ACCT 2110 Exam 4

current ratio

current assets/current liabilities

to get current assets

current liabilities x current ratio

The journal entry to record the issuance of a note for the purpose of borrowing funds is

debit cash, credit notes payable

The journal entry to record the payment of an ordinary note is

debit notes payable and interest expense, credit cash

f bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will

decrease as bonds approach their maturity rate

With the effective interest method of amortization, the amortization of a bond premium results in a(n)

decrease in interest expense

determine cash interest to be paid

face value x stated rate x month rate (6/12)

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount

greater than face value

Bonds are sold at a premium if the

market rate of interest was less than the stated rate at the times of the issue

sales taxes

money collected from the customer for the governmental unit levying the taxes

current liabilities

obligations that require a firm to pay cash or another current asset, create a new current liability, or provide goods or services within one year or one operating cycle, whichever is longer

The bond issue price is determined by calculating the

present value of the stream of interest payments and the present value of the maturity amount

When determining the amount of interest to be paid on a bond, which of the following information is necessary

the stated rate of interest on the bonds

debt to asset ratio

total liabilities/total assets

Pointe Corporation's balance sheet showed the following amounts for its liability accounts: Notes payable, $130,000; Bonds Payable, $800,000; Accrued Expenses, $20,000; and Deferred Income Tax Liability, $120,000. Total assets was $1,470,000. The debt to assets ratio is:

$130,000 (Notes payable) + $800,000 (Bonds Payable) + $20,000 (Accrued Expenses) + $120,000 (Deferred Income Taxes) / $1,470,000 (Total Assets) =$1,070,000 / $1,470,000 = 0.73

To find discount amortized under Straight Line Method

Discount Amortized = Discount at Issuance/Number of Interest Payments

Rating Corporation's balance sheet showed the following amounts for its liability accounts: Accounts Payable, $100,000; Bonds Payable, $150,000; Taxes Payable, $20,000; and Deferred Income Tax Liability, $5,000. Total assets was $500,000. The debt to assets ratio is:

$100,000 (Accounts Payable) + $150,000 (Bonds Payable) + $20,000 (Taxes Payable) + $5,000 (Deferred Income Taxes) / $500,000 (Total Assets)$275,00/$500,000 = .55

Which of the following statements regarding contingent liabilities is true

If they are probable and estimable, then they must be recorded even before the outcome of the future event.

The Collins Company sold $200,000 of 10-year bonds for $190,000. The stated rate on the bonds was 8% and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)

Interest Expense Discount on Bonds Payable Cash

To find premium amortized under Straight Line Method

Premium Amortized = Premium at Issuance/ Number of Interest Payments

The Discount on Bonds Payable account is shown on the balance sheet as

a contra-liability

warranty

a guarantee to repair or replace defective goods during a period (ranging from a few days to several years) following the sale

note payable

a payable that arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract

The Premium on Bonds Payable account is shown on the balance sheet as

an addition to long term liability

describe a callable bond

borrower has the right to call on the bond before the due date

effective interest method/interest expense

carrying value x market rate x month rate (6/12)

Which of the following lease conditions would result in a capital lease to the lessee

The lessee obtains enough rights to use the asset and is in substance the owner

unearned revenue

a liability that occurs when a company receives payment for goods that will be delivered or services that will be performed in the future

interest rate

a percentage of the principal that must be paid in order to have use of the principal. it is multiplied by the beginning of period balance to yield the amount of interest for the period

account payable

an obligation that arises when a business purchases goods or services on credit

contingent liability

an obligation whose amount or timing is uncertain and depends on future events. For example, a firm may be contingency liable for damages under a lawsuit that has yet to be decided by the courts.

witholding taxes

businesses are required to withhold taxes from employees' earnings; standard withholdings include federal, state, and possibly city or county income taxes, as well as Social Security and Medicare. Employees may also have amounts withheld for such things as retirement accounts and health insurance

The amount of federal income taxes withheld from an employee's gross pay is recorded as a

current liability

If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will

increase as bonds approach maturity date

When bonds are issued by a company, the accounting entry shows an

increase in both assets & liabilities

With the effective interest method of amortization, the amortization of a bond discount results in a(n)

increase in interest expense

accrued liabilities

liabilities that usually represent the completed portion of activities that are in process at the end of the period

liabilities

probable future sacrifices of economic benefits; liabilities usually require the payment of cash, the transfer of assets other than cash, or the performance of services

The portion of long-term debt due within one year should

reclassified as a current liability

Under the effective interest method, the cash paid on each interest payment date will

remain constant regardless of the issuance price

Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?

rent expense on the leased asset

When bonds are sold for less than the face amount, this means that the

stated rate of interest is less than the market rate of interest

payroll taxes

taxes that businesses must pay based on employee payrolls; these amounts are not withheld from employee pay, rather they are additional amounts that must be paid over and above gross pay

when will bonds sell at a discount

when the stated rate of interest is less than the market rate at the time of the issue