ACCT322 - Intermediate Accounting II, Study Guide for Test 4, Chapters 14-15
You may bring a 3” by 5" card with as much info crammed on both sides as possible; (or a onesided 3”x 10” or 6”x 5” piece of paper).
Chapter 14
1. Know the following: (a) the types of bonds (e.g. debenture, investment-grade vs. junk, term
vs. serial, deep discount/zero-coupon bonds, registered vs. bearer, etc.); (b) how the quality of
bonds is rated and how the rating affects return; (c) the various names for the two different
kinds of interest rates on bonds (fixed/stated/contractual vs. market/effective/YTM).
2. Understand how to calculate the price of a bond using present value tables and/or financial
calculators.
3. Be able to read a bond quote (e.g. what does a bond price of 99 mean?)
4. Be able to explain why a bond might sell for more or less than face value and why bond prices
move inversely to interest rates.
5. Review how to create amortization tables for premium or discount bonds using either the
effective interest rate method or the straight-line method. Which of these methods is always
GAAP? Under what circumstances is the straight-line method GAAP?
6. Be able to prepare journal entries for the life cycle of bonds, including: (a) sale of bonds (note
additional entry for accrued interest when a sale occurs between interest dates); (b)
amortization of discount/premium; (c) payment of interest; (d) accrual of interest at year-end;
(e) retirement of bonds (note: for early retirement of bonds, record amortization and interest
first).
7. Know how bond issue costs are handled.
8. Review how notes payable issued at face value are accounted for differently from those not
issued at face value. For notes not issued at face value, be able to prepare entries for both
interest-bearing and non-interest bearing notes.
9. What does imputing an interest rate mean and why would one have to do this?
10. What information must be disclosed in the notes to the financial statements concerning longterm debt?
11. How does iGAAP and U.S. GAAP differ when it comes to accounting and reporting of
liabilities?
Chapter 15
12. Who gives corporations the right to exist by granting them a charter? Are laws more attractive
in some states than in others?
13. If you own one share of common stock, what are your basic rights as an owner?
14. What is the preemptive right and why has it been eliminated by many corporations?
15. Do all of the following terms refer to the same thing? Premium on common stock, additional
paid-in capital (APIC), paid-in capital in excess of par value, and contributed capital in excess
of par value?
16. What is the legal significance of par value?
17. What must occur before dividends can be declared?
18. What is the difference between paid-in capital and earned capital? Is a similar distinction
made in a partnership and sole proprietorship?
19. Be able to prepare entries to record the issuance of: (a) par value stock; (b) no-par stock; (c)
stated value stock; (d) common and preferred stock issued for lump-sum; (e) stock issued for
non-cash assets.
20. What is subscribed common stock? How did Enron mis-account for subscribed stock? Why
is a receivable for stock not considered a current asset?
21. Be able to distinguish between the number of shares authorized, issued, and outstanding. Do
outstanding shares include treasury shares?
22. How should stock issue costs be handled?
23. Be able to intelligently discuss the reasons that corporations buy back their own stock. Are all
these reasons legitimate business reasons? Are all these reasons ethically sound in your
opinion?
24. Know how to account for treasury stock under the cost method. Note that the par value
method is a theoretically superior method but is used very little. Consequently, you do not
need to learn the par value method.
25. Review the characteristics of preferred stock. How is it more similar to debt than equity?
26. Why do most companies not pay dividends in amounts equal to legally available retained
earnings?
27. Review the various types of dividends and the related journal entries on the date of declaration
and payment. All dividends are paid out of retained earnings (RE is debited) except for what
kind of dividend? A liability is credited at the declaration date for all dividends except for
what kind?
28. Review the accounting for stock dividends. Why are stock dividends called a “capitalization
of retained earnings?” How and why does the accounting for small stock dividends differ
from that for large stock dividends? What effect does a stock dividend have on market price
per share, par value per share, and number of shares outstanding? Why should an investor not
get overly excited about a stock dividend?
29. Why are stock splits popular even though nothing of economic consequence has occurred?
What effect does a stock split have on the market price, par value, and number of shares
outstanding? From an investor’s perspective, how does a stock dividend differ from a stock
split?
30. Be able to allocate dividends between preferred and common stock, including when various
preferences exist, such as cumulative and participating.
31. For what reasons might retained earnings be restricted?
32. How does iGAAp and U.S. GAAP differ when it comes to accounting and reporting for
stockholders’ equity?
33. Know how each stock and bond transaction covered in these chapters affects the balance sheet
accounts (increase, decrease, no effect, etc.).
Make sure to review your homework, as similar problems will appear on the test. Good luck!