Accounting Chapter 10

issues or retires (buys back bonds and when bondholders convert bonds into common stock

A corporation records bond transactions when it

off-balancing-sheet financing

contingencies and leasing (operating lease and capital lease)

gross earnings, payroll deductions, and net pay

determining the payroll involves computing three amounts:

contra account

discount on bonds payable is a

interest on the unpaid balance of the loan and a reduction of loan principal

long-term notes payable; each payment consists of

salaries

managerial, administrative, and sales personnel (monthly or yearly rate)

long-term notes payable

may be secured by a mortgage that pledges title to specific assets as security for a loan; typically the terms require the borrower to make installment payments over the term of the loan.

solvency ratios

measure the ability of a company to survive over a long period of time

liquidity ratios

measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash

current maturities of long-term debt

portion of long-term debt that comes due in the current year; no adjusting entry required

face value

principal due at the maturity

contractual interest rate

rate to determine cash interest paid, generally semiannually

compute the -bond interest expense -the bond interest paid or accrued -amortization amount

required steps under the effective-interest method

payroll tax expense (FICA tax, Federal unemployment tax, state unemployment tax)

results from three taxes that governmental agencies levy on employers.

unearned revenue

revenues that are received before the company delivers goods or provides service

sales tax payable

sales taxes are expressed as a stated percentage of the sales price.

wages

store clerks, factory employees, and manual laborers (rate per hour)

carrying value

the __________ of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.

increase

the bond is considered to be a _______ in the cost of borrowing

reduction

the bond premium is considered to be a _____ in the cost of borrowing

1. the dollar amounts to be received. 2. the length of time until the amounts are received 3. the market rate of interest

the current market price (present value) of a bond is a function of three factors:

discounting

the process of finding the present value is referred to as ______ the future amounts.

market interest rate

the rate of interest investors demand for loaning funds to a corporation is the

salaries and wages

the term "payroll" pertains to both:

out of existing current assets, by creating other current liabilities

to be classified as a current liability, a debt must be expected to be paid:

amortizing bond discount

to follow the expense recognition principle, companies __________ to expense in each period in which the bond are outstanding.

face value

companies initially record mortgage notes payable at

selling company

collects tax from the customer; remits the collections to the state's department of revenue.

borrowing money; investing

When a corporation issues bonds, it is _______. The person who buys the bonds (the bondholder) is _______ in bonds.

the carrying value of the bonds is transferred to paid-in capital accounts

When bonds are converted into common stock:

-debits -credits

When the company earns the revenue, it ____ the unearned revenue account, and _____ a revenue account

sales of bonds below face value

causes the total cost of borrowing to be more than the bond interest paid

bonds

are a form of interest-bearing notes payable issued by corporations, universities, and governmental agencies.

bond discount amortization

bond discount / number of interest periods

percentage

bond prices are quoted as a ______ of face value

face value, below face value (discount), or above face value (premium).

bonds may be issued at

notes payable, accounts payable, unearned revenues, taxes, salaries and wages, and interest

current liabilities

maturity date

date final payment is due

interest on the unpaid balance of the loan and reduction of loan principal

each payment on a mortgage note payable consists of:

federal income taxes

employer payroll taxes do not include:

bond certificate

issued to the investor; provides name of the company issuing bonds, face value, maturity date, and contractural (stated) interest rate.

1. Company expects to pay the debt from existing current assets or through the creation of other current liabilities. 2. Company will pay the debt within one year or the operating cycle whichever is longer

two key features of a current liability

secured, unsecured, convertible, callable

types of bonds

effective-interest method

under the ____________, the amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value

1. eliminate the carrying value of the bonds at the redemption date 2. record the cash paid 3. recognize the gain or loss on redemption

when a company retires bonds before maturity, it is necessary to:

carrying value of the bonds

when bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the:

-debits -credits

with unearned revenue the company ____ cash, and ______ a current liability account

notes payable

written promissory note; usually require the borrower to pay interest; those due within one year of the balance sheet date are usually classified as current liabilities