Copy And Paste The Following Questions Into Microsoft Word ✓ Solved
Copy and paste the following questions into a Microsoft Word
Copy and paste the following questions into a Microsoft Word document. Answer each question with a minimum of two to three (2–3) sentences. Some prompts will require substantially more than that to fully respond. Be thorough when addressing each item and be sure to answer each part of the prompt. You should use only your textbook to support this activity.
1. Why do corporations purchase and issue treasury stock?
2. What is the Journal entry for recording the purchase of treasury stock?
3. How would you record the reissuance of treasury stock if the proceeds obtained are:
- At cost of the treasury stock?
- Less than the cost of the treasury stock?
- More than the cost of the treasury stock?
4. What is the main difference between notes payable and bonds payable?
5. What is the main difference between a bond and a share of stock?
6. What does it mean to issue bonds at:
- Par?
- At a Discount?
- At a Premium?
7. What is the difference between the contract (coupon) rate and the market rate for bonds?
8. What is the journal entry for recording the issue of a discount bond?
9. What is the entry for recording interest and amortization?
10. What is the journal entry for recording the issue of a premium bond?
11. What is the entry for recording interest and amortization?
12. What is the Journal entry for recording the bond maturity?
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Corporations engage in the purchase and issuance of treasury stock for various strategic and financial reasons. Firstly, they may opt to buy back their shares to improve financial ratios, such as earnings per share (EPS), by reducing the number of shares outstanding (White, 2021). This can also signal to investors that the company believes its stock is undervalued, thereby promoting investor confidence (Smith, 2020). Additionally, treasury stock can be held for future reissuances as employee compensation or to finance acquisitions without diluting existing ownership.
The journal entry for recording the purchase of treasury stock involves debiting the "Treasury Stock" account and crediting the "Cash" account. For instance, if a corporation buys back 1,000 shares of its stock at $10 per share, the entry will be as follows:
Treasury Stock $10,000
Cash $10,000
When dealing with the reissuance of treasury stock, the accounting treatment varies based on the sale proceeds relative to the cost of the treasury stock. If treasury stock is reissued at cost, the entry will mirror the original purchase. For example, if the company sold the shares at $10 each, the journal entry would be:
Cash $10,000
Treasury Stock $10,000
If the shares are reissued for less than the original cost, the entry would include a debit to an equity account, "Paid-in Capital from Treasury Stock," to account for the loss on the transaction. For instance, if the reissued shares were sold for $8 each:
Cash $8,000
Paid-in Capital from Treasury Stock $2,000
Treasury Stock $10,000
Conversely, if the shares are sold for more than the cost, the excess would be credited to "Paid-in Capital from Treasury Stock." An example entry when shares are sold at $12 each would appear as follows:
Cash $12,000
Treasury Stock $10,000
Paid-in Capital from Treasury Stock $2,000
The main distinction between notes payable and bonds payable lies in their structure and purpose. Notes payable are typically short-term obligations that require the borrower to pay back the principal amount along with interest, usually within one year (Jones, 2019). Bonds payable, on the other hand, are long-term debt instruments where the issuer borrows money from investors at a fixed interest rate for a specified period, often exceeding one year (Brown, 2018).
Furthermore, a bond and a share of stock differ fundamentally in ownership rights. When an individual purchases a bond, they are effectively lending money to the issuer in exchange for interest payments and the return of the principal at maturity (Johnson, 2020). In contrast, buying stock represents ownership in the company, with potential dividends and voting rights (Levine, 2022).
When bonds are issued at par, it means they are sold at their face value, corresponding to the nominal interest payable over their life. However, bonds may also be issued at a discount or premium, depending on the relationship between the coupon rate and market interest rates. When issued at a discount, bonds fetch a price below their par value, typically when the coupon rate is lower than the market rate; conversely, a premium indicates a sale above face value when the coupon rate is higher than the market rate (Taylor, 2021).
The contract (coupon) rate refers to the interest rate that the bond issuer agrees to pay bondholders, while the market rate reflects the prevailing interest rates in the market for similar bonds (Miller, 2020). Differences between these rates can significantly influence bond pricing and yield calculations.
The journal entry for recording the issuance of a discount bond entails debiting "Cash" for the amount received, "Discount on Bonds Payable" for the difference, and crediting "Bonds Payable" for the face value. For example, issuing a $100,000 bond at a $95,000 cash inflow would look like this:
Cash $95,000
Discount on Bonds Payable $5,000
Bonds Payable $100,000
When recording interest and amortization for a discount bond, you would debit "Interest Expense" and credit "Cash" for the actual payment, while adjusting the "Discount on Bonds Payable." An example would be a semiannual interest at a rate of 6%:
Interest Expense $6,000
Cash $5,700
Discount on Bonds Payable $300
For a premium bond, the entry for issuance records the cash received above par. Assuming a $100,000 bond sold for $105,000, the journal entry would be:
Cash $105,000
Bonds Payable $100,000
Premium on Bonds Payable $5,000
Amortization expense for a premium bond reduces the premium account over its life, typically lowering the interest expense recorded. The adjusting entry when making a semiannual interest payment may look like this:
Interest Expense $5,700
Premium on Bonds Payable $300
Cash $6,000
Finally, the journal entry for bond maturity involves debiting "Bonds Payable" and crediting "Cash" to reflect the repayment of the principal amount. When a $100,000 bond matures, the entry would be as follows:
Bonds Payable $100,000
Cash $100,000
Understanding treasury stock, notes payable, and bonds payable is vital for corporate finance as they depict the organization's financial health and strategic decisions regarding capital structure.
References
- Brown, L. (2018). Corporate Finance. Pearson Education.
- Johnson, R. (2020). Investing in Bonds. Wiley.
- Jones, M. (2019). Accounting for Financial Instruments. McGraw-Hill.
- Levine, T. (2022). Stocks and Bonds: Understanding Financial Instruments. Routledge.
- Miller, A. (2020). Essentials of Financial Management. Harvard Business Press.
- Smith, J. (2020). Equity Markets and Corporate Policies. Oxford University Press.
- Taylor, P. (2021). The Bond Market: A Comprehensive Guide. Prentice Hall.
- White, D. (2021). Financial Accounting: A Detailed Overview. Cengage Learning.