FINANCIAL ACCOUNTING EXAM 4 INFO

During 2013, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The balloons carry a 5 year warranty for defects. Estimates indicate that repair costs will average 4% of the total selling price. At the beginning of the year, the balance in the warranty account was $42,000. During the year, $11,000 in claims were incurred and paid (honoring the warranty). What was the balance in the estimated warranty liability at the end of the year?

$47,000

*Contractual Interest Rate

Stated Rate (usually annual and usually paid semiannually)....percentage of interest on market value

**Convertible Bonds

gives lender option to convert bond into other securities, like common stock -lenders exercise this when value of shares of stock is more attractive than the interest and principal payments supplied by debt instrument

If bonds were initially issued at a discount, the carrying value of the bonds on the issuer's books will:

increase as the bond approaches their maturity date

Liquidity

investors & creditors are interested in a company's liquidity, the ability to meet short-term obligations determined by ratios analyzing current liabilities

*Ratio Analysis

long-term liabilities are analyzed with solvency in mind *debt load ratios (ones you are tested on) *ability to cover interest payments ratios

**Market/Yield Rate

market rate of interest demanded by creditors this is a function of economic factors and the creditworthiness of the borrower *time value of money *process of finding present value is called discounting future cash flows

*Capital Lease

noncancelable agreement that is in substance a purchase of the leased asset

Which of the following is NOT classified as a current liability?

note payable, due within 2 years

Long-term debt generally includes:

obligations that extend beyond one year

*Issuance/Market Price

-Face/Par Value -Discount (Below Face) Market < Face -Premium (Above Face) Market > Face

Examples of Current Liabilities

Accounts Payable, Notes Payable (due for payment within one year of the balance sheet date), Taxes Payable, unearned revenues, other accrued liabilities

Which of the following lease conditions would result in a capital lease to the lessee?

The lessee can purchase the property for $1 at the end of the lease term.

*Straight-Line Method Amortization

allocates same amount of interest expense in each period

Withholding & Payroll Taxes

businesses required to withhold taxes from employees' earnings and pay taxes based on wages and salaries paid to employees .two sources for these taxes are employees (difference between gross pay and net pay) or the business itself (pays taxes based on employee payrolls)

Sales Tax

collected by seller on behalf of these entities not additional revenue to seller, % sales price, obligation for the seller to pay the authority .these tax collections are liabilities until they are paid to the taxing authority

*Bonds Payable

long-term transactions recorded by corporations *There is no entry when bondholder sells to another investor!

*Leases

opportunity for off-balance sheet financing

**Secured Bonds

provides collateral for the lender...if borrower fails to make payments, the lender can take steps to repossess the collateral

*Bonds Interest Payable

short-term obligation (usually semiannually)

*Operating Lease

the lessor (legal owner of asset) retains substantially all of the risks and obligations of ownership, while lessee uses the asset during term of lease

Jensen Company will pay salaries for the pay period of December 15-31, 2012. Based on the following information, what amount would the company record as salaries expense on December 31, 2012? Gross Salaries = $10,000 State Income Tax withheld = $1,200 Federal Income Tax withheld = $1,500 FICA = $565

$10,000

Jensen Company will pay salaries for the pay period of December 15-31, 2012. Based on the following information, what amount would the company record for cash on December 31, 2012? Gross Salaries = $10,000 State Income Tax withheld = $1,200 Federal Income Tax withheld = $1,500 FICA = $565

$6,735 (gross salaries-everything else)

A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what is the total amount of interest that would be paid over the life of the bonds?

$800,000 ($1,000,000 x .08 x 10)

*Effective Interest Method Amortization

1. Compute Bond Interest Expense (Carrying Value x Effective Interest Rate 2. Compute Bond Interest Paid (Face Value x Stated Rate) 3. Compute Amortization Amount (Bond Interest Expense-Bond Interest Paid) *bond premium= IE<IP *bond discount= IE>IP

Contingent Liabilities are Recognized When...

1. Event on which contingent is possible 2. A reasonable estimate of loss can be made **Lawsuits filed against businesses are classic examples of contingent liabilitites

*Liabilities Required for Capital Lease

1. Transfer of leased asset to lessee occurs attend of least at no cost or at bargain price 2. Term for lease is at least 75% of the economic life of the leased asset 3. Present value of the lease payment is at least 90% of the fair value of leased asset

Characteristics of Liability

1. payment of cash, assets or service 2. certainty (amount & timing are sometimes known, sometimes not) 3. legally enforceable (some are probable, though) 4. usually entity is known, but payment might also be unidentified recipients

A company has total assets of $350,000 consisting of current assets of $115,000, Property, Plant, and Equipment of $200,000 and other assets of $35,000. The company has total liabilities of $100,000, consisting of current liabilities of $65,000 and other liabilities of $35,000. What is the current ratio?

1.77 (current assets/current liabilities)

Which of the following would describe a callable bond?

Borrower has the right to pay off the bonds prior to the due date.

Analyzing Current Liabilities

Ratios are used....most information for these ratios can be found on the BALANCE SHEET

When will bonds sell at a discount?

The stated rate of interest is less than the market rate at the time of issue.

When will bonds sell at a premium?

The stated rate of interest is more that the market rate at the time of issue.

**Face Value/Par Value/Principal

amount of money the borrower agrees to repay at maturity

Current Liabilities

any debt that can reasonably expect to be... 1. satisfied or paid by existing current assets/other current liabilities/performing service 2. within one year of operating cycle *if both criteria not met, it is long term

The portion of long-term debt due within one year should:

be reclassified as a current liability

*Bond Redemption

bonds are retired when purchased/redeemed (open response question)

The amount of federal income taxes withheld from an employee's gross pay is recorded by the employer as a:

current liability

The Journal entry to record the issuance of a note for the purpose of borrowing funds is:

debit cash; credit notes payable

The Kaplan Group sold $200,000 of 10 year bonds for $190,000. The rate on the face of the bonds was 8% and interest is payable annually on December 1st. What entry would be made on December 1st to when the interest is paid?

debit interest expense; credit cash and discount on bonds payable

Grayson Bank agrees to lend BJC Corp. $100,000 on January 1st. BJC signs a $100,000, 12%, 9 month note. What entry will BJC make to pay off the note and interest at maturity assuming the interest has been accrued to September 30th.

debit notes payable-$100,000, debit interest payable-$9,000; credit cash-$109,000

**Notes/Bonds

debt instruments that require borrowers to pay lender face value and make periodic interest payments

**Unsecured/Debenture Bonds

debt that does not have collateral is unsecured

Notes Payable

formal debt instruments used in place of A/P financing legal document. Can be current or long term. Can occur when open account terms cannot be met, usually requires interest to be paid

**Callable Bonds

give borrower option to pay off debt prior to maturity -borrowers exercise this when interest being paid on debt is greater than current market rate of interest

Contingent (subject to change) Liabilities

may or may not end up turning into actual obligations, depending on outcome of future event measurement of liabilities described so far was not affected by uncertainties about amount, timing, or receipt of future asset outflows

Accrued Liabilities

originate from adjusting entries usually represent the completed portion of activities that are in process at the end of the period

Liability

probably future sacrifices of economic benefits (debts or obligations arising from activities that already occurred...represent creditors' claims on total assets)

*Bond Certificate

promises to pay future interest and principal (original borrowing amount) to a creditor in exchange for cash today .interest-bearing notes, small denominations secured/unsecured

**Stated/Coupon/Contract Rate

rate of interest paid on the face value...borrower pays interest to the creditor each period until maturity

Unearned Revenue

receive cash before revenue is earned current portion of long-term debt does not require adjusting entry

*Long-Term Notes Payable

terms of note exceed one year secured note (mortgage), have fixed or adjustable interest rate

**Junk Bonds

unsecured bonds that are relatively risky and require high rate of interest to compensate the lender

Accounts Payable

when businesses purchase goods/service on credit, generally requiring payment within 30 to 60 days and usually not with interest (2/10, n30) does not require formal agreement or contract

Warranties

when goods are sold, customer is often provided with warranty against certain defects that .usually guarantees the repair or replacement of defective goods during a period following the sale the matching concept requires that all expenses required to produce sale revenue for a given period is recorded in that period *recognized by adjustment at end of period *as warranty claims are paid, liability is reduced *income statement effect occurs when goods are sold...payments of other asset outflows associated with warranty claims do not affect it!