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zAccounting > Chapter 10 powerpoint > Flashcards

Chapter 10 powerpoint Flashcards

1
Q

Current liability

A

A debt with two key features:

  1. Company expects to pay the debt from
    a. existing current assets or
    b. through the creation of other current liabilites
  2. Company will pay the debt within one year of the operating cycle, whichever is longer
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2
Q

Examples of current liabilities:

A

Notes Payable

Accounts Payable

Unearned Revenues

Accrued liabilities - taxes, salaries and wages, and interest payable

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3
Q

Notes Payable - current liability

A

Written as promissory notes

Require the borrower to pay interest

Those due within one year of the balance sheet are classified as current liabilites

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4
Q

Why are notes payable used instead of accounts payable?

A

Because notes payable give the lender written documentation of an obligation in case legal remedies are needed to collect the debt

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5
Q

Journal entry accepting a notes payable

A

Cash XXX

Notes Payable XXX

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6
Q

Journal entry accruing interest

A

Interest expense XXX

Interest Payable XXX

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7
Q

Journal entry paying note payable at maturity

A

Notes Payable 100,000

Interest Payable 4,000

Cash 104,000

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8
Q

Long-term notes payable

A

It may be secured by a mortgage that pledges title to specific assets (usually real estate) as security for a loan

Typically, terms require the borrower to make installment payments over the term of the loan. Each payment consists of:

  1. interst on unpaid balance of loan
  2. reduction of loan principal
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9
Q

Journal entry accepting a mortgage loan

A

Cash XXX

Mortgage Notes Payable XXX

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10
Q

Journal entry making firs installment on mortgage payments

A

Interest Expense 30,000

Mortgage Notes Payable 3,231

Cash 33,231

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11
Q

Balance shet - long term notes payable

A

Reduction in principal for the next year - current liability in balance sheet

Remaining unpaid principal balance - long term liability in balance sheet

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12
Q

Each payment on a mortgage note payable consists of:

A

Interest on the unpaid balance of the loan and reduction of loan principal

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13
Q

Sales Taxes are expressed as ___________________

A

a stated percentage of the sales price

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14
Q

The retailer collects tax from the ____________

A

customer

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15
Q

The terailer serves as a _____________ for the taxing authority

A

collection agent

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16
Q

The selling company is usually required to ring up ______________ on the cash register the amount of the sale and the amount of the sales tax collected

A

seperately

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17
Q

If Sales revenue and tax are together, to find sales revenue

A

Total cash received / (1 + Sales Tax Rate)

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18
Q

Journal Entry for sales revenue with tax

A

Cash 10,600

Sales Revenue 10,000

Sales Tax Payable 600

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19
Q

Unearned Revenue

A

Revenues that are received before the company delivers goods or provides services

Cash XXX

Unearned Revenue XXX

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20
Q

Journal entry when company earns money

A

Unearned Revenue XXX

Sales Revenue XXX

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21
Q

Current Maturities of Long-Term Debt

A

The portion of long-term debt that comes due in the current year

There is no adjusting entry required

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22
Q

Payroll and Payroll Taxes Payable

A

The term “payroll” pertains to both:

Salaries - monthly or yearly rate

Wages - hourly rate

*A company will withold amounts to pay various governmental authorities

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23
Q

Salaries

A

Managerial, Administrative, and Sales Personnel

(Monthly or Yearly Rate)

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24
Q

Wages

A

Store Clerks, Factory Employees, and Manual Laborers

(Hourly rate)

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25
Q

Determining the payroll involves computing three amounts:

A
  1. gross earnings
  2. payroll deductions
  3. net pay
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26
Q

Journal entry for payment of payroll

A

Salaries and Wages Payable 67,564

Cash 67,564

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27
Q

Payroll Tax Expense

A

Governmental agencies levy on employers

3 taxes:

  1. FICA Tax
  2. Federal Unemployment Tax
  3. State Unemployment Tax
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28
Q

Journal Entry for payroll on employees

A

Salaries and Wages Expense XXX

FICA Tax Payable XXX

Federal Tax Payable XXX

State Tax Payable XXX

Salaries and Wages Payable XXX

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29
Q

Journal entry on payroll employers

A

Payroll Tax Expense XXX

FICA Tax Payable XXX

State Unemployment Tax Payable XXX

Federal Unemployment Tax Payable XXX

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30
Q

Payroll and Payroll Tax Liabilities are classified as ____________ because they must be paid to employees or remitted to taxing authorities periodically and in the near term

A

current liabilities

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31
Q

Long-Term Obligations

A

The obligations a company expect to pay more than one year in the future

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32
Q

Bonds

A

A form of interest-bearing notes payable issued by corporations, universities, and governmental agencies

*usually denominations of $1,000 or multiples of $1,000 so they attract many investors

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33
Q

Secured

A

The specific assets of the issuer pledged as collateral for bonds

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34
Q

Unsecured

A

It is issued against the general credit of the borrower

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35
Q

Convertible

A

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

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36
Q

Callable

A

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

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37
Q

Bond Certificate

A

Issued to the investor

Provides information such as:

  1. Name of company issuing bonds
  2. Face value
  3. Maturity date
  4. Contractual interest rate (stated rate)
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38
Q

Face Value

A

The principal due at the maturity

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39
Q

The Maturity Date

A

The date final payment is due

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40
Q

Contractual interest rate

A

The rate (usually annual) to determine cash interest paid, generally semiannually

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41
Q

Time Value of Money

A

Used to indicate the relationship between time and money

i.e a dollar received today is worth more than a dollar promised at some time in the future

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42
Q

The market value is a function of the three factors that determine present value:

A

The dollar amounts to be received

The length of time until the amounts are received

The market rate of interest (rate investors demand for loaning funds)

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43
Q

Discounting

A

The process of finding the present value is referred to as discounting the future amounts

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44
Q

Simple interest

A

Computed on the principle amount only

The return on the principle for one period

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45
Q

Compound interest

A

Computed on the principal AND on any interest earned that has not been paid or withdrawn

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46
Q

Present Value formula

A

Present Value = Future Value / (1 + i)n

p = principal or present value

i = interest rate for one period

n = number of periods

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47
Q

Present value of an annuity

A

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

Necessary to know:

  1. Discount Rate
  2. Number of Discount Periods
  3. Amount of Periodic Receipts or Payments
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48
Q

What happens to interest rate when discounting is semiannual

A

divide by 2

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49
Q

When discount rate is identical to the interest payment

A

Present value of bond = principal

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50
Q

A corporation records bond transactions when it:

A

Issues or Retires (Buys Back) Bonds

Converts Bonds into Common Stock (Bond Holders)

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51
Q

If bond holders sell their bond investments to other investors, ___________________

A

the isue firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction

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52
Q

Bonds may be issued at:

A

Face Value

Below Face Value (Discount)

Above Face Value (Premium)

*bonds are quoted as a percentage of face value

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53
Q

The rate of interest investors demand for loaning funds to a corporation

A

Market Interest Rate

54
Q

Journal Entry when issue a bond

A

Cash XXX

Bonds Payable XXX

55
Q

Journal entry when a bond you issue accrues interest

A

Bond Interest Expense XXX

Bond Interest Payable XXX

56
Q

Journal entry when you pay interest you accrued on a bond

A

Bond Interest Payable XXX

Cash XXX

57
Q

Assume Contractual rate of

A

10%

58
Q

Market interest 8%

A

Premium

59
Q

Market interest 10%

A

Face Value

60
Q

Market Interest 12%

A

Discount

61
Q

If a bond is sold at a premium, it means the contractual interest rate ____________________

A

exceeds the market interest rate

62
Q

Journal entry issuing a bonds payable

A

Cash 98,000

Discount on Bonds Payable 2,000

Bonds Payable 100,000

63
Q

Discount on Bonds Payable

A

Debit balance

Contra account deducted from Bonds Payable

64
Q

Journal entry issuing bond at premium

A

Cash 102,000

Bonds Payable 100,000

Premium on Bonds Payable 2,000

65
Q

Premium on Bonds Payable is an ________________ added to Bonds Payable

A

adjunct

66
Q

Amortizing the Discount/Premium

A

To follow the expense recognition principle, companies allocate the bond expense in each period in which bonds are outstanding

67
Q

The amortization of a _____________ INCREASES the amount of interest expense reported each period

A

discount

i.e additional cost of borrowing

68
Q

The amortization of a _________ DECREASES the amount of interest expense reported each period

A

premium

i.e reduction in the cost of borrowing

69
Q

Effective interest method

A

The amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value

  1. Compute the Bond Interest expense
  2. Compute the Bond interest paid or accrued
  3. Compute the Amortization amount
70
Q

GAAP requires the use of ___________________

A

effective-interest method

71
Q

Journal entry amortizing a bond discount

A

Bond Interest Expense 10,319

Discount on Bonds Payable 319

Bond Interest Payable 10,000

72
Q

Journal entry amortizing bond premium

A

Bond interest expense 9,670

Premium on Bonds Payable 330

Bond Interest Payable 10,000

73
Q

Which type of amortization increases the Interest Expense?

A

Discount

74
Q

Which type of amortization decreases the Interest Expense?

A

Premium

75
Q

Regardless of the issue price of bonds, the book value of the bonds at maturity will ________________

A

equal their face value

76
Q

Journal entry when a company pays bonds payable

A

Bonds Payable 100,000

Cash 100,000

77
Q

A company may retire bonds before maturity to ____________________________

A

reduce interest cost and remove debt from its balance sheet

78
Q

When a company retires bonds before maturity, it is necessary to:

A
  1. Eliminate the carrying value of the bonds at the redemption date
  2. Record the cash paid
  3. Recognize the gain or loss on redemption
79
Q

Carrying value of bonds

A

Face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date

80
Q

When bonds are redeemd before maturity, the gain or loss on redemptionis the difference between the cash paid and the:

A

Carrying value of the Bonds

81
Q

Loss paid on Bond Redemption

A

Cash Paid - Carrying Value

103,000 - 100,400

82
Q

Journal entry for redemption of bond with a loss on bond redemption

A

Bonds Payable 100,000

Premium on Bonds Payable 400

Loss on Bond Redemption 2,600

Cash 103,000

83
Q

When bonds are converted into common stock

A

The carrying value of the bonds is transferred to paid-in capital accounts

84
Q

Times Interest Earned (Definition)

A

An indication of a company’s ability to meet interest payments as they come due

85
Q

Times Interest Earned Formula

A

Net Income + Interest Expense + Tax Expense

Interest Expense

86
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

87
Q

Two types of off-balance-sheet financing

A

Contingencies

Lease Transacctions

  • operating lease
  • capital lease
88
Q

Contingencies

A

An event with uncertain outcomes that may represent potential liabilities

ex. lawsuit

89
Q

Example of contingency: lawsuit

A

Lawsuit is recorded if can determine a reasonable estimate of the loss and if it is probable that it will lose

-if not, disclose in the notes

90
Q

Operating Leases

A

These leases are treated like rentals with no assets or liabilites on the books

91
Q

Capital leases

A

These leases are treated like debt-financed purchase that increases both assets and liabilities

92
Q

What kind of leases do companies NOT want?

A

Capital lease, so they purposely structure their lease agreement to meet operating lease requirements

93
Q

The matching principle….

A

necessiatates the recording of an estimated amount for bad debts

94
Q

Under the allowance method, when a specific account is written off _______________

A

total assets will be unchanged

95
Q

Allowance for doubtful accounts: effect on a/r

A

Contra-asset account

It is subtracted from the gross amount of accounts receivable so A/R is reported at cash realizable value

96
Q

The cost of an intangible asset with an indefinte life should _____________________

A

not be amortized

97
Q

Unearned Rental Revenue is __________________

A

reported as a current liability

98
Q

The carrying value of bond will equal the market price _______________

A

on the date of issuance

99
Q

Depreciation notes

A

A process of cost allocation

Provides for proper matching of expenses with revenues

100
Q

Balance in Accmumulated Depreciation:

A

The total cost that has been charged to expense

101
Q

Depreciation applies to three classes of plant assets:

A
  1. Land improvements
  2. Buildings
  3. Equipment
102
Q

Journal entry when receiving a note receivable plus interest

A

Cash 7500

Notes Receivable 7000

Interest Revenue 500

103
Q

Journal entry when accruing interest you will receive

A

Interest receivable XXX

Interest Revenue XXX

104
Q

Received 5,800 on cash sale. The cost of the goods sold was 3000

Effects?

A

Current ratio => increase

Receivables Turnover => No effect

Average Collection period => No effect

105
Q

Recorded bad debts expense of $580 using the allowance method

Effects?

A

Current ratio => Decrease

Receivables Turnover => Increase

Average Collection Period => Decrease

106
Q

Wrote off a $116 account receivable as uncollectible (uses allowance method)

Effects?

A

Current ratio => No effect

Receivables Turnover => No effect

Average Collection period => No effect

107
Q

Recorded $2,902 sales on account. The cost of the goods sold was $1,741

Effects?

A

Current ratio => Increase

Receivables Turnover => Decrease

Average Collection Period => Increase

108
Q

Two advantages of having assets and liabilities not reported on balance sheet:

A

ROA higher if less assets

Less liabilities = Less risky

109
Q

If listed as Revenue Expenditure when it should be a Capital Expenditure

A

Expenses overstated

Assets Understated

Net Income understated

110
Q

If listed as a Capital Expenditure instead of a Revenue Expenditure

A

Assets Overstated

Expenses Understated

Net income overstated

111
Q

Journal entry when buying a vending machine

A

Eqipment 11050

Prepaid ins. 1500

Liscence exp. 50

Cash 12,600

112
Q

Which depreciation method best matches benefits to expense?

A

Units of activity

113
Q

Which depreciation method has higher net income at first?

A

Straight-line method

Used for book purposes

114
Q

Which depreciation method results in lower net income at first?

A

Declining balance

  • lower net income
  • lower taxes

*Used for tax purposes

115
Q

Book value =

A

Cost - Accmumulated depreciation

116
Q

How do we know if there is a gain or loss on disposal of assets?

A

Compare book value (cost - acc. dep) to what we sold it for

If book value is greater than cost we sold it for => loss

If book value is less than cost we sold it for => gain

117
Q

Title of accounts for gain/loss

A

Gain on disposal of plant assets

Loss on disposal of plant asset

118
Q

Why can we never have a gain on retiring an asset?

A

Because Accmulated depreciation will never be bigger than the asset and we have gains when debits are more than credits before gain/loss is inserted

119
Q

Copyrights last for

A

the life of the creator plus 70 years

120
Q

Profit Margin ratio

A

Net income / Net Sales

*How much sales is being retained as income

121
Q

Asset Turnover ratio:

A

Net Sales / Average Total Assets

*Shows how efficiently we use assets to generate sales

122
Q

Return on Assets ratio:

A

Net Income / Average Total Assets

*Shows amount of net income generated on each dollar of assets

*The bigger => the more profitable

123
Q

Are intangible assets often overstated or understated on a company’s books?

A

Understated because a company cannot record internally developed goodwill on its balance sheet

*Since balance sheet is at historical cost instead of fair value, it is often understated

124
Q

Explain how amortization is different than depreciation?

What type of assets do we amortize?

A

In amortization there is no contra account so the credit goes directly to the asset instead of using a contra account such as accumulated depreciation, which is used in depreciation

We amortize INTANGIBLE ASSETS

125
Q

3 main factors of fraudulent activity

A

Opportunity

Financial Pressure

Rationalization

126
Q

The control activity of establishing responsibilities includes ___________________________

A

aurhorizing and approving transactions

127
Q

What only happens mid-period with respect to receivables?

A

Only write-offs mid period

128
Q

Bank Reconciliation Heading

A

Wellmeyer Company

Bank Reconciliation

December 31, 2012

129
Q

Journal entry for a $30 bank service charge

A

Miscelaneous expense 30

Cash 30

130
Q

Journal entry:

The bank collected a note receivable for $1,000, plus $48 of interest revenue

A

Cash 1048

Note Receivable 1000

Interest Revenue 48

131
Q

Journal entry:

A NSF check for $328 from Brittney Spears, a customer, was returned with the statement.

A

Dr. Accounts Receivable 328

Cr. Cash 328

132
Q

Journal Entry:

Note for $1,504 collected for Ghose in July by the bank, plus interest $36 less fee $20. The collectionhas not been reorded by Ghose and no interest has been accrued

A

Dr. Cash 1520

Dr. Misc. Expense 20

Cr. Notes Receivable 1504

Cr. Interest Revenue 36

zAccounting (31 decks)

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