Accounting quiz 2
Problem: Daenerys Dragons purchased a building on January 1 by signing a long-term (20 years) $600,000 mortgage with monthly payments of $3,300. The mortgage carries an interest rate of 5% per year. How much of the first payment, which is due on January 31, is interest and how much is principal?
$2,500= interest $800=principle, $3,300 total Again, this is for payment 1 only. For payment 2, how much of the payment is interest and how much goes to principal?
what is a bond
-A bond is an interest-bearing long-term note payable issued by corporations, universities, and governmental agencies to borrow money from individual investors -Bonds usually involve the borrowing of a large sum of money, called principal. -The principal is usually paid back as a lump sum at the end of the bond period. Individual bonds are often denominated with a par value, or face value of $1,000.
Problem: A company sold $4,000 worth of merchandise with a warranty. The accountant estimated that the $100 of warranty cost will be incurred over the next two years on the goods sold. What accounts will be affected?
-Liabilities (warranty expense) increase by the $100 and Retained Earnings decrease by $100. -Assets = Liab.(100) + Contributed Cap. + Ret. Earnings (100) -Income Statement: Decreases income -Statement of Changes in Equity: Decreases equity -Statement of Cash Flows: No effect on cash flow
What are liabilites
-Liabilities are probable future sacrifices of economic benefits (different flavors of debt) -require the business to transfer assets or provide services to another entity sometime in the future -have a wide variety of characteristics "flavors"
what is treasury stock
-Shares of stock bought back by the corporation -Is a contra-equity account -Is considered issued stock but not outstanding stock -Reduces total stockholders' equity on the Balance Sheet
A contingent liability is not recognized in the account unless?
-The event on which it is contingent is probable -A reasonable estimate of the loss can be made. Lawsuits filed against a business are classic examples of contingent liabilities.
what are notes payable
-a business borrows money or purchases goods or services from a company that requires a formal agreement or contract (ex: bank loan) -these notes are called interest-bearing notes because they have an interest rate
what is account payable
-business purchases goods or services on credit. -do not require a formal agreement or contract. -generally require that the purchaser pay the amount within 30-60 days and seldom require interest
Dividends: what are the rules? what happens when you declare a dividend?
-must be declared before they can be paid -corporations have no legal obligation to pay dividends to common shareholders -dividends are liabilities -only paid to outstanding shares -A liability, Dividends Payable, is recorded and the amount of dividends is deducted from the Retained Earnings account
what is a bond discount? will this increase or decrease the periodic interest for the issuer?
-when the selling price of a bond is less than the face (par) value(<100) -The discount must be amortized over the outstanding life of the bonds. -The discount amortization increases the periodic interest expense for the issuer.
what is a bond premium? will this increase or decrease the periodic interest for the issuer?
-when the selling price of a bond is more that the face (par) value (>100) -The premium must be amortized over the term of the bonds. -The premium amortization decreases the periodic interest expense for the issuer.
Problem: On February 3, 2019, Maron's Brains Inc. repurchased 1,200 shares of its outstanding common stock for $9 per share. On April 15, 2019, the company sold 300 shares of the treasury stock for $4 per share. Then on May 31, 2019, Maron's Brains sold the remaining 900 shares of its treasury stock for $15 per share.
02/03/19 Debit: Treasury stock 10,800 Credit: Cash 10,800 (1,200 x $9 = $10,800) 04/15/19 Debit: Cash 1,200 Credit: Retained Earnings 1,500 Credit: Treasury Stock 2,700 (300 x $4 = $1,200 300 x ($9 - $4) = $1,500 300 x $9 = $2,700) 05/31/19 Debit: Cash 13,500 Credit: Treasury Stock 8,100 Credit: APIC - Treasury Stock 5,400 (900 x $15 = $13,500 900 x $9 = $8,100 900 x ($15 - $9) = $5,400)
Problem: -On July 23rd, 2015 Parrish Inc. issued 10,000,000 shares of common stock to the markets for $30 a piece. Each share had a par value of $.75 -On November 7th, 2017 Parrish Inc. repurchased 1,500,000 shares of their common stock. The price per share was $42. -On July 1st , 2019 Parrish Inc. sold 400,000 shares of their treasury stock back to the markets for $36 per share. -On April 2nd, 2020 Parrish Inc. sold 150,000 shares of their treasury stock back to the markets for $45 per share. -On July 1st 2020, Parrish Inc. declared cash dividends of $2.00 per share to be paid at a later date. Record all transactions
07/23/2015 debit: cash 300,000,000 credit: common stock 7,500,00 credit: APIC common stock 292,500,000 11/07/2017 debit: treasury stock 63,000,000 credit: cash 63,000,000 07/01/2019 debit: cash 14,400,000 debit: retained earnings 2,400,000 credit: treasury stock 16,800,000 04/02/2020 debit: cash 6,750,000 credit: treasury stock 6,300,000 credit: APIC treasury stock 450,000 07/01/2020 debit: dividends 18,100,000 credit: dividends payable 18,100,000 (Remember that there is no such thing as Dividends Expense) *9,050,000 shares of common stock outstanding as of July 1, 2020 How many shares of treasury stock does Parrish Inc. still have left? What is the $$ amount of treasury stock? If Net Income was $22,000,000.....what is earnings per share?
Problem: On June 1, 2019, Dunder Mifflin issued 35,000 shares of common stock. The company bought back 7,000 shares on September 30, 2019. On December 1, 2019, Dunder Mifflin's executive team declared a cash dividend of $0.55 per share payable on December 15, 2019.
12/01/19 Debit: Dividends 15,400 Credit: Dividends Payable 15,400 12/15/19 Debit: Dividends Payable 15,400 Credit: Cash 15,400
Problem: Let's say that SnowCat Ski Resort "closes it's books" on December 31st. The resort had wages earned (by their employees) from December 1 - December 31, 2019 totaling $257,000. Wages of $52,000 that were earned between December 15th and December 31st will not be paid until after the first of the year. The rest will be paid on the 31st. Record the journal entry on December 31, 2019
12/31/2019 Debit: Wage Expense 257,000 Credit: Cash 205,000 Credit: Wages Payable 52,000
Problem: On May 1, 2019, Wayfarer Travel borrowed $245,000 from Ute Bank. The loan has a 3 year term and a 4% interest rate. The loan is an interest-only notes payable with the principal amount due in full at the end of the 3 year term. Interest payments are due annually on May 1st. (1) Record the journal entry for the loan transaction on May 1, 2019. (2) Record the journal entry on December 31, 2019 to recognize the interest accrued for the year (round the answer to the nearest whole dollar).
5/01/2019 Debit: Cash 245,000 Credit: Notes Payable 245,000 12/31/2019 Debit: Interest Expense 6,533 Credit: Interest Payable 6,533 ($245,000 x .04 = $9,800 per year $9,800/12 months - $816.67 per month $816.67 x 8 = $6,533.33)
Problem: On September 1, 2019, Big Mountain Designs was paid $84,000 cash by a client for 1,120 hours of service to be completed over the next 6 months. By December 31, 2019, Big Mountain had completed 975 hours of service. Record the journal entry on September 1, 2019. Record the adjusting entry on December 31, 2019.
9/01/2019 Debit: Cash 84,000 Credit: U.E. Revenue 84,000 12/31/2019 Debit: U.E Revenue 73,125 Credit: Service Revenue 73,125
what are warranties
A written guarantee, promising to repair or replace it if necessary within a specified period of time -An accountant estimates the future repairs and replacement costs related to current sales. -Companies provide warranties as a sales or marketing tool -Warranty expense is estimated and a liability (warranties payable) is created
what is a market interest rate
Always changing. Used to calculate the issue price of the bonds (also called yield, effective rate, or true rate) Creditors demand a certain rate of interest to compensate them for the risks related to bonds.
what is an IPO
An initial public offering (IPO) is the very first time a corporation sells stock to the public
What are contingent liabilities
Contingent liabilities can be either current or long term
Problem: Ute Industries issued 195,000 shares of common stock (par value $0.15) for $43 per share on August 31, 2019. Prepare the journal entry to record the sale of common stock.
Debit: Cash $8,385,000 Credit: Common Stock $29,250 Credit: APIC - Common Stock $8,355,750
what is Definitely Determinable Liability
Definitely Determinable Liability: Obligations that can be measured exactly
What are current liabilities
Due within one year or one operating cycle, whichever is longer All other are long term
What is Earnings per share and how to calculate it?
Earnings per share measures the net income earned by each share of common stock. It is used to predict future dividends and stock prices. EPS = (Net Income - Preferred Dividends) / Avg. Common Shares Outstanding
what two methods are commonly used for amortization in bonds
Effective-interest amortization Straight-line amortization (most companies don't say what they use)
What is Estimated liability
Estimated liability: Obligations that have some uncertainty in the amount to record for the obligation
Bond: $1,000, 5% stated rate. The market rate of interest is 4%. Who will buy these bonds at face value?
Everyone! Bondholders will pay more than face value, bond issuers will gain more money
How to calculate interest on a notes payable?
I=PRT Interest = Principal x Rate x Time Remember the rate in the formula is an annual interest rate.
what is legal capital
Is the amount of capital, required by the state, that must remain invested in the business. It serves as a cushion for creditors.
what are issued shares
Issued Shares: Shares of stock "purchased" or issued to owners.
what is a callable bond
May be retired and repaid (called) at any time at the option of the issuer. (call it at any time)
what is a redeemable bond
May be turned in at any time for repayment at the option of the bondholder
Bond: $1,000, 5% stated rate, 6 years. The market rate of interest is 6%. Who will buy this bond at face value?
Nobody. It will have to sell at a discount because bondholders will give me less than face value
what are outstanding shares
Outstanding Shares: Shares of stock that are owned by stockholders
Problem: (ROE) Lets say that Maron's Brains Inc. had net income of $36,796 ($ in thousands) and average common equity of $128,445 as of 12/31/2017.
Return on Equity = (Net income - preferred dividends) / Average Common Equity = $36,796 / $128,445 = 28.6%
What is Return on equity (ROE) and how to calculate it
Return on equity is the amount of net income returned as a percentage of shareholders equity Return on Equity = (Net income - preferred dividends) / Average Common Equity
what is a secure bond
Secured bonds include specific assets as a guarantee of repayment. In the event of a default, the bond issuer passes title of the asset onto the bondholders
What is shown on a bond certificate?
The bond certificate identifies the par value, the stated interest rate, the interest dates, and the maturity date. $1,000 - principal 10% - interest rate (annual) 5 years - time to maturity Annual - interest payments
Why would a corporation reacquire its own stock? (treasury stock)
To use in employee stock option programs. To return cash to shareholders. To increase earnings per share. To reduce cash needed to pay future dividends To reduce chances of a hostile takeover.
what is the equation for notes payable
Total payment = Principal + (Principal x Interest Rate x Period)
What is differed/unearned revenue
Unearned revenue is the liability created when customers pay for goods or services in advance
what is a unsecured bond
Unsecured bonds - is a promise to pay it back. when you do not have pledged assets as a guarantee of repayment
Problem: Your company issued 1,000, 4.2% bonds (face value of each bond is $1,000) at 102.7014 on January 1, 2019. The bonds are due on January 1, 2024, with an interest payment due on January 1st of each year during the 5 year term. The market rate at the time of the bond issuance was 3.6%. First, record the complete journal entry for the sale/issuance of the bonds.
What we know: Issued 1,000 bonds Face value = $1,000 per bond Selling/issue rate = 102.7014 Stated rate = 4.2% 5 year term for maturity Annual interest payment Market rate = 3.6% Total face value: 1,000 (bonds) x $1,000 (FV) = $1,000,000 Carrying value: $1,000,000 (TFV) x 102.7014% (issued rate) = $1,027,014 Journal entry: 01/01/19 Debit: Cash 1,027,014 credit: Bonds payable 1,000,000 credit: premium on B/P 27,014 Next, use the effective-interest method to create an amortization schedule. Calculate both the interest expense and the amortization of the bond premium when each interest payment is made.
Problem: Your company issued 1,000, 3.4% bonds (face value of each bond is $1,000) at 98.6531 on January 1, 2019. The bonds are due on January 1, 2024, with an interest payment due on January 1st of each year during the 5 year term. The market rate at the time of the bond issuance was 3.7%. First, record the complete journal entry for the sale/issuance of the bonds.
What we know: Issued 1,000 bonds Face value = $1,000 per bond Selling/issue rate = 98.6531 Stated rate = 3.4% 5 year term for maturity Annual interest payment Market rate = 3.7% Total face value: 1,000 (bonds) x $1,000 (FV) = $1,000,000 Carrying value: $1,000,000 (TFV) x 98.6531% (issued rate) = $986,531 Journal entry: 01/01/19 Debit: Cash 986,531 Debit: Discount on B/P 13,469 Credit: Bonds payable 1,00,000 Next, use the effective-interest method to create an amortization schedule. Calculate both the interest expense and the amortization of the bond discount when each interest payment is made.
What is long-term note payable
When a company borrows money from the bank for longer than a year The borrower receives the principal amount and promises to repay the principal plus interest example: mortgage
what is a convertible bond
convertible bonds give the issuer the option to exchange the bond for a predetermined number of shares in the issuing company
What is current ratio
current assets/current liabilites
what is the stated rate of interest
does not change. the annual interest rate that is printed on the face of the bond instead of par value is always used to calculate the interest payments to the bondholders
what is par value
face value Has no relationship to market value Serves as the basis for legal capital
what are accrued liabilities
is an expense that a business has incurred but has not yet paid
what is retained earnings
is the accumulated earnings (or losses) over the entire life of the company that have not been declared as dividends Beginning Retained earnings + net income - dividends= ending retained earnings
what is a junk bond
junk bonds" - a bond rated 'BB' or lower because of its high default risk. Also known as a "high yield bond" or "speculative bond" Junk bonds typically offer interest rates 3-4 percentage points higher than safer government issues.
what is no par value
shares that have been issued without a par value listed on the face of the stock certificate. These stocks get a stated value
what is Contributed Capital
the amount owners have invested in the corporation. It is generally subdivided into two parts: capital stock and additional paid-in capital.
what are authorized shares
the maximum number of shares of stock a corporation is allowed to issue
what is equity
the value of what owners have put into the business as well as what owners have kept (all profits - losses - dividends) equity = assets - liabilities