accounting ch 8/9/10/11
a contingent liability is recorded ONLY if
1. The loss is probable AND 2. The amount is reasonably estimable
If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?
A credit to Premium on Bonds Payable of $10,000 A credit to Bonds payable of $100,000 A debit to Cash of $110,000.
employee costs
Federal and state income taxes FICA taxes
employer costs
Federal and state unemployment taxes employer matching portion of Social Security and Medicare
Advantages of a corporation
Limited liability Easier to raise capital
times interest earned ratio
Net income + Interest expense + Tax expense Interest expense
notes payable
Note signed by a firm promising to repay the amount borrowed plus interest
long-term liability
Payable in more than one year from the balance sheet date
current portion of long-term debt
Portion of long-term debt due within one year or the operating cycle, reported under current liabilities
Initial public offering (IPO)
The first time a corporation issues stock to the general public
reasons companies buy back their own stock
To boost the underpriced stock. To distribute surplus cash without paying dividends. To boost earnings per share. To satisfy employee stock ownership plans
Debt to Equity Ratio
Total liabilities Stockholders' equity
Angel investors
Wealthy investors, like those featured on the television show Shark Tank.
stock dividends
additional shares of a company's own stock given to stockholders
A bond will be issued at a premium when the market rate of interest is ______ the stated rate
less than
market interest rate
represents the true interest rate used by investors to value a bond
Bonds Retired at Maturity
the carrying value will equal the face amount. The bond payable is debited and cash is credited
articles of incorporation
the document filed with a state government to establish the existence of a new corporation
liquidity
the ease with which an asset can be converted into cash
Treasury Stock
the purchase of a corporation's own stock, and we record it as a reduction in stockholders' equity
line of credit
- Informal agreement - Permits a company to borrow up to a prearranged limit
serial bonds
bonds that mature in installments
Debt financing
borrowing money
Working Capital
current assets - current liabilities
The return on assets is calculated by dividing ____ by _______.
net income; average total assets
three essential characteristics of liabilities
- probable future sacrifices of economic benefits - arising from present obligations to other entities - resulting from past transactions or events
Why Do Many Companies Lease Rather Than Buy?
1. Leasing reduces the upfront cash needed to use an asset. 2. Lease payments often are lower than installment payments. 3. Leasing offers flexibility and lower costs when disposing of an asset. 4. Leasing may offer protection against the risk of declining asset values
3 liquidity measures
1. working capital 2. current ratio 3. acid-test ratio
Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should record a contingent liability and loss of
250,000 When no amount within the range appears more likely than others, we record the minimum amount.
Susan, a recent college graduate, makes a base salary of $70,000 per year. Susan has federal income tax withholding of $12,000, and state tax withholding of $4,000. Employers are required to withhold a 6.2% Social Security tax and a 1.45% Medicare tax. What is Susan's take-home pay?
48,645
Deferred Revenue
A liability created when a business collects cash from customers in advance of completing a service or delivering a product.
Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?
Investors are willing to pay 12 times the current year's earnings per share of stock.
par value
Legal capital per share of stock that's assigned when the corporation is first established has no relationship to the market value of the common stock
Venture capital firms
Provide additional funding and business expertise.
Large stock dividends
Records a decrease in retained earnings and an increase in common stock; recorded at par value
stock split
Reduces par value per share and increases shares outstanding; no need to record the transaction.
Sales Tax Payable
Sales tax collected from customers by the seller, representing current liabilities payable to the government
outstanding stock
Share issued and held by investors
issued stock
Shares actually sold (= Outstanding + Treasury)
authorized stock
Shares available to sell (= Issued + Unissued)
treasury stock
Shares issued and repurchased by the company
On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash?
The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.
Disadvantages of a corporation
additional taxes and more paperwork
stock splits
an action by a company that gives stockholders two or more shares of stock for each one they own
contingent gain
an existing uncertain situation that might result in a gain
Contingent Liability
an existing uncertain situation that might result in a loss depending on the outcome of a future even
Which of the following is not a primary source of corporate debt financing?
common stock
The two types of adjustments to net income for the indirect method are adjustments for
components of net income that do not affect cash. changes in operating assets and liabilities during the period that affected cash and were not in net income.
Features of Preferred Stock
convertible, redeemable, cumulative
Current Ratio
current assets / current liabilities
On the date of declaration of the dividend, we _____.
debit DividendsThe declaration of a cash dividend creates a binding legal obligation for the company declaring the dividend. On that date, we increase Dividends, a temporary account that is closed into Retained Earnings at the end of each period, and increase the liability account, Dividends Payable.
installment payment
debt owed to someone that is paid monthly 1. Interest on borrowed amount 2. Reduction of outstanding loan balance
current liability
debt that is payable within one year of the balance sheet date
dividend dates
declaration date, record date, payment date
cash dividends
distributions by a corporation to its stockholders
interest =
face value x annual interest rate x fraction of the year
Bonds will be issued a premium if the stated interest rate is
greater than the market interest rate
Capital structure
mixture of liabilities and stockholders' equity a business uses
in a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:
more than in the fourth year
When accounts receivable decrease
net sales are less than cash receipts from customers
equity financing
obtaining investment from stockholders
Amounts that are subtracted from an employee's gross pay are referred to as
payroll withholdings
Stockholder Rights
right to vote, right to receive dividends, right to share in the distribution of assets
Profits generated by the company are a(n):
source of internal financing.
A corporate charter
specifies the shares of stock to be issued names the board of directors describes the business activities
Equity Investment
the purchase of stock in another corporation, and we record it as an increase in assets.
stated interest rate
the rate quoted in the bond contract used to calculate the cash payments for interest
When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.
true
the source of the most commonly reported contingent liability
warranties
retained earnings
•Earnings retained in the corporation and not paid out as dividends. • = net income - all dividends since the company began operations. • a normal credit balance
cost of financing
Debt: interest expense (tax-deductible) Equity: dividends (not tax-deductible)
Duties of Board of Directors
Establish corporate policies. Appoint officers to manage the corporation.
fringe benefits
Any financial extras beyond the regular pay check, such as health insurance, life insurance, paid vacation and/or retirement
commercial paper
Borrowing from another company rather than a bank Sold with maturities ranging from 30 to 270 days Interest rate is usually lower than on a bank loa
Acid Test Ratio
Cash + current investments + accounts receivable / current liabilities measures the availability of liquid current assets to pay current liabilities
On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?
Debit interest expense $5,705 Credit discount on bonds payable $705 Credit cash $5,000
Bonds retired before maturity
Exercising the call feature included in the bond contract or buying the bonds in the open market Retirement before maturity is called early extinguishment of debt and may result in a gain or loss equal to the difference between the book value of the bond and the price paid to retire the bonds