1. The time period for classifying a liability as current is one year or the operating cycle, whichever is:
A. longer.
B. shorter.
C. probable.
D. possible.
A
2. To be classified as a current liability, a debt must be expected to be paid:
A. out of existing current assets.
B. by creating other current liabilities.
C. within 2 years.
D. both (a) and (b).
D
3. Maggie Sharrer Company borrows $88,500 on September 1, 2011, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2011?
A. $2,655.
B. $3,540.
C. $4,425.
D. $10,620.
B
4. Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales is:
A. $4,000.
B. $4,300.
C. $4,289.25.
D. No correct answer given.
B
5. Employer payroll taxes do not include:
A. federal unemployment taxes.
B. state unemployment taxes.
C. federal income taxes.
D. FICA taxes.
C
6. Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?
A. $0.
B. $4,500.
C. $13,500.
D. $18,000.
B
7. The term used for bonds that are unsecured is:
A. callable bonds.
B. indenture bonds.
C. debenture bonds.
D. bearer bonds.
C
8. Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
A. the contractual interest rate exceeds the market interest rate.
B. the market interest rate exceeds the contractual intere
A
9. Gester Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of semiannual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a:
A. credit
B
10. Colson Inc. converts $600,000 of bonds sold at face value into 10,000 shares of common stock, par value $1. Both the bonds and the stock have a market value of $760,000. What amount should be credited to Paid-in Capital in Excess of Par as a result of
D
11. Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc
C
12. Howard Corporation issued a 20-year mortgage note payable on January 1, 2011. At December 31, 2011, the unpaid principal balance will be reported as:
A. a current liability.
B. a long-term liability.
C. part current and part long-term liability.
D. in
C
13. For 2011, Corn Flake Corporation reported net income of $300,000. Interest expense was $40,000 and income taxes were $100,000. The times interest earned ratio was:
A. 3 times.
B. 4.4 times.
C. 7.5 times.
D. 11 times.
D
14. The market price of a bond is dependent on:
A. the payments amounts.
B. the length of time until the amounts are paid.
C. the interest rate.
D. All of the above.
D
15. On January 1, Besalius Inc. issued $1,000,000, 9% bonds for $939,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Besalius uses the effective-interest method of amortizing bond discount. At the end
B
16. On January 1, Dias Corporation issued $1,000,000, 10%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $1,081,105. The market rate of interest for these bonds was 8%. On the first interest date, using the effective-inter
C
17. On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on July 1 to record payment of bond interest and the amortization of bond discount using the straight-line method will i
D
18. For the bonds issued in question 17 above, what is the carrying value of the bonds at the end of the third interest period?
A. $486,000.
B. $488,000.
C. $472,000.
D. $464,000.
A
What is interest?
Payment for the use of another persons money
The amount of interest involved in any financing transaction is based on:
Principal (p): The original amount borrowed or invested
Interest Rate (i): An annual percentage of the principal
Time (n): The number of years that the principal is borrowed or invested.
Interest is the difference between...
the amount borrowed or invested (called
the principal) and the amount repaid or collected.
Simple interest is computed...
on the principal amount only.
Compound Interest is computed...
on principal and on any interest earned that has not been paid or withdrawn. It is the return on
the principal for two or more time periods.
SALES TAXES PAYABLE -
ENTITY SERVES ONLY AS COLLECTION AGENT FOR TAXING AUTHORITY (ESTABLISHES LIABILITY AT TIME OF SALE, REDUCING IT WHEN REMITTING AMOUNT TO TAXING AUTHORITY)
CURRENT MATURITIES OF LONG-TERM DEBT -
NOT NECESSARY TO PREPARE AN ADJUSTING ENTRY TO RECOGNIZE (JUST SHOWN ACCORDINGLY ON BALANCE SHEET)
Retailers remit sales tax to the... periodically, usually...
States Department of Revenue... Monthly
Under most states laws, how should sales tax be rung up?
The company then...
Seperately from the sale... Gasoline is a big exception
uses cash register readings to credit Sales and Sales Tax Payable
If the cash register reading shows sales of 10,000 with a tax rate of 6%, the JE would be,
(DR) Cash 10,600
(CR) Sales 10,000
(CR) Sales Tax Payable 600
When the company remits sales taxes to the taxing agency, it...(je)
Debits Sales Taxes Payable and Credits Cash
Sales tax is not reported as
an expense
A grocery store serves as a... for the government
collection agent. by simply forwarding taxes from the customer to the governing agency, not recording sales tax as an expense
Sometimes companies do not ring up sales taxes separately on the register. In these cases how is the amount of sales determined?
Divide total receipts by 100% plus the sales tax %.
The grocery store receipts equal 10,600, sales tax is 6%. What were total sales? How much sales tax must they remit?
10,600 % 1.06 = 10,000
10,600-10,000= 600
How does an entity's liability work with sales taxes?
Liability is established at the time of sale and reduced when money is remitted to governing agency.
When a portion of a long term debt comes due in the current year,
that amount is now considered a current liability, the remaining due is still reported as a long term liability
Why is it not necessary to prepare a JE to recognize the current maturity of a long term liability?
The company will recognize the proper statement classification of each balance sheet account when it prepares the balance sheet.
Companies seldom list liabilities in order of...
maturity (notes) liquidity (book)
A common method of listing liabilities is
order of magnitude with the largest ones first.
Many companies show notes payable first and then accounts payable regardless of amount, followed by remaining liabilities in order of magnitude (use this in homework)
Why do companies seldom list current liabilities in order of liquidity?
varying maturity dates may exist for specific obligations
Terms of N/P and other pertinent information concerning current liability items should be...
disclosed in the notes to the F/S
Use of current and non-current classifications makes it possible to analyze
a company's liquidity
Liquidity refers to
a company's ability to pay maturing obligations and meet unexpected needs for cash
Common measures for assessing liquidity include:
current ratio (ratio) and working capital (dollar amount)
Working capital-
the excess of current assets over current liabilities
Working capital offers...
limited informational value.
ex. $100,000 may be a lot to me but not to a large company. Also it may be adequate at one time but not at another.
Current ratio permits us to compare...
the liquidity of different sized companies and of a single company at different times.
Current Ratio-
Current Assets/Current Liabilities
Historically a good current ratio was...
2:1, however many companies have maintained ratios well below that by improving management of their current assets and liabilities.
Long Term Liabilities-
Obligations expected to be paid after one year, often in the form of bonds or long term notes
Bearer Bonds-
(Coupon Bonds) bonds not registered
Bond Certificate-
A legal document that indicates
~the name of the issuer,
~the face value of the bonds,
~the contractual interest rate and
~the maturity date of the bonds
Bond discount-
the amount at which a bond sells by less than it's face value
BOND INDENTURE-
A LEGAL DOCUMENT THAT SETS FORTH THE TERMS OF THE BOND ISSUE, summarizes the rights of the bondholders and their trustees and the obligations of the issuing company
Bond premium-
The amount by which a bond sells above it's face value
Bonds-
a form of interest bearing notes payable issued by corporations, universities and governmental entities
Callable bonds-
bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer. A call feature is included in nearly all corporate bonds.
CONTRACTUAL INTEREST RATE-
rate used to determine the amount of interest the borrower pays and the investor receives. Often referred to as the stated rate.
Convertible bonds-
bonds that permit bond holders to convert into stock at their option
Debenure bonds-
bonds issued against the general credit of the borrower. Also called unsecured bonds
Debt to total asset ratio-
A solvency measure that indicates a percentage of total assets provided by creditors; computed as total debts/total assets
FACE VALUE
amount of principal due at maturity date
Market interest rate-
the rate investors demand for loaning funds to corporations
Mortgage bond-
a bond secured by real estate
Mortgage note payable-
a long term note secured by a mortgage that pledges title to a specific asset as security for a loan
Registered bonds-
bonds issued in the name of the owner
Secured bonds-
bonds that have specific assets of the issuer pledged as collateral
Serial bonds-
Bonds that mature in installments
Sinking fund bonds-
bonds secured by specific assets set aside to retire them
Term bonds-
Bonds that mature at a single specified future date
Times interest earned ratio-
A solvency measure that indicates a company's liquidity; computed as (current assets-current liabilities)
Unsecured bonds-
Bonds issued against the general credit of the borrower. Also called debenture bonds.
Working capital-
a measure of a company's liquidity; computed as (current assets - current liabilities)
Corporate management decides whether to issue bonds or common stock (equity financing) in order to...
obtain large amounts of long term capital.
Bonds offer three advantages over common stock...
1) Stockholder control is not affected - Bondholders do not have voting rights so stockholders retain full control over the company.
2) Tax Savings - the cost of bond interest is tax deductible dividends are not.
3) Earnings per share may be higher - Alth
Company's with good credit ratings extensively use what kind of bonds?
Sinking aka debenture bonds
In authorizing the issue of bonds...
both the board of directors and the stockholders must usually approve. The board of directors must stipulate the number of bonds to be authorized, total face value and contractual interest rate.
The total bond authorization usually exceeds the amount of b
stated rate-
term often used to describe the contractual interest rate. The rate used to determine the amount of cash interest the borrower pays and the investor receives. Usually stated as an annual rate but paid semiannually
Trustee-
usually a financial institution that keeps records of each bond holder, maintains custody of unissued bonds, and holds conditional title to pledged property
Bond prices are quoted as...
a percentage of the face value of the bond, which is usually $1,000
A $1,000 bond with a quoted price of 97 means that
the selling price of the bond is 97% of face value or $970
A corporation makes JE's for bonds only when...
it issues or buys back bonds or when bondholders convert bonds into common stock
If an investor sells his bonds, what does a company or trustee do?
They do not journalize but they do keep track of the bondholders names in the case of registered bonds.
Present value-
The amount that must be invested today at a given rate of interest over a specified time. The value at which it should sell in the market place.
Market value is a factor of three factors...
1) Dollar amount to be received
2) Length of time until amounts are recieved
3) Market rate of interest (rate demanded by investors)
T/F
Mortgage bonds and sinking fund bonds are both examples of secured bonds
T
T/F
Unsecured bonds are also known as debenture bonds
T
The stated rate is the rate investors demand for loaning funds.
F. The stated rate is the contractual interest rate used to determine the amount of cash interest the borrower pays.
T/F
The face value if the amount of principle the issuing company must pay at the maturity date.
T
T/F
The bond issuer must make journal entries to record transfers of it's bonds among investors.
F Only when it issues or buys back bonds, when it records interest and when bonds are converted.
There are 3 ways bonds may be issued...
1) At face value
2) below face value ( at a discount)
3) above face value (at a premium)
JE to record the issuance of a $100,000, five year, 10% bond at 100...
Where would this be reported?
(DR) Cash 100,000
(CR) Bonds payable 100,000
in the long term liabilities section of the B/S because the maturity date is more thanone year away
What does it mean when a bond is issued at discount?
market rate of interest is greater than stated rate of interest
What does it mean when a bond is issued at a premium?
market rate of interest is less than the stated rate of interest
What type of account is Discount on B/P?
Contra-bonds payable account
It is deducted from bonds payable on the B/S
Company's classify bond interest payable as
a current liability because it is scheduled for payment in the next year.
Interest expense incurred is recorded as...
(DR) Bond Interest Expense
(CR) Bond Interest Payable
When a company pays the interest on a bond they record....
(DR) Bond Interest Payable
(CR) Cash
What is the difference between the contractual interest rate and the market interest rate?
The contractual rate is applied to the face value to arrive at the interest paid in a year, the market rate is what investors demand for loaning funds to the corporation. When these rates are the same bonds sell at face value.
What effects market interest rates?
the type of bond issued, the state of the economy, current industry conditions, and the company's performance
What causes bonds to sell above or below face value?
When contractual and market rates differ
Carrying value (book value) of bonds issued at a discount is determined by...
subtracting the balance of the discount account from the balance of the bonds payable account
JE Bonds issued at face value
(DR) Cash
(CR) B/P
JE Bonds issued at discount
(DR) Cash
(DR) Disc. On B/P
(CR) B/P <a@face value>
JE Bonds issued at premium
(DR) Cash
(CR) B/P <@facevalue>
(CR) Prem. on B/P (adjunct B/P acct.)
Accounting for bond retirements - JE redeeming bonds at maturity
(DR) B/P
(CR) Cash
Bonds Payable (B/P)
A form of interest bearing N/P issued by corporations, governmental agencies, and universities. Sold in small denominations, usually $1,000.
Advantages of Bonds:
Stockholders control is not diluted. (bondholders can't vote)
Tax savings (interest is tax deductible, dividends paid are not)
EPS on common stock may be higher
Disadvantages of bonds include:
Higher risk: interest must be paid on a periodic basis and principal must be repaid (at maturity dates)
Types of bonds include:
Secured: assets pledged as collateral
Unsecured: Issued against general credit
Term: matures at a single date
Serial: matures in installments
Registered: interest made by check to bondholders
Bearer: holder is required to send in coupons to receive intere
What is the difference between a Secured and unsecured bond:
Secured: assets pledged as collateral
Unsecured: Issued against general credit
What is the difference between a term and serial bond?
Term: matures at a single date
Serial: matures in installments
What is the difference between a Registered and Bearer Bond?
Registered: interest made by check to bondholders
Bearer: holder is required to send in coupons to receive interest payments
What is the difference between a Convertible and Callable Bond?
Convertible: can be converted into stock at bondholders option
Callable: subject to retirement at a stated dollar amount before maturity at option of bond holder
Regarding bonds, JE's are only made when...
a corporation issues or buys back bonds, and when bondholders convert bonds into common stock.
Determining the market value of bonds is a function of three factors:
1) Dollar amount to be received
2) Length of time until amounts are received
3) Market rate of interest-amount demanded by investors
When do bonds sell at face value?
When the market interest rate and contractual interest rate are the same
When do bonds sell at a premium?
When the Mkt Rate is Less than the Stated Rate
When do bonds sell at a discount?
When the Mkt Rate is greater than the Stated Rate
JE to record Interest Payment
(DR) Int. Exp
(CR) Cash
Adjusting entry to record interest expense
(DR) Int. Exp
(CR) Int. Payable?