• stated rate and face value determine interest paid
• yield rate- rate on notes if similar. used to calculate PV (aka market rate)
• discount is when yield rate > stated rate. amortization increases net liability
• premium is when stated rate>yield rate. amortization decreases net liability

• FV of note
• interest rate
• assets pledged
• rights
• restrictions
• aggregate maturity amounts

• stated rate: interest payable
• market interest rate: interest expense

• matures on a specific date
• PV=reciprocal of FV (1/FV) 

• compute interest expense based on beginning BV and market rate
• interest expense-cash interest paid = amount of discount or premium

• pay no interest
• same accounting procedure except no cash interest is paid during term
• all interest is included in FV

1. legal costs, accounting costs, promotion, salary, engraving, etc.
2. capitalized as noncurrent deferred charge and amortized to expense over bond term using SL
3. have no effect on premium or discount recorded

1. irrevocable decision must be made at date of issue
2. if chosen, account is same, and then firm increases/decreases BV to FV
3. required change in fair value adjustment for period is recognized as unrealized gain/loss and inluded in income from continuing operations
4. unrealized loss/gain also = sum of increase/decrease in FV for period +/- premium/discount amortization

• debt-issue costs- actually called transaction costs and treated as a reduction in proceeds from debt, reduces premium or increases discount. if not reported at FV, effective interest rate is increased w/ corresponding effect on interest expense periodically
• fair value option: less of a free choice but still irrevocable and records unrealized g/l. limited to financial assets and liabilities that are managed and evaluated as a group on a FV basis as part of a risk management or investment strategy

1. book value mathod: face value + unamortized premium or - unamortized discount is transferred to capital account and contributed capital in excess of par account
2. market value method: MV of stock or bonds (whichever is more reliable) is allocated to capital stock account and contributed capital in excess of par account. G/L recorded = total MV - remaining BV of bonds

• issuer may offer additional consideration to encourage conversion
• on conversion, issuer recognizes an expense for excess of CS and other consideration provided to bondholder over FV of CS  under original terms

• portion of bond price from issuance must be allocated to the conversion feature as OE
• upon issue, yield-rate is used to determine portion of bond price to allocate to bonds alone. remainder allocated to conversion feature in OE
• upon bondholder request for cash, bond accounts are closed, conversion feature stays
• upon normal conversion, bond accounts and OE are closed and CS and contributed capital in excess of par are recorded

• if FV of stock to be issued upon conversion > FV of bonds on date of convertible bond issuance, a portion of bond price is allocated to converstion option
• conversion price= 1000/#of shares per bond
• intrinsic value= MV - conversion value. recorded in OE account w/ other value mentioned above

1. 2 securities at once
2. accrued interest treated same as ordinary bonds
3. portion of bond price allocated to warrant is recorded in an OE account

1. both FVs known: proceeds allocated based on FMV
2. only 1 FV known: proceeds = to that FMV are allocated to it and remainder to other

• unaffected by warrants
• warrant exercised: cash debited at exercise price and detachable stock warrant account is debited (closed). credit CS and contributed in excess of par
• warrant expires: detachable stock warrant account is closed to contributed capital from expiration of stock warrants

• requires compound securities be separated into their debt/equity components for reporting purposes
• total price allocated first to debt component and remainder to equity

• don't recognize expense for inducement
• OE account already recorded so nothing else is necessary

1. intent
2. ability- (a)actually refinance on LT-basis (b)enter into a noncancellable refinancing agreement supported by a viable lender, or (c)issue equity securities replacing debt

*must be done between BS date and date of FS issuance and details must be disclosed

1. CL to NCL must occur before BS date
2. intent of firm must be to refinance the obligation on a LT basis within 1 year of BS date. existing loan facility and intent of firm to roll-over debt suffices as well.
3. issuing equity securities to extinguish liability b4 BS date is not an option

1. firms can retire debt at anytime unless prohibited by agreement
2. if retired early, firm must pay an amount reflecting the new market rate of interest to retired debt (resulting g/l usually goes to income from continuing operations)

1. debtor pays creditor and is relieved of any obligation related to the debt
2. debtor is legally released from being primary obligator of the liability

1. record interest and amortization of discount.premium and debt issue costs to date of extinguishment. accrued interest from most recent interest date will be included in proceeds
2. remove related debt acounts at remaining amounts
3. record gain/loss. 

*gain- mv of instrument used to retire is < BV of debt less unamortized issue costs

-=debt BV - unamortized debt issue costs - cash paid

loss- MV of instrument > BV of debt - unamortized issue costs

-=cash paid - debt BV + unamortized issue costs

1. record gain = BV of debt including unpaid accrued interest - MV consideration
2. record ordinary G/L on disposal of nonmonetary assets transferred in full settlement
3. remove debt from book
4. record stock issued in settlement @ MV

1. record orinary loss = BV of receivable - MV of assets or stock in settlement
2. remove receivables
3. record assets at MV

1. reduce CV of debt to nominal sum of restructured CF
2. record gain = BV of new debt - nominal sum of restructured CF
3. record no further interest; all future cash payments are returns of principle

1. record no g/l and no change in CV of debt
2. compute new interest rate equating PV of restructured CFs and BV of debt
3. record interest expense based on new rate for remainder of loan term

• treat as loan impairment: calculate PV of future CF using original interest rate.
• if PV of future CFs < investment in receivable, difference=impairment loss

1. part of larger K underlying the debt instrument
2. section of K that describes responses avaliable to creditor
3. also protect debtor from certain actions
4. may restrict debtor transactions

1. liability callable on demand w/ out qualification, liability is current (even if > 1 yr)
2. L callable on demand if convenant violated and no violation, L=current
3. L callable on demand if convenant violated and there is a violation, but its waived by creditor, noncurrent
4. L callable on demand if covenant violated and there is a violation, creditor grants grace period, and its probable debtor will rectify that violation in grace period, then L=noncurrent
5. subjective clauses-enable creditor to call debt for reasons not objectively specified

-when relevant conditions are present because callable on demand feature can't be controlled by debtor=current L

-only remote chance L will be called = noncurrent L

• if debtor breaches covenant causing debt to be payable on demand, it is classified as current unless creditor agrees by BS date to allow a grace period ending > or = to a year after BS date
• no requirement for subjective clauses to be current 

1. earned capital- no one measurement basis for earned capital b/c all measurement bases that are reflected in NI are also reflected in RE
2. contributed capital- primary measurement basis for contributed capital is the historical value of direct investments made in the firm by investors in return for shares of capital stock

1. vote
2. dividends (after preferred)
3. preemptive (right to retain ownership % upon new issuance)
4. rights related to liquidation

1. nonvoting
2. dividend preferences
3. dividend in arrears
4. liquidation preferences

1. rights and preferences
2. # shares authorized
3. par values
4. treasury shares
5. restrictions
6. call and conversion information

1. CS is called "ordinary shares"
2. PS is called "preference shares"
3. APIC = "share premium"
4. reserves: similar to RE in that dividends can't be declared from it (also includes OCI)

1. share price
2. # of shares
3. payment dates

• few shares: FV of shares more reliable
• significant number of shares: use FV of consideration received

1. proportional method: based on FVs
2. incremental method- only one FV known, that security is designated its FV, other gets remainder

• reduction in proceeds of stock issuance which reduces contributed capital in excess of par
• debt issuance costs are not treated the same (deferred charge and amortized)

• issue price allocated to PS accounts and another OE account for CS warrants based on FV when exercised (D-cash,warrant account closed, cs issued and CS accounts required)

1. debit difference is recorded in OE
2. credit difference recorded in contributed capital account
3. division in arrears must be paid when shares are acquired

1. TS reduce # of shares outstanding but not issued
2. purchase of treasury stock increases EPS

1. par value
2. cost method

1. SH donates to corporation
2. TS and a gain or rev account increase by MV of stock received
3. increase in TS account causes decrease in OE, but g/rev increases OE by same amount so no effect on OE

1. return of capital (not on)
2. reduced contributed capital account rather than RE and must be disclosed
3. contributed capital account debited instead of RE

• decrease EPS
• purpose: to reduce market $ of stock and reduce SH demand for cash dividends
• permanent capitalization of RE into contributed capital 

1. preferred in arrears
2. PS current period
3. Common stock

• stock may receive dividends in addition to the annual current dividend requiremnt
• CS receives matching amount

• after dividends in arrears, remaining is allocated based on par value of the PS and CS outstanding
• if dividends not sufficient to provide CS with matching amount equal to (preferred % X total par value of common), then there is no participation and common gets all dividends for current year after PS current and arrears

1. PS receives dividend up to an additional %

-CS receives matching amount equal to (preferred % X total par value of CS outstanding) before preferred stock receives its additional allocation

-CS receives dividends in excess of the additional amount allocated to CS

1. if dividend not sufficient to provide maximum additional particpating % to both common and preferred after CS receives its share based on preferred %, then each class receives a share based on par

• unappropriated-available for declaration, no specific purpose, not all are paid
• appropriated- declared off limits. (D-RE, C- RE-approximated for X purpose)

• restraint put on RE by an external party
• same effect as an appropriation

  ---

  *appropriations and restrictions must be disclosed

= (total OE-preferred dividend claims)

number of CS outstanding

1. approval (SH and creditors)
2. balance becomes 0 for RE
3. no negative balance after contributed capital
4. assets down to market
5. dates years after

1. write assets down to market
2. reduce contributed capital
3. changes value/# of shares

1. persuassive evidence of an argument w/ a customer leading to revenue exists
2. delivery accrued or services provided
3. seller's price is fixed or determineable
4. collectibility is reasonably assure

1. gross profit calculated for merchandise sold ((sales-cogs)/sales)
2. when cash is received, amount received is divided between recovery of cost and gross profit received
3. recognized gross profit = (cash received in period)x(gross profit %)

1. more conservative than installment method
2. no gross profit is recognized on cash collections until cost of item sold is fully recovered
3. used bc of uncertainty of collection
4. similar entries as installment but revenue is recognized more slowly

(used for precious metals and certain agricultural products)

1. relatively stable market
2. related marketing costs are nominal
3. units produced are homogeneous

1. seller's $ to buyer is substantially fixed or determineable at date of sale
2. buyer paid seller or is obligated to pay
3. buyer's obligation wouldn't change as result to theft, destruction, or damage to product
4. buyer acquiring for resale has economic substance apart from that provided by seller
5. seller has no significant obligations for future performance
6. future return amount can be reasonably estimated

• net sales= total sales-actual returns on sales-estimated returns @ yr-end
• accounts receivable= AR-deferred gross profit on sales w/ effective privilege

• revenue recognized consignor recognizes revenue when sold
• selling expenses charged to consignor
• revenue not recognized when merely shipped to consignee

recognized by franchisor as revenue when all material services or conitions have substantially been performed

(continuing fees accounted for with accrual method)

1. overall losses
2. single period losses

1. total profit through given year < profit recognized previously
2. doesn't affect completed K method
3. same as profit adjusting entry except CIP is credited, not debited

• cost recovery method used instead of %-completion when completed K can't be used

• either expensed when incurred or when advertising first occurs
• billboards and catalogs: prepaids that are amortized to advertising expense until no longer owned or expected to be used

1. obligation is attributable to services rendered as of BS date
2. rights vest or accumulate
3. payment is probable
4. amount of obligation is estimatable

1. some holiday pay benefits
2. military/maternity leave

1. can be based on current or future rates although typically current rates are used
2. if current rates used, and a pay raise is enacted between accrual of expense and payment, the effect of the raise is treated as a change in estimate and recognized in year of payment
3. liability not discounted but rather is reported at nominal (future) value

• not accrued b/c event causing payment cannot be predetermined
• if unused sick pay benefits are routinely paid to employees, then accrual is required b/c in this case, benefits vest