>>Hello.
How are you all doing?
>>Great.
>>Grand.
That is excellent.
I have a question for you guys and I have
a question for you folks who are watching
this as well.
I want you to answer this, maybe jot it down
on a piece of paper or at least make a mental
note in your mind.
Why are you taking this class?
Not Dave Krug.
But why are you taking Accounting 2?
Why are you taking Accounting 2?
Okay.
Think about that for a second.
All right.
Now, I asked my students here before the cameras
rolled why they were taking it.
What are some of the reasons?
Jeremiah?
>>I'm going to be an accountant, so I kind
of have to take it.
(Laughter)
>>Your actual words were I'm required to;
right?
>>Yes.
>>Yes.
Okay.
Anybody else say that?
>>I enjoy it, too.
I think it's an interesting class.
>>Okay.
The reason I'm going through this little mental
exercise here is I think a big part of life
is getting to the why you do something.
For example, you said I'm required to, I have
to.
Sometimes people say, I have to take this
class.
Well, you don't have to.
You realize that.
>>I'm choosing to be an accountant so I'm
choosing that I have to choose to take this
class.
>>Okay.
Why do you want to be an accountant?
>>I enjoy it.
>>Why is it important for you to do something
that you enjoy?
>>Because it makes me happy to get up every
day to go to work.
>>Okay.
See what I'm getting at here?
Sometimes --
>>You could always ask why, though.
Why would that make you happy?
You could always ask that.
>>You could always go further.
But I think it's good on this to say, okay
-- because sometimes students say I'm required
to do this and I say you're not required to
do it.
And they say, well, I'm required to do it
to get my business degree.
And I say, well, why are you getting a business
degree?
You don't have to get a business degree.
Is it the law that you have to get a business
degree?
Is it a law that you have to get any degree?
No.
Well, why do you want to get a degree?
And a lot of times it comes down to this:
I don't want to do a really hard manual labor
job my whole life.
Right?
>>True that.
>>Yes.
>>Has anybody ever done a really tough manual
labor job?
>>Yes.
>>I have.
>>And I hate my life.
>>And you know what?
As tough as it is when you're in your 20s,
wait until you're in your 40s.
Wait until you're in your 50s.
Right?
But I think it's an important exercise that
I utilize a lot in my life to ask why am I
really doing this?
Because after I go -- I answer the first why
and then go, well, why am I doing that?
Well, why am I doing that?
A lot of times it gets down to, well, it's
because I want to provide for my wife and
my kids, who I love.
I want to be able to, you know, have some
financial security.
I don't want to have to do a manual labor
job when I'm 65-years-old.
But I have found in my own life that when
I get to the why I'm doing something -- if
I know why I'm doing it, it's a lot easier
to do.
Have you ever gotten to that?
Okay.
If you know why you're doing something, a
lot of times the motivation to do well in
it is a lot more apparent.
Okay.
So, think about that.
Deep thoughts on a Monday morning.
>>I was going to say, happy Monday.
>>Happy Monday.
Okay.
Let's go ahead and go through the homework.
What we're going to do today, we are going
to wrap up Chapter 13.
We just have a few homework exercises from
Chapter 13.
They weren't too tough, were they?
And then we're going to actually start Chapter
15.
Okay.
We're going to start Chapter 15, which is
on investments.
Okay.
Now, this is lecture number 208.
Are you with me?
We will have the test over Chapters 12, 13
and 15 after lecture 210.
Are you with me?
This is 208 -- so we'll have 209.
Then we'll have 210.
Now, I'll tell you off-camera when that specific
date is for you; but I don't to even mention
it on camera because it fouls up the people
at home.
They get confused.
So we have this lecture and two more lectures
and then the test.
Cool?
All right.
So let's go ahead and start.
This is lecture 208.
The test will be after lecture 210.
Okay.
I believe I assigned a couple discussion questions,
did I not?
We don't often do the discussion questions;
but let's take a look at Discussion Question
13 and Discussion Question 18.
Okay.
Discussion Question 13: What's the difference
between a stock dividend and a stock split?
I'll go ahead and answer that.
Well, first of all, I'll say some commonalities
that the two items have.
They are both means of increasing the number
of shares out there without requiring additional
payment from the shareholders.
Is that correct?
And the main reason to do that is to move
that market price down to a manageable trading
range.
A range that can be afforded by current investors
and potential investors.
All right?
So that is the thing that they have in common.
The difference between them is a stock dividend
requires journal entries to be made.
I don't require you to learn those journal
entries.
But a stock dividend does have journal entries
that have to be made; whereas, a stock split
does not.
Make sense?
Okay.
There's some other minor differences I'm not
too concerned about.
I mainly want you to understand what those
mechanisms are used for.
>>Just want to make sure I'm understanding
it right because what I read was, like, a
stock dividend increases the amount of equity
that the stockholders then own.
Is that more complex?
>>Yeah, it is more complex.
And the reason I didn't go down that road
was that's mainly apparent if you teach all
those journal entries.
>>Okay.
>>Okay.
And, again, the reason I'm not teaching those
journal entries is not because I don't think
you can't handle it.
It's just that we have a finite amount of
time.
In 25 years of accounting, I've never once
made that journal entry for a stock dividend.
Okay.
And you will go over it again in advanced
accounting classes.
But we have a finite amount of time in this
class.
I like to concentrate on the things I think
you will utilize in your jobs.
And I think stock splits are used a lot more
common than stock dividends anyway.
Okay.
But, yeah, you're right.
>>Okay.
>>Okay.
Discussion Question number 18: What is a stock
option?
A stock option is -- think of it as a coupon
that gives the holder the right to purchase
a stock at a specified price during a specified
time.
We talked about this.
And I won't repeat the whole lecture from
last time.
But the hope is that those who hold the stock
option will realize that the stock option
gets more valuable as the stock price goes
up so they will make decisions for the company
as a key member of the company or key executive
of the company to help the stock price rise.
Okay.
The stock price goes down, that stock option
is not going to be worth anything.
Okay?
All right.
Okay.
That's it for the discussion questions.
Any questions on those?
Okay.
If not, let's go jump over to Quick Study
13-11.
The first part of it is right here.
And the second part of it is continued on
to the next page right down here below.
All right.
Let me go ahead and take a look at that.
Quick Study 13-11.
A review of the notes payable files discovers
that three years ago the company reported
the entire amount of a payment, principal
and interest, on an installment note payable
as interest expense.
This mistake had a material effect on the
amount of income in that year.
How should the correction be reported in the
financial statements?
Well, it says that it's material.
Right?
You can come off that.
It says that it's material.
So, what do you do when you discover an error
that actually occurred, in this case, three
years ago?
We handle it on the statement of retained
earnings, don't we?
Now, that's key.
It is not handled on the income statement.
Okay.
It's not handled on the income statement because
that would muddy up the results of this period's
operations.
And it wasn't something that occurred this
period, was it?
Okay.
So we handle it on the statement of retained
earnings.
Or sometimes we call it the statement of stockholders'
equity.
And it's handled as a prior period adjustment
on the beginning balance of retained earnings.
Okay.
We handle that as an adjustment to the prior
-- an adjustment to the prior year's -- I'm
not saying this very well.
We handle this as an adjustment to the beginning
balance of retained earnings.
Okay.
Make sense?
Now, also, you know how a lot of times in
your financial statements you'll show this
year's and prior years.
Wherever that data is for the prior years
is presented, that needs to be changed as
well.
But it's not handled on the income statement.
We adjust the beginning balance of retained
earnings.
Okay.
Let's read the next one.
Try to get it out of that glare.
After using an expected useful life of seven
years, and no salvage value to depreciation,
its office equipment over the preceding three
years, the company decided early this year
that the equipment will last only two more
years.
How should the effects of this decision be
reported in the current year financial statements?
Okay.
What do we do there?
Anybody want to take a --
>>Change the percentage amount of the depreciation.
>>Yes.
But do we go back to prior years and make
a change?
>>No.
>>No.
This is not a material situation.
We would not be changing the beginning balance
of retained earnings.
This is -- you remember from Accounting 1,
Chapter 10, change an accounting estimate?
Do you remember that?
Like if you change the estimated salvage value
or change in this case the remaining years
of life on a fixed asset?
Okay.
We don't go back and change anything.
As you said, we just change how much from
here on forward that we're going to depreciate.
Cool?
All right?
Cool.
And then I believe we did Exercise 13-11.
Is that correct?
>>Yes.
>>Exercise 13-11.
So let's take a look at that.
Okay.
This is Exercise 13-11.
The following information is available for
Amos Company for the year ended December 31,
2013.
The balance of retained earnings at December
31, 2012, prior to discovery of error is 1,375,000.
Cash dividends declared and paid during 2013
were 43 grand.
It neglected to record 2011 depreciation of
expense of 55,500, which is net of 4,500 in
income taxes.
Okay.
So that is the error that we discovered.
It was back in 2011.
We neglected to record that amount of depreciation
expense.
The company earned 126,000 in 2013 net income.
Okay.
First of all, we have to ask ourselves -- stay
on this if you would -- we have to ask ourselves
if this is material.
Okay?
Well, evidently it is.
Okay.
Because they're asking us to prepare a statement
of retained earnings.
Okay.
For 2013.
But if you look at the size of that error
compared to, for example, the current year
net income, that's probably -- that's probably
material.
Okay.
Now a 55,500 error for, like, Sprint Corporation,
which has billions and billions of dollars,
that would not be material.
But for a company of this size, a 55,500 error
would be material.
Okay.
So you have to make that decision.
Sometimes that decision is not as clear-cut
as you might think and you might need to consult
a CPA or an attorney or something like that.
Okay?
All right.
So let's take a look at that answer.
Let's take a look at this.
Okay.
Exercise 13-11.
Okay.
We're going to do a statement of retained
earnings for Amos Company for the year ended
December 31, 2013.
Okay.
The first thing we're going to do is we're
going to report that retained earnings balance
that was previously reported.
Okay.
And they tell us that's 1.375 million.
Then what we're going to do is we are going
to make that prior period adjustment.
Okay.
Now, this is the expense that wasn't recorded
in 2011.
Now, this is net of the $4500 in income taxes.
And, again, this class does not really go
into income tax too much.
You'll get that in the tax class.
So I'm not so concerned that you, you know,
understand the whole income tax effects of
this; but what I do want you to understand
is this: If we did not record expense in that
prior period, then that prior period net income
was overstated.
Agreed?
>>Uh-huh.
>>And if that net income in the prior period
was overstated, when we closed it to retained
earnings, thus, retained earnings is overstated.
Was overstated.
Right?
So we have to subtract that.
And in a way we're saying, the retained earnings,
this is what it really should have been.
This is what we mistakenly, you know, over-calculated
it to be; but it really should have been this.
You with me?
Once we do that, then the rest of this is
pretty easy.
Then we add the net income.
We subtract out the dividends and we get our
retained earnings for December 31st of 2013.
Are you with me?
Now, how does the market react when we have
to make a change in a prior period?
When we have to -- the market doesn't like
it.
The market doesn't like it.
As I said, when you tell somebody, hey, remember
that annual report we gave you last year?
Well, it was wrong.
But here's this year's.
Okay.
You might have reasons to be a little bit
skeptical.
Correct?
All right.
Okay.
We are now officially done with Chapter 13.
All right.
Now, take a look -- I'll tell you folks after
the cameras stop rolling as far as when your
Chapter 13 Connect assignment is due.
You folks at home, look on the red calendar
on D2L.
But you are officially ready to do your Chapter
13 Connect assignment.
Cool?
Now we're going to go, not to Chapter 13,
but to Chapter 15.
Okay.
Chapter 15.
And what this chapter is over is investments.
This chapter is over investments.
Now, this lecture will have a little less
of me yakking and more of you doing.
So we're going to talk about some things and
then we're going to work on some things in
class.
Okay.
But let's talk about investments.
First of all, let's know real clearly what
we're talking about here.
This is a partial balance sheet.
And you can see in red the things that are
highlighted that we are going to be discussing
in this chapter.
We're going to be discussing short-term investments,
which is in the current asset section.
We're going to be discussing long-term investments,
which is in the long-term investments section.
We're going to be talking about long-term
investments in common stock.
And we're going to be talking about long-term
investments in, like, for example, long-term
bonds or debt securities.
This lecture in particular, we're really going
to focus on debt securities.
And then the next lecture we'll talk about
equity.
Okay?
So, we are in the asset section right now.
We are talking about the asset section of
investments.
Now, why would a company have investments
on their balance sheet?
Well, the same reason, largely, that individuals
would have investments.
They want to transfer excess cash into investments
to produce higher income; right?
For example, as you guys start saving for
your retirement, do you think your broker
is going to advise you to put all your money
into a savings account that earns .3% per
year?
No.
They're going to say to take a large portion
of that and put it into investment vehicles
that will hopefully earn a higher income.
Correct?
So, it's not prudent for companies to have
a lot of excess cash just sitting around.
Let's get it into something that's going to
earn some money.
Okay.
So that's one motivation for investments.
Another motivation, some companies are set
up to produce income from investments.
For example, you guys have heard about in
Kansas City there is a company called American
Century.
Right?
That's a mutual fund company.
Well, that's what they do, they mange investments.
Okay.
So for some companies, that's part of what
their operations are.
And then the third reason, and we'll just
kind of touch on this, is some companies make
investments for strategic reasons.
Some companies make investments for strategic
reasons.
You can come off that.
For example, there might be times that companies
might invest in a customer or a vendor.
Okay.
One real quick kind of elementary example
is, as an example of this, might be, let's
say you're a transportation company.
You do transportation.
And let's say the rates that you charge your
customers are somewhat fixed in contracts.
Well, if fuel prices go up, if fuel prices
go up, that's going to be a big expense for
you for providing your services; right?
So your net income is going to decrease; correct?
If fuel prices go up.
So one thing you might do is maybe you would
invest some of your money in some sort of
company that benefits, that their income actually
increases, if fuel prices are going up.
Maybe Exxon or something.
So that if and when fuel prices go up, that
investment, increased investment income that
you earn from that investment, will somewhat
offset the increase in operation expenses
that you are now incurring.
Are you with me?
That's a very simplified example.
When I was in my MBA at KU we -- this was
a very complicated subject that we went into
as far as trying to offset risk by doing investments.
But that's just kind of a simplified example.
Kind of understand that?
So, that's the third motivation that a company
might have for investments.
Now, accounting for investments depends on
three factors.
First of all, is it a long-term or is it a
short-term investment?
Is it long-term or short-term?
Or sometimes we say is it non-current or current.
Is it a debt or is it an equity investment?
That's a very important one.
We're going to talk about debt today.
Next time we'll talk about equity.
And, third, if it is equity, in other words,
we are owners or shareholders, what percentage
of the company do we own?
Okay.
Now, for the majority of this lecture and
the lectures that come after, we are really
assuming that we own less than 20% of the
company for which we have equity investments.
Okay.
And that's usually the case.
All right.
Let's talk about the short-term versus long-term.
Short-term investments are readily convertible
to cash and they're intended to be converted
to cash within the next year.
And they are reported in the Current section
of the balance sheet.
Okay.
So short-term investments are going to be
converted to cash within the next year.
However, we have an exception.
We do not include into short-term investments
what we call cash equivalents.
What are cash equivalents?
Cash equivalents are investments that are
both readily converted to known amounts of
cash and they mature within the next three
months.
Okay.
This would be like a 90-day Certificate of
Deposit.
A 90-day Certificate of Deposit.
So, if it's going to mature in zero to three
months, and it's a cash equivalent, it's actually
recorded in the line of the balance sheet
that says cash and cash equivalents.
But if it's going to mature in between three
months and 12 months, then it's reported in
that separate line of short-term investments.
Does that make sense?
Okay.
Long-term investments, on the other hand,
are not readily convertible to cash and they
are not intended to be converted to cash within
the next year.
Predictably, they're reported in the non-current
section of the balance sheet.
Okay.
All right.
Not too tough there.
Yeah, Luke.
>>So when you intend to cash a long-term investment
the next year, does it become a short-term
or do you still -- do you still account for
it as a long-term?
>>That's a great question.
Did you hear that question?
What if you have a long-term investment that
you're intending to -- you know you're going
to cash it in in the next year.
Yeah, then it would actually be moved.
>>Okay.
>>Okay.
And you could have a long-term investment
such as a debt security that's been out there
a long time; but once it's getting ready to
mature, you move it into the current section.
Okay.
So.
Good question.
There's kind of a constant analysis that has
to be done on one's investments to know how
to properly classify them.
So, but that's kind of the same with other
assets, too, right?
With notes receivable.
Long-term notes receivable eventually become
current notes receivable, don't they?
Okay.
Good question.
Now let's make a differentiation between debt
securities and equity securities.
Debt securities reflect a creditor relationship.
Such as, if you have an investment in a treasury
note or a bond of the government or bond of
a company, or a Certificate of Deposit.
Okay.
Those are debt securities.
Think about those.
Are you an owner of that entity?
No.
Are you a shareholder of that entity?
No.
You are a creditor in your relationship with
them.
You're going to receive interest revenue.
Correct?
So that's a debt security.
Equity securities, which we'll talk about
next lecture, those do reflect an owner relationship.
Like when you buy stock in a company, you
are an owner, aren't you?
Okay.
And there you have investments and shares
of stock and you probably receive dividend
revenue.
Okay.
But let's focus today on debt securities.
Okay?
Where it is a creditor relationship and we
are not an owner.
Okay.
Cool.
Let's talk about the accounting basics for
debt securities.
Debt securities are recorded at cost when
purchased.
And we receive interest revenue for investments
in debt securities as it's earned.
Okay.
Interest revenue, as we earn it, we record
that.
Okay.
Now -- come off that for a second.
Let's make sure we understand.
When we go back to Chapter 14 we're going
to talk a lot more about bonds.
Okay.
But basically what a bond is is if I buy a
bond for, like, $10,000, I give the company
$10,000 today; and in a way, I'm acting as
a creditor.
And during the life of that bond, let's say
it's three years, every six months, they pay
me some interest.
So I have some interest revenue.
And then at the end of the life of that bond,
then they pay me back my principal as well.
Does that make sense?
That's how a bond works in a very simplified
explanation.
So, looking back at the slide.
Debt securities are recorded at cost when
purchased.
Interest revenue for investments in debt securities
is recorded when we earn it.
So let's look at an example.
Most of this stuff, an example will clarify.
On January 1 of 2015, Matrix, Inc., that's
us, we paid Garmin, Inc. $975,000 as an investment
in Garmin's bonds.
These are two-year bonds and they have a stated
rate of 6% annually.
Interest is paid semi-annually.
What does semi-annually mean?
Twice a year, every six months.
And in this case it says they are paid semi-annually
on June 30th and December 31st.
Okay.
Let's take a look at the journal entries.
Well, when we purchased the bonds, we debit
long-term investments.
Okay.
And then we sometimes put in parenthesis Garmin
so we can kind of keep track of these things
a little more easy.
So we debit that for 975,000.
We credit cash for 975,000.
Okay.
Now, we record interest revenue as it's earned.
Well, on June 30, we have earned six months
worth of interest.
Correct?
Now, how do we calculate -- how do we calculate
the amount of interest that we have earned
on June 30th?
Well, we're going to take the principal amount
-- going to try to write with a mouse here
-- times the interest rate.
But then we take it times one-half because
it pays every six months.
Okay.
So what was the principal amount?
975,000.
And we take that times 6%.
And then we take that times one-half.
Henry, bang that out on your calculator over
there.
And make sure that 975,000 times 6%, times
one-half, that should equal the amount of
interest revenue that we show recorded above.
Does it?
>>Yep.
>>Okay.
So that's how we get that 29,250.
And we debit cash, we credit interest revenue
for 29, 250.
Okay.
Now, that's the journal entry we make six
months into this bond.
How long a bond was this?
Let's go back.
This was a two-year bond.
So, we are going to make this entry again
December 31st, this exact entry.
Correct?
Matter of fact, how many total times will
we make this journal entry that you're looking
at right now?
>>Four.
>>Four times.
Because it's a two-year bond.
We make it every six months.
There's four six month periods in two years.
Correct?
So we'll make that journal entry three more
times after this June 30th.
Then we'll also make one more journal entry
on that -- they didn't show it -- but on that
final -- let me go ahead and write it down.
On that final December 31st, two years after
we purchased the bond --
>>Scoot it up.
>>Can you scoot it up?
>>Thank you..
12-31.
We are going to debit cash and credit long-term
investments, Garmin, for the principal amount.
Because they're going to pay us back our principal.
Okay.
>>So that's made on the 31st?
In the notes it says on January 1st that same
exact thing is made.
>>On the next slide it says the exact same
entry but it says January 1.
>>You're right.
Yeah, it does.
Well, this is 12-31 of 2016.
Yes.
Okay.
>>So would you also make that other journal
entry for the cash and interest revenue on
the same 12-31?
>>Yeah, you would.
Now, what they did here is -- sometimes you
make this on 12-31-16.
Sometimes you make it the next day on January
1 of 2017.
Okay.
But here is that journal entry.
You can see it better and more clearly written
right here.
Okay.
On January 1 of 2017, they do.
I didn't think they showed the journal entry
for the bond maturing, but they did.
Okay.
So, either on January 1, 2017 or December
31 of 2016.
Okay?
>>That's them giving you your money back?
>>That's them paying you back the principal.
During the life of the bond, they paid you
interest.
And then -- they don't pay you off principal
gradually.
They just pay you interest during the life
of the bond.
And then at the end when the bond matures,
that's when they pay you back all your principal.
Cool?
>>So how is that bond making profit at all
for Garmin since they're paying out expenses?
>>For Garmin?
Well, here's the reason, is at the inception
of the bond, they received $975,000, didn't
they?
Which they needed the money to do something
with; right?
So, yeah, they have to pay that back at the
end; but they've had to pay interest during
the life of that bond.
Just like if you want to buy a house, you've
got to have some money.
So you take a loan and you pay that back but
you also pay interest for the cost of having
that money.
>>Okay.
Makes sense.
>>Okay.
Make sense?
>>Uh-huh.
>>So -- good question.
Now, these journal entries that we looked
at for long-term investments -- for short-term
investments, everything would be the same
except we used the account called short-term
investments.
Make sense?
All right.
Let's look at one more example here.
Different security.
On August 1, 2015, Matrix, Inc., that's us,
we paid Sprint, Inc., $100,000 for their bonds.
Okay.
The ten-year Sprint, Inc. bonds have a stated
value of 7% annually.
Now, listen to this.
Interest is paid semi-annually on January
the 31st and July the 31st.
Okay.
Well, when we acquire those bonds, we debit
long-term investments for Sprint.
Then credit cash for 100,000.
Right?
Now, on December 31st, we have to make an
adjusting journal entry.
Okay.
Now, here's the way I think through this adjusting
journal entry.
Let's go back a slide to the inception of
this bond.
Okay.
Henry, have your calculator ready.
Okay.
I want to figure up how much interest we are
normally going to receive when we get paid
in this first six-month period.
Okay.
So I'm going to take the principal amount
of 100,000, times the annual interest rate
of 7%.
Times what?
You guys tell me.
>>Half.
>>Times one-half since it's paid semi-annually.
Okay.
So 100,000 times 7%, times one-half, equals
what, Henry?
>>3,500.
>>$3,500.
So every six months, we are going to receive
cash of $3,500 interest revenue.
Are you with me?
Okay.
Now let's go to the next slide.
Because what happens is we have a fiscal year-end
of December 31st, don't we?
Now, do we get paid interest on December 31st?
We do not.
But we've earned some interest, haven't we?
So we have to make an AJE.
Remember adjusting journal entries?
AJE.
We have earned five-sixths of the amount of
that $3,500 for the month of August, September,
October, November, December.
Right?
Now, we're not getting paid our cash here;
but we need to show the five-sixths earned.
So, Henry, if you take five over six times
3,500, bang that out real quick.
>>2,916 -- or 17.
>>But if you round it, it's 2,917.
Correct?
That's how we get that amount.
So what we'll do is -- I say that approximately
equals 2,917.
So we make that journal entry.
We debit interest receivable and we credit
interest revenue.
Correct?
So we can book the revenue which is earned
in the proper period in which it was earned.
Right?
Chapter 3, Accounting 1.
Questions?
Any questions on that, folks?
You can come off that.
>>Do you round it every time?
>>Yeah just round it to the dollar.
>>Okay.
>>Okay.
For your purposes now.
Okay.
What I want to do now in class is, I want
to do a handout, which I will give you here
in a second, and it is the Leonard handout.
Okay.
The Leonard handout.
Where did I put those?
Okay.
I want to do the Leonard handout -- let me
show you an example of what it looks like.
The Leonard Company handout.
Do that whole thing.
And then after you're doing with that, I want
you to do Quick Study 15-7.
Quick Study 15-7.
Okay?
And I will lay that up, after the music starts,
after a minute or so, I'll lay up Quick Study
15-7 in case you didn't bring it.
But what I want you to do, they're going to
play the music, do the whole Leonard Company
handout and then do Quick Study 15-7 and then
we'll go over the answers.
All right?
(Music playing.)
>>All right.
Okay.
We are back.
Let's go ahead and go over these real quick.
Okay.
Let's do Leonard Company first.
On January 1, 2014, Leonard Company paid $8,000
cash to purchase a three-year bond at par
value of Sprint as a long-term investment.
The bonds pay interest semi-annually on June
30 and December 31st.
The annual interest rate for these bonds is
6%.
Make journal entries for the following dates.
Okay.
Well, on January 1 of 2014, we debit long-term
investments.
And we might put Sprint there in parenthesis.
And we credit cash for how much?
>>8,000.
>>$8,000.
Okay.
So that's our journal entry there.
Right?
Okay.
On June 30 of 2014, we earn -- we're going
to receive some interest, don't we?
>>Uh-huh.
>>How much do we earn?
Let's calculate that up here.
We take 8,000 times 6%; correct?
>>Uh-huh.
>>Times one-half since it's semi-annually.
And that equals, what?
Is that 240 bucks?
>>Yeah.
>>Okay.
So we debit cash and credit interest revenue
for $240.
Is that correct?
Okay.
Questions?
Now, we make this same journal entry right
here, right here, right here, right here.
And we also make it down here, don't we?
>>Scoot it up.
Yeah.
>>Okay.
So we make this journal entry a total of how
many times?
>>Six.
>>Six.
One, two, three, four, five, six.
Correct?
But also on 12-31-16, we make an additional
journal entry, don't we?
And that's when we receive our principal.
How much principal -- how much cash do we
get paid?
>>8,000.
>>And what do we credit for 8,000?
>>Long-term investment.
>>Long-term investments, Sprint.
Correct?
Okay.
So this exact same journal entry, five additional
times.
Okay.
Are you with me?
Now let's do Quick Study 5-7.
>>15.
>>Thank you.
Quick Study 15-7.
We're not going to go back to Chapter 5.
We're going to stay in Chapter 15.
Quick Study 15-7.
On February 1, 2013, Garzon purchased 6% bonds
issued by PBS Utilities at a cost of $40,000,
which is their par value.
The bonds pay interest semi-annually on July
31st and January 31st.
For 2013, prepare entries to record Garzon's
July 31 receipt of interest and December 31
year-end interest accrual.
Okay.
Well, let's do that.
Well, they don't ask us to make a journal
entry for the purchase of the bond, do they?
Okay.
Just for those interest dates.
So, the journal entry on July 31st would be
this right here.
We debit cash, credit interest revenue, for
$1,200.
How do we calculate that?
We take the principal or the par value of
40,000, times 6%, times one-half.
Right?
And we actually receive cash on July 31st;
correct?
Now we have to record an AJE at December 31st,
don't we?
Okay.
Now, how much of that 1,200 have we earned?
Five-sixths, again, for August, September,
October, November, December.
Right?
Five.
So we take five-sixths times 1,200 and we
debit, not cash, but interest receivable,
for 1,000 and credit interest revenue.
And if you don't know whether you debit cash
or debit interest receivable, just ask yourself,
is this a date that we received cash payment?
And it's not, is it?
We don't receive any cash on December 31st.
It very clearly says that they pay interest
on July 31st and January 31st.
Not December 31st.
Right?
So those are the entries.
Okay?
Any questions on Leonard Company or Quick
Study 15-7?
Okay.
What I want you to do for homework then is
Exercise 15-2, 15-3 and 15-4.
Now, remember, you can also do your Chapter
13 Connect assignment.
And, remember, this was lecture 208.
After lecture 210, we have our test over 12,
13 and 15.
But do Exercise 15-2, 15-3 and 15-4 for next
time.
Thanks, guys.
See you later.
