acc chapter 10
time interest earned ratio
measures a company's ability to meet interest obligations as they come due income before interest and tax/ interest expense
debt to equity ratio
measures the proportion of a company's debt to its equity total liabilities/ total stockholder's equity
$500,000
on jan 2, 2015 roof master construction inc issued $500,000, 10 year bonds for $574,540. the bonds pay interest on june 30 and dec 31. the face rate is 8% and the market rate is 6%. at the maturity date, in addition to the last interest payment, roof master would repay the bondholders how much???
criteria for lease capitalization
one or more of the following criteria must be met: -transfer of ownership of property to the lessee at the end of the lease term -contains a bargain-purchase option to purchase the asset for lower than its fair market value -the lease term is 75% or more of property's economic life -the present value of payments is 90% or more of property's fair market value at the inception of the lease
off balance sheet financing
the lessee has arraigned the right to use property but has not recorded that right, or the accompanying obligation, on the balance sheet.
cash, discount on bonds payable, and bonds payable
to record the issuance of bonds when the face rate of interest is less than the market rate, the company would increase ____.
interest expense and decreases cash and discount on bonds payable
to record the semiannual payment of interest on bonds sold at a discount, the company increase ____.
leasing
u.s accounting standards: rule based. if lease meets any of the criteria-capital lease. does not meet any criteria-operating lease
the cash flows from operating activities section
using the indirect method depreciation on factory equipment would be reported in
net income, increase to accounts payable
using the indirect method, cash flows from operating activities would include
the interest expense is calculated as the carrying value x the effective (market) value
what happens in bond accounting under the effective interest method....
operating
what type of lease does not result in recording a long term liability?
issuance of a long term debt
what would be reported on the statement of cash flows
a decrease in the amount of liability
when amortizing the premium on bonds payable a ____ occurs.
increase in assets and increase in liabilities
when bonds are issued by a company, the accounting entry shows an
depreciation on the equipment, a loss on the sale of a machine, a decrease in inventory
when preparing the operating activities section of the statement of cash flows using the indirect method, what would be added to the net income
premium
when the stated interest rate on bonds is higher than the market rate of interest, the bonds sell at a _____.
face rate, market rate of interest
you should be able to determine whether a bond will set at a premium or a discount by the relationship that exists between the _____ and the _____.
lease
a contractual arrangement between two parties, allows one party the lessee, the right to use an asset in exchange for making payments to its owner, the lessor.
gain on redemption of bonds is increased
as callable bonds are redeemed below carrying value, what is true
convertible bonds
can be converted into common stock at a future time
interest expense
carrying value X effective rate
gain
carrying value- redemption price
premium amortized
cash interest- interest expense
ifrs
criteria are used as "guidelines" rather than rigid rules. more flexibility in applying the lease standards
effective rate
= annual interest expense/ carrying value
a separate schedule
a company issues a 10 yr bonds payable in exchange for preferred stock. this transaction is included in...
temporary difference
a difference that affects both book and tax records but not in the same time period
permanent difference
a difference that affects the tax records but not the accounting records, or vice versa
operating lease
a lease that does not meet any of the four criteria and is not recorded as an asset by the lessee. off balance sheet- financing -the lessee acquires the right to use an asset for a limited period of time -the lessee is not required to record the right to use the property as an asset or record the obligation for payments as a liability
capital lease
a lease that is recorded as an asset by the lessee. the lessee has the right of ownership and control
bond
a security or financial instrument that allows firms to borrow large sums of money and repay the loan over a long period of time. the borrower (issuing company) agrees to pay interest on specific dates, usually semiannually or annually. the borrower also agrees to repay the principal at the maturity, or due date, of the bond. bonds are usually in denominations of $1,000 called face value or par value. bond contracts can have other features concerning the collateral or due date and features that make the bonds convertible to stock or callable by the issuer.
long term liability
a ten year obligation appears on the balance sheet of generic products company. how would it most likely be classified on the balance sheet?
long term liability
an obligation that will not be satisfied within one year or the current operating cycle components: bonds or notes payable, leases, deferred taxes
cash interest
bond face value X face rate
$60,000
bonds in the amount of $100,000 and a life of 10 years were issued by the focus com pay. if the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
debenture bonds
bonds that are not backed by specific collateral
serial bonds
bonds that do not have the same due date; a portion of the bonds comes due each time period
callable bonds
bonds that may be redeemed or retired before their specified due date
total liabilities/ stockholders equity
debt to equity
total liabilities/ total stockholders equity
debt to equity ratio
term bonds
entire principal amount is due on a single date
carrying value premium instead of discount
face value+ unamortized premium
carrying value discount instead of premium
face value- unamortized discount
as a long term asset, a current liability, and a long term liability
how is a capital lease presented by the lessee?
on the income statement as a gain
in 2012, harley co. decides to retire bonds due in 2014. the carrying value of the bonds is higher than the call price to be paid. how will the company shows the difference in the financial statements on 12/31/2012?
ignored since it is a non cash activity
in the direct method, depreciation is
discount amortized
interest expense- cash interest
effective interest method
produces a constant effective interest rate from period to period. =annual interest expense/ carrying value
loss
redemption price- carrying value
redemption
retirement of bonds by repayment of the principal.
redemption of bonds
retirement of bonds by repayment of the principal. if redeemed at maturity, no gain or loss occurs. if retired before maturity, a gain or loss occurs the gain or loss on bond redemption is shown on the income statement
deferred tax
the account used to reconcile the difference between the amount recorded as income tax expense and the amount that is payable as income tax
present value of the stream of interest payments and the present value of the maturity amount
the bond issue price is determined by calculating the
secured bond
the certificate indicates specific assets that serve as collateral in case of default
25,000
the charter provides for the issuance of 100,000 shares of common stock. if 40,000 shares were issued and 15,000 were subsequently reacquired, what is the number of shares outstanding?
gain or loss on redemption
the difference between the carrying value and the redemption price at the time bonds are redeemed
discount
the excess of the face value of bonds over the issue price
premium
the excess of the issue price over the face value of the bonds
carrying value
the face value of a bond plus the amount of unamortized premium or minus the amount of unamortized discount.
lessor
the party who legally owns a leased asset in a capital lease is a _____.
bond issue price
the present value of the annuity of interest payments plus the present value of the principal
face value
the principal amount of the bond as stated on the bond certificate
effective interest method of amortization
the process of transferring a portion of the premium or discount to interest expense; this method results in a constant effective interest rate
amortization
the process of transferring an amount from the discount or premium account to interest expense each time period to adjust interest expense.
face rate of interest
the rate of interest on the bond certificate. it is also called the stated rate, nominal rate, contract rate, coupon rate
market rate of interest
the rate that investors could obtain by investing in other bonds that are similar to the issuing firm's bonds. also called the effective rate, bond yield
inverse
the relationship between interest rates and bond prices is always ____.
addition to cash flows from financing activities
the statement of cash flows reports a long term liability account increase as a
if market rate > face rate
then bonds are issued at a discount
if market rate < face rate
then bonds are issued at a premium
if market rate=face rate
then bonds are issued at face value amount
income before interest and tax/ interest expense
time interest earned ratio
net income + tax expense + interest expense / interest expense
times interest earned
premium on bonds payable and increase interest expense
to record the amortization of a premium on bonds payable a company will decrease _____.