Chapter 10 Flashcards
Current liability
A debt that a company reasonably expects to pay
- ) from existing current assets or through creation of other current liabilities
- ) Within one year or the operating cycle, whichever is longer
Notes payable
An obligation in the form of a written note
Why notes payable instead of accounts payable
Give the lender written documentation of the obligation in case legal remedies are needed to collect the debt
Journal Entry accepting notes payable
Cash XXX
Notes Payable XXX
Journal Entry for accrual of interest
Interest Expense XXX
Interest Payable XXX
Journal Entry for Payment of Note Receivable
Notes Payable XXX
Interest Payable XXX
Cash XXX
Sales Tax Journal Entry by Company before remitting it to the government
Cash XXX
Sales Revenue XXX
Sales Taxes Payable XXX
Journal entry when company remits sales tax to government
Sales Taxes Payable XXX
Cash XXX
Cooley Grocery store serves only as a ______________ for the taxing authority
collection agent
Company rings up sales taxes seperately:
Total receipts of 10,600 with a 6% sales tax
find sales tax amount
10,600 / 1.06 = 10,000
10600 - 10000 = 600
Journal entry when a company receives an advance
Cash XXX
Current liability XXX
Journal entry when company earns the revenue
Unearned revenue account XXX
Earned Revenue Account XXX
Airline
Unearned revenue: Unearned Passanger Ticket Revenue
Earned Revenue: Passenger Ticket Revenue
Magazine publisher
Unearned Revenue: Unearned Subscription Revenue
Earned Revenue: Subscription Revenue
Hotel
Unearned Revenue: Unearned Rental Revenue
Earned Revenue: Rental Revenue
Companies often identify current maturities of long-term debt on the balance sheet as _________________
long-term debt due within one year
account for social security
FICA Taxes Payable
Account for federal income tax
Federal Income Taxes Payable
Account for State Income Tax
State Income Taxes Payable
Account for unemployment federal taxes
Federal Unemployment Taxes Payable
Account for unemployment state taxes
State Unemployment Taxes Payable
Wages expense and Wages payable journal entry
Salaries and Wages Expense XXX
FICA Taxes Payable XXX
Federal Income taxes Payable XXX
State Income Taxes Payable XXX
Salaries and Wages Payable XXX
Company’s Payaroll Tax Expense Journal Entry
Payroll Tax Expense XXX
FICA Taxes Payable XXX
Federal Unemployment Taxes Payable XXX
State Unemployment Taxes Payable XXX
Long-term liabilities
Obligations that a company expects to pay more than one year in the future
Long term liabilities are often in the form of ________________________
bonds or long-term notes
Bonds
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
Secured bonds
Bonds that have specific assets of the issuer pledged as collateral
Unsecured bonds
Bonds issued against the general credit of the borrower
Convertible bonds
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
Callable bonds
Bonds that the issuing company can retire at a stated dollar amount prior to maturity
Bond certificate
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
Face Value
Amount of principal due at the maturity date of the bond
Maturity date
The date on which the final pyament on a bond is due form the bond issuer to the investor
Contractual (stated) interest rate
Rate used to determine the amount of interest the borrower pays and the investor receives
The contractual rate is often referred to as the __________
stated rate
Time value of money
The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future
Present Value
The value today of an amount to be received at some date in the future after taking into account current interest rates
Market interest rate
The rate investors demand for loaning funds
Discounting the future amounts
The process of finding the present value
Market value of bond
Present value of all the future cash payments promised by the bond
Bond prices for both new issues and existing bonds are quoted as ________________________
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
Journal Entry for issuing bonds
Cash XXX
Bonds Payable XXX
Interest adjusting entry on bonds
Interest expense XXX
Interest Payable XXX
Interest payable classified as
current liability
bond payable classified as
long-term liability
Payment of interest journal entry
Interest Payable XXX
Cash XXX
When the contractual interest rate and the market interest rate are the same, _______________
bonds sell at face value
Discount (of a bond)
The difference between the face value of a bond and its selling price, when a bond is sold for less than its face value
Premium (on a bond)
The difference between the selling price and the face value of a bond when a bond is sold for more than its face value
Bond prices ____________ with changes in the market interest rate
vary inversely
As market interest rates decline
bond prices will increase
If the market interest rate is below the contractual rate when a bond is issued ___________
the price will be higher than the face value
Zero-coupon bonds
pay no interest
sell at a deep discount to face value
Journal entry for issuance of bonds at a discount:
Cash XXX
Discount on Bonds Payable XXX
Bonds Payable XXX
Discount on bonds payable
contra account to bonds payable
deducted from bonds payable on the balance sheet
Carrying value (book value)
Subtracting balance of the discount account from the balance of the Bonds Payable account
Amortizing the discount
Allocating bond discount to expense in each period in which the bonds are outstanding
Journal entry issuing bonds at a premium
Cash XXX
Bonds Payable XXX Premium on Bonds Payable XXX
Premium on bonds payable
added to the bonds payable on the balance sheet
Premium is considered to be a ___________________
reduction in the cost of borrowing that reduces bond interest expense over the life of the bonds
Amortization of the premium ___________ the amount of interest expense reported each period
decreases
Statement of Cash Flows: Debt
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
Bank line of credit
A prearranged agreement between a company and a lender that permits the company to borrow up to an agreed-upon amount
Times interest earned ratio
A measure of a company’s solvency, calculated by dividing income before interest expense and taxes by interest expense
Times interest earned ratio:
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
Off balance-sheet financing
An intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet
Two common types of off-balance sheet financing result from _______________________
unreported contingencies
lease transactions
Contingencies
Events with uncertain outcomes that may represent potential liabilities
ex. lawsuits - possilbe negative implications; warranties; environmental clean-up obligations
Two characteristics to record a contigency
Reasonable estimate
Probable outcome
*otherwise write it in notes to its financial statements
GAAP on leases
more rules-based
companies get get around the rules to listing it as an operating lease instead of a capital lease
debt covenants
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
Straight-line method of amortization
A method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period
Bond discount amortization =
Bond discount / Number of interest periods
Journal entry for recording amortization of a bond discount
Interest expense 10,400
Discount on Bonds Payable 400
Interest Payable 10,000
Bond Premium Amortization =
= Bond Premium / Number of Interest Periods
Journal entry of amortization of bond premium
Interest Expense 9,600
Premium on Bonds Payable 400
Interest Payable 10,000
Effective interest rate
Rate established when bonds are issued that remains constant in each interest period
Effective-interest method of amortization
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
Bond interest expense
Carrying value of Bonds at Beginning of Period
x
Effective-interest rate
Bond interest paid
Face amount of bond
x
Contractual interest rate
Amortization amount in effective-interest method
Bond Interest Expense - Bond Interest Paid
When the amounts are materially different, GAAP requires ___________________
use of the effective-interest method
Discount on Bonds Payable account is often referred to as ________
Unamortized Discount on Bonds Payable
Amortizing a bond discount under effective-interest method
Interest Expense 10,319
Discount on Bonds Payable 319
Interest Payable 10,000
Amortizing a bond premium under effective-interest method
Interest Expense 9,670
Premium on Bonds Payable 330
Interest Payable 10,000
Mortgage
Pledges title to specific asset as security for a loan
a document that secures a long-term note
Mortgage notes payable
A long-term note secured by a mortgage that pledges title to specific asset as security for the loan
Electronic spread sheet programs
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
Journal entry to record mortgage loan
Cash XXX
Mortgage Payable XXX
Journal Entry to record semiannual payment on mortgage
Interest Expense XXX
Mortgage Payable XXX
Cash XXX
Bond Discount Amortization =
Bond Discount / Number of interest periods
Journal entry: straight line method of amortization bond discount
Interest Expense 10,400
Discount on Bonds Payable 400
Interest Payable 10,000
Journal entry: amortizing bond permium straight-line
Interest Expense 9,600
Premiumon Bonds Payable 400
Interest Payable 10,000
Effective interest rate
Rate established when bonds are issued that remains constant in each interest period.
Effective interest method of amortization
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
present value
the value now of a given amount to be paid or received in the future, assuming compounding interest
Discounting the future amount
The process of determining the present value
Present value =
Future value / (1 + i)^n
Present value gets smaller ________
as you move farther away from future
ex. 1 year to 5 years
Present value of an annuity
The value now of a series of future receipts or payments, discounted assuming compounded interest
Examples of a series of periodic receipts or payments
Loan agreements, installment sales, mortgage sales, lease contracts, and pension obligations
annuities
Periodic receipts or payments
To compute present value of an annuity, it is necessary to know:
- Discount rate
- Number of discount periods
- Amount of the periodic receipts or payments
semiannually
twice a year
When market interest rate is equal to the bond’s contractual interest rate___________________
the present value of the bonds will equal the face value of the bonds
Current cash debt coverage
Measure of liquidity
Net cash by operating activities / Average Current Liabilities
Direct write-off info:
No estimation
No “matching”
Gross A/R
Volitale
Allowance method results in ___________
Net Accounts Receivable
Aging receivables method:
Use different time periods
The longer outstanding, the higher % uncollectible
Contingent liabilities effect:
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.
