7-1
in whole or in part.
CHAPTER 7
FINANCING ACTIVITIES
7.1 Common Equity Transactions.
Item
Common
Stock
Additional
Paid-in
Capital
Deferred
Compensation
Retained
Earnings
Treasury
Stock at
Cost
Total
Common
Shareholders’
Equity
a I I NE NE NE I
b NE I NE NE NE I
c NE NE NE D NE D
d NE NE NE NE NE NE
e NE NE NE D (1) NE D
f I NE NE D NE NE
g I I NE D NE NE
h NE NE NE NE NE NE
i NE NE NE NE NE NE
*Indicates income statement effect
(1) The direct effect of the property dividend is to reduce retained earnings by the fair
value of the property distributed with no income statement effect. However, prior to
Chapter 7
Financing Activities
7-2
7.2 Common Equity Issue.
a.
CC AOCI RE
1
Cash +1,000,000 Common Stock +100,000
APIC +900,000
Shareholders’ Equity
+LiabilitiesAssets =
Journal Entry
CC AOCI RE
2
Land +150,000 Common Stock +10,000
APIC +140,000
Shareholders’ Equity
+LiabilitiesAssets =
Journal Entry
net increase in shareholders’ equity. In Transaction 2, the fair value of the asset
received (land) is approximated by the fair value of the common stock issued
the land is not readily determinable.
7.3 Dividends.
a.
CC AOCI RE
1
Cash –40,000 Retained Earnings –40,000
Shareholders’ Equity
+LiabilitiesAssets =
CC AOCI RE
2
Investments –10,000 Retained Earnings –10,000
Shareholders’ Equity
+LiabilitiesAssets =
Chapter 7
Financing Activities
7-3
in whole or in part.
CC AOCI RE
3
Common Stock +8,000 Retained Earnings –520,000
APIC +512,000
Shareholders’ Equity
+LiabilitiesAssets =
CC AOCI RE
4Common Stock +80,000 Retained Earnings –80,000
Shareholders’ Equity
Assets = Liabilities +
6. Memorandum entry only to note that number of shares outstanding falls to
Transaction 3: 40,000 shares outstanding × 10% dividend = 4,000 shares distri-
Transaction 4: 40,000 shares outstanding × 100% dividend = 40,000 shares dis-
b. The book value of common equity (that is, total shareholders’ equity) decreases
decreases the investment on which returns (that is, earnings) can be made. If the
company could have retained the funds rather than pay them out in dividends
and earned the same level of ROE on the funds, ROE would have been unaf-
fected by the dividend. So to predict future levels of ROE, one must develop be-
ROE given the company’s risk characteristics.)
Chapter 7
Financing Activities
7-4
in whole or in part.
7.4 Cash Flow Effects of Equity and Debt Financing.
a. Financing; increase in cash
financing activities
f. Financing; decrease in cash (IFRS rules allow the reporting of dividends paid in
the operating section)
removed from the operating section.)
k. No effect
l. Financing; increase in cash
m. Financing; increase in cash
n. No effect
firms reporting under IFRS show the amount in interest paid directly in the
operating section. They accomplish this type of disclosure by beginning the
Operating Activities section with operating income instead of net income.
Finally, IFRS rules allow the reporting of interest paid as a financing activity.)
p. Financing; decrease in cash
Chapter 7
Financing Activities
7-5
in whole or in part.
q. Financing; decrease in cash (The gain on retirement would be reported as a
subtraction in the operating section because, under the indirect method, all of
net income is initially reported as an operating cash inflow and non-operating
gains and losses must be removed from the section.)
7.5 Accounting for a Note Payable.
a.
12/31/13 Signing
CC AOCI RE
Cash + 867.331 Note Payable +867.331
Shareholders’ Equity
+LiabilitiesAssets =
12/31/14 Year-End Interest Payment
CC AOCI RE
Cash –27.000 Note Payable +7.693 Interest Expense –34.693
Shareholders’ Equity
+LiabilitiesAssets =
Interest Expense ………………………………………………………… 34.693
12/31/15 Year-End Interest Payment
CC AOCI RE
Cash –27.000 Note Payable +8.001 Interest Expense –35.001
Shareholders’ Equity
+LiabilitiesAssets =
Effective Interest Amortization Table
3% Cash 4% Effective Book Value
Date Interest Interest Expense Amortization of Note
12/31/13 867.331
Chapter 7
Financing Activities
7-6
in whole or in part.
b. (1) On the face of its December 31, 2015, balance sheet, The Cola-Cola Com-
pany reports long-term debt equal to the book value of the note using the
(2) In the notes to the financial statements, Coca-Cola reports the fair value of
this financial instrument, which is equal to the present value of the remain-
c. (1) If The Coca-Cola Company chooses the fair value option, it will report
(2) Coca-Cola would report a gain on revaluation on the income statement as
follows:
7.6 Accounting for Troubled Debt: Settlement.
Record Increase in Investment’s Fair Value:
CC AOCI RE
Investments +15,000 Gain +15,000
Shareholders’ Equity
+LiabilitiesAssets =
Journal Entry
Settle Debt:
CC AOCI RE
Cash –700,000 Notes Payable –1,000,000 Gain +235,000
Investments –135,000 Interest Payable –70,000
Shareholders’ Equity
+LiabilitiesAssets =
Journal Entry
Notes Payable ………………………………………………………. 1,000,000
Chapter 7
Financing Activities
7-7
in whole or in part.
7.7 Accounting for Troubled Debt: Modification of Terms.
a. (1) U.S. GAAP
Undiscounted Future Cash Flows of
Restructured Debt:
New Principal ………………………………………… $ 4,500,000
New Interest ($4,5000,000 × 6% × 2
CC AOCI RE
Notes Payable –5,000,000 Gain +410,000
Interest Payable –450,000
Restructured Notes
Payable +5,040,000
Shareholders‘ Equity
+LiabilitiesAssets =
Journal Entry
Notes Payable ………………………………………………………. 5,000,000
(2) IFRS
Present Value of Future Cash Flows (Using a
Financial Calculator):
Chapter 7
Financing Activities
7-8
in whole or in part.
which the fair value of the debt is below the current book value. Computing
debt’s cash flows.
Present Value of Future Cash Flows (Using a 15%
Current Market Rate):
A gain is recorded for the decrease in the liability from its book value of
CC AOCI RE
Notes Payable –5,000,000 Gain +1,608,412
Interest Payable –450,000
Restructured Notes
Payable +3,841,588
Shareholders’ Equity
+LiabilitiesAssets =
Journal Entry
b. (1) U.S. GAAP
Gross Future Cash Flows of Restructured Debt:
of 0.208%.
Chapter 7
Financing Activities
7-9
in whole or in part.
(2) IFRS
Under IFRS, Great Beef Co. would compare the present value of future
cash flows under the restructured debt to the book value of the debt using
the historical effective interest rate of 9%.
Financial Calculator):
Present Value of Future Cash Flows (Using a 15%
Current Market Rate):
CC AOCI RE
Notes Payable –5,000,000 Gain +1,274,272
Interest Payable –450,000
Restructured Notes
Payable +4,175,728
Shareholders‘ Equity
+LiabilitiesAssets =
Journal Entry
the financial statements. Also, U.S. firms may choose the fair value option.
Chapter 7
Financing Activities
7-10
in whole or in part.
7.8 Redeemable Preferred Stock.
a. If redemption will occur at a specific time or at the time at which a specific
event occurs (that is, death of the holder), the preferred stock will be treated as a
liability under both U.S. GAAP and IFRS. This situation is typically referred to
as mandatorily redeemable preferred stock.
a liability.
7.9 Convertible Preferred Stock.
a.
CC AOCI RE
1
Cash +210,000 Preferred Stock +200,000
APIC +10,000
Shareholders’ Equity
+LiabilitiesAssets =
b.
CC AOCI RE
2
Cash –12,000 Retained Earnings –12,000
Shareholders’ Equity
+LiabilitiesAssets =
c.
CC AOCI RE
3
Preferred Stock –200,000
APIC –10,000
Common Stock +100,000
APIC +110,000
Shareholders’ Equity
+LiabilitiesAssets =
Transaction 1: 2,000 shares × $105 per share = $210,000 proceeds; place 2,000