ACG4111 Exam 1 Review

Question 1

Accrued liabilities

Answer 1

Expenses that have been incurred but not been paid yet

Question 2

Four conditions for accrual of paid future absenses

Answer 2

1. Obligation to employees’ services has already been performed.
2. Paid absence can been taken later years; accumulative.
3. Payment is probable.
4. Amount can be reasonably estimated.

Question 3

Journal entry for vacation weeks not taken

Answer 3

Debit wages/salaries expense
Credit liabilities - compensated future absences

Question 4

Journal entry for prior vacation weeks taken in later years

Answer 4

Debit liabilities - compensated future absences; salaries expense
Credit cash/salaries payable

Question 5

Journal entry for sale of gift cards

Answer 5

Debit cash
Credit deferred gift card revenue

Question 6

Journal entry for redemption/expiration of gift cards

Answer 6

Debit deferred gift card revenue
Credit revenue - gift cards

Question 7

Noncurrent classification

Answer 7

Results in higher working capital and higher current ratio because outsiders believe current debt is riskier than debt not be paid for some time.

Question 8

When long-term obligations need to be reclassified to current

Answer 8

When the liability/obligation is payable within the upcoming year or operating cycle if longer than 1 year.

Question 9

Requirements to classify maturing debt as current liability

Answer 9

1. Debt is callable by creditor in upcoming year
2. Creditor has right to demand payment because of a violation of provision, making it callable
3. Debt is not callable but will be within the year if an existing violation is not corrected

Question 10

Requirements for short-term obligations to be long-term obligations

Answer 10

1. Company must intend to refinance on a long-term basis
2. Company must demonstrate ability to refinance on a long-term basis
   Ex. existing refinancing agreement or actual financing prior to issuance of FS.

Question 11

Loss contingency

Answer 11

Existing, uncertain situation that involves potential loss depending on a future event
It is accrued and reported as a liability based on the likelihood of event occurring and amount of loss is determinable

Question 12

Probable, reasonably possible, remote

Answer 12

Probable - event most likely to occur
Reasonably possible - event somewhat to occur
Remote - event not likely to occur

Question 13

Liability accrued & disclosure note, d. note only, no disclosure required

Answer 13

Liability accrued & disclosure note - Probable & known/reasonably estimable
D. note only - Probably & not reasonably estimable; reasonably possible
No disclosure required - Remote

Question 14

Journal entry for loss contingency either accrued as liability or resolved

Answer 14

Debit loss or expense
Credit liability/asset

Question 15

Accrual of litigation: when cause of loss contingency happens before fiscal year ends

Answer 15

Clarify the claim’s probability of loss will occur and estimable amount of loss before FS

Question 16

Accrual of litigation: when cause of loss contingency happens after fiscal year ends

Answer 16

No liability accrues but must be disclosed in notes.

Question 17

Two-step process

Answer 17

Used to determine how an unasserted claim be reported:
1. Is it probable that the claim will be asserted? If no, stop, if yes, continue to 2.
2. Treat the claim as if the claim has been asserted; evaluate if the likelihood of unfavorable outcome and loss amount can be estimable

Question 18

Gain contingency

Answer 18

An uncertain situation that might result in a gain; not accrued due to conservatism
Material gain contingencies are disclosed in the notes of FS

Question 19

Calculate interest

Answer 19

Face amount * annual rate * months/12

Question 20

Calculate vacation pay not taken

Answer 20

Total salaries * vacation time allotted per hour of a work week (fraction)
Vacation time earned - vacation time taken

Question 21

Bond indenture

Answer 21

Describes specific promises made to bondholders
Held by a trustee of a bank, appointed by issuing company

Question 22

Debenture bonds

Answer 22

Secured only by faith and credit of issuing corporation; no collateral

Question 23

Subordinated debentures

Answer 23

Not entitled to receive any liquidation payments until claims of other specified debit issues are satisfied

Question 24

Mortgage bonds

Answer 24

Backed by a lien (legal right to own) on specified real estate
Low risk, low interest rate

Question 25

Convertible bonds

Answer 25

Convertible into shares of stock, used as medium of exchange in mergers/acquisitions, enable small firms or debt-heavy firms to obtain access to bond market

Question 26

Callable/redeemable bonds

Answer 26

Allows issuing company to buy back, or call, bonds before their scheduled maturity date. Call price must be prespecified and often exceeds bond’s face amount.

Question 27

Sinking fund redemptions

Answer 27

Corporation may be required to redeem bonds on a prespecified, year-by-year basis.

Question 28

Serial bonds

Answer 28

A more structured and less popular way to retire bonds in parts; retired in installments during all or part of the life of the issue with each bond having its own specified maturity date

Question 29

Sale of bonds

Answer 29

Directly to a single investor (private placement): Issuing company incurs only issue costs
Indirectly through underwriters (resellers): Issuing company pays underwriting fee

Question 30

Installment notes

Answer 30

Installment payments are equal amounts each period. Each payment includes the amount of interest and amount reduction of the outstanding balance (principal reduction)

Question 31

Financial statement disclosures

Answer 31

Fair value of financial instruments must be disclosed either in body of FS or disclosure notes.
Disclosure note includes: Nature of company liabilities, interest rates, maturity dates, call provisions, conversion options, restrictions imposed by creditors, collateral

Question 32

Induced conversion

Answer 32

Reduces debt, become a better risk to potential lenders, and achieves lower debt-to-equity ratio.
Used either through call provision when call price is less than conversion value of bonds or when companies add something extra in order for voluntary conversion

Question 33

Detachable stock purchase warrants

Answer 33

Gives the investor an option to purchase a stated amount of shares of common stock at a specified amount during a timeframe. Has lower interest rate.
Can be exercised independently or traded into markets separately from bonds, having their own market price.
Issue price is allocated between two different securities of their fair values

Question 34

Other comprehensive income (OCI)

Answer 34

Any portion of gain or loss that is result of change in credit risk of debt is reported as OCI.

Question 35

Net income

Answer 35

Any portion of gain or loss that is result of change in general (risk-free) interest rate is reported in net income.

Question 36

Credit risk

Answer 36

Risk that investors will not receive the promised interest and maturity amounts at time they are due

Question 37

Accrued interest

Answer 37

Interest paid by the buyer to seller for delay in selling bonds
All bonds sell at their price + any interest that has accrued since last interest date

Question 38

Troubled debt restructuring

Answer 38

Bank allows debt to continue but modifies terms of debt agreement so its easier for debtor to comply by reduce or delay the scheduled interest payments or maturity amount.
Book value of debt = current balance of primary debt + accrued interest
Accounting procedures depends if total cash payments are less than or exceed book value of the debt