Question

1: Where should a declared but unpaid cash dividend be reported on the balance sheet?

2:What is the primary purpose of a stock split?

3:What are the three classifications of restrictions of retained earnings, and how are such restrictions normally reported on the financial statements?

4:  If you asked your broker to purchase for you a 7% bond when the market interest rate for such bonds was 8%, would you expect to pay more or less than the face amount for the bond? Explain.

5: Where are investments in bonds that are classified as held-to-maturity securities reported on the balance sheet?

6: What has the higher present value: (a) $10,000 to be received at the end of two years, or (b) $5,000 to be received at the end of each of the next two years?

Answer 1

(1)

Declared but unpaid cash dividend:

If the cash dividends have not been paid by the end of the period, Cash Dividends

Payable will be reported on the balance sheet as a Current Liability.

(2)

The primary purpose of a stock split is to bring about a reduction in the market price per share of the stock and thus to encourage and attracts more investors to the stock due to reduce price and buy the company’s shares.

(3)  The three classifications of restrictions of retained earnings are:

(1)        Legal: State laws may require a restriction of retained earnings.

(2)        Contractual: A Corporation may enter into contracts that require restrictions of retained earnings.

(3)        Discretionary: A Corporation’s board of directors may restrict retained earnings voluntarily.

These restrictions of retained earnings are normally disclosed in the financial statements. Such disclosures are usually included in the notes to the financial statements.

(4)  Less than face amount. Because comparable investments in bonds provide a market interest rate (8%) that is greater than the rate on the bond being purchased (7%), the bond will sell at a discount as the market's means of equalizing the two interest rates.

(5)  Investments are classify as held to maturity or held for trading or available for sale. Held to maturity security is a debt or equity securities that is purchased with the intention of holding the investment to maturity. This type of security is reported at amortized cost on a company's financial statements and is usually in the form of a debt security with a specific maturity date. In the financial statements held to maturity securities are recorded in the balance sheet under the caption “Investments”.

(6)        $9,000 to be received at the end of each of the next two years has the higher present value because cash that is received earlier can be invested to earn income.