Chapter 10 powerpoint Flashcards
Current liability
A debt with two key features:
- Company expects to pay the debt from
a. existing current assets or
b. through the creation of other current liabilites - Company will pay the debt within one year of the operating cycle, whichever is longer
Examples of current liabilities:
Notes Payable
Accounts Payable
Unearned Revenues
Accrued liabilities - taxes, salaries and wages, and interest payable
Notes Payable - current liability
Written as promissory notes
Require the borrower to pay interest
Those due within one year of the balance sheet are classified as current liabilites
Why are notes payable used instead of accounts payable?
Because notes payable give the lender written documentation of an obligation in case legal remedies are needed to collect the debt
Journal entry accepting a notes payable
Cash XXX
Notes Payable XXX
Journal entry accruing interest
Interest expense XXX
Interest Payable XXX
Journal entry paying note payable at maturity
Notes Payable 100,000
Interest Payable 4,000
Cash 104,000
Long-term notes payable
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:
- interst on unpaid balance of loan
- reduction of loan principal
Journal entry accepting a mortgage loan
Cash XXX
Mortgage Notes Payable XXX
Journal entry making firs installment on mortgage payments
Interest Expense 30,000
Mortgage Notes Payable 3,231
Cash 33,231
Balance shet - long term notes payable
Reduction in principal for the next year - current liability in balance sheet
Remaining unpaid principal balance - long term liability in balance sheet
Each payment on a mortgage note payable consists of:
Interest on the unpaid balance of the loan and reduction of loan principal
Sales Taxes are expressed as ___________________
a stated percentage of the sales price
The retailer collects tax from the ____________
customer
The terailer serves as a _____________ for the taxing authority
collection agent
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
seperately
If Sales revenue and tax are together, to find sales revenue
Total cash received / (1 + Sales Tax Rate)
Journal Entry for sales revenue with tax
Cash 10,600
Sales Revenue 10,000
Sales Tax Payable 600
Unearned Revenue
Revenues that are received before the company delivers goods or provides services
Cash XXX
Unearned Revenue XXX
Journal entry when company earns money
Unearned Revenue XXX
Sales Revenue XXX
Current Maturities of Long-Term Debt
The portion of long-term debt that comes due in the current year
There is no adjusting entry required
Payroll and Payroll Taxes Payable
The term “payroll” pertains to both:
Salaries - monthly or yearly rate
Wages - hourly rate
*A company will withold amounts to pay various governmental authorities
Salaries
Managerial, Administrative, and Sales Personnel
(Monthly or Yearly Rate)
Wages
Store Clerks, Factory Employees, and Manual Laborers
(Hourly rate)
Determining the payroll involves computing three amounts:
- gross earnings
- payroll deductions
- net pay
Journal entry for payment of payroll
Salaries and Wages Payable 67,564
Cash 67,564
Payroll Tax Expense
Governmental agencies levy on employers
3 taxes:
- FICA Tax
- Federal Unemployment Tax
- State Unemployment Tax
Journal Entry for payroll on employees
Salaries and Wages Expense XXX
FICA Tax Payable XXX
Federal Tax Payable XXX
State Tax Payable XXX
Salaries and Wages Payable XXX
Journal entry on payroll employers
Payroll Tax Expense XXX
FICA Tax Payable XXX
State Unemployment Tax Payable XXX
Federal Unemployment Tax Payable XXX
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
current liabilities
Long-Term Obligations
The obligations a company expect to pay more than one year in the future
Bonds
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
Secured
The specific assets of the issuer pledged as collateral for bonds
Unsecured
It is issued against the general credit of the borrower
Convertible
The bonds that can be converted into common stock at the bondholder’s option
Callable
The bonds that the issuing company can retire at a stated dollar amount prior to maturity
Bond Certificate
Issued to the investor
Provides information such as:
- Name of company issuing bonds
- Face value
- Maturity date
- Contractual interest rate (stated rate)
Face Value
The principal due at the maturity
The Maturity Date
The date final payment is due
Contractual interest rate
The rate (usually annual) to determine cash interest paid, generally semiannually
Time Value of Money
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
The market value is a function of the three factors that determine present value:
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)
Discounting
The process of finding the present value is referred to as discounting the future amounts
Simple interest
Computed on the principle amount only
The return on the principle for one period
Compound interest
Computed on the principal AND on any interest earned that has not been paid or withdrawn
Present Value formula
Present Value = Future Value / (1 + i)n
p = principal or present value
i = interest rate for one period
n = number of periods
Present value of an annuity
The value now of a series of future receipts or payments, discounted assuming compounded interest
Necessary to know:
- Discount Rate
- Number of Discount Periods
- Amount of Periodic Receipts or Payments
What happens to interest rate when discounting is semiannual
divide by 2
When discount rate is identical to the interest payment
Present value of bond = principal
A corporation records bond transactions when it:
Issues or Retires (Buys Back) Bonds
Converts Bonds into Common Stock (Bond Holders)
If bond holders sell their bond investments to other investors, ___________________
the isue firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction
Bonds may be issued at:
Face Value
Below Face Value (Discount)
Above Face Value (Premium)
*bonds are quoted as a percentage of face value
The rate of interest investors demand for loaning funds to a corporation
Market Interest Rate
Journal Entry when issue a bond
Cash XXX
Bonds Payable XXX
Journal entry when a bond you issue accrues interest
Bond Interest Expense XXX
Bond Interest Payable XXX
Journal entry when you pay interest you accrued on a bond
Bond Interest Payable XXX
Cash XXX
Assume Contractual rate of
10%
Market interest 8%
Premium
Market interest 10%
Face Value
Market Interest 12%
Discount
If a bond is sold at a premium, it means the contractual interest rate ____________________
exceeds the market interest rate
Journal entry issuing a bonds payable
Cash 98,000
Discount on Bonds Payable 2,000
Bonds Payable 100,000
Discount on Bonds Payable
Debit balance
Contra account deducted from Bonds Payable
Journal entry issuing bond at premium
Cash 102,000
Bonds Payable 100,000
Premium on Bonds Payable 2,000
Premium on Bonds Payable is an ________________ added to Bonds Payable
adjunct
Amortizing the Discount/Premium
To follow the expense recognition principle, companies allocate the bond expense in each period in which bonds are outstanding
The amortization of a _____________ INCREASES the amount of interest expense reported each period
discount
i.e additional cost of borrowing
The amortization of a _________ DECREASES the amount of interest expense reported each period
premium
i.e reduction in the cost of borrowing
Effective interest method
The amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value
- Compute the Bond Interest expense
- Compute the Bond interest paid or accrued
- Compute the Amortization amount
GAAP requires the use of ___________________
effective-interest method
Journal entry amortizing a bond discount
Bond Interest Expense 10,319
Discount on Bonds Payable 319
Bond Interest Payable 10,000
Journal entry amortizing bond premium
Bond interest expense 9,670
Premium on Bonds Payable 330
Bond Interest Payable 10,000
Which type of amortization increases the Interest Expense?
Discount
Which type of amortization decreases the Interest Expense?
Premium
Regardless of the issue price of bonds, the book value of the bonds at maturity will ________________
equal their face value
Journal entry when a company pays bonds payable
Bonds Payable 100,000
Cash 100,000
A company may retire bonds before maturity to ____________________________
reduce interest cost and remove debt from its balance sheet
When a company retires bonds before maturity, it is necessary to:
- Eliminate the carrying value of the bonds at the redemption date
- Record the cash paid
- Recognize the gain or loss on redemption
Carrying value of bonds
Face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date
When bonds are redeemd before maturity, the gain or loss on redemptionis the difference between the cash paid and the:
Carrying value of the Bonds
Loss paid on Bond Redemption
Cash Paid - Carrying Value
103,000 - 100,400
Journal entry for redemption of bond with a loss on bond redemption
Bonds Payable 100,000
Premium on Bonds Payable 400
Loss on Bond Redemption 2,600
Cash 103,000
When bonds are converted into common stock
The carrying value of the bonds is transferred to paid-in capital accounts
Times Interest Earned (Definition)
An indication of a company’s ability to meet interest payments as they come due
Times Interest Earned Formula
Net Income + Interest Expense + Tax Expense
Interest Expense
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 types of off-balance-sheet financing
Contingencies
Lease Transacctions
- operating lease
- capital lease
Contingencies
An event with uncertain outcomes that may represent potential liabilities
ex. lawsuit
Example of contingency: lawsuit
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
Operating Leases
These leases are treated like rentals with no assets or liabilites on the books
Capital leases
These leases are treated like debt-financed purchase that increases both assets and liabilities
What kind of leases do companies NOT want?
Capital lease, so they purposely structure their lease agreement to meet operating lease requirements
The matching principle….
necessiatates the recording of an estimated amount for bad debts
Under the allowance method, when a specific account is written off _______________
total assets will be unchanged
Allowance for doubtful accounts: effect on a/r
Contra-asset account
It is subtracted from the gross amount of accounts receivable so A/R is reported at cash realizable value
The cost of an intangible asset with an indefinte life should _____________________
not be amortized
Unearned Rental Revenue is __________________
reported as a current liability
The carrying value of bond will equal the market price _______________
on the date of issuance
Depreciation notes
A process of cost allocation
Provides for proper matching of expenses with revenues
Balance in Accmumulated Depreciation:
The total cost that has been charged to expense
Depreciation applies to three classes of plant assets:
- Land improvements
- Buildings
- Equipment
Journal entry when receiving a note receivable plus interest
Cash 7500
Notes Receivable 7000
Interest Revenue 500
Journal entry when accruing interest you will receive
Interest receivable XXX
Interest Revenue XXX
Received 5,800 on cash sale. The cost of the goods sold was 3000
Effects?
Current ratio => increase
Receivables Turnover => No effect
Average Collection period => No effect
Recorded bad debts expense of $580 using the allowance method
Effects?
Current ratio => Decrease
Receivables Turnover => Increase
Average Collection Period => Decrease
Wrote off a $116 account receivable as uncollectible (uses allowance method)
Effects?
Current ratio => No effect
Receivables Turnover => No effect
Average Collection period => No effect
Recorded $2,902 sales on account. The cost of the goods sold was $1,741
Effects?
Current ratio => Increase
Receivables Turnover => Decrease
Average Collection Period => Increase
Two advantages of having assets and liabilities not reported on balance sheet:
ROA higher if less assets
Less liabilities = Less risky
If listed as Revenue Expenditure when it should be a Capital Expenditure
Expenses overstated
Assets Understated
Net Income understated
If listed as a Capital Expenditure instead of a Revenue Expenditure
Assets Overstated
Expenses Understated
Net income overstated
Journal entry when buying a vending machine
Eqipment 11050
Prepaid ins. 1500
Liscence exp. 50
Cash 12,600
Which depreciation method best matches benefits to expense?
Units of activity
Which depreciation method has higher net income at first?
Straight-line method
Used for book purposes
Which depreciation method results in lower net income at first?
Declining balance
- lower net income
- lower taxes
*Used for tax purposes
Book value =
Cost - Accmumulated depreciation
How do we know if there is a gain or loss on disposal of assets?
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
Title of accounts for gain/loss
Gain on disposal of plant assets
Loss on disposal of plant asset
Why can we never have a gain on retiring an asset?
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
Copyrights last for
the life of the creator plus 70 years
Profit Margin ratio
Net income / Net Sales
*How much sales is being retained as income
Asset Turnover ratio:
Net Sales / Average Total Assets
*Shows how efficiently we use assets to generate sales
Return on Assets ratio:
Net Income / Average Total Assets
*Shows amount of net income generated on each dollar of assets
*The bigger => the more profitable
Are intangible assets often overstated or understated on a company’s books?
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
Explain how amortization is different than depreciation?
What type of assets do we amortize?
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
3 main factors of fraudulent activity
Opportunity
Financial Pressure
Rationalization
The control activity of establishing responsibilities includes ___________________________
aurhorizing and approving transactions
What only happens mid-period with respect to receivables?
Only write-offs mid period
Bank Reconciliation Heading
Wellmeyer Company
Bank Reconciliation
December 31, 2012
Journal entry for a $30 bank service charge
Miscelaneous expense 30
Cash 30
Journal entry:
The bank collected a note receivable for $1,000, plus $48 of interest revenue
Cash 1048
Note Receivable 1000
Interest Revenue 48
Journal entry:
A NSF check for $328 from Brittney Spears, a customer, was returned with the statement.
Dr. Accounts Receivable 328
Cr. Cash 328
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
Dr. Cash 1520
Dr. Misc. Expense 20
Cr. Notes Receivable 1504
Cr. Interest Revenue 36
