Chapter 10 Flashcards

1
Q

Current liability

A

A debt that a company reasonably expects to pay

  1. ) from existing current assets or through creation of other current liabilities
  2. ) Within one year or the operating cycle, whichever is longer
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2
Q

Notes payable

A

An obligation in the form of a written note

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3
Q

Why notes payable instead of accounts payable

A

Give the lender written documentation of the obligation in case legal remedies are needed to collect the debt

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4
Q

Journal Entry accepting notes payable

A

Cash XXX

Notes Payable XXX

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5
Q

Journal Entry for accrual of interest

A

Interest Expense XXX

Interest Payable XXX

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6
Q

Journal Entry for Payment of Note Receivable

A

Notes Payable XXX

Interest Payable XXX

Cash XXX

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7
Q

Sales Tax Journal Entry by Company before remitting it to the government

A

Cash XXX

Sales Revenue XXX

Sales Taxes Payable XXX

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8
Q

Journal entry when company remits sales tax to government

A

Sales Taxes Payable XXX

Cash XXX

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9
Q

Cooley Grocery store serves only as a ______________ for the taxing authority

A

collection agent

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10
Q

Company rings up sales taxes seperately:

Total receipts of 10,600 with a 6% sales tax

find sales tax amount

A

10,600 / 1.06 = 10,000

10600 - 10000 = 600

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11
Q

Journal entry when a company receives an advance

A

Cash XXX

Current liability XXX

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12
Q

Journal entry when company earns the revenue

A

Unearned revenue account XXX

Earned Revenue Account XXX

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13
Q

Airline

A

Unearned revenue: Unearned Passanger Ticket Revenue

Earned Revenue: Passenger Ticket Revenue

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14
Q

Magazine publisher

A

Unearned Revenue: Unearned Subscription Revenue

Earned Revenue: Subscription Revenue

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15
Q

Hotel

A

Unearned Revenue: Unearned Rental Revenue

Earned Revenue: Rental Revenue

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16
Q

Companies often identify current maturities of long-term debt on the balance sheet as _________________

A

long-term debt due within one year

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17
Q

account for social security

A

FICA Taxes Payable

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18
Q

Account for federal income tax

A

Federal Income Taxes Payable

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19
Q

Account for State Income Tax

A

State Income Taxes Payable

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20
Q

Account for unemployment federal taxes

A

Federal Unemployment Taxes Payable

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21
Q

Account for unemployment state taxes

A

State Unemployment Taxes Payable

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22
Q

Wages expense and Wages payable journal entry

A

Salaries and Wages Expense XXX

FICA Taxes Payable XXX

Federal Income taxes Payable XXX

State Income Taxes Payable XXX

Salaries and Wages Payable XXX

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23
Q

Company’s Payaroll Tax Expense Journal Entry

A

Payroll Tax Expense XXX

FICA Taxes Payable XXX

Federal Unemployment Taxes Payable XXX

State Unemployment Taxes Payable XXX

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24
Q

Long-term liabilities

A

Obligations that a company expects to pay more than one year in the future

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25
Q

Long term liabilities are often in the form of ________________________

A

bonds or long-term notes

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26
Q

Bonds

A

A form of interst-bearing note payable issued by corporations, universities, and governmental agencies

Sold in small denominations (1,000 or multiples of $1,000)

Attract many investors

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27
Q

Secured bonds

A

Bonds that have specific assets of the issuer pledged as collateral

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28
Q

Unsecured bonds

A

Bonds issued against the general credit of the borrower

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29
Q

Convertible bonds

A

Bonds that can be converted into common stock at the bondholder’s option

Attractive to bondholder and the issuer

For the issuer, bonds sell at a higher price and pay a lower rate of interst than comparable debt securities that do not have a conversion option

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30
Q

Callable bonds

A

Bonds that the issuing company can retire at a stated dollar amount prior to maturity

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31
Q

Bond certificate

A

A legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual interest rate and the maturity date of the bonds

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32
Q

Face Value

A

Amount of principal due at the maturity date of the bond

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33
Q

Maturity date

A

The date on which the final pyament on a bond is due form the bond issuer to the investor

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34
Q

Contractual (stated) interest rate

A

Rate used to determine the amount of interest the borrower pays and the investor receives

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35
Q

The contractual rate is often referred to as the __________

A

stated rate

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36
Q

Time value of money

A

The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future

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37
Q

Present Value

A

The value today of an amount to be received at some date in the future after taking into account current interest rates

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38
Q

Market interest rate

A

The rate investors demand for loaning funds

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39
Q

Discounting the future amounts

A

The process of finding the present value

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40
Q

Market value of bond

A

Present value of all the future cash payments promised by the bond

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41
Q

Bond prices for both new issues and existing bonds are quoted as ________________________

A

a percentage of the face value of the bond

Face value is usually $1,000

Ex. $1,000 bond with a quoted price of 97 means $970

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42
Q

Journal Entry for issuing bonds

A

Cash XXX

Bonds Payable XXX

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43
Q

Interest adjusting entry on bonds

A

Interest expense XXX

Interest Payable XXX

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44
Q

Interest payable classified as

A

current liability

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45
Q

bond payable classified as

A

long-term liability

46
Q

Payment of interest journal entry

A

Interest Payable XXX

Cash XXX

47
Q

When the contractual interest rate and the market interest rate are the same, _______________

A

bonds sell at face value

48
Q

Discount (of a bond)

A

The difference between the face value of a bond and its selling price, when a bond is sold for less than its face value

49
Q

Premium (on a bond)

A

The difference between the selling price and the face value of a bond when a bond is sold for more than its face value

50
Q

Bond prices ____________ with changes in the market interest rate

A

vary inversely

51
Q

As market interest rates decline

A

bond prices will increase

52
Q

If the market interest rate is below the contractual rate when a bond is issued ___________

A

the price will be higher than the face value

53
Q

Zero-coupon bonds

A

pay no interest

sell at a deep discount to face value

54
Q

Journal entry for issuance of bonds at a discount:

A

Cash XXX

Discount on Bonds Payable XXX

Bonds Payable XXX

55
Q

Discount on bonds payable

A

contra account to bonds payable

deducted from bonds payable on the balance sheet

56
Q

Carrying value (book value)

A

Subtracting balance of the discount account from the balance of the Bonds Payable account

57
Q

Amortizing the discount

A

Allocating bond discount to expense in each period in which the bonds are outstanding

58
Q

Journal entry issuing bonds at a premium

A

Cash XXX

Bonds Payable XXX

Premium on Bonds Payable XXX

59
Q

Premium on bonds payable

A

added to the bonds payable on the balance sheet

60
Q

Premium is considered to be a ___________________

A

reduction in the cost of borrowing that reduces bond interest expense over the life of the bonds

61
Q

Amortization of the premium ___________ the amount of interest expense reported each period

A

decreases

62
Q
A
63
Q

Statement of Cash Flows: Debt

A

information regarding cash inflows and outflows during the year that resulted form the principal portion of debt transactions appears in the “financing activities”

Interest expense in the “operating activities” as a result of debt transactions

64
Q

Bank line of credit

A

A prearranged agreement between a company and a lender that permits the company to borrow up to an agreed-upon amount

65
Q

Times interest earned ratio

A

A measure of a company’s solvency, calculated by dividing income before interest expense and taxes by interest expense

66
Q

Times interest earned ratio:

A

Net income + Interest expense + Tax expense

Interest expense

*solvency ratio

**uses income before interest expense and taxes because this number best represents the amount available to pay interest

67
Q

Off balance-sheet financing

A

An intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet

68
Q

Two common types of off-balance sheet financing result from _______________________

A

unreported contingencies

lease transactions

69
Q

Contingencies

A

Events with uncertain outcomes that may represent potential liabilities

ex. lawsuits - possilbe negative implications; warranties; environmental clean-up obligations

70
Q

Two characteristics to record a contigency

A

Reasonable estimate

Probable outcome

*otherwise write it in notes to its financial statements

71
Q

GAAP on leases

A

more rules-based

companies get get around the rules to listing it as an operating lease instead of a capital lease

72
Q

debt covenants

A

Specific financial measures, such as minimum levels of retained earings, cash flows, that a company must maintain during the life of a loan

if a company violates a covenant, it violated the loan agreement and the creditor can demand immediate repayment

73
Q

Straight-line method of amortization

A

A method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period

74
Q

Bond discount amortization =

A

Bond discount / Number of interest periods

75
Q

Journal entry for recording amortization of a bond discount

A

Interest expense 10,400

Discount on Bonds Payable 400

Interest Payable 10,000

76
Q

Bond Premium Amortization =

A

= Bond Premium / Number of Interest Periods

77
Q

Journal entry of amortization of bond premium

A

Interest Expense 9,600

Premium on Bonds Payable 400

Interest Payable 10,000

78
Q

Effective interest rate

A

Rate established when bonds are issued that remains constant in each interest period

79
Q

Effective-interest method of amortization

A

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds

80
Q

Bond interest expense

A

Carrying value of Bonds at Beginning of Period

x

Effective-interest rate

81
Q

Bond interest paid

A

Face amount of bond

x

Contractual interest rate

82
Q

Amortization amount in effective-interest method

A

Bond Interest Expense - Bond Interest Paid

83
Q

When the amounts are materially different, GAAP requires ___________________

A

use of the effective-interest method

84
Q

Discount on Bonds Payable account is often referred to as ________

A

Unamortized Discount on Bonds Payable

85
Q

Amortizing a bond discount under effective-interest method

A

Interest Expense 10,319

Discount on Bonds Payable 319

Interest Payable 10,000

86
Q

Amortizing a bond premium under effective-interest method

A

Interest Expense 9,670

Premium on Bonds Payable 330

Interest Payable 10,000

87
Q

Mortgage

A

Pledges title to specific asset as security for a loan

a document that secures a long-term note

88
Q

Mortgage notes payable

A

A long-term note secured by a mortgage that pledges title to specific asset as security for the loan

89
Q

Electronic spread sheet programs

A

Creat a schedule or installment loan pyaments

allows you to put in the data for your own mortgage loan and get an illustration that really hits home

90
Q

Journal entry to record mortgage loan

A

Cash XXX

Mortgage Payable XXX

91
Q

Journal Entry to record semiannual payment on mortgage

A

Interest Expense XXX

Mortgage Payable XXX

Cash XXX

92
Q

Bond Discount Amortization =

A

Bond Discount / Number of interest periods

93
Q

Journal entry: straight line method of amortization bond discount

A

Interest Expense 10,400

Discount on Bonds Payable 400

Interest Payable 10,000

94
Q

Journal entry: amortizing bond permium straight-line

A

Interest Expense 9,600

Premiumon Bonds Payable 400

Interest Payable 10,000

95
Q

Effective interest rate

A

Rate established when bonds are issued that remains constant in each interest period.

96
Q

Effective interest method of amortization

A

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds

97
Q

present value

A

the value now of a given amount to be paid or received in the future, assuming compounding interest

98
Q

Discounting the future amount

A

The process of determining the present value

99
Q

Present value =

A

Future value / (1 + i)^n

100
Q

Present value gets smaller ________

A

as you move farther away from future

ex. 1 year to 5 years

101
Q

Present value of an annuity

A

The value now of a series of future receipts or payments, discounted assuming compounded interest

102
Q

Examples of a series of periodic receipts or payments

A

Loan agreements, installment sales, mortgage sales, lease contracts, and pension obligations

103
Q

annuities

A

Periodic receipts or payments

104
Q

To compute present value of an annuity, it is necessary to know:

A
  1. Discount rate
  2. Number of discount periods
  3. Amount of the periodic receipts or payments
105
Q

semiannually

A

twice a year

106
Q

When market interest rate is equal to the bond’s contractual interest rate___________________

A

the present value of the bonds will equal the face value of the bonds

107
Q

Current cash debt coverage

A

Measure of liquidity

Net cash by operating activities / Average Current Liabilities

108
Q

Direct write-off info:

A

No estimation

No “matching”

Gross A/R

Volitale

109
Q

Allowance method results in ___________

A

Net Accounts Receivable

110
Q

Aging receivables method:

A

Use different time periods

The longer outstanding, the higher % uncollectible

111
Q

Contingent liabilities effect:

A

If the contingent liabilities result in material losses for the company it will negatively impact the company’s financial results and affect the decisions made by the users of the financial statements.