GPC accounting chapter 10

Capital Lease

treated like a debit finance purchase, assets and liabilities are shown on the books.

Operating Lease

treated like rentals. No assets or liabilities are shown on the books.

Current Liabilities

debit a company reasonably expects to pay from other assets and within one year. Major types include : Notes payable, accounts payable, unearned revenue, accrued liabilities( taxes, wages, or interest).

The present value of a bond is a function of three factors:

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

How to record unearned revenue

1. When the company receives an advance(unearned revenue), it increases (debits) Cash and increases (credits) a current liability account identifying the source of the unearned revenue. 2. When the company recognizes revenue, it decreases (debits) the unearned revenue account and increases (credits) a revenue account.

current ratio

A commonly used measure of liquidity is the ______________. It is calculated as current assets divided by current liabilities. Measures the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Want it to be higher so credit lines will be lower.

Recording bonds

A corporation records bond transactions when it issues (sells) or redeems (buys back) bonds and when bondholders convert bonds into common stock. If bondholders sell their bond investments to other investors, the issuing firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction (although it does keep records of the names of bondholders in some cases).

Discount on Bonds Payable

Although _____________________ has a debit balance, it is not an asset. Rather it is a contra account, which is deducted from bonds payable on the balance sheet

Why bond prices vary

Bond prices vary inversely with changes in the market interest rate. As market interest rates decline, bond prices increase. When a bond is issued, if the market interest rate is below the contractual rate, the bond price is higher than the face value.

face value, at a discount, or at a premium

Bonds can be sold at

Convertible Bonds

Bonds that can be converted into common stock at the bondholder's option. Convertible bonds have features that are attractive both to bondholders and to the issuer. The conversion feature often gives bondholders an opportunity to benefit if the market price of the common stock increases substantially. Furthermore, until conversion, the bondholder receives interest on the bond. For the issuer, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities that do not have a conversion option.

Callable Bonds

Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity are

Current liabilities on the balance sheet.

Current liabilities are the first category under "Liabilities" on the balance sheet. Companies list each of the principal types of current liabilities separately within the category. Within the current liabilities section, companies often list notes payable first, followed by accounts payable.

Recording a discounted bond

Cash is debited the face value - discount amount. Discount to bonds payable is debited for amount of discount. Bonds payable is credited for the face value of the bond.

Amortization of the premium

Companies allocate bond premium to expense in each period in which the bonds are outstanding. This is referred to as amortizing the premium. Amortization of the premium decreases the amount of interest expense reported each period. That is, after the company amortizes the premium, the amount of interest expense it reports in a period will be less than the contractual amount. As the premium is amortized, its balance declines. As a consequence, the carrying value of the bonds will decrease, until at maturity the carrying value of the bonds equals their face amount.

Sales tax Revenue

Debit Cash (for taxes + revenue amount), Credit Sales Revenue for sale price of the goods, Credit Sales tax payable for tax amount. When the company remits the taxes to the taxing agency, it decreases (debits) Sales Taxes Payable and decreases (credits) Cash.

Recording bonds sold at a premium

Debit Cash For Face value + premium amount. Credit Bonds payable and premium to bonds payable. The sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid because the borrower is not required to pay the bond premium at the maturity date of the bonds. Thus, the premium is considered to be a reduction in the cost of borrowing that reduces bond interest expense over the life of the bonds.

recording the redemption of a bond:

Debit bonds payable and credit cash, both for the face value of the bond.

Payroll and Payroll payable

For a tax withheld payroll amount - Recorded as Debit to Salaries and Wages Payable( salary - taxes) and Credit to Cash. In addition to the liabilities incurred as a result of withholdings, employers also incur a second type of payroll-related liability. With every payroll, the employer incurs liabilities to pay various payroll taxes levied upon the employer. These payroll taxes include the employer's share of Social Security (FICA) taxes and state and federal unemployment taxes. Recorded as a debit to payroll tax expense and credit to the taxes payable. Companies classify the payroll and payroll tax liability accounts as current liabilities because they must be paid to employees or remitted to taxing authorities periodically and in the near term.

Notes payable, Interest payable, Cash.

How would you journalize a notes payable at maturity? Debit to _____________, Debit to __________________, Credit to_________________.

Debit, Notes Payable, Interest Expense, Credit Interest Payable.

How would you journalize a notes payable? __________to cash and Credit to ________________. When accounting for the accrued interest, Debit______________________and Credit _______________.

times interest earned

It provides an indication of a company's ability to meet interest payments as they come due. It is computed by dividing income before interest expense and income taxes by interest expense. It uses income before interest expense and taxes because this number best represents the amount available to pay interest. Net income + interest expense + tax expense / Interest expense. Should be high because creditors want the company to have excess income to pay interest. Con

book value

Regardless of the issue price of bonds, the ____________ of the bonds at maturity will equal their face value. Assuming that the company pays and records separately the interest for the last interest period.

additional cost of borrowing

The issuance of bonds below face value causes the total cost of borrowing to differ from the bond interest paid. That is, the issuing corporation not only must pay the contractual interest rate over the term of the bonds but also must pay the face value (rather than the issuance price) at maturity. Therefore, the difference between the issuance price and the face value of the bonds—the discount—is an _________________________. The company records this cost as interest expense over the life of the bonds.

debt to assets ratio

This is calculated as total liabilities (debt) divided by total assets. This ratio indicates the extent to which a company's assets are financed with debt. Total L / Total A. Should be low because creditors are concerned if the company has excessive debt.

amortizing the discount

To follow the expense recognition principle, companies allocate bond discount to expense in each period in which the bonds are outstanding. Amortization of the discount increases the amount of interest expense reported each period. That is, after the company amortizes the discount, the amount of interest expense it reports in a period will exceed the contractual amount. As the discount is amortized, its balance declines. As a consequence, the carrying value of the bonds will increase, until at maturity the carrying value of the bonds equals their face amount.

Recording a bond at face value

To record the sale of the bond: Debit Cash, Credit Bonds Payable. This is a long term liability on the balance sheet. To recognize the periodic interest on a bonds payable: P x R x T (in months, if yr. 12/12) Debit Interest expense, Credit Interest payable Interest payable is classified as a current liability on the balance sheet. This payment of interest would be recorded as a debit to interest payable and a credit to cash. So when the payment is actually made to pay the interest you would record it as this.

discount

When a bond is sold for less than its face value, the difference between the face value of a bond and its selling price is called a ___________. As a result of the decline in the bonds' selling price, the actual interest rate incurred by the company increases to the level of the current market interest rate.

premium

When a bond is sold for more than its face value, the difference between the face value and its selling price is called a ______________. If the market rate of interest is lower than the contractual interest rate, investors will have to pay more than face value for the bonds. That is, if the market rate of interest is 8% but the contractual interest rate on the bonds is 10%, the price on the bonds will be bid up.

redeeming bonds before maturity

When bonds are redeemed before maturity, it is necessary to (1) eliminate the carrying value of the bonds at the redemption date, (2) record the cash paid, and (3) recognize the gain or loss on redemption. The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date. Debit Bonds payable, Premium on bonds payable, and loss on bond redemption. Credit Cash for the sum of these three amounts.

Bonds

are a form of interest-bearing note payable issued by corporations, universities, and governmental agencies. Bonds, like common stock, are sold in small denominations (usually $1,000 or multiples of $1,000). As a result, bonds attract many investors. When a corporation issues bonds, it is borrowing money. The person who buys the bonds (the bondholder) is investing in bonds.

Unsecured Bonds

are issued against the general credit of the borrower. Large corporations with good credit ratings use unsecured bonds extensively.

Long term liabilities

are obligations that a company expects to pay more than one year in the future. In this section, we explain the accounting for the principal types of obligations reported in the long-term liabilities section of the balance sheet. These obligations often are in the form of bonds or long-term notes.

Secured Bonds

have specific assets of the issuer pledged as collateral for the bonds.

Off the balance sheet financing

is an intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet. Two common types of off-balance-sheet financing result from unreported contingencies and lease transactions.

Current market price

is equal to the present value of all the future cash payments promised by the bond.

Bond certificate

is issued to the investor to provide evidence of the investor's claim against the company. They provide information such as the name of the company that issued the bonds, the face value of the bonds, the maturity date of the bonds, and the contractual interest rate.

face value

is the amount of principal due at the maturity date.

market interest rate

is the rate investors demand for loaning funds. The process of finding the present value is referred to as discounting the future amounts.

contractual interest rate

is the rate used to determine the amount of cash interest the borrower pays and the investor receives. Usually, the contractual rate is stated as an annual rate, and interest is generally paid semiannually.

time value of money

is used to indicate the relationship between time and money—that a dollar received today is worth more than a dollar promised at some time in the future. If you had $1 million today, you would invest it and earn interest so that at the end of 20 years, your investment would be worth much more than $1 million. Thus, if someone is going to pay you $1 million 20 years from now, you would want to find its equivalent today, or its present value. In other words, you would want to determine the value today of the amount to be received in the future after taking into account current interest rates.

Solvency ratios

measures the ability of a company to survive over a long period of time.

Notes Payable

often used instead of accounts payable because it provides written documentation of the obligation in case legal remedies are needed to collect the debt. Companies frequently issue these to meet short-term financing needs. They usually require the borrower to pay interest. They are issued for varying periods of time. Those due for payment within one year of the balance sheet date are usually classified as current liabilities. What is this?

Contingent liabilities

potential liabilities that may become real in the future. are recorded as a liability if can be reasonably estimated and is probable. Debit a loss account and credit the liability. If the liability does not meet both requirements it is only disclosed in notes to the financial statements.

Current maturities of long term debt

the current installment due on long-term debt, reported as a current liability. It is not necessary to prepare an adjusting entry to recognize the current maturity of long-term debt. At the balance sheet date, all obligations due within one year are classified as current, and all other obligations are long-term. Recorded as long term debt due within one yr.

maturity date

the date that the final payment is due to the investor from the issuing company.