Accounting 2036 Smartbook Chapter 10

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 ; subtract all deductions from the initial amount of $600 (15x40)

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

$921,000

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

-Accruing interest incurred but not paid -Establishing the note -Recording interest paid -Recording principal paid

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

Cash; Bonds Payable

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.

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

Issuing a note payable for cash immediately results in a(n) ______.

increase in assets and an increase in liabilities

When a company records a debit to Bonds Payable and a credit to Cash, it is the bonds' ______.

maturity date

An installment note differs from an interest-only note in that it requires the borrower to ______.

pay equal amounts over the note's life to maturity with each payment consisting of interest and principal

The _____ rate on a bond is the rate used to determine the interest payments. (Enter one word per blank.)

stated

A bond's maturity date is ______.

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

Liabilities are classified as current if they ______.

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

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?

$0

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 Expense increases $600.

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

What is the percentage of assets financed by debt?

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.)

a credit to Bonds Payable of $100,000 a credit to Premium on Bonds Payable of $5,000 a debit to Cash of $105,000

If ABC Company issues 100 of its $1,000 bonds at a price of 110.00, i.e., $1,100 each, the journal entry to record the transaction includes ______.

a credit to Premium on Bonds Payable of $10,000

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

credit rating agencies

The straight-line method of amortization ______. (Check all that apply.)

distorts the financial results somewhat because it produces an equal Interest Expense each period despite a change in the bond's carrying value evenly allocates the amount of bond premium or discount over each period of a bond's life

Bond premium is the amount by which a bond's issue price ______ its face value.

exceeds

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 -stockholders' equity to decrease -liabilities to increase

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

-balance sheet; Interest Payable -balance sheet; Notes Payable -income statement; Interest Expense

Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______.

100,000 ; they have not been charged interest yet

When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a discount.

increases

Assume ABC Company issues a bond with a stated interest rate above the market rate. Using the simplified effective-interest amortization, interest expense is ______ the cash interest payment.

less than

Assets are financed with and stockholders' equity.

liabilities

A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is ______.

issued

The debt-to-asset ratio indicates _____. (Check all that apply.)

the percentage of assets financed by debt a higher ratio means greater financing risk

On the maturity date, the bondholders of $100,000 of bonds that were issued at a $90,000 will receive ______.

$100,000 in cash plus the interest owed

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

-credit to FICA Payable -debit to Salaries and Wages Expense -credit to Withheld Income Tax Payable -credit to Cash

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

Using the simplified effective-interest amortization, the credit to Cash each interest payment equals ______.

Face Value x Stated Interest Rate x Time

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

a discount

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 by $100,000

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

expense

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

face value

When using the straight-line method of bond amortization, Interest Expense ______ each payment.

stays the same

The ______ method of amortization reduces the premium or discount by an equal amount each period.

straight-line

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

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

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

-debit to Inventory of $500 -credit to Accounts Payable of $500

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

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

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

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.)

-Standard & Poor's -Moodys

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

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

Using the simplified effective-interest amortization, the debit to Interest Expense equals ______.

Bonds Payable, Net x Market Interest Rate x Time

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

False

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

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

a premium

The discount on a bonds payable becomes ______.

additional interest expense over the life of the bonds

Bondholders are willing to pay a premium to acquire a bond because the ______.

bond's stated interest rate is higher than the market interest rate

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

A(n) ________ note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal. (Enter one word per blank.)

installment

Bonds are financial that outline the future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.)

instruments, promises, obligations, investments, liabilities, tools, or loans

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 the payroll deductions are paid in the following month, ABC would record John's pay with a journal entry that includes a ______. (Check all that apply.)

-credit to FICA (Social Security and Medicare) Payable of $45.90 -debit to Salaries and Wages Expense of $600 -credit to Cash of $486.10 -credit to State and Federal Income Tax Payable of $68

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.)

-credit to Interest Payable of $1,000 -debit to Interest Expense of $1,000

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

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

-increase in assets -increase in liabilities

For an investor, bonds are attractive investments because ______.

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

Which of the following are current liabilities? (Check all that apply.)

-salaries and wages payable -accounts payable -note payable due in 3 months

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%

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.

Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?

effective-interest

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 the payroll deductions are paid in the following month, ABC would record John's pay with a journal entry that includes a ______. (Check all that apply.)

-credit to State and Federal Income Tax Payable of $68 -debit to Salaries and Wages Expense of $600 -credit to FICA (Social Security and Medicare) Payable of $45.90 -credit to Cash of $486.10

A bond's maturity date is the date on which the ______.

face value of the bonds are paid

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

not generating enough income to cover its interest expense

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

notes payable

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