Accounting Chapter 7-Accounting for Liabilities

On January 1, Year 1, Zoe Company issued a $200,000, 9%. 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the principal balance on the loan on January 1, Year 2 is

$166,581. $200,000 January 1, Year 1 principal balance - $33,419 Year 1 principal repayment = $166,581 January 1, Year 2 principal balance.

On January 1, Year 1, Zoe Company issued a $200,000, 9%. 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the portion of the principal balance repaid during Year 1 was

$33,419. $51,419 annual payment - $18,000 interest expense ($200,000 x 0.09) = $33,419 principal payment.

Jack Company issued a $12,000 note payable on September 1, Year 1 for a one year term. Interest was set at 5% per year. Assume that the company's balance sheet date is 31st December each year. In Year 2, Jack would recognize cash flow from operating activities amounting to

$600 of interest expense. Cash payment for the total amount of interest occurs in Year 2, ($12,000 Principal x 5% = $600 per year). Although interest expense is recognized in Year 1, all interest is actually paid in Year 2.

Recognizing a cash revenue event that is subject to state sales tax would:

Affect the income statement, affect the Statement of changes in stockholders' equity

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.

How would issuing a note to borrow money affect a company's financial statements?

Assets increase, liabilities increase

Paying off a sales tax liability would affect which of the following financial statements?

Balance sheet, Statement of Cash Flows

Recognizing accrued interest expense would affect which of the following financial statements?

Balance sheet, Statement of Changes in Stockholders' Equity, Income Statement

Paying a warranty claim will affect which of the following financial statements?

Balance sheet, Statement of cash flows

Which of the following statements is true?

Bond obligations normally have longer terms to maturity than bank notes.

In a note containing the terms of a lending transaction, the party borrowing the money may be called the:

Borrower, maker of the note, or issuer of the note

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following answers shows the effect of this event on the financial statements?

Choice A. Assets= Liab. + Equity Revenue - Expense = Net Inc. (100) = NA. + (100). NA 100 (100) Cash Flow (100) OA

Which of the following reflects the effect of the year-end estimation os warranty expense?

Choice A. Assets=NA, Liabilities increase, Equity decreases, Revenue=NA, Expense increases, Net Income decreases, Cash Flow=NA

Which of the following correctly shows the effects of the December 31, Year 2 payment

Choice C. Assets=(1,156), Liabilities=(951), Equity=(205), Revenue=NA, Expense=205, Net Income=(205), Cash Flow=(951) FA/ (205) OA

Warranties normally:

Guarantee repair or replacement, are based in estimates, cover a specific time period.

A company issued bonds on January 1, Year 1 at face value. At the end of the Year 1, the company made a cash payment for interest. As a result of this payment, the balance of the:

Interest Expense account increases, Cash account decreases.

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on the net income. Which of the following events could have cause these effects?

Issuing a bond with a 20 year term. NOT: Buying a bond with a 20 year term Collecting the principal balance of a bond at maturity Paying the principal balance of a bond at maturity

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the:

Sales Tax Liability account would increase by $120, Cash account would increase by $2,120

Which of the following statements is true?

The more quickly an asset is converted to cash or consumed, the more liquid it is considered.

Which of the following statements is true?

The principal amount of a bond is called the face value of the bond, A bond certificate acknowledges the issuer's obligation to repay the principal amount on the maturity date.

Fran Company recognized accrued internet expense. How would this event affect Fran Company's financial statements?

Total liabilities increase, Stockholders' equity decreases

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, Simms would recognize:

a $120 liability on the Balance sheet, a $2,120 increase in total assets.

A payment on an installment loan will:

be shown in the operating activities section of the statement of cash flows, be shown in the financing activities section of the statement of cash flows.

When respect to a bond liability the lender is called the _________________, while the borrower is called the ____________.

bondholder, issuer.

The seller of a bond is called the ____________, while the buyer of a bond is called the ___________.

borrower (issuer), lender (bondholder)

When a company makes a cash payment for interest on a bond that was issued at face value,:

cash flow from OA decreases, net income decreases

What are balance sheets that distinguish between current and noncurrent items known as?

classified balance sheets

The primary purpose of classified balance sheets is to distinguish between:

current and long-term assets, current and noncurrent liabilities.

What type of interest rate remains constant during the term of the loan?

fixed

A warranty is an obligation that:

has an estimable amount, does not have to be disclosed in the notes to the statements, is reasonably likely to occur, has to be reported as a liability in the balance sheet.

A company issued bonds on January 1, Year 1, at face value. At the end of Year 1, the company makes a cash payment for interest. When the company recognizes this transaction in the books, its:

income statement is affected, statement of changes in stockholders' equity is affected.

Houston Co. borrowed $20,000 from Dallas Co. on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements?

increase liabilities and increase expenses.

When Grey Company borrowed money by issuing bonds, the balance in the Bonds Payable account ______________ (increased/decreased) and the balance in the Cash account ____________ (increased/decreased).

increased, increased.

Loans that require payments of principal and interest at regular intervals are called

installment loans

Which of the following would be classified as a current asset on the balance sheet?

inventory, cash, accounts receivable NOT: accounts payable, equipment

The maker of a promissory note is sometimes called the

issuer

When a company increases the amount borrowed on a line of credit, the amount of

net income is not affected, net cash flow from financing activities increases

A line of credit

normally has fluctuating interest rates, is normally renewable on a on year term

A warranty is

reported in financial statements, a general uncertainty

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

to repay the interest and repay the debt.

When a company increases the amount borrowed on a line of credit, the amount of

total liabilities increases, total assets increases.

When a company makes a cash payment for interest on a bond that was issued at face value,:

total liabilities is not affected, total assets decreases.

Semiannual interest means that interest is paid

two times per year.

What type of interest rate fluctuates up or down during the loan period?

variable