IMI 203: ESSENTIALS OF ACCOUNTING

Class 6: Valuing Assets, Liabilities, and

Equity

Michael Marin
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Administrative Issues EXACT Same Format as Practice

Written Submission. You will be provided Questions on paper, F/S and Annual Report online.

1. Term Test: Tuesday, October 14th during class time.

• Case Style: No Multiple Choice. Calculations & Critical Thinking.
• Open Book: Textbook, Formulas, Lecture Notes, etc.
• 1 hour and 45 minutes

Part Topic Marks Time

1. Financial Analysis including Cash Flow 25 40.38
2. The Accounting Information System 15 24.23
3. Accrual Accounting Concepts 10 16.15
4. Forms of Business Organization/Financial Statements 10 16.15
5. Fraud & Internal Controls 5 8.08
TOTAL (≈1.6 mins/mark) 65 105.00

Attend your section.

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Learning Objectives of Class 6

Chapter 7
1. Discuss how to classify and determine inventory.
2. Explain how companies recognize and value receivables.
Chapter 8
1. Explain the accounting for plant asset expenditures.
2. Explain how to account for the disposal of plant assets.
3. Identify the basic issues related to reporting intangible assets.

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Learning Objectives of Class 6 (cont’d)

Chapter 9
1. Explain how to account for bonds.
2. Explain how to account for the issuance of common and preferred stock,
and the purchase of treasury stock.
3. Explain how to account for cash dividends.
4. Discuss how stockholders’ equity is reported and analyzed.

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What we have done.
We have completed an entire course in 6 weeks…

Be proud of your progress.

Today is High-Level. I want to make sure you have a “general” understanding of the
remaining core topics. We have covered a lot in 6 classes!

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 Receivables
and Revenues

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Accounts Receivable - Definition

• The most common method of revenue recognition is the Delivery Method.

• Revenue is recognized when the good is delivered or the service is
performed, regardless of when the customer pays, as long as collectability is
reasonably assured.
• When payment comes after revenue recognition, it gives rise to an account
receivable.
• Some customers will not pay the bill. How do we account for this?

Allowance for Doubtful Accounts and Write-Offs

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What is a Write-Off?
https://www.youtube.com/watch?v=BAjxn2US7J8

• A write-off of accounts receivable

(A/R) refers to the accounting
process of recognizing that a specific
amount owed by a customer will not
be collected.
• Record a bad debt expense account
(which appears on the income
statement) reduce the accounts
receivable

Doesn’t this violate the matching

principle?

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Allowance Method for A/R Question of Estimation Technique

• Adjusts accounts receivable in the period of sale for amounts that are not expected to
be collected.
• IFRS/GAAP require firms to use the allowance method
1. Percentage of Sales Method:
• This approach focuses on the income statement.
• Uncollectible accounts are estimated as a percentage of total credit sales for the
period.
2. Percentage of Account Receivables/Aging Method:
• This approach focuses on the balance sheet.
• Uncollectible accounts are estimated based on the ending balance of Accounts
Receivable or based on the age of individual receivables.
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Allowance Method Steps Remember Estimates from last week?

Impact on Cash Flow?

1. Estimate the amount of accounts that will be uncollectible.

2. Recognize bad debt expense in that period to provide for the estimated additional
uncollectible amount.
3. Adjust the total value of accounts receivable for the amount you estimated in (2) – this
is most frequently done by adjusting a contra-asset account. The sum of the Accounts
Receivable and the Allowance for Doubtful Accounts is the net A/R the firm expects to
collect.
4. In later periods, when the specific accounts are determined to be uncollectible, the
accounts receivable of specific customers are written off (from both the Accounts
Receivable and the Allowance for Doubtful Accounts).
5. No effect on income at the time accounts are written off!

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 Example

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 Allowance Method – Percent-of-Sales

Assets Income Statement

Journal Entry Notes:
Cash (A) Accounts Receivable (A) Revenue (1) Sale of goods on credit.
(COGS & inventory portions
Beginning Bal. Beginning Bal. (1) Credit
of transaction not shown.)
Sales
(1) Credit (2) Payment received for AR no
(2) Payment Sales (2) Payment previously written-off
(3) Write off (3) Write-off when A/R deemed to
be uncollectible
(4b) Recovery (4a) Recovery (4b) Recovery (4) Recovery when previously
written-off
Ending Bal. Ending Bal. account is expected to be
collected. (4a) Reinstate A/R
Allowance for Uncollectible
and AUA. (4b) Record
Accounts [AUA] (XA) Bad Debt Exp. [BDE]
payment when received.
Beginning Bal. (5) Record Bad Debt Expense
Bad Debt Expense (UAE) and Allowance for
(3) Write off
=Total Credit Sales × Uncollectible Accounts (AUA)
(4a) Recovery increase based on estimated
Estimated Percentage
% of credit sales not
of Uncollectible Sales Bal. Before BDE expected to be collected
(5) BDE
(5) BDE

Ending Bal.

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 Allowance Method – Aging (% A/R)

Assets Income Statement

Journal Entry Notes:
Cash (A) Accounts Receivable (A) Revenue
(1) Sale of goods on credit. (COGS & inventory
Beginning Bal. Beginning Bal. (1) Credit portions of transaction not shown.)
Sales
(1) Credit (2) Payment received for AR no
(2) Payment Sales (2) Payment previously written-off
(3) Write off (3) Write-off when A/R deemed to be uncollectible
(4b) Recovery (4a) Recovery (4b) Recovery (4) Recovery when previously written-off account
is expected to be collected. (4a) Reinstate
Ending Bal. Ending Bal.
A/R and AUA. (4b) Record payment when
Allowance for Uncollectible received.
Accounts [AUA] (XA) Bad Debt Expense
(5) Estimate uncollectible A/R at end of period
Beginning Bal. using A/R Aging (% of A/R) approach. This will
Allowance =
(3) Write off be the ending balance in the AUA.
Total Accounts
(4a) Recovery (6) Record Bad Debt Expense (BDE) necessary
Receivable×Estimated
Percentage of to adjusting the ending AUA balance to the
Bal. Before BDE (6) BDE
Uncollectible Accounts amount calculated in (5), i.e. “plug value.”
(6) BDE

(5) Ending Bal.

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 Inventory

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 Concept of Inventory

• Inventory are goods held by a company for the purpose of sale to customers.
• Inventory is not goods held for the company use, like “supplies” or “supplies
inventory.”
• When the firm sells the inventory, they consume the assets and record an
expense (COGS) on the income statement.

Inventory is carried on the Consumption (use) of the asset Inventory item is sold, its cost is
balance sheet as an asset transferred to cost of goods sold
until it is sold. on the income statement.

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Allocation of Inventory Cost Between Asset and Expense Accounts

Inventory Cost of
Beginning
purchased Goods
inventory + During the
=
Available
balance
Period for Sale

Merchandise Inventory =
Cost of Inventory not been
sold
(Balance Sheet)
Cost of Goods
Available for Sale

Cost of Goods Sold = Cost

of the items sold
(Income Statement)

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 Cost of Merchandise Acquired

• Cost of Merchandise
• Invoice price + Inbound transportation charges − offsetting discounts –
returns and allowances
• Transportation Charges
• Freight charges
• F.O.B. destination: Seller bears cost Who owns Goods during
• F.O.B. shipping point: Buyer bears cost shipping?

IAS 2 (10): The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location
and condition.
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Freight Charges See the Difference

FREE ON BOARD (FOB)

FOB Shipping Point FOB Destination

1. BUYER responsible for freight 1. SELLER is responsible for freight

cost, costs (Transportation-in cost
costs) ADDED to Inventory of Buyer 2. Account Title: Transportation- out
(Expensed in the Income Statement
2. Account Title: Merchandise of Seller)
Inventory (Balance Sheet of Buyer)

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 Principal Inventory Valuation Methods
How to assign values to inventory? → Impacts both the balance sheet and cost of goods sold on I/S.

1. Specific Identification:
• Directly links the cost of specific items to the items sold and those remaining in
inventory.
• Best Suited For: Unique, high-value items like jewelry, real estate, or artwork.
• Impact: Precise tracking but can lead to income manipulation if selective sales are
made.
2. First-in, First-out (FIFO):
• Assumes that the oldest items (first-in) are sold first.
• Best Suited For: Perishable goods or items that can become obsolete.
• Impact: In rising price conditions, it results in lower COGS and higher ending
inventory.
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 Principal Inventory Valuation Methods (cont’d)

3. Last-in, First-out (LIFO):

• Assumes that the newest items (last-in) are sold first.
• Best Suited For: Non-perishable, consistent products.
• Impact: In rising price conditions, it results in higher COGS and lower ending
inventory. Not permitted under IFRS.
4. Weighted Average:
• Takes an average of all units available for sale during the period.
• Best Suited For: Items that are indistinguishable from each other, like fuel or grains.
• Impact: Smoothens out price fluctuations, leading to COGS and ending inventory
values that fall between FIFO and LIFO.

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FIFO – Conveyor Belt

FIFO (conveyor belt)

Purchases Beg. inventory

physical flow

End. inventory Cost of goods sold

• 7 units available for sale. If 4 units are sold, COGS is the purchase price of the
first 4 units put on the conveyor belt (purchased first). Ending inventory is the
cost of the 3 remaining units (purchased last).

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LIFO – Cookie Jar

• LIFO (cookie jar) → If 4 units sold, COGS is the purchase price of last 4 units put in the
jar.
• LIFO is not an allowed method under IFRS.
Physical Flow

Cost of goods
Purchases sold
(recent prices)

End. Inventory
Beg. inventory
(older prices)
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Weighted Average

• Compute a weighted average cost per unit by dividing the total acquisition cost
of all items available for sale (CGAS) by the number of units available for sale.

CGAS / Units Available for Sale = Weighted Average Cost Per Unit

Assign costs to COGS and ending inventory using the weighted average cost per
unit.

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 Reporting Inventory

• Inventory cost flow methods have to be reported consistently, year over year
• Any deviation (i.e.: changing of cost flow method) needs to be disclosed.
• Inventory needs to be represented faithfully.
• Matching principle requires a “cost flow” assumption that leads to the choice
among different accounting inventory methods
• This produces temporary differences in accounting numbers.

What is the impact if prices are rising?

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 Lower of Cost or Market Value

• Accounting Standards require inventory to be shown on the balance sheet at

either historical cost or fair market value (FMV), whichever is lower. Why?
• If Cost ≤ FMV, inventory on B/S at original cost
• If Cost > FMV, inventory written down to FMV
• FMV generally means either realizable or replacement cost of inventory.

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 Inventory Write-Down

• When inventory is “written down” (or “impaired”), a charge to earnings (often in

COGS) is made.

Assets Liabilities Equity

↓ Inventory ↓ COGS

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 Long Term
Long-term assets, often referred to
Assets as non-current assets, are assets
that a business expects to retain for
a period exceeding one year and
are not intended for resale within
the short term. These assets are
utilized in the regular operations of
the business and are not easily
converted into cash. They play a
crucial role in the production of
goods and services that generate
revenue for the entity.

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Long Term Operational Assets

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 Costs Included in PP&E

• Purchased Asset
• Capitalize all costs necessary to get an asset ready for its intended use, including:
• purchase price
• delivery charges
• installation costs, testing of machinery, etc.
• Self-Constructed Asset
• Entire cost of building the asset should be capitalized, including interest on debt that
is incurred to finance the asset’s construction.
• Thus, some interest costs expensed through depreciation
• Implies that interest expense on the income statement does not necessarily
reflect all of the interest incurred by the firm
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 Calculating Depreciation Estimates! Estimates! Estimates!

• Steps:
1. What is the acquisition cost to be allocated?
2. What is the estimated salvage value?
• The salvage value is the amount of the acquisition cost that will not be
depreciated. It will be left on the books at the end of the depreciation period.
3. What is the expected useful life of the asset?
• The period over which the asset is expected to provide benefits and is the period
over which costs will be depreciated.
4. What pattern of depreciation should be used to allocate the expense over the period
of the benefits?
• The pattern that determines the amount of depreciation recognized each period.
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 Depreciation Methods Remember. NON-CASH EXPENSE

1. Straight-line method
• The same amount is depreciated each
accounting period.
2. Double-declining-balance
• Produces more depreciation expense in
the early years of an asset’s life, with a
declining amount of expense in later years.
3. Units-of-Production
• Produces varying amounts of depreciation
in different accounting periods depending Which method do you choose?
upon the number of units produced.

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 Expenditures During Life of Assets

• If expenditures are related to restoring or maintaining an asset, they are expensed in

the period incurred
• If expenditures:
1. Increase the useful life of the asset; or
2. Reduce its operating costs; or Significant Management
Judgement
3. Increase its productivity
• they are capitalized as part of the asset and depreciated over the remaining useful life
• If the useful life of the asset changes substantially at a later date, the depreciation
schedule can be adjust to reflect revised useful life .

Any relevant examples?

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 Disposal of PPE

Proceeds – NBV = Gain/Loss

• At disposal, net book value of the asset is removed from the balance sheet, and
any proceeds from the disposal are recognized.
• Remember. You no longer have the asset!
• Net book value = historical cost – accumulated depreciation
• Gain or loss on the sale of PPE is recorded when the proceeds from disposal
are more or less than the net book value, respectively.
• – A gain/loss at the time of disposal is very common: Why?

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 PPE Example

• Assume a firm builds some non-production related equipment, using $65K in

raw materials and $50K in labor. In addition, $5K in interest costs are incurred to
finance the equipment building process.
• Management determines the equipment is expected to have a 4-year useful life
and salvage value of $20K upon disposing of the equipment.
• The equipment will be depreciated using the straight-line method. The asset is
sold at the end of four years for $15K in cash
• What is:
• Total amount to go on the balance sheet, Total amount to be depreciated,
Depreciation per year, Gain/Loss on Disposal

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 PPE Example

• Total amount to go on the balance sheet:

What about any
• [$65K + $50K + $5K] = $120K
modifications?
• Total amount to be depreciated:
• [$65K + $50K + $5K] - $20K = $100K
• Depreciation per year:
• $100K / 4 = $25
• Gain/Loss on Disposal:
• Proceeds – NBV
Impact on Accounting
• $15K – ($120K – 4 years * $25K/year) Equation?
• Loss of $5K
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 Where have we seen this before?
Impairment of That different from Inventory?

Tangible Assets Impairment refers to the reduction in

the value of an asset below its
carrying amount on the balance
sheet. Essentially, it's a recognition
that an asset is no longer worth as
much as its listed value. Impairment
can occur for a variety of reasons,
including significant changes in
market conditions, technological
obsolescence, changes in usage
patterns, or adverse legal or
regulatory developments.

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Impairment of Assets See the Judgement?

• Recoverability Test: Compares the sum of the expected future net cash flows
from the use of asset plus its expected future disposal value with the current
carrying value (net book value) of the asset
• Asset not impaired if:

Future Net Cash Flow of Asset + Salvage Value > Current Carrying Value of Asset

• Asset impaired if:

Future Net Cash Flow of Asset + Salvage Value < Current Carrying Value of Asset

• Computation of dollar amount of impairment loss:

• Net book value- fair market value of the equipment
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 Intangible assets are non-physical
Accounting for assets that represent legal rights or
competitive advantages developed
Intangible or acquired by a business.

Assets •
•
Goodwill
Trademarks
• Patents
• Copyrights
• Licenses
• Customer Lists
• Etc.

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Importance of Intangible Assets
About 48% of the world’s stock market value is derived from intangible assets

Intangible Assets Matter!

The value of intangible assets has

risen from 17% of the value of the S&P
500 in 1975 to around 90% now in
2022.

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 Intangible Assets

• Internally generated intangibles generally not capitalized on the balance sheet

• Uncertainty, subjectivity, and challenges associated with reliably measuring their fair
value.
• Some internally generated intangible assets, like certain development costs for
software or patents, can be capitalized if they meet specific criteria set out in
accounting standards.
• Capitalized purchased intangibles can be:
1. Separately identifiable with definite life: Patents, Copyrights
2. Separately identifiable with indefinite life: Brand Names, Trademarks
3. Not separately identifiable with indefinite life: Goodwill

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 Goodwill=Purchase Price−(Fair Value of Identifiable Assets−Fair Value of
Goodwill Liabilities)

• Goodwill is an intangible asset that arises when a company acquires another

company for a price higher than the sum of its identifiable tangible and intangible
assets minus liabilities.
• Put Simply: the excess amount that one company pays over the fair market value of
another company's net assets during an acquisition.
• Why?
• Reputation, Synergies, Talented Workforce, Future Growth Potential, etc.

Goodwill is not amortized. Instead, it remains on the acquiring company's balance

sheet at its original value until it's deemed to be impaired or the related operations are
disposed of.
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 Goodwill Example

• Assume that your Buyer Company is willing to pay $300,000 cash to acquire
Seller Company.
• Assume that the assets of the Seller Company have a fair market value of
$280,000 and its liabilities have a market value of $50,000
• What is the goodwill that Buyer Company will pay for?

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 Intangibles: Amortization & Impairment
Recoverability test is based on future undiscounted cash flows. Fair value test is based on the asset’s fair value.

• Intangible assets with value that is consumed with the passage of time are
amortized (e.g., patents, copyrights, customer lists). These assets are also
subject to impairment tests. → Recoverability Test
• Intangible assets with value that is not consumed with the passage of time, such
as goodwill and brands, are not amortized. They are written down only if
impaired. → Fair Value Test
• The test for impairment of intangible assets is similar to that of tangible assets.
• If book value of asset > fair market value
• Impairment loss recorded
• Revised value is new cost basis of asset
• Companies cannot reverse impairment loss at later date
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 Long-Term Debt

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 Common Types of Debt
Long-term debt is recorded on the balance sheet at the present value of the obligated cash flows.

• Bank loan: principal borrowed; periodic interest charged; principal paid at end of
loan.
• Mortgage: principal borrowed; periodic interest charged; principal paid
periodically over the loan period.
• Corporate bonds: Firm offers investors promise to pay periodic cash flows
(“coupons”), plus a lump sum at maturity (e.g., in 20 years). Investors evaluate
cash flows and offer the firm a $ amount of capital. Investors can then trade the
bonds freely until maturity.
• Convertible debt: corporate bonds that allow investors an option to convert
debt into a pre-specified number of shares of stock (i.e., firm retires debt and
gives stock)

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 Corporate Bonds

• Corporate bonds are securities that trade like stock, but where the investors lend
money to the company in return for interest and principal payments
• Essentially, the investors play the role of “the bank” but where the cash flow
rights are more liquid
• Bond represents a series of cash flows:
• Periodic cash payments (e.g., semi-annual), called a “coupon”
• Single payment of principal at maturity, called the “face value”

Firms sometimes issue bonds or other debt instruments that can be converted.

This is beyond the scope of an intro course.

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 Corporate Bonds Example

• W-Mart Inc. needs to raise $500 million in capital. On January 1, 2020, it offers
investors 10-year bonds, each with a $1,000 “face value” (i.e., principal amount)
and 6% annual cash “coupons”. The cash flows to be paid to investors for each
bond are therefore as follows:

1. How much will investors pay for each bond?

2. How many bonds will the firm have to issue to raise $500 million?

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 Bond Value

• The company sets the bond terms, and investors decide how much they will pay
for the bond based on the present value of cash flows offered
• PV = Present value
• PRn = Principal to be paid at end of period n
• C = the coupon amount to be paid each period
• i = periodic interest rate demanded by investors
• n = number of compounding periods, so n = 1,2,...N
• The interest rate demanded stems from market conditions (e.g., inflation, real
interest rates) and the firm’s credit risk

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 Bond Value (cont’d)

• Present value of the bond principal:

𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙𝑛
PV =
(1+𝑖)𝑛

• Present value of the coupons (formula is for the present value of an annuity of
identical cash flows at regular intervals over n periods):
𝐶
𝐶 ( )
𝑖
PV = ( ) -
𝑖 (1+𝑖)𝑛

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 Bond Value Example

1. How much will investors pay for each bond?

WalMart Bond Value = 𝑃𝑉 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑃𝑉 𝐶𝑜𝑢𝑝𝑜𝑛
1
1 −( )
1.06 10
= ($1,000) * (1.06)−10 + ($1,000*.06) *
.06

= $558.39 + $441.61
=$1,000
2. How many bonds will the firm have to issue to raise $500 million?
• $500,000,000/$1,000
• 500,000 Bonds

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 The Market Rate of Interest

• The selling price of a bond is determined by the market rate of interest versus the
stated rate of interest.
1. Bond's Stated Rate = Market Rate (Bond issued at Par)
• Accounting Implication: No initial premium or discount to amortize. Interest expense
equals the interest payment.
2. Bond's Stated Rate > Market Rate (Bond issued at a Premium)
• The bond is more attractive because it pays a higher interest rate than other similar
bonds in the market.
• Accounting Implication: The bond is issued for more than its face value. The difference
between the issue price and the face value is called a premium. Over the life of the
bond, this premium is amortized and reduces the interest expense. As a result, the
effective interest expense (using the effective interest method) will be less than the
stated interest payment.
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 The Market Rate of Interest(cont’d)

3. Bond's Stated Rate < Market Rate (Bond issued at a Discount)

• The bond is less attractive because it pays a lower interest rate than other similar bonds
in the market.
• Accounting Implication: The bond is issued for less than its face value. The difference
between the issue price and the face value is called a discount. Over the life of the
bond, this discount is amortized and increases the interest expense. Hence, the effective
interest expense (using the effective interest method) will be more than the stated
interest payment.

52
 Discount Bond Value Example

• Same facts. But WM is offering 4% coupon. Market Rate is 6%.

1. How much will investors pay for each bond?
WalMart Bond Value = 𝑃𝑉 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑃𝑉 𝐶𝑜𝑢𝑝𝑜𝑛
1
1 −( )
1.06 10
= ($1,000) * (1.06)−10 + ($1,000*.04) *
.06

= $558.39 + $294.40
=$852.80
2. How many bonds will the firm have to issue to raise $500 million?
• $500,000,000/$852.80
• 586,303 Bonds
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 Accounting for Discount Bonds

• Initial Accounting:
• Cash ↑ $500 M, Bonds Payable ↑ $500 M
• The term “discount bond” stems from difference between NBV of debt ($500)
and principal amount of debt ($586.3)
• Year 1 Interest
• Interest Expense = $500,000,000 *.06 = $30,000,000
• Int. Expense ↑ $30 M, Cash ↓ $23.5 M (i.e., 4% *500) Bonds Payable ↑ $6.5 M

Over time NBV of debt will hit the $586.3 M

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 Accounting for Discount Bonds (cont’d)

• Year 2 Interest
• Interest Expense = $506,500,000 *.06 = $30,390,000
• Int. Expense ↑ $30.39 M, Cash ↓ $23.5 M (i.e., 4% *500) Bonds Payable ↑ $6.89 M

• Principal Repayment
• Note that the cash paid at maturity is equal to the principal amount of the bonds
issued (= 586,303 bonds x $1,000)

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 Summary of Interest and Coupons

Relations Consequences for

at Issuance NBV of Debt
Interest Expense > Coupon Payments Increased by the difference
Interest Expense < Coupon Payments Decreased by the difference
Interest Expense = Coupon Payments No change over time

What happens if you retire debt?

…You buy at market prices. Compare to Carrying Value for Gain/Loss

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 Represents the owners' claim on the company's assets
after all liabilities have been paid off.

Components include:
• Contributed Capital: Amounts invested by
Equity shareholders in exchange for shares of stock.
• Retained Earnings: Cumulative net income of the
company that hasn't been distributed as dividends.
• Treasury Stock: Stock that the company has
repurchased from shareholders. It reduces total
equity.
• Additional Paid-In Capital: Amounts received from
shareholders over the par or nominal value of shares.
• Other components such as other comprehensive
income.

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 Flowchart of Shareholders‘ Equity

Shareholders’ equity

Contributed capital Treasury Stock Retained earnings Comprehensive Income

Cost APIC*

Common stock Preferred stock

Par APIC* Par APIC*

*APIC = Additional Paid-in-capital

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 Shares “Outstanding”

The shares were not issued for

.000625…

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 Cash Dividends

• Mechanics of cash dividend payments:

1. Declaration date: firm declares a dividend will be paid to all investors that
hold shares as of the “date of record” (e.g., 10 days after the declaration
date)
2. Date of record: date on which investors must hold shares to be entitled to
receive the dividend. Firm must determine which investors held shares on
the record date (an investor that sells shares after the record date is still
entitled to receive the dividend).
3. Payment date: date on which the firm pays the dividend.

60
 Cash Dividends

• Example: Suppose a firm has 9 million shares outstanding and declares a $2

dividend per share on November 25th to shareholders of record on December
10th. The dividend will be paid on December 17th.
• November 25th:
Assets Liabilities Equity
↑ Dividends Payable ↓ Retained Earnings

• December 10th:
• No entry
• December 17th:
Assets Liabilities Equity
↓ Cash ↓ Dividends Payable
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 Key Take-Aways

1. Shareholders’ equity represents the residual of total assets minus total liabilities.
2. Firms may issue equity for funding purposes and compensation purposes.
3. Share repurchases are an alternative to dividend payments.
4. Retained earnings provide the conceptual link between the balance sheet and
the income statement. Gains and losses that bypass the income statement are
captured in (accumulated) other comprehensive income.

Are dividends and share repurchases always a good sign?

62
Thank You!
Good Luck on Term Test!
Remember. I am here to help. Ask!!!