User:X vdvd/sandbox

Intermediate Accounting Student’s Name Institutional Affiliation Chapter 13 Explain the characteristics of the following investment classifications: Held-to-maturity, trading securities, available-for-sale. Held-to-maturity securities are characterized as debt securities only. Purposefully, this is because equity securities lack specific maturity dates. Besides, stocks do not mature. This type of investment classification entails part of the debt security that the management intends to put on hold until it reaches the time for maturity (Khurana & Kim, 2003). Also, the held-to-maturity securities described to be the long-term assets that are amortized or repaid unless they can mature within a period of one year. Held-to-maturity securities are only characterized as such if only the maturity date is more than one year. Otherwise, they are termed as current assets. Mainly, trading securities are characterized as debt or equity securities because they are the fastest moving investments. It is evident that trading securities are managed as well as traded more regularly in the open markets to enhance the making of profits at any given time since they are done on a daily basis (Khurana & Kim, 2003). More importantly, the value of these trading securities showcases on the balance sheet in a context of fair market price. In a way, this characteristic ensures that the exact amount shown on the financial statements gives a reflection of the economic impact caused by these investments. Available for sale securities fits under the category of debt and equity investments that are characterized differently from trading or held-to-maturity securities. They are not actively manageable, and they are not in any way possible traded for a profit. As such, available for sale securities are the kind of investments that a company can decide to hold and plan to set at any point since they do not need to reach the maturity date for them to be amortized (Khurana & Kim, 2003). In essence, they can be sold anytime because the management never intends to keep them for a longer time to earn their returns on investments. Chapter 14 Explain why a company may want to issue debenture bonds as a source of financing. Primarily, debenture bonds are redeemable resulting in easy retrieval of money to finance the company. A company may decide to issue debenture bonds as a source of funding. There are unique features that assist in the minimization of risk such as the "sinking fund" that suggests that the debtor is obligated to pay a particular value of bond within a given period that is usually fixed (Avadhani, 2010). As well, a debenture bond is convertible and can be converted easily into equity shares to act as a source of financing. Also, the issuance of the company’s debenture bonds relies on the ability of the bond to carry interest and the security it attracts when reviewing the credit ratings of the debt holder. What potential benefits might the issuance of bonds have over the issuance of equity securities (common stock)? Evidently, the publication of bonds is way cheaper than the issuance of equity securities (common stock) since it has the benefit of reducing the company’s overall tax liability without risking sacrificing the control of the entire firm. The further advantage is that the interest on bonds as well as another debt is easily deductible on the business's income tax return. On the contrary, the dividends raised from common stock are not deductible. Besides, the issuance of bonds is beneficial since the ownership interest does not suffer dilution by inviting more owners. In essence, the issuance of bonds has tax benefits. Chapter 15 What is a stock split? Primarily, a stock split refers to a decision of the corporation to bolster the total number of shares by issuing more of it to the current shareholders. The stock prices reduce when the number of shares that are outstanding rises. How do stock splits affect each element of a corporation’s shareholders’ equity? Ideally, a stock split has no effect on the existing shareholders' equity since it is a transaction that causes an increase in the number of equal shares outstanding and at the same time reducing the value per share proportionally. However, a stock split contributes to the remarkable reduction in the par, whereby the there is nothing to enter in the journal (Baker & Gallagher, 1980). As such, the purpose of the stock split is to bolster the marketability by lowering the market value per share. As a result, it makes it quite easy for the corporation to initiate the issuance of additional shares. Chapter 16 Explain why a company may elect to issue stock dividends. A company can elect to issue stock dividends if the availability of its liquid cash is in short supply. The firm can distribute stock dividends to shareholders, with each distribution acknowledged in the form of fractions paid. Stock dividends are used when the company wants to reward investors but lack enough capital to distribute. In a similar way, they can be issued when the firm needs to maintain the existing liquidity carried by other investments. In essence, stock dividends are beneficial since they have a tax advantage. What is the net effect to stockholders’ equity as a result of a stock dividend? The paying out of stock dividends results in the decline of assets. Since assets are the same as the stockholders' equity, when one of them declines, the remainder is affected in the same manner. For instance, if a stock dividend is issued summing to $30,000, then the assets will also reduce by the same amount of the stockholders' equity. In such a way, if stockholders were initially $80,000, then it will now become $50,000. This is because a deduction is caused by the paying out of dividends.

References Avadhani, V. A. (2010). Investment management. Himalaya Publishing House. Baker, H. K., & Gallagher, P. L. (1980). Management's view of stock splits. Financial Management, 73-77. Khurana, I. K., & Kim, M. S. (2003). Relative value relevance of historical cost vs. fair value: Evidence from bank holding companies. Journal of Accounting and Public Policy, 22(1), 19-42.