Chapter 10 Learnsmart

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

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

It will decrease.

Deli Llama operates in a state with a sales tax. What will be the effect if it records a cash sale to a customer?

Liabilities will increase. Assets will increase. Stockholders' equity will increase. - The entry includes a debit to Cash (+A) and a credit to Sales Tax Payable (+L) and Revenue (+SE).

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

Notes Payable

Match the interest rates with the related bond prices: - 6% stated interest rate and 4% market interest rate

Premium - Investors will pay more than face value

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

a premium

Accrued Liabilities are ______.

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

The normal balance for Discount on Bonds Payable is a ______.

debit - Discount on Bonds Payable is a contra-liability account.

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 ______.

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

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. The entry ABC would record at maturity when the note is repaid, assuming adjusting entries were made correctly at December 31 but have not been made since then, would include a(n) ______.

debit to Interest Expense of $1,250 debit to Notes Payable of $50,000 debit to Interest Payable of $1,000 credit to Cash of $52,250

Accounts (or trade) Payable is debited when ______ and credited when ______.

paid; purchases are made on credit

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

payroll deductions federal and state income taxes FICA taxes

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

remains the same

end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.

revenue

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

Asset

Bonds are financial _________ that outline the future payments a company promises to make in exchange for receiving a sum of money now.

instruments/ liabilities

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

investors

For an investor, bonds are attractive investments because ______.

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

The premium on a bond is ______ and ______ each period.

amortized; decreases

A bond premium ______.

arises when interest payments are higher than the cost of borrowing

The debt-to-asset ratio is calculated by dividing total liabilities by total _______.

assets

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

credit rating agencies

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

issued

What are the key events with notes payable?

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

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?

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

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?

A debit to Cash of $300 and a credit to Revenue of $300 - The credit is to Deferred Revenue (+L) because the cash has been collected in advance. Later when ABC Airlines provides the service of flying its customers, it can record a decrease to Deferred Revenue (debit) and increase Revenue (credit).

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

False - Some payroll deductions such as retirement savings are voluntary.

Deferred Revenue is a liability account and represents amount collected from customers in advance.

Liability account

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.

Sales taxes are recorded by the retailer as ______.

Sales Tax Payable - The retailer is not incurring the sales tax expense, the customer is. The retailer is collecting the tax on behalf of the taxing authorities.

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 - Debit to Cash =100 x $1,000 x 110% = $110,000 - Cash is debited for $110,000 but the credits are split into two liability accounts: Bonds Payable for $100,000 and Premium for $10,000. - The bonds sold for 110% of face value, which is a premium, not a discount.

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

a discount

The journal entry to record the payment of salaries and wages to employees includes a ______.

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

Assets are financed with _______ and stockholders' equity.

liabilities

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

lower than

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

not generating enough income to cover its interest expense - 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).

The ______ rate on a bond is the rate used to determine the interest payments.

stated

Match when bonds sell at face value, a premium or a discount: Face Value

stated rate equals the market rate of interest

Match when bonds sell at face value, a premium or a discount: Premium

stated rate is greater than the market rate of interest

Match when bonds sell at face value, a premium or a discount: Discount

stated rate is less than the market rate of interest

Net pay is calculated by ______.

subtracting payroll deductions from gross pay

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 - FICA payable should be credited, not debited. - The credit to Cash is $70,000. Gross pay of $100,000 less $30,000 withholdings (6,700 + 1,450 + 18,000 + 3,850).

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 ______.

$105 debit to Cash $100 credit to Sales Revenue $5 credit to Sales Tax Payable

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

$110 debit to Interest Payable $10 debit to Interest Expense $1,000 debit to Notes Payable $1,120 credit to Cash

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 - Net pay = $600 - $37.20 - $8.70 - $58 - $10 = $486.10.

Acme Enterprises began the new year owing its suppliers $3,000 for merchandise purchased last year. Acme then sold half of this merchandise for $5,000 on account. Two weeks later, Acme paid its suppliers $1,000 and bought another $4,000 of merchandise on account. Acme now has an Accounts Payable balance of ______.

$6,000 - Accounts Payable balance = $3,000 - 1,000 + 4,000 = $6,000.

The entry to record the issuance of 100 bonds at their $1,000 face value causes ______.

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

The debt-to-asset ratio indicates _____.

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

ABC purchased $500 of merchandise on account. ABC's journal entry to record this transaction includes a ______.

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

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. The journal entry on November 1, would include which of the following?

- credit to Note Payable $100,000 - debit to Cash $100,000

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 ______.

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

Payroll deductions ______.

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

Under US GAAP, a contingent liability should ______.

- not be reported if the loss is remote and unable to be estimated - be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated - be reported on the balance sheet if the loss will probably occur and can be reasonably estimated

Bond carrying value equals Bonds Payable ______.

- plus Premium on Bonds Payable - minus Discount on Bonds Payable

A bond's stated interest rate is ______.

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

A $1,000 bond's carrying value will be greater if the bond is sold ______.

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

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% - Beginning liabilities equal $60,000 or $120,000 x 0.5. Ending liabilities equal $96,000 or $60,000+$36,000. Debt-to-assets equals 0.6 or $96,000/($120,000+$40,000).

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

101.000 - Bond prices are quoted as a percent of the face value. Thus, these bonds sold at 101% or 101.000 of their face value.

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.

ABC Airlines collected $300 for a round-trip ticket from Chicago to Los Angeles in advance. The entry to record after the flight occurs includes a debit to ______ for $300.

Deferred Revenue credit to Service Revenue - When the cash was received in advance Cash (+A) was debited and Deferred Revenue (+L) was credited. Now that the service has been provided, Deferred Revenue (-L) is debited and Service Revenue (+SE) is credited.

Match the interest rates with the related bond prices: - 6% stated interest rate and 8% market interest rate

Discount - Investors will pay less than face value

Company Maturity. Stated Interest. Market Interest. Bond Price STW Cruises. 2026. 1.85. 2.70. 93.14 Lilly. 2020. 6.00. 4.00. 107.26 McDonald's. 2045. 4.88. 4.10. 112.89 Which of the following statements is true about McDonald's $1,000 bond price?

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

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

True

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

True

When bonds are issued at a premium, the bond issuer receives more cash on the issue date than it repays at maturity. The difference, a premium, is a reduction in the cost of borrowing, which has to be ______.

amortized - 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 interest expense that is less than the interest paid each period.

Premium on Bonds Payable will be ______ with each interest payment causing the Premium on Bonds Payable balance to ______ when the bonds mature.

amortized; decrease to a $0 balance

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

decreases

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 - The adjusting entry to record the interest owed on a bond is similar to a note and requires a debit to Interest Expense and credit to Interest Payable for the same amount. The amount depends on what portion of the annual rate is owed.

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

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

face value

If a company receives $100,000 cash in exchange for issuing 100 bonds at $1,000, the bonds were issued at ______.

face value

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

face value of the bonds are paid

Companies that have issued bonds will report the bonds as a(n) ______.

liability at the bonds' carrying value which is equal to the face value plus related premiums or minus related discounts

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

maturity date

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' - the same amount for both notes

A bond with a face value of $1,000 has a current price quote of 102.880. What is the bond's current price in dollars?

$1,028.80 - $1,028.80=$1,000 x 102.880%= $1,000 x 1.02880

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 - A liability is first recorded at $100,000, representing the amount of cash a creditor would accept to immediately settle the liability, which excludes interest charges. Interest arises only when time passes.

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

$921,000 - 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%).

Which accounts are credited when the journal entry to pay employees is recorded?

- Cash - Withheld Income Tax Payable - FICA Payable

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______.

- Moody's - Standard & Poor's

Which of the following are current liabilities?

- Note Payable due in 3 months - Salaries and Wages Payable - Accounts Payable

If an adjusting entry is required for interest owed, then the ______ will report ______.

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

The entry to record the issuance of bonds at face value includes a debit to Cash and a credit to ______ _______.

Bonds payable

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

The adjusting entry to record interest accrued on a note payable is debit ______.

Interest Expense credit Interest Payable - The adjusting entry to record the interest owed from the issuance of a promissory note includes a debit to Interest Expense (+E,-SE) and a credit to Interest Payable (+L).

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

The issue price will be above the bond's face value.

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

What is the percentage of assets financed by debt?

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

a premium

The discount on a bonds payable becomes ______.

additional interest expense over the life of the bonds

The carrying value of bonds payable equals ______.

bonds payable minus any discount on bonds payable - The carrying value of a bond equals its face value plus any premium or minus any discount.

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 ______.

credit to Cash of $106,000 debit to Note Payable of $100,000 debit to Interest Expense of $5,000 debit to Interest Payable of $1,000

Assuming no previous accrual of interest has been recorded, On December 31 year-end, the adjusting entry to record the interest owed on its $100,000, 6% bonds issued at face value on January 31 with interest paid annually includes a ______.

debit to Interest Expense of $5,500 credit to Interest Payable of $5,500

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

increase in assets and an increase in liabilities - The issuance of a note payable is recorded with a debit to Cash and a credit to Notes Payable, a liability

Accruing a liability always involves ______ expenses and ______ liabilities.

increasing; increasing - 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.

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 - No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).

Match the interest rates with the related bond prices: - 6% stated interest rate and 6% market interest rate

Investors will pay face value

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

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. - The year-end adjusting entry to accrue the interest owed requires a debit to Interest Expense (+E, -SE) and a credit to Interest Payable (+L).

The Discount on Bonds Payable account ______.

is a contra account to Bonds Payable