholders’ section
Common stock
Additional paid-in capital
Retained earnings
Total shareholders’ equity
$80,000
10,000
60,000
$150,000
During 2012, the company entered into the following transactions:
1.
Purchased 1,000 shares of treasury stock for $60 per share.
2.
As part of a compensation package, reissued half of the treasury shares to executives who exercised stock options for $20 per share.
3.
Reissued the remainder of the treasury stock on the open market for $66 per share.
a.
Prepare the shareholders’ equity section of the balance sheet as of
12.31.2012. Company generated
$20,000 in net income and did not declare dividends during 2012.

12.31.2011 Shareholders’ section
Common stock
Additional paid-in capital
Retained earnings
$80,000
10,000
60,000
Total shareholders’ equity $150,000 b. What portion of the additional paid-in capital account is attributed to treasury stock transactions?

2012 2011
Preferred stock (no par)
Common stock ($1 par value)
Additional paid-in capital:
Common stock
Treasury stock
Less Treasury stock
Provide the journal entries for the following: a. Issuance of preferred stock during 2012.
$ 700
1,000
40
10
130
$ 400
900
20
---
150 b. Issuance of common stock during 2012.
c. Sale of treasury stock during
2012.

Cash Dividends and Stock Dividends: 3 Dates

When Tandy (Radio Shack) Corporation announced a 2:1 stock split, it had 97 million shares outstanding, trading at
$100 per share.
a. Estimate the number of shares outstanding and market price per share immediately after the split.
b. Estimate the company’s overall market value, and explain whether you expect the company’s overall market value to change due to the split.

For each transaction indicate which
SHE accounts are affected, whether these accounts increase or decrease, and the transaction’s effect on total
SHE.
1.
Issue common stock above par for cash.
2.
Declare a 3-for-1 stock split.
3.
Repurchase 10,000 shares of own stock for cash.
4.
Declare and issue a stock dividend.
Market>Par
5.
Reissue 1,000 treasury shares for
$75. Treasury stock had been previously acquired for $60.
6.
Pay cash dividend that had been previously declared.
7.
Generate net income of $250,000.

The company paid the following total cash dividends since 2008:
2008:$0; 2009:$30,000;
2010:$80,000; 2011:$15,000; and
2012:$40,000.
• Preferred stock-10,000 shares authorized, 5,000 issued, cumulative, nonparticipating,
$5, $10 par.
• Common stock-500,000 shares authorized, 200,000 shares issued, 50,000 held in treasury, no par.
a. Compute the dividends paid to the preferred and common shareholders for each year since
2008. b. Compute the balance of dividends in arrears at yearend. c. Should dividends in arrears be considered a liability?

SHE as of 12.31.2012:
Common stock (10,000 shares issued @$6 par)
Additional paid in capital-common stock
Retained earnings
Less: Treasury stock (2,000 @ $12)
Total shareholders’ equity
$ 60,000
100,000
60,000
(24,000)
$196,000
Prepare journal entries for the following independent transactions: a. Declare and distribute a 2% stock dividend when the market price of the stock was $70.
b. Declare a 3:2 stock split.
c.
Declare a 10% stock dividend when the market price of the stock was $80.
d. Declare a 2:1 stock split.

Preferred stock (9%, $100 par value)
Common stock ($10 par value, 750,000 authorized,
90,000 issued, and 5,000 held in treasury
Additional paid in capital-preferred
Additional paid in capital-common
Retained earnings
Less: Treasury stock
Total shareholders’ equity
2012
$200,000
900,000
150,000
465,000
575,000
(110,000)
$2,180,000
2011
$110,000
750,000
35,000
298,000
495,000
$1,688,000 a.
How many shares of preferred stock were issued during 2012? What was the average issue price?
b.
How many shares of common stock were issued during 2012? What was the average issue price?
c.
Prepare the entry to record the repurchase of the company’s own stock during
2012? What was the average repurchase price?

Sample Co. Shareholders’ Equity
Common stock, $1 par value, 500,000 shares authorized, 80,000 shares issued, and
75,000 shares outstanding
Common stock dividends distributable
Preferred stock, $100 par value, 1,000 shares authorized, 100 shares issued and outstanding
Paid in capital on common
Paid in capital on preferred
$ 20,000
3,000
Paid in capital on treasury stock 2,000
Retained earnings:
Unappropriated
Appropriated
$18,000
4,000
Less: Treasury stock, 5,000 shares (at cost)
Less: Other comprehensive income items
(unrealized loss on AFS securities)
Total Shareholders’ Equity
$ 80,000
2,000
10,000
25,000
22,000
(6,000)
(2,000)
$131,000

Retained Earnings
We will be expanding the basic retained earnings formula in this chapter. Now the Statement of Retained Earnings will include the following:
RE, beginning (unadjusted)
Add/Subtract: Prior period adjustment
RE, beginning (restated)
Add: net income
Less dividends:
Cash dividends-common
Cash dividends - preferred
Stock dividends
Property dividends
Less: Adjustment for TS transactions
Appropriation of RE
RE, ending xx xx xx xx xx xx xx xx xx xx xx

• “Other Comprehensive Income” includes certain direct equity adjustments that are not part of the current income statement, but which may have an eventual effect on income.
• We already discussed one of these direct equity adjustments when reviewing Available-
unrealized gains/losses from revaluation to market are shown in SE (as “other comprehensive income”) rather than on the income statement.

• Granted to employees as part of their compensation.
• Generally not transferable and must either be exercised prior to expiration date or allowed to expire as worthless on expiration day. May have a vesting period.
• When granted, company expenses options for their fair value on grant date [may be a complicated calculation].
• Depending on the type of option granted, the employee may or may not be taxed when granted or exercised.
• Gives employees an incentive to behave in ways that will boost the company's stock price. If the company's stock market price rises above the exercise price stated in the option, the employee could exercise the option, pay the exercise price and would be issued ordinary shares in the company.

Leases, and Enduring
Accounting
Wonders

• Improved credit ratings can lead to lower borrowing costs
• Management has strong incentive to manage the balance sheet by using
“off-balance-sheet financing” i.e., operating leases

• FASB issued SFAS No. 13, which requires certain leases to be recorded as capital leases.
– Capital leases record the leased asset as a capital asset, and reflect the present value of the related payment contract as a liability.
• Requirements of SFAS No. 13 - record as capital lease for the lessee if any one of the following is present in the lease:
– Title transfers at the end of the lease period,
– The lease contains a bargain purchase option,
– The lease life is at least 75% of the useful life of the asset, or
– The lessee pays for at least 90% of the fair market value of the lease.

Company leased equipment on 1.1.11 for an annual lease payment of $30,000.
Assume the lease term is 5 years and the life of the equipment is also 5 years. If the lease is treated as a capital lease, the FMV of the equipment is $119,781. The straight line depreciation method is used to depreciate fixed assets. The effective interest rate on the lease is 8%.
a.
Compute rent expense for 2011-2015 if lease is treated as an operating lease.
b.
Compute the amounts that would complete the table:
Date BS Value Leasehold
Obligation
Interest
Expense
Depreciation
Expense
Total
Expense
1.1.2011
12.31.2011
12.31.2012
12.31.2013
12.31.2014
12.31.2015
c. Compare total expense over 5 years for the two methods and comment.

Annual Report Treasure Hunt-Find the 6 Key Numbers
• Revenue
• Income (Loss)
• Cash Flow from (used by) Operating Activities
• Assets
• Liabilities
• Stockholders’ Equity
Prove the Accounting Equation
Can you tell the type of business?
Service, Retail, Manufacturing

OPERATING ASSET MANAGEMENT : Ability to utilize current assets and liabilities in a way that supports growth in revenues with minimum investment.
• Measures the time it takes from cash invested in inventory to cash received from customers versus the time it takes to pay suppliers. (The time required to make or buy products, finance the products, and to sell & collect for them.)
+ Days Receivables
Operating Cycle
- Days Payables
Cash Conversion Cycle
If Operating Cycle is > Days Payables then Financing Gap
If Operating Cycle is < Days Payables then able to Self-finance

Inventory:
Inventory Turnover = COGS/Average inventory
Average inventory = (Beginning + Ending)/2
Days Inventory on Hand = 365 days/Inventory turnover
Accounts Receivable:
A/R Turnover=Net Credit Sales/Average A/R
Average A/R= (Beginning + Ending)/2
Days Sales= 365/A/R Turnover
Operating Cycle= Days Inventory on Hand + Days Sales

Accounts Payable:
Accounts Payable Turnover = COGS/Average A/P
Average A/P = (Beginning + Ending)/2
Days Payables = 365 days/Accounts Payable Turnover
Financing Gap?
Operating Cycle - Days Payables= Financing Gap…
BORROW SHORT TERM
OR
Days Payables – Operating Cycle= No Gap…
Free Financing from Suppliers

The SEC mandated the use of XBRL for public company reporting and other reporting applications:
Public Company Reporting – all public companies must file in XBRL format; companies with worldwide public float greater than $5 billion to comply starting with period ending June
2009; all other large accelerated filers to comply starting with period ending June 2010; all other public companies comply with period ending June 2011.
Risk Return Summary Portion of Mutual Fund Prospectus – mutual funds must begin publishing the risk return summary portion of their prospectuses in XBRL format starting
January 1, 2011.
Credit Rating Agencies – must report ratings actions (initial rating, upgrades, downgrades, etc.) in XBRL format.
The SEC and XBRL US have resources available to help public company preparers get educated, identify tools and resources to tag their financials and create their own XBRLformatted financials.
http://xbrl.us/Learn/Pages/FactSheet.aspx

XBRL ( eXtensible Business Reporting Language ) is a freely available and global standard for exchanging business information.
XBRL is a technology language for the electronic communication of business and financial data and is being implemented worldwide. XBRL-formatted documents enable greater efficiency, improved accuracy and reliability as well as cost savings to those involved in supplying and using financial and business information data.
What XBRL can do:
XBRL allows for the creation of interactive, intelligent data.
Each piece of business information has detailed descriptive and contextual information wrapped around it, so that the data becomes machine-readable and can be automatically processed and analyzed.
XBRL allows business reporting information to be reused and repurposed.
A financial or business report created once can be used to create many documents in different formats--HTML, ASCII text, Microsoft Word or Excel—with no loss of accuracy or integrity.
XBRL adds value to every step of an organization’s business information reporting.
The entire reporting chain of business information -- from data collection through internal reporting and external reporting -- will be made more efficient and accurate and will contain more useful data.
XBRL enhances the ability to compare information from one organization or entity to another , because XBRL lays out a common set of definitions by which all organizations tag their data.
XBRL allows for unique reporting situations , because it can be extended by a single reporting entity by adding special elements that may be needed to best represent that company.

• The Global Reporting Initiative (GRI) is a nonprofit organization that promotes economic sustainability. It produces one of the world's most prevalent standards for sustainability reporting — also known as ecological footprint reporting, environmental social governance
(ESG) reporting, triple bottom line (TBL) reporting, and corporate social responsibility
(CSR) reporting. GRI seeks to make sustainability reporting by all organizations as routine as, and comparable to, financial reporting.
• A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance.

http://www.responsibility.ups.com/Sustainability

https://corporate.homedepot.com/CorporateRespo nsibility/Environment/Documents/Sustainability__
Brochure_pages.pdf

http://www.coca-colacompany.com/sustainability/performance-highlights

Telling the story of business by converting events into numbers
• Resources
• Unit of Measure
• Valuation
• Responsibilities
• Capital
• Cost-Benefits
• Exchange Transactions
• A=L+OE
• Rise of Corporations
• Going Concern & Business Entity
• Net Income, Contributed Capital,
Retained Earnings, & Dividends
• Depreciation, Amortization, & Depletion
• Financial reporting & Auditing
• Product & Service Costing
Accounting kept the books (locked the data up) and interpreted the data for others.

Assumptions
• Economic Entity
(identified and measured)
• Fiscal Period
(periodicity)
• Going Concern
(life indefinite)
• Stable Dollar
(across time)
Valuation
 Input Market (purchase)-original, replacement
 Output Market (sell)-present, fair market
Measurement Principles
• Objectivity
(Verifiable and documented)
• Matching and Revenue
Recognition
(costs & benefits)
• Consistency
(methods same across time)
• Two Exceptions
– Materiality –little to no effect on user decisions
– Conservatism -understate assets, overstate liabilities, accelerate losses, and delay gains (due to legal liability)
Financial Statements:
• Original (Historic) Cost: Land, LT Invt
– Lower of Cost or Market: Inventory
– Net Realizable Value: net AR
– Net Book Value: PP&E, Intang.
• Face: Cash, Current liabilities
• Fair Market Value (sales price): ST
Invt
• Present Value: LT NR & LTL
IFRS v. US GAAP
 Principles based
 Rules based

1. The company has completed a significant portion of the production and sales efforts.
2. The amount of revenue can be objectively measured.
3. The company has incurred the majority of costs, and remaining costs can be reasonably estimated, and
4. Cash collection is reasonably assured.

Transformative Technologies
• Now data unlocked with 24/7 access to anyone via Internet & Cloud.
• Massive quantities of financial and nonfinancial data.
• Making sense of business to an audiencewhat info important?
• Point of view of who’s telling the storysingle entity or helicopter?
• Accountants still can be the storytellers by bringing meaning to data through the process of:
Understanding the Concepts first
Then applying the best Accounting Tools
To analyze and make Business Decisions
Resources-Events-Agents