ACC exam 1 Ch 13-16

Accumulated rights are those that can be:

carried forward to future periods if not used in the period in which they are earned. the length of time, the legality or compensation involved are not characteristics which identify specific differences.

The fact that a company has the right to refinance at any time permits the company to:

classify the liability as non current.

Discount on notes payable

contra account to notes payable represents the cost of borrowing debited to interest expense over live of note represents interest expense chargeable to future periods

If a loss contingency is likely to occur and its amount can be reasonably estimated:

it should be recorded in the accounts

Stock dividend

large stock dividend- 20-25% of the # of shares previously outstanding same effect on market prices as stock split par value transferred from retained earnings to capital stock

A stock dividend distributable is:

liquidated using capital stock rather than assets. thus, a stock dividend distributable should be classified in an entity equity section

To report a loss and a liability in the financial statments:

the cause or litigation must have occurred on or before the date of the financial statements.

Revenue bonds

the interest is paid from a specified revenue source- frequently issued by airports, school districts, counties, and govt. bodies.

exclude debts maturing currently from current liabilities if:

they are to be retired by assets accumulated that have not been shown as current assets they are to be refinanced or retired from proceeds of new debt issued converted into capital stock

The cost of premiums should be charged:

to expense during the period in which the sale that gave rise to the premium is made. this method will wind some of the premium cost being charged to expense when premiums are distributed to customers. However, any portion of the estimated premium expense not charged to expense during the period of sale must be accrued at year end so that a proper matching of revenues and expenses takes place. Dr: inventory of preminums Cr: Cash (to record the purchase of inventory) Dr: cash Cr: sales revenue (to record the sale) Dr: Cash Dr: premium expense Cr: inventory of premiums (to record redemption) Dr: premium expense Cr: premium liability (to record the estimated liability for premium claims outstanding)

the accounting profession requires that a liability be accrued for the cost of compensation for future absence if all of the following conditions are met:

- the employer's obligation relating to the employee's rights to receive compensation for future absences is attributed to employees' services already renderer -The obligation relates to rights that are vested or accumulated - payment of the compensation is probable -the amount can be reasonably estimated

A short term obligation expected to be refinanced may be excluded from current liabilities if:

- the liability is contractually due to be settled more than one year or operating cycle if longer, after the balance sheet date - the company has a contractual right to defer settlement of the liability for at least one year, or operating cycle if longer, after the balance sheet date.

A liability has 3 essential characteristics:

-It is a present obligation that entails settlement by probable future transfers or use of cash, goods or services -The liability must be an unavoidable obligation - the transaction or other event creating the obligation must have already occurred

in practice, current liabilities are usually recorded in:

accounting records and reported in financial statements at their full maturity value

if sick pay benefits accumulate but do not vest,

accrual is permitted but not required

cash dividends

BOD vote on the declaration of cash dividends a declared cash dividend is a liability companies do not declare or pay cash dividends on treasury stock

In accounting for compensated absences, a company following GAAP would account for the liability using the:

Cash Basis: NO Accrual Basis: YES

The D Co. issues a $208,000 6 month, zero interest bearing note to the T national bank. the present value of the note is $200,000. the entry to record this transaction by D Co. would include:

Dr: Cash $200,000 Dr: Discount on notes payable $8,000 Cr: Notes Payable. $208,000

T/F The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer.

False, in addition to the operating cycle or one year, whichever is longer criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations who liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other liabilities.

T/F Notes payable are only classified as short term.

False, notes payable may be classified as short term or long term depending upon the payment due date

Which of the following loss contingencies normally accured?

General or unspecified business risk loss related to receivable collections loss related to product warranties

On Oct. 1, 2019, a company borrowed cash and signed a one year interest bearing note on which both the principal and interest are payable on Oct 1, 2020. How will the note payable and the related interest be classified in the Dec 31 2019 balance sheet?

Notes payable: Current liability Accrued interest: Current liability

Because current liabilities tend to be liquidated within a short period of time:

Present value techniques are NOT normally applied

Williams co. which has a taxable payroll of $300,000, is subject to the FUTA tax of 6.2% and the state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. what is the total amount of federal and state unemployment tax or Williams co.?

State unemployment tax = .02* $300,000 = $6,000 Federal unemployment tax = (6.2-5.4%) * 300,000 = $2,400 Total federal and state unemployment tax = $8,400

The amount of unremitted employee and employer social security tax on gross wages paid should be reported

by the employer as a current liability

T/F currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long term asset such as a sinking fund.

True

T/F when a company issues a zero interest bearing note, the difference between the face amount of the note and the cash proceeds is more appropriately recorded as a discount on notes payable

True

in accounting for compensated absences, the difference between vested rights and accumulated rights is:

Vested rights are not contingent upon an employee's future service.

convertible bonds

a bond that is convertible into other secerities at the corporation for a specific time after isurrance

A current liability results when

a company collects sales taxes from customers

Discount on notes payable is:

a contra account to notes payable and therefore is subtracted from notes payable on the balance sheet

the liability for the cost of compensation for future absences is required if four of the following conditions are met:

a) the employee's services have already been rendered b)the obligation relates to rights that vest or accumulate c) payment is probable d) the amount can be reasonably estimated

Commodity backed bonds

also called linked bonds- are redeemable in measures of commodity such as oil. coal etc.

Vested rights exist when:

an employer has an obligation to make payment to an employee even if his or her employment is terminated

A contingency is:

an existing condition, situation, or set of circumstances involving uncertainty as a possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur

term bonds

are bonds that mature at a certain date

unsecured or debenture bonds

are not backed by any type of collateral and are risky with higher interest rates. sometimes used to finance leverage buyouts

Gain Contingencies

are not recorded. the are disclosed only if probability of receipt is high

registered bonds

bonds issued in the name of the owner and require surrender of the certificate and issuance of new certificate to complete the sale `

secured bonds

bonds that are backed by some type of collateral

serial bonds

bonds that mature in installments

if a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be:

disclose in the footnotes to the financial statements -the nature of the contingency and -an estimate of the possible loss or range of loss or a statement that an estimate cannot be made.

Zero interest bearing note payable

does not explicitly state an interest rate on the face of the note, however, interest is still charged. @ maturity, the borrower must return amt greater than cash received at insurance dates

the number of outstanding premium offers that will be presented for redemption must be:

estimated in order to reflect the existing current liability and to match costs with revenues

An assurance type warranty should be:

expensed in the period the goods are provided or services performed.

callable bonds

give the issuer the right to call and redeem the bonds prior to maturity

Threatened litigation

is a loss contingency that should be recorded as a liability if it is probable that a liability has been incurred and the amount of the loss is reasonably estimated.

bearer / coupon bonds

is not recorded in the name of the owner and may be transfered from one owner to the other by mer deliver

Contingencies result in liabilities if:

it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. the mere passage of time is not a criteria in determining whether a loss contingency should be recorded as a liability

return on equity

measures profitability from the stockholders view how many dollars of net income the company earned for each dollar invested by the owners helps investors determine the worthiness of a stock when the overall market is not doing well

Preferred dividends in arreas are:

not an obligation until formal action is taken by the BOD authorizing the distribution of earning- although a disclosure may be involved

Current liabilities are:

obligations that mature within one year or the operating cycle, whichever is longer, and they are reasonably expected to require the use of current assets for their liquidation.

Income bonds

pays no interest unless the issuing company is profitable

a loss and related liability should be reported in the financial statements if the amount can be:

reasonably estimated, and unfavorable outcome is highly probable, and the cause for action occurred during the accounting period covered by the financial statements

A service type warranty is usually:

recorded in an unearned warranty revenue account

stock split

reduces the market value of shares not entry recored for a stock split decreases par value and increases number of shares

The absence of insurance does NOT mean:

that a liability has been incurred at the date of the financial statements

service type warranty

warranty that provides an additional service beyond the assurance type warranty. not included in the price of the product or service. -recorded as a separate performance obligation usually recorded in an unearned warranty rev account recognize revenue on a straight line basis over the period the service type warranty is in effect.

If a company at the balance sheet date has a liability that will be settled on a long term basis, this means that the company:

will not require the use of working capital during the ensuing fiscal year or operating cycle if longer.

deep discount bonds

zero interest debenture bonds- are sold at a discount that provides buyers total interest payoff at maturity