accounting
Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.(T/F)
FALSE
The stated rate is the same as the coupon rate.(T/F)
TRUE
Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson used a "Discount of Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2020 will include a
debit to Interest Expense for $5,200.
Companies should recognize the expense and related liability for compensated absences in the year earned by employees.(T/F)
TRUE
A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
What is a discount as it relates to zero-interest-bearing notes payable?
The discount represents the cost of borrowing.
What is the market rate?
The interest rate that investors are demanding for debt that has a similar maturity and risk Think market value of house
When is a contingent liability recorded?
When the future events are probable to occur and the amount can be reasonably estimated.
Deferred Tax Asset
Future Tax Deductible (or Tax Refundable) x Tax Rate
Venible Newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?
$375,000.
BI < TI
DTA: ITE XX DTA XX ITP XX
Taxable Income
Income determined using tax rules
A company recognizes gain contingencies only when a high probability exists for realizing them.(T/F)
FALSE
How is taxable income calculated?
taxable revenue - taxable expenses
On October 1, 2020 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a credit of
$240,000 to Premium on Bonds Payable.
A company offers a cash rebate of $2 on each $6 package of batteries sold during 2021. Historically, 10% of customers mail in the rebate form. During 2021, 5,000,000 packages of batteries are sold, and 175,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2021 financial statements dated December 31?
$1,000,000; $650,000
On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2031. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Solis's adjusted unamortized bond premium should be
$1,006,400
On January 1, 2021, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $5,000,000 zero-interest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2021. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,605,000 at January 1, 2021. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2021 after adjusting entries are made, assuming that the effective-interest method is used?
$1,070,550
A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2020?
$1,176,373
A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. What is interest expense for 2021, using straight-line amortization?
$1,184,845
Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows: 2020 2021 Bags of dog food sold 500,000 600,000 Leashes purchased by Muggs 18,000 22,000 Coupons redeemed 120,000 150,000 The premium liability at December 31, 2021 is
$112,500.
A company gives each of its 75 employees (assume they were all employed continuously through 2020 and 2021) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2020, they made $21 per hour and in 2021 they made $24 per hour. During 2021, they took an average of 9 days of vacation each. What amount of vacation liability would be reflected on the 2020 and 2021 balance sheets, respectively?
$151,200; $210,600
A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet?
$24,515,802
During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Year Sales Actual Warranty Expenditures 2019 1,600,000 39,000 2020 2,500,000 65,000 2021 2,100,000 135,000 6,200,000 239,000 What amount should Rao report as a liability at December 31, 2021?
$319,000
On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6%........................................... .627 Present value of 1 for 8 periods at 8%........................................... .540 Present value of 1 for 16 periods at 3%......................................... .623 Present value of 1 for 16 periods at 4%......................................... .534 Present value of annuity for 8 periods at 6%................................. 6.210 Present value of annuity for 8 periods at 8%................................. 5.747 Present value of annuity for 16 periods at 3%............................... 12.561 Present value of annuity for 16 periods at 4%............................... 11.652 The issue price of the bonds is
$5,301,360.
Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. What amount is the note payable recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020?
$700,000 and $12,000.
Composite provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $162 each. Related to these contracts, the company spent $800,000 servicing the contracts during the current year. What is the net profit that the company will recognize in the current year related to these contracts?
$901,000.
Employers should accrue for compensated absences if:
-The employer's obligation is attributable to employees' services already rendered, -The obligation relates to the rights that vest or accumulate -Payment of the compensation is probable -The amount can be reasonably estimated
Income Tax Expense
Book Income x Tax Rate
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the face value by the table value for:
20 periods and 4% from the present value of 1 table.
How is interest due calculated? (amortization table)
= coupon payment principal x adj coupon rate
When is a bond priced at a discount?
A Discount when the coupon rate is < market rate
What is a net operating loss?
A net operating loss (NOL) occurs for tax purposes in a year when tax-deductible expenses are greater than taxable revenues.
When is a bond priced at premium?
A premium (or greater than the principal) when coupon rate > market rate
What is the accounting treatment of an assurance warranty?
Accrued Expense
Which of the following should not be included in the current liabilities section of the balance sheet? -Trade notes payable -The discount on short-term notes payable -Short-term zero-interest-bearing notes payable
All of these answers are included.
Which of the following is a condition for accruing a liability for the cost of compensation for future absences? -The obligation is attributable to employee services already performed. -Payment of the compensation is probable. -The obligation relates to the rights that vest or accumulate.
All of these are conditions for the accrual.
Bad Debt Expense (Book Tax Difference)
BI < TI
Cash Receipts for Unearned Revenue (Book Tax Difference)
BI < TI
Depreciation (Book Tax Difference)
BI > TI
Prepaid Expenses (Book Tax Difference)
BI > TI
Sales made on Account (Book Tax Difference)
BI > TI
Fines for Misconduct (Book Tax Difference)
BI > TI (recorded for gaap purposes, not tax purposes)
Investment in Municipal Debt (Book Tax Difference)
BI > TI (recorded for gaap purposes, not tax purposes)
How is ending bond carrying value calculated? (amortization table)
Beg Carrying Value + Amortization
How do you calculate bond price?
Bond Price = Present value of all future cash outflows = Present value of principal payment + Present value of the interest payments
What are carryforwards?
Carryforwards, just like other deferred tax assets, are valued as deferred tax assets to the extent they are more likely than not to be used. 1. Any amount that is more likely than not to be unused is recorded as an allowance to reduce deferred tax assets. 2. Record both the carryforward as a deferred tax asset and a valuation allowance for expected unused carryforward amounts.
Tax Basis of a Fixed Asset
Cost of the fixed asset minus tax depreciation
Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as
Current Liabilities
Income Tax Payable
Current Tax Expense = Taxable Income x Tax Rate
BI > TI
DTL: (d) ITE XX (c) ITP XX (c) DTL XX
What is the accounting treatment of a service warranty?
Deferred Revenue
When are loss contingencies placed in footnotes?
Either 1. Loss is probable & loss can NOT be estimated in $ amount 2. Loss is reasonably possible
Companies should accrue an estimated loss from a loss contingency occurring during the fiscal year if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.(T/F)
FALSE
If the market rate is greater than the coupon rate, bonds will be sold at a premium.(T/F)
FALSE
The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.(T/F)
FALSE
Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.(T/F)
FALSE
Deferred Tax Liability
Future Taxable Income x Tax Rate
Book Income
GAAP income before taxes
How is amortization calculated? (amortization table)
Interest Expense - Interest Due
What is the relationship between current liabilities and a company's operating cycle
Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
When are loss contingencies accrued?
Loss is probable & loss can be estimated in $ amount
When is a bond priced at par?
Par when coupon rate = market rate
What term is associated with recording a contingent liability?
Probable
On January 1, 2015, Hernandez Corporation issued $18,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2021, when the fair value of the bonds was 96, Hernandez repurchased $4,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2021. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as
a gain of $196,000.
How is interest expense calculated? (amortization table)
adj market rate x beg carrying value
The rate of interest actually earned by bondholders is called the
effective rate.
A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2021, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2021 should have equaled the
face amount less unamortized discount.
Bond interest paid is equal to the
face amount of the bonds multiplied by the stated interest rate.
If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
greater than if the straight-line method were used.
When the effective-interest method is used to amortize bond premium or discount, the periodic amortization amount will
increase if the bonds were issued at either a discount or a premium.
When are gain contingencies recognized?
not recognized, but disclosed in footnotes if the gain is probable
Liabilities are
obligations arising from past transactions and payable in assets or services in the future.
Assurance Warranty
product meets agreed-upon specifications in the contract at the time the product is sold (example: standard car warranty)
Service Warranty
provides an additional service beyond the assurance-type warranty (example: extended warranty
What is coupon rate?
the interest rate that a bond issuer will pay to a bondholder think price sold of house
Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
the market rate multiplied by the beginning-of-period carrying amount of the bonds
When are loss contingencies ignored?
when loss is remote
