Chapter 10

Question 1

What is the definition of an accounting liability?

Answer 1

Probable sacrifice of future economic benefit that arises from a past transaction

Question 2

What is the difference between a current liability and a long-term liability?

Answer 2

Current - will be paid off within the year

Long-term - will take a year+ to be paid off

Question 3

What are some examples of current liabilities?

Answer 3

• Account payable
• Dividends payable
• Deffered revenue
• Payroll
• Taxes payable

Question 4

What are journal entries involved with basic payroll?

Answer 4

• Gross wages expense and withholding liabilities
• Company’s expenses for payroll-related items (Social Security and Medicare tax)

Question 5

How do you calculated the 401(K)?

Answer 5

The rate multiplied by the gross wages

Question 6

How do you calculate income taxes?

Answer 6

The rate multiplied by the taxable wages (gross wages-retirement contributions)

Question 7

Who pays for Social Security and Medicare?

Answer 7

By the employees and employer

Question 8

What does withholding mean?

Answer 8

The employers deduct a certain amount from the employee’s gross wages to send directly to the government

Question 10

What is contingency?

Answer 10

things that might happen by are not certain

potential obligation or asset that may arise based on the outcome of a future event

Question 11

How are gain contingencies generally accounted for?

Answer 11

These are not recognized under GAAP

Question 12

What are the terms that relate to loss of contingencies?

Answer 12

Probable, Reasonably Possible, Remote, Estimable, Not Estimable

Question 13

If a loss is probable and estimate it is…

Answer 13

Recognized

Question 14

If a loss is not estimable you…

Answer 14

put it in the footnotes

Question 15

Reasonably possible means…

Answer 15

It is put on the notes whether it is estimable or not

Question 16

When a loss is remote you…

Answer 16

Do not do anything

Question 17

What is a note payable?

Answer 17

A long-term liability (like a bank loan)

Question 18

How are account payable and note payable different?

Answer 18

Note payable is a formal obligation with a written contract like a bank loan.

Account payable not as formal, short-term, and is more likely to not be paid

Question 19

What is the formula to calculate simple interest?

Answer 19

Principalratetime=interest

Question 20

What is a bond?

Answer 20

a way to raise money through the public

Question 21

What amount are bonds usually sold at?

Answer 21

$1000

Question 22

What does it mean that a bond sells “at par”?

Answer 22

the bond is being sold for its face value - the amount that the issuer agrees to pay back to the bondholder at maturity

Question 23

What is stated interest?

Answer 23

Determines how much interest is paid on the principal at regular intervals?

Question 24

What does it mean that a bond is callable?

Answer 24

the bond can be redeemed by the issuer before its maturity date.

Question 25

If the face value was 1,000 and was called at 102 what does that mean?

Answer 25

The bond will be bought back at 102% so it would be $1,020 to buy pack

Question 26

Why are investors interested in debt-related ratios like the times interest earned ratio?

Answer 26

how many times a company can pay interest (the higher the better)

Question 27

How do you calculate Times Interest Earned ratio?

Answer 27

Pretax income + interest expense/interest expense = TIE