Question

discussion post:

Chapter 13

This module extends our conversation to the corporate form of organization. We describe the accounting and reporting for stock issuances, dividends and other equity transactions.

What is a corporation? Identify the key advantages and disadvantages of corporations.

Explain how to calculate the price-earnings ratio and describe how it is used in analysis of a company's financial condition and performance.

What is a stock split? How is a stock split different from a stock dividend?

Chapter 14

This module focuses on long-term liabiities. We explain how to value, record, amortize, and report these liabilities in financial statements.

What is a bond? Identify and discuss the different characteristics and features bonds may possess.

How are bond issue prices determined?

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest at 9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428. Explain.

Answer 1

- Corporate is a legal entity, established under state laws, whose investors purchase shares of stock as evidence of ownership in it.

Advantages of corporation

Source of capital - A Public ltd company can raise substantial amount of capital by issuing shares and bonds.

Limited liability - Shareholders are liable only upto the amount of their investments.

Transfer of ownership - Shareholders can easily transfer, sell shares of a corpotation

Perpetual life - There is no limit to the life of a corporation

Disadvantages of corporation

Independent management - The management of a corporation can operate without any real oversight from the owners.

Excessive compliance - Corporation has to pay different types of taxes, this requires lots of paperwork.

- Price Earnings Ratio = Market value per share / Earnings per share

The price earnings ratio indicates expected price of a share based on its earnings. So when company's EPS begins to rise, its market price also rises. In general higher PE ratio means that investors anticipate higher performance and growth in the future.

- Stock split happens when a company issues two or more new shares for every existing share investor holds.

A stock dividend is issued when a company wants to keep its earnings in the company and make the company more valuable in future. A stock split is performed to reduce price of a share in proportion to declared stock split for example 1 for 1 stock split.

- A bond is known as fixed income security, is a debt instrument created for the purpose of raising capital. They are loan agreements between the bond issuer and an investor, in which issuer is obligated to pay a specified amount of money at specified future date.

- Characteristics of bond

A bond is form of debt which the investors pay to the issuers for a defined time frame.

Bonds generally have fixed maturity date

All bonds repay principal amount after maturity date

Price of a bond is determined by comparing bond interest rate with market rate of interest. If market rate of interest is higher than bond's interest rate bond will be issued at discount and if market rate of interest is lower than bond's interest rate bond will be issued at a premium.

- In this case amount of installment note is repaid yearly. So at the end of the year from installment of $21607 a portion of amount also reduces principal amount outstanding. So interest for the next year is calculated only on reduced amount. Following amortization chart will make it clear.

Beginning Balance	Scheduled Payment	Extra Payment	Total Payment	Principal	Interest	Ending Balance	Cumulative Interest
$       70,000.00	$     21,606.81	$             -	$      21,606.81	$     15,306.81	$      6,300.00	$    54,693.19	$     6,300.00
54,693.19	21,606.81	-	21,606.81	16,684.42	4,922.39	38,008.77	11,222.39
38,008.77	21,606.81	-	21,606.81	18,186.02	3,420.79	19,822.76	14,643.18
19,822.76	21,606.81	-	19,822.76	18,038.71	1,784.05	0.00	16,427.23