accounting 212 ch 9 smartbook

A(n) ______ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.

Accounts

A(n) _______ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas a(n) ______ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity date.

Accounts, notes

Identify characteristics of notes payable that are NOT common to accounts payable. (multiple) a.) does not arise from past transaction b.) based on a promissory note c.) interest bearing d.) usually classified as a current liability

Based on a promissory note Interest bearing

Which of the following obligations is NOT commonly classified as a current liability? a.) deferred revenue b.) accounts payable c.) bonds payable d.) sales tax payable

Bonds payable

______ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Which of the following is an important criteria used to determine the reporting of a contingent liability? a.) the classification of the related expense or loss b.) the potential effect on financial statement users c.) the likelihood of future payment or loss d.) the effect on key balance sheet ratios

The likelihood of future payment or loss

On March 5, ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles scheduled for April 10. On March 5, how does ABC Airlines report the $300 collected in advance? a.) decrease revenue and decrease cash b.) increase cash and increase deferred revenue c.) increase cash and increase revenue d.) decrease deferred revenue and decrease cash

Increase cash and increase deferred revenue

The financial statement effects of the issuance of a note payable include a(n): (multiple) a.) decrease in liabilities b.) increase in net income c.) decrease in assets d.) increase in liabilities e.) decrease in net income f.) increase in assets

Increase in assets Increase in liabilities

An advantage to financing with debt is that a.) dividends are tax deductible b.) interest does not have to be paid until the maturity date c.) interest is tax deductible d.) dividends reduce retained earnings whereas interest expense does not reduce retained earnings

Interest is tax deductible

Debt is considered a lower cost method of financing than equity because

Interest on debt is tax deductible

Improved cash flows is a common advantage of acquiring equipment through ________

leasing/lease

Amounts owed to employees that will be paid in a subsequent reporting period are reported by the company as a.) revenues on the income statement b.) assets on the balance sheet c.) liabilities on the balance sheet

liabilities on the balance sheet.

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company reports: (multiple) a.) a lease expense b.) a note payable c.) interest expense d.) a lease asset e.) a lease payable

a lease asset a lease payable

At the beginning of a lease period, the lessee reports a.) a lease asset and lease payable for the market value of the lease. b.) lease expense for the current period payment amount. c.) a lease asset and lease payable for the present value of the lease payments. d.) lease expense for the full lease amount.

a lease asset and lease payable for the present value of the lease payments.

Periodic payments on installment notes typically include (Select all that apply.) a.) a portion that reduces the outstanding loan balance b.) an increase in stockholders' equity c.) a portion that reflects interest d.) installment fees

a portion that reduces the outstanding loan balance a portion that reflects interest

On September 1, 2021, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. By recognizing the interest owed on December 31, 2021, ABC's net income ______

decreases by $1,000 Interest expense for the 4 months in 2021 = $50,000 x 6% x 4/12 = $1,000, which decreases net income.

Formula for calculating interest

face amount x annual interest rate x fraction of the year

When a company issues a note payable, the balance sheet effects include a(n) a.) increase in assets and increase in stockholders' equity b.) increase in assets and increase in liabilities c.) decrease in assets and decrease in liabilities d.) decrease in assets and decrease in stockholders' equity

increase in assets and increase in liabilities

Loans requiring periodic payments of interest and principle are referred to as _______ notes.

installment

The ______ rate of interest is used to compute the cash interest paid to bondholders

nominal

A(n) ______ bond is backed by a lien on specified real estate owned by the issuer.

secured

What are the two criteria used to determine whether a contingent liability is reported in the financial statements? (multiple) a.) the payment date b.) the percentage of the payment to total income c.) the likelihood of payment d.) the ability to estimate the amount of payment

the ability to estimate the amount of payment the likelihood of payment

On December 31, Martin Corp. makes a payment on an installment note that increases Interest Expense by $3,000 and reduces Notes Payable by $8,000. What was Martin's installment payment? a.) $5,000 b.) $11,000 c.) $8,000

$11,000

Jingle Company signs a 6-month, $20,000 note. The stated interest rate is 8% payable at the maturity date. Interest incurred on the note is _______

$800 $20,000 x 0.08 x 6/12

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should: a.) credit notes expense $5,000. b.) credit notes payable $5,000. c.) debit notes receivable $5,000. d.) debit notes payable $5,000.

Credit notes payable $5,000

In November 1, Year 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, Year 2. The journal entry on November 1, Year 1 would include which of the following? (multiple) a.) credit to notes payable $100,000 b.) credit to notes payable $106,000 c.) debit to interest expense $6,000 d.) debit to cash $100,000

Credit to notes payable $100,000 Debit to cash $100,000

The ______ portion of long-term debt is the amount that will be paid within the next year.

Current

Liabilities that are payable within one year are commonly classified as _______ liabilities, while those payable more than one year from now are commonly classified as _______ liabilities.

Current, long-term

On October 1, 2021, Logan Corporation signed a 6-month, 8% interest-bearing promissory note for $10,000. The journal entry required at December 31, 2021, would include which of the following? a.) debit interest expense $400 b.) credit cash $800 c.) credit interest payable $600 d.) debit interest expense $200

Debit interest expense $200 $10,000 x 8% (annual rate) x 3/12

The two types of financing are

Debt financing and equity financing

Financing with _____ requires borrowing, whereas financing with _____ requires issuing shares of stock.

Debt, equity

Langlee Hardware provides a two-year warranty against defects on all major appliances sold. New appliance sales in December 2021 are $150,000. Langlee expects future warranty costs to be 2% of sales. For Langlee, the recognition of expected future warranty costs in December 2021 causes net income to: a.) increase by $3,000 b.) decrease by $150,000 c.) decrease by $3,000 d.) increase by $150,000

Decrease by $3,000 Expected future warranty costs are reported as warranty expense. Expenses reduce net income.

True or false: current liabilities are always payable within one year

False In most cases, current liabilities are payable within one year. However, if the company's operating cycle exceeds one year, current liabilities may include obligations payable more than one year from the balance sheet date.

The issuance of a note payable results in a(n): (multiple) a.) decrease in Notes Payable b.) increase in Notes Payable c.) increase in Cash d.) decrease in Cash

Increase in notes payable Increase in cash

We report interest expense in the period in which we a.) pay it b.) incur it

Incur it

An obligation to transfer assets or provide services in the future is a(n) _______

Liability

Which of the following are long-term liabilities? (multiple) a.) note payable due in 3 years b.) note payable due in 3 months c.) salaries payable d.) 20-year mortgage payable e.) lease

Note payable due in 3 years 20-year mortgage payable lease

Which of the following are current liabilities? (multiple) a.) notes payable due in 3 months b.) accounts payable c.) notes payable due in 36 months d.) accounts receivable e.) salaries payable

Notes payable due in 3 months Accounts payable Salaries payable

Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should increase Notes Payable when Munster: a.) receives cash under the line of credit b.) negotiates the terms of the line of credit c.) pays off the line of credit

Receives cash under the line of credit

______ payable reflects the amount owed, but not yet paid, to employees for their past work.

Salaries

Which of the following are current liabilities? (multiple) a.) notes payable due in 5 years b.) sales tax payable c.) deferred revenue d.) accounts payable

Sales tax payable Deferred revenue Accounts payable

_______ bonds are supported by a specific asset the issuer pledges as collateral.

Secured

_______ bonds require payment of the full principal amount of the bond at the end of the loan term.

Term

Thornton Corp. negotiates a line of credit with its bank. The agreement specifies that Thornton may borrow up to $100,000 at a 6% annual interest rate. The financial statement effects, if any, when Thornton signs the agreement with the bank include: a.) an increase in notes payable b.) there is no financial statement effect since no money has yet been borrowed c.) an increase in interest expense

There is no financial statement effect since no money has yet been borrowed

Which of the following are correct regarding bonds? (multiple) a.) They obligate the issuing company to pay a specific amount. b.) They obligate the issuing company to repay the bonds at a specific date. c.) They obligate the issuing company to repay the bonds when market interest rates decrease. d.) They obligate the issuing company to pay an estimated amount.

They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds at a specific date.

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

True The note must be split into its current and long-term portions.

A contingent liability is an existing ________ situation that might result in a loss depending on the outcome of a future event.

Uncertain

For a manufacturer, the most commonly reported contingent liabilities relate to product ______

Warranty

Dragon Electronics provides a two-year warranty against defects on all television sets sold. New sales in December 20X1 are $120,000. Dragon expects future warranty costs to be 4% of sales. For Dragon, the journal entry for expected future warranty costs recorded in December 20X1 includes a debit to: a.) warranty liability for $4,800 b.) warranty expense for $4,800 c.) warranty liability for $120,000 d.) warranty expense for $120,000

Warranty expense for $4,800

Dragon Electronics provides a two-year warranty against defects on all television sets sold. New sales in December 2021 are $120,000. Dragon expected future warranty costs to be 4% of sales. In 2022, Dragon incurred actual warranty costs of $2,000. For Dragon, the financial statement effects of actual warranty costs incurred in 2022 include a(n): (multiple) a.) decrease in cash of $2,000 b.) increase in cash of $2,000 c.) increase in warranty expense of $2,000 d.) decrease in warranty liability of $2,000 e.) increase in warranty liability of $2,000

decrease in cash of $2,000 decrease in warranty liability of $2,000

Rauch Corporation estimated warranty expense in Year 1 of $10,000. In Year 2, Rauch performed warranty work of $8,000. The journal entry to record the performance of warranty work would include a: a.) credit to warranty liability. b.) debit to cash. c.) debit to warranty liability. d.) debit to warranty expense.

debit to warranty liability

A(n) ________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)

lease

Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should increase Notes Payable when Munster a.) negotiates the terms of the line of credit. b.) receives cash under the line of credit. c.) pays off the line of credit.

receives cash under the line of credit

A corporation will issue bonds when: a.) the interest rate on the bond is greater than the interest rate on a note payable. b.) they need to borrow money quickly. c.) the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan. d.) they cannot issue stock because investors have not been paid recent dividends

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan