ch. 10 learnsmarts

A $1,000 bond's carrying value will be greater if the bond is sold ______. (Select all that apply.)

- when the stated rate is greater than the market rate of interest - at a premium

True or false: A classified balance sheet separates liabilities into current and non-current categories.

true

The debt-to-assets ratio best answers which financial question?

what is the percentage of assets financed by debt?

At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year?

0.6 or 60%

On November 1, ABC Corp. borrowed $100,000 cash on a 1-year note payable with a 6% annual rate that requires ABC to pay all the interest as well as the principal on October 31 of the following year. Assuming the November 1 transaction was properly recorded, how would the December 31, year-end adjusting entry affect the accounting equation?

liabilities increase and stockholders' equity decreases

Bonds are issued at a discount when the bond's stated interest rate is ______ the market interest rate.

lower than

..... ..... is a liability that represents the amount the company owes to others as a result of issuing a promissory note.

notes payable

The stated rate ______.

remains the same throughout the life of bonds

A bond's maturity date is ______.

the date on which the face value of the bond will be repaid in full

A company recorded the issuance of its bonds with a debit to Cash for $107,260 and a credit to Bonds Payable for $100,000, and a ______ on Bonds Payable for $7,260.

credit to a premium

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record the payroll deductions?

current liabilities increase $113.90

If a company forgets to record the journal entry to accrue interest expense, then its net income is too ______ and its liabilities are too ______.

high; low

If an entry is recorded that debits Interest Payable and Interest Expense and credits Cash, what must be the case?

interest incurred from the current and prior period is being paid

From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n) .....

investment

A bond's issue price is determined by the ______.

investors

Sales taxes are recorded by the retailer as ______.

sales tax payable

Liabilities are classified as current if they ______.

will be paid within the company's operating cycle or within 1 year, whichever is longer

The ...... ...... is the payment made when a bond matures.

face value

Assets are financed with ..... and stockholders' equity. (Enter only one word per blank.)

liabilities

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. What is the net pay to employees?

$70,000 Reason: Net pay = $70,000 = $100,000 - 6,700 - 1,450 - 18,000 - 3,850

The issue price of 1,000, 5%, $1,000 bonds issued at 92.10 equals ______.

$921,000 Reason: The bonds are selling at 92.10 which means the issuance price is 92.1% of the face value or $1,000,000 (=1,000 x $1,000 x 92.1%).

Match the interest rates with the related bond prices. Instructions

- 6% states interest rate and 4% market interest rate -> premium: investors will pay more than face value - 6% states interest rate and 6% market interest rate -> investors will pay face value - 6% stated interest rate and 8% market interest rate -> discount: investors will pay less than face value

If a bond's stated rate is 4% and the market rate is 4%, this bond will sell at ______.

face value

Which of the following statements is true about McDonald's $1,000 bond price?

they sold for $1,128.90 each Reason: The bond price is a percent, thus the bond price equals $1,128.90 (=$1,000 x 112.89%).

If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?

it decreases

What effect will issuing more bonds have on the times interest earned ratio over time?

it will decrease

The journal entry to record the payment of salaries and wages for work performed in the current accounting period causes ______. (Select all that apply.)

- assets to decrease - liabilities to increase - stockholders' equity to decrease

If an adjusting entry is required for interest owed, then the ______ will report ______. (Check all that apply.)

- balance sheet; interest payable - income statement; interest expense - balance sheet; notes payable

Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)

- charitable contributions - state unemployment tax (SUTA) - federal unemployment tax (FUTA)

Employees' gross earnings differ from their net pay because of ______. (Select all that apply.)

- FICA taxes - federal and state income taxes - payroll deductions

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______. (Check all that apply.)

- Moody's - Standard & Poor's

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income tax $58; and State income tax $10. What is John's net pay?

$486.10

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. The journal entry to record wages paid includes a ______.

$100,000 debit to salaries and wages expense

Payroll deductions ______. (Check all that apply.)

- decrease the amount of cash an employee receives - are amounts subtracted from employees' gross earnings to determine their net pay

Bond carrying value equals Bonds Payable ______. (Check all that apply.)

- minus discounts on bonds payable - plus premium on bonds payable

..... ..... is a current liability that represents the amount owed for goods or services purchased on credit and is generally interest free. (Enter one word per blank.)

accounts payable

Bond ..... is the process that causes the balance in Premium on Bonds Payable to decline each period. (Enter one word per blank.)

amortization

When the times interest earned ratio is less than 1.0, a company is ______.

are not generating enough income to cover its interest expense Reason: Times interest earned ratio = (net income + interest expense + income tax expense)/interest expense. If the ratio is less than 1.0, it means there is not enough income (the numerator) to cover its interest expense (the denominator).

A bond premium ______.

arises when interest payments are higher than the cost of borrowing

The entry to record the initial borrowing of cash by issuing a promissory note includes a debit to ______ and a credit to ______.

cash; notes payable

..... Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated. (Enter one word per blank.)

contingent

For investors, the ______ provide independent, easy-to-use measurements of relative credit risk.

credit rating agencies

Accrued Liabilities are ______.

current liabilities resulting from adjusting entries that record amounts incurred but not yet paid

Accounts (or trade) Payable is a ______ and increases when ______ and decreases when ______.

current liability; purchases are made on credit; bills are paid

The following 12%, $1,000 notes have varying periods to maturity but all were issued on December 1. Which of the following are the correct calculations of interest for these notes on December 31 of this same year? (Select all that apply.)

- A 3-month note's interest equals $1,000 x 12% x 1/12 - A 2-year note's interest equals $1,000 x 12% x 1/12 - A 4-month note's interest equals $1,000 x 12% x 1/12

The entry to record the issuance of a note for cash was recorded with a debit to Cash and a credit to Notes Receivable instead of Notes Payable. The effect of recording this entry causes ______. (Select all that apply.)

- assets to be understated - liabilities to be understated

The entry to record the issuance of 100 bonds at their $1,000 face value causes ______. (Select all that apply.)

- assets to increase by $100,000 - liabilities to increase $100,000

The entry to record the issuing of a note payable for cash results in a(n) ______. (Select all that apply.)

- increase in liabilities - increase in assets

XYZ Warehouse operates in a state with a 6% sales tax. For convenience, XYZ Warehouse credits Sales Revenue for the total amount (selling price plus sales tax) collected from each customer. What will be the effect if XYZ Warehouse fails to make an adjustment for sales tax? (Select all that apply.)

- liabilities will be understated - net income will be overstated Reason: The sales tax should have been credited to Sales Tax Payable, a liability, instead of revenues. Revenues will be overstates making net income overstated and liabilities will be understated.

What are the key events with notes payable? (Check all that apply.)

- recording principal paid - establishing the note - accruing interest incurred but not paid - recording interest paid

For an investor, bonds are attractive investments because ______.

- they can be traded on established bond exchanges - interest is higher than bank savings accounts

A bond's stated interest rate is ______. (Check all that apply.)

- used to calculate interest payments - always expressed as an annual interest rate

If an adjusting entry for interest owed is recorded then the company must have issued ..... .....

notes payable or promissory note

True or false: Companies issue bonds at a discount when the bond's stated interest rate is lower than the market interest rate.

true

The carrying value of bonds payable equals ______.

Bonds Payable minus any discount on Bonds Payable.

If a bond's stated rate is 6% and the market rate is 4%, this bond will sell at ______.

a premium

The entry to record the issuance of 100, $1,000 bonds for 98.000 includes a ______. (Select all that apply.)

Dr. Cash $98,000 Dr. Discount on Bonds Payable $2,000 Cr. Bonds Payable $100,000

On November 1, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 of the following year. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, ABC's year end, would include a ______. (Check all that apply.)

Dr. Interest Expense $1,000 Cr. Interest Payable $1,000

As of December 31, $110 of interest had been accrued on a 12%, 1-year, $1,000 note payable. On January 31, the entry to record the payment of the note's principal and interest requires a ______. (Select all that apply.)

Dr. Notes Payable $1,100 Dr. Interest Payable $110 Dr. Interest Expense $10 Cr. Cash $1,120

Select all that apply The journal entry to record the payment of salaries and wages to employees includes a ______. (Select all that apply.)

Dr. Salaries and Wages Expense Cr. FICA Payable Cr. Withheld Income Tax Payable Cr. Cash

Employees' gross earnings differ from their net pay because of ______.

payroll deductions

Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?

probable contingent liability that can be estimated

Discounts on Bonds Payable are recorded with a debit and are ______.

contra-liabilities

The issue price of 1,000, 5%, $1,000 bonds issued at 100.00 equals ______.

1,000,000 Reason: The bonds are issued at 100.00 which means the issuance price is 100% of the face value or $1,000,000 (=1,000 x $1,000 x 100%). See the "Bond Prices" spotlight in the textbook.

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a debit to ______.

Dr. Cash $100,000 Cr. Bonds Payable $100,000

If ABC Company issues 100 of its $1,000 bonds at a price of 105.00, i.e., 105%, the journal entry to record the transaction includes ______. (Select all that apply.)

Dr. Cash $105,000 Cr. Bonds Payable $100,000 Cr. Premium on Bonds Payable $5,000

ABC Company issues a bond with a face value of $100,000 at par on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes a ______. (Select all that apply.)

Dr. Interest Expense $500 Cr. Interest Payable $500

Select all that apply ABC purchased $500 of merchandise on account. ABC's journal entry to record this transaction includes a ______. (Check all that apply.)

Dr. Inventory $500 Cr. Accounts Payable $500

On November 1, ABC Corp. borrowed $100,000 cash on an 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 in the following year. The last adjusting journal entry was made on December 31, ABC's year end. The entry to record the payment on October 31 would include a ______. (Check all that apply.)

Dr. Note Payable $100,000 Dr. Interest Expense $5,000 Dr. Interest Payable $1,000

The entry to record the cash sale of a $100 pair of jeans in a state that requires charging a 5% sales tax will include a ______. (Select all that apply.)

Dr. cash $105 Cr. Sales Revenue $100 Cr. Sales Tax Payable $5

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles. The flights will not occur until the next accounting period. How should ABC Airlines record the $300 collected in advance?

Dr. cash $300 Cr. Deferred Revenue $300

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record his gross pay?

Salaries and Wages Payable increase $600

A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______.

a premium

A company recorded the issuance of its bonds with a debit to Cash for $98,260 and a credit to Bonds Payable for $100,000, and a ______ on Bonds Payable for the difference.

debit to discount

On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, ABC's adjusting entry at December 31 would include a ______.

debit to interest expense $1,000

A company's debt-to-assets ratio is 0.7 or 70%. If the company issues common stock for cash, then the debt-to-assets ratio will ______.

decrease

Amortizing a bond premium will ______ the premium balance and ______ the carrying value of the bond so that when the bond matures the carrying value will ______ the face value.

decrease; decrease; equal Reason: The premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in a decrease to the premium and carrying value each period. When the bond matures, the premium will equal $0 resulting in a carrying value equal to the face value.

When recording the adjusting entry to accrue the interest owed on a bond that was issued at face value, the debit to Interest Expense will be ______.

equal to the credit to Interest Payable

A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.

excludes

Accruing a liability always involves recording both a(n)______ and a liability.

expense reason: accrued liabilities represent the amount of unpaid expenses, not assets. accrues liabilities include unpaid wages, interest, etc.

If a $1,000 bond is issued at 100.00, then the bond sold at ______.

face value Reason: The price of bonds are quoted as a percent, Thus, a bond that sells at 100.00 means the bond sold at 100% of its par value.

True or false: The bond issue price is determined by the company issuing the bonds.

false Reason: The investors in the market determine the price they are willing to pay and is based on a present value calculation using the current market rate of interest.

True or false: All payroll deductions are required by law.

false some payroll deductions such as retirement savings are voluntary

Accruing a liability always involves ______ expenses and ______ liabilities.

increasing; increasing Reason: Accrued Liabilities represent the amount of unpaid expenses, not assets. Accrued liabilities include unpaid wages, interest, etc. and are recorded with a debit to an expense and a credit to Accrued Liabilities.

The stated rate is the rate used to determine the ______.

interest payment

What kind of account is Deferred Revenue?

liability account

A bond that was issued at face value will have a carrying value that ______ with each interest payment.

remains the same

On November 30, Burrows, Inc. issued 2 notes payable at 6% per year for $10,000 each. One is a 3-month, 6%, note and the other is a 6-month, 6% note. The amount of interest owed at December 31 will be ______.

the same amount for both notes Reason: Both notes cost 6% per year, or 0.5% per month. Thus, the interest will be the same for both notes in December since both notes have been outstanding for just one month or 1/12 of a year.

Which of the following statements is true about Sea the World Cruises' $1,000 bond price?

they sold for $931.40 each