ACC 201 Final Ch.10-14
Current Funds
(Current Assets): Payroll Cash Account (to pay salaries and wages); Dividend Cash Account (to pay dividends); Interest Fund (to pay interests on long‑term debt)
Available‑for‑Sale Securities
(Current or Noncurrent Assets) debt or equity securities are not classified as held‑to‑maturity or trading securities.
Held‑to‑Maturity Securities
(Current or Noncurrent Assets, stocks are not included in this category) debt securities that the enterprise has the positive intent and ability to hold to maturity.
Long‑term Funds
(Long‑term Investments): Sinking Funds (for example, to retire long‑term liabilities), Stock Redemption Funds (to retire capital stocks), Plant Expansion Funds (to purchase or construct additional plants), Contingency Fund (to pay unforeseen obligations)
Corporation
(large multinational business): A business organized under state law that is a separate legal entity. One or more (called stockholders), (2) Stockholders are not personally liable. Corporation pays tax. (Double Taxation)
Partnership
(professional organizations of physicians, attorneys, and accountants): A business with two or more owners and not organized as a corporation. Partners are personally liable. Partners pay tax on their share of the earnings.
3 categories of Marketable securities
1. Held‑to‑Maturity Securities 2. Available‑for‑Sale Securities 3. Trading Securities (Current Assets)
Three characteristics of liabilities
1. They create a present obligation for future payment of cash or services. 2.They are an unavoidable obligation. 3.They occur because of a past transaction or event.
Four basic stockholder rights
1. Vote 2. Dividends: A dividend is a distribution of a corporation's earnings to stockholders. 3. Liquidation: Stockholders receive their proportionate share of any assets remaining after the corporation pays its debts and liquidates (goes out of business). 4. Preemptive right: Stockholders have a preemptive right to maintain their proportionate ownership in the corporation. However, this right is usually withheld by contract for most corporations.
Which of the following investments is most likely classified as a held-to-maturity debt investment? 1. 80% stock ownership in a subsidiary 2. 100% ownership in voting stock of a supplier 3. 10 year bonds
10 year bonds
A _______ ownership in the investee's voting stock can significantly influence the investee's decision.
20 percent to 50 percent
Carrying amount of bonds
A bond payable minus the discount account current balance or plus the premium account current balance
Serial bonds
A bond that matures in installments at regular intervals
Sole Proprietorship
A business with a single owner. Small business, Owner is personally liable. The owner pays tax on the proprietorship's earnings.
Limited-Liability Company
A company in which each member is only liable for his or her own actions. One or more (called members or partners), (2) Members are not personally liable. Members pay tax on their share of the earnings.
Subsidiary Company:
A company that is controlled by another corporation.
Parent Company:
A company that owns a controlling interest in another company.
Treasury Stock:
A corporation's own stock that it has previously issued and later reacquired. (20 shares)
Long-term liability
A liability that does not need to be paid within one year or within the entity's operating cycle, whichever is longer.
Bond payable
A long-term debt issued to multiple lenders called bondholders, usually in increments of $1,000 per bond
Pension plan
A plan that provides benefits to retired employees
Contigent Liability
A potential liability that depends on some future event
Debt to equity ratio
A ratio that measures the proportion of total liabilities relative to total equity. Total liabilities/total equity
Under the equity method, dividend revenue is treated as ________.
A return of capital
Amortization schedule
A schedule that details each loan payments allocation between principal and interest and the beginning and ending loan balances
Payroll Register
A schedule that summarizes the earnings, withholdings, and net pay for each employee
Annuity
A stream of equal cash payments made at equal time intervals
Short-term notes payable
A written promise made by the business to pay a debt, usually involving interest, within one year or less
Jade Larson Antiques owes $20,000 on a truck purchased for use in the business. Assume the company makes timely principal payments of $5,000 each year at Dec. 31 plus interest ay 8%. Which of the following is true?
After the payment is made, $5,000 would be shown as the current portion due on the long-term note.
Identify the appropriate accounting method for this situation: Bond Investment that matures in four years. The investor plans to hold the bond for the full four years
Amortized cost
Adjunct Account
An account that is directly related to another account. Adjunct accounts have the same normal balance as the related account and are added to the related account on the balance sheet
Warranty
An agreement that guarantees a company's product against defects
Straight-line amortization mathod
An amortization method that allocates an equal amount of bond discount or premium to each interest period over the life of the bond
Effective-interest amortization for a bond discount
An amortization model that calculates interest expense based on the current carrying amount of the bond and the market interest rate at issuance, and then amortizes the difference between the cash interest payment and calculated interest expense as a decrease to the discount of premium
Passive Interest Investment:
An equity security in which the investor owns less than 20% of the investee's voting stock.
Controlling Interest Investment
An equity security in which the investor owns more than 50% of the investee's voting stock.
Trading Securities Investment (Current Assets):
An equity security the investor plans to sell in the very near future.
Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year
Available-for-sale debt investments
Best Appliances owns 90% of the voting stock of Wratchet, Inc. Which of the following is true: 1. The financial statements of Best would be consolidated into Wratchet 2. Wratchet would be considered the parent entity 3. Best would be considered the parent entity
Best would be considered the parent entity
Term bonds
Bonds that all mature at the same time. Bond at the same specified time.
Identify the appropriate accounting method for this situation: Investments in more than 50% of the investee company's stock
Consolidation
Jane owns 53% of Richard's Rose's voting stock.
Controlling interest equity investments
If Intervale Railway invests $100,000 in 5% bonds at face value that the company intends to hold until the bond maturity date, the interest revenue recognized when each semiannual interest payment is received would be recorded as:
Credit to interest revenue $2,500
A company owns 25% of the voting stock of Pink Co. and can exercise significant influence, dividends received will be:
Credited to Equity investments-Pink Co.
Investment
Debt Securities, Equity Securities, Funds, etc.
Trading Investments Include:
Debt securities that the investor plans to sell in the very near future
A company invested $45,000 in Yale Co. stock. The investment represented 5% of the voting stock of Yale Co. If the Yale Co. stock investments paid dividends, what account would be credited?
Dividend revenue
Identify the appropriate accounting method for this situation: Investment in 25% of the investee company's stock of which the investor has significant influence
Equity
Significant influence investments
Equity securities in which the investor owns between 20% and 50% of the investee's voting stock.
Time-interest-earned ratio
Evaluates a business's ability to pay interest expense. (Net income + income tax expense + interest expense)/ interest expense
Identify the appropriate accounting method for this situation: Available-for-sale debt investments
Fair Value
Social Security (FICA) Tax
Federal Insurance contributions act (FICA) tax, which is withheld from the employee's pay and matched by the employer
Consolidated Statements:
Financial statements that combine the balance sheets, income statements, and statements of cash flow of the parent company with those of its controlling interest affiliates.
Net pay
Gross pay minus all deductions. The amount of compensation that the employee actually takes home
Joe owns a debt security in Bones, Inc. and intends to hold it until maturity
Held-to-Maturity debt investments
Income tax withholding
Income tax deducted from an employee's gross pay
Compound interest
Interest calculated on the principal and on all previously earned interest
Simple interest
Interest calculated only on the principal amount
On Jan. 1, 2018, a business borrowed $18,000 on a five-year, 5% notes payable. At Dec. 31, 2018 the business should record
Interest payable of $900
Available-for-sale (AFS) debt investments that are expected to be held longer than a year are reported as:
Long-term assests
Significant influence equity investments are reported as ________ as on the balance sheet.
Long-term assets
Mortgages payable
Long-term debts that are backed with a security interest in specific property
Jimenez owns 5% of Delgado, Inc.'s voting stock but does not have the ability to participate in the decisions of Delgado, Inc.
No significant influence equity investments
Stated Value Stock:
No-par stock that has been assigned an amount similar to par value. For accounting purposes, stated value stock is treated the same as par value stock.
Discount on bonds payable
Occurs when a bond's issue price is less than face value
Premium on bonds payable
Occurs when a bond's issue price is more than face value
Financial leverage
Occurs when a company earns more income on borrowed money than the related interest expense
Brandi Corp. purchased 1,000 shares of Kala Corp. for $16 per share. The investment represents 5% ownership, and Bendi does not have significant influence. The fair value at year-end is $15 per share. Assuming no other transactions occurred, where would the $1 per share difference be reported on the year-end financial statements?
Other income and (expense)
Unrealized holding gains or losses on trading debt investments are reported in the ______
Other income and (expenses) section of the income statement
Stock Certificate:
Paper evidence of ownership in a corporation showing (a) company name, (b) stockholder name, and (c) number of share owned by the stockholders.
Unemployment compensation taxes
Payroll tax paid by employers to the government, which uses the cash to pay unemployment benefits to people who are out of work
Liabilities
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions of events.
Time value of money
Recognition that money earns interest over time
Equity Security
Represents stock ownership in another company and sometimes pays dividends
Capital Stock:
Represents the individual's ownership of the corporation's capital. The basic unit of stock is a share.
Stockholders' Equity:
Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.
A company sells $180,000 (sales price) of goods and collects sales tax of 8%. What current liability does the sale create?
Sales tax payable of $14,400
Jacob owns 24% of Pay, Inc.'s voting stock and has the ability to exert influence over Pay, Inc.
Significant influence equity investments
Par Value Stock:
Stock that has an amount assigned by a company to a share of its stock.
Issued Stock:
Stock that has been issued but may or may not be held by stockholders. (100 shares)
No-par Stock:
Stock that has no amount (par) assigned to it.
Outstanding Stock:
Stock that is held by the stockholders. (80 shares).
Debentures
Such bonds are unsecured bonds that are not backed by assets. They are backed only by the credit worthiness of the bond issuer
Face value
The amount a borrower must pay back to the bondholders on the maturity date
Current portion of notes payable
The amount of the principal that is payable within one year of the balance sheet date
Federal Insurance Contributions ACT (FICA)
The federal act that created the social security tax that provides retirement, disability, and medical benefits
Stated interest rate
The interest rate that determines the amount of cash interest the borrower pays and the investor receives each year
Market interest rate
The interest rate that investor demand in order to loan their money
Authorized Stock:
The maximum number of shares of stock that the corporate charter allows the corporation to issue. (1,000 shares)
Capital Stock:
The par or stated value of the shares issued.
Gross pay
The total amount of salary, wages, commissions, and any other employee compensation before taxes and other deductions
Future value
The value of an investment at the end of a specific time frame
Present value
The value of an investment today
Consolidation Accounting:
The way to combine the financial statements of two or more companies that have the same owners.
Secured bonds
These bonds give the bondholder the right to take specified assets of the issuer if the issuer fails to pay principal or interest
Jim owns a debt security in Tag, Inc.'s and plans on holding the debt for only a week
Trading debt investments
Equity Securities/Stocks
are described as securities representing ownership interests such as common, preferred, or other capital stock. They also include rights to acquire or dispose of ownership interests at an agreed upon or determinable price such as warrants, rights, and call options or put options.
Debt Securities/Bonds
are instruments representing a creditor relationship with an enterprise such as U.S. treasury securities, municipal securities, corporate bonds, convertible debt, commercial paper, investments in preferred stock that have a mandatory redemption feature or are redeemable at the option of the holder, and all securitized debt instruments (includes convertible debt securities, redeemable preferred stocks.)
Current Liabilities:
are those obligations whose liquidation expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities within one year or the normal operating cycle, whichever is longer.
Marketable securities
are those traded in a qualifying market such as NYSE. are grouped into three separate categories for accounting and reporting purposes:
Callable bonds
bonds that the issuer may call and pay off at a specified price whenever the issuer wants
Trading Securities (Current Assets)
debt or equity securities bought and held primarily for sale in the near term to generate income on short‑term price differences.
Preferred Stock
gives its owners certain advantages over common stock. Owners of preferred stock have the four basic stockholder rights, unless a right is withheld. The right to vote is usually withheld from preferred stock.
Comprehensive Income
the change in equity from owner or non-owner transactions, includes all revenues and gains, expenses and losses reported in net income, and, additionally it includes gains and losses that bypass net income but affect stockholders' equity. These items that bypass the income statement are referred to as other comprehensive income. Net Income = Revenue + Gain - Expense - Loss Comprehensive Income = Net Income + Other Comprehensive Income/Loss (net of tax)
Fair Value
the price that would be used if the investment were sold on the market.
fair value method
used to account for Trading Securities. Trading securities must be adjusted and reported at fair value. used to account for AFS Securities. AFS securities must be adjusted and reported at fair value.
Common Stock
which represents the basic ownership of the corporation.