Ch. 8,9,10 Notes 8
sales discount
A cash discount on sales taken by a customer
Interest Expense 1,125 Interest Payable 1,125 (Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding.) $50,000 × 9% × 3/12 = $1,125
A corporation issued a $50,000, 9%, 4-month note on July 1. The corporation's year-end is September 30. Which one of the following is the adjusting entry for interest on September 30? Interest Expense 1,125 Notes Payable 1,125 Interest Expense 1,500 Notes Payable 1,500 Interest Expense 1,125 Interest Payable 1,125 Interest Expense 1,500 Interest Payable 1,500
carrying Value > Retirement Price =
Gain
$1,000
In what denomination are bonds typically issued? $100,000 $1,000,000 $1,000 $10,000
How are selling price and markup related?
Markup is the amount added to the cost of merchandise to set the selling price.
terminal summary
The report that summarizes the cash and credit card sales of a point-of-sale terminal
True
When a bond premium is amortized over time, the carrying value of the bonds decreases over time. True False
Bonds payable
Which one of the following is not a typical current liability? Bonds payable Sales taxes payable Unearned revenue FICA taxes payable
14. Which of the following is an obligation requiring a series of payments to a lender? A) Current liability B) Installment note c) Accounts payable D) Series note payable E) None of the above
b) installment payments Feedback: An installment note is an obligation requiring a series of payments to the lender. (Learning Objective P5)
The total amount of interest to be paid on a $10,000, 8%, 90-day note at maturity is ________.
$200 interest is computed as face value x rate x time. ($10,000 x .08 x 90/360 = $200).
Becky Sherrick Company collected $4,515 of cash from sales activity today. If the proceeds include sales taxes of 5%, the amount to be credited to Sales Revenue is ________.
$4,300. Total proceeds represents the cash collected, which includes the sales tax. The formula is Cash / (1 + Sales tax rate) = Sales revenue, which computes to $4,515/(1.05) = $4,300 Objectives Evaluated: 10.1 Explain how to account for current liabilities.
Corn Flake Corporation reported net income of $300,000. Interest expense was $40,000 and income taxes were $100,000. The times interest earned ratio was ________.
11.0 times Times interest earned is computed by dividing the sum of the net income, interest expense, and income tax expense by interest expense [($300,000 + $40,000 + $100,000) ÷ $40,000 = 11].
Zilch Incorporated has the following financial statement information for the fiscal year ending December 31st, 2017: current assets: 1145000 long-term assets: 575000 stockholders equity: 325000 net income: 480000 What is Zilch's debt to assets ratio as of this date?
1395000 / 1720000 = 81% A firm's debt to equity ratio is calculated by dividing its total liabilities by its total assets. Here, Zilch's total assets are $1,720,000 ($1,145,000 + $575,000). Using the formula Assets = Liabilities + Stockholders' Equity, it can be determined that Zilch's total liabilities are equal to $1720000 - 325000 = 1395000 Zilche's debt to assets ratio is 1395000 / 1720000 = 81%
Chang Manufacturing reported net income of $546,000 for its most recent fiscal year. If the firm's income tax expense for the year was $459,000 and its interest expense was $345,000, what was Chang's times interest earned?
3.9 times To find Chang's times interest earned, we must first find the sum of the firm's net income, interest expense, and income tax expense. This amount is equal to $546,000 + $459,000 + $345,000 = $1.35 million. We then divide this amount by the interest expense of $345,000 ($1,350,000 ÷ $345,000 = 3.9) to get a result of 3.9 times
In the most recent fiscal year, Potter Industries reported current assets of $560,000; current liabilities of $85,250; long-term assets of $391,600; long-term liabilities of $250,125; stockholders' equity of $616,225; and net income of $456,125. What is Potter's debt to assets ratio?
35.2% The debt to assets ratio is determined by dividing the firm's total liabilities ($85,250 + $250,125) by total assets ($560,000 + $391,600), ($335,375 ÷ $951,600 = 0.352) or 35.2%
2. A bondholder that owns a $1,000, 6%, 15-year (term) bond has a. The right to receive $1,000 at maturity. b. Ownership rights in the bond-issuing entity. c. The right to receive $60 per month until maturity. d. The right to receive $1,900 at maturity. e. The right to receive $600 per year until maturity
A
A $1,750 loss The bonds were retired for $506,250 ($500,000 × 101¼%) and the carrying value is $504,500, resulting in a loss of $1,750.
A $500,000 bond is retired at 101¼ when the unamortized premium is $4,500. Which of the following is one effect of recording the retirement? A $6,250 gain A $6,250 loss A $10.806 loss A $1,750 loss
A $2,000 loss Since the bonds were retired for $485,000 ($500,000 × 97%) and the carrying value is $483,000, the company should record a loss of $2,000.
A $500,000 bond is retired at 97 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the retirement? Entry field with correct answer A $15,000 loss A $2,000 gain A $2,000 loss A $15,000 gain
What are the two types of batch reports?
A batch report can be detailed, showing each credit card sale, or a summary of the number and total of sales by credit card type.
True
A company must accrue a contingency if the company can determine a reasonable estimate of the loss and the loss is deemed probable. True False
contractual
A corporation issues $1,000,000 of 8%, 5-year bonds. The 8% rate of interest is called the __________ rate. effective yield contractual market
Distinguish between a current asset and a current liability.
A current asset represents resources that can easily be converted to cash within one year; whereas current liabilities are debts to be repaid, using current assets, within one year.
Which statement most accurately describes the process of recording a gain for bonds when they are redeemed before the maturity date?
A gain is recorded for bonds redeemed prior to the maturity date when the carrying value of the bonds is more than the redemption price of the bonds.
point-of-sale (POS) terminal
A specialized computer used to collect, store, and report all the information about a sales transaction.
$4,300 (The amount of sales can be computed by dividing total cash received by one plus the sales tax rate of 5%. The computation is as follows: $4,515/1.05 = $4,300.)
Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue? $4,300 $4,515 $4,289.25 $4,000
At the time of the sale as a liability.
At what point and how are sales taxes incurred by customers recorded? At the time collected from the customer as unearned revenue. At the time of the sale as a liability. At the time of the sale as revenue. At the time the sale takes place as an expense.
How does a POS terminal determine the price of an item?
Before any sale is entered, the number, description, price, and quantity on hand of each item of merchandise are stored in the POS terminal.
An advantage of issuing bonds instead of issuing common stock is that the return on common stockholders' equity may be higher after bonds are issued. Why is this?
Bond interest expense reduces net income but return on equity is higher because the number of shares outstanding does not increase.
what kind of interest do bonds pay?
Bonds pay a stated rate of interest that may be different from the market rate of interest when the bonds are issued.
Loss on redemption of $8,000 The company had to pay $204,000 for bonds with a carrying value of $196,000. The difference between the $204,000 and $196,000 is the loss on redemption.
Bonds payable with a face value of $200,000 and a carrying value of $196,000 are redeemed prior to maturity at 102. Which of the following willl result? Gain on redemption of $8,000 Loss on redemption of $4,000 Gain on redemption of $4,000 Loss on redemption of $8,000
$3,540 (Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. At December 31, four months of interest should be accrued: $88,500 × 12% × 4/12 = $3,540.)
Buttner Company borrows $88,500 on September 1, 2017, from Harrington State Bank by signing an $88,500, 12%, one-year note. How much is accrued interest at December 31, 2017? $2,655 $4,425 $10,620 $3,540
What column on a general ledger form is not on an accounts receivable ledger form?
Credit Balance.
On January 1st, 2017, Discipline Company, a calendar-year company, issued $800,000 of notes payable, of which $200,000 is due on January 1st for each of the next 4 years. What is the proper balance sheet presentation on December 31st, 2017?
Current Liabilities, $200,000; Long-Term Debt, $600,000
The contractual interest rate exceeds the market interest rate. (When the contractual interest rate and the market rate are the same, the bonds will be issued at face value not at a premium or discount.)
Cuso Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate? The market interest rate exceeds the contractual interest rate. The contractual interest rate and the market interest rate are the same. No relationship exists between the market and contractual rates. The contractual interest rate exceeds the market interest rate.
What are two ratios that companies use to evaluate a company's ability to pay debt obligations as they become due?
Debt to Assets and Times Interest Earned
What are two ratios that companies use to evaluate a company's ability to pay debt obligations as they become due?
Debt to Assets and Times Interest Earned.
False
Federal unemployment taxes are paid by both the employer and the employee. True False
Credit to Interest Payable (Since the interest has been accrued but not yet paid, it has to be recognized as an increase in expenses and liabilities. The entry would be a debit to Interest Expense and a credit to Interest Payable.)
Four-Nine Corporation issued bonds at par that pay interest every July 1 and January 1. Which one of the following is one effect of the entry to accrue bond interest at December 31? Credit to Cash Credit to Interest Expense Credit to Interest Payable Debit to Interest Payable
Cash 1,940,000 Discount on Bonds Payable 60,000 Bonds Payable 2,000,000 The debit to Cash is $1,000 × 2,000 bonds × 97%, which is $1,940,000. Discount on Bonds Payable is debited for $60,000, and Bonds Payable is credited for $2,000,000, the face amount of the bonds
Hanlin Enterprises issued 2,000 bonds with a face value of $1,000 each at 97. What is the entry to record the issuance? Cash 2,000,000 Discount on Bonds Payable 60,000 Bonds Payable 1,940,000 Cash 1,940,000 Bonds Payable 1,940,000 Cash 1,940,000 Discount on Bonds Payable 60,000 Bonds Payable 2,000,000 Cash 2,060,000 Discount on Bonds Payable 60,000 Bonds Payable 2,00,000
By adding the present value of the principal amount to the present value of the interest payments.
How is the market value of a bond issuance determined? By adding the present value of the principal amount to the present value of the interest payments. By computing the present value of the principal. By computing the present value of the interest payments. By adding the face value of the principal amount to the stated value of the interest payments.
False If the contractual rate of interest is lower than the market rate of interest, bonds will be at a discount
If the contractual rate of interest is lower than the market rate of interest, bonds will sell at a premium. True False
A debit of $3,745 to Premium on Bonds Payable (The entry removes the face amount of the bonds from the Bonds Payable account, removes the remaining Premium on Bonds Payable, records the cash paid on retirement, and recognizes a gain or loss on redemption for the difference.The entry to record this transaction will have debits to Bonds Payable for $100,000, Premium on Bonds Payable for $3,745 and Loss on Retirement for $1,255. The credit will be to cash for $105,000.)
Kant Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. Which of the following is part of the entry to record the bond redemption? A credit of $3,745 to Loss on Bond Redemption A debit of $3,745 to Premium on Bonds Payable A credit of $1,255 to Gain on Bond Redemption A debit of $5,000 to Premium on Bonds Payable
Jackson Motors issued a five-year interest-bearing note payable for $100,000 on January 1st, 2013. Each January the company is required to pay $20,000 on the note. How will this note be reported on the December 31st, 2014, balance sheet?
Long-term debt, $60,000; Long-term debt due within one year, $20,000 $100,000 - $20,000 (paid in 2014) - $20,000 (due in 2015) = $60,000 Long-term debt
Bonds Payable 100,000 Cash 100,000 (When bonds mature, the principal is paid and the obligation removed from the Bonds Payable account. Any discount or premium will be completely amortized by maturity. The bonds payable and cash amounts of $100,000 are recorded in the redemption entry.)
Nashville Rail Co. issued $100,000 in 10-year bonds in 2009 at 103. The final interest payment was made and recorded. What entry will Nashville record for the redemption of its bonds at maturity? Entry field with correct answer Bonds Payable 103,000 Gain on Bonds Redemption 3,000 Cash 100,000 Bonds Payable 103,000 Premium on Bonds Payable 3,000 Cash 100,000 Bonds Payable 100,000 Cash 100,000 Bonds Payable 103,000 Cash 103,000
$10,000 current liability; $40,000 long-term liability (The $10,000 is a current maturity of long-term debt. The $40,000 is a long-term liability.)
On December 30, 2017, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet? $50,000 long-term liability $50,000 current liability $10,000 current liability; $40,000 long-term liability $10,000 long-term liability; $40,000 current liability
Credit to Bonds Payable for $200,000 (The issuance entry for the bonds includes a debit to cash for $200,000 and a credit to bonds payable for $200,000.)
On January 1, 2017, Slice Corp. issues $200,000 of 5-year, 7% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds? Credit to Cash for $14,000 Debit to Bonds Payable for $200,000 Credit to Bonds Payable for $200,000 Credit to Bond Interest Expense of $14,000
Notes Payable 70,000 Interest Payable 2,100 Interest Expense 525 Cash 72,625 (Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. At December 31, 2017 four months of interest were properly accrued and recognized in the interest payable account: $70,000 × 9% × 4/12 = $2,100. An additional month of interest is recognized at the maturity date to be expended in 2018 : $70,000 × 9% × 1/12 = $525.)
On September 1, 2017, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Interest was properly accrued on December 31, 2017. What entry is needed to record the payment of the note and accrued interest on the due date? Notes Payable 72,625 Cash 72,625 Interest Payable 2,625 Notes Payable 70,000 Cash 72,625 Interest Expense 2,625 Notes Payable 70,000 Cash 72,625 Notes Payable 70,000 Interest Payable 2,100 Interest Expense 525 Cash 72,625
Interest Expense 2,100 Interest Payable 2,100 (Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding: $70,000 × 9% × 4/12 = $2,100.)
On September 1, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Which journal entry will Banner Co. make on December 31 before issuing its financial statements? Interest Expense 2,100 Interest Payable 2,100 Interest Expense 6,300 Notes Payable 6,300 Interest Expense 1,575 Interest Payable 1,575 Interest Expense 2,625 Notes Payable 2,625
Both the note payable and the interest payable are current liabilities. (A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable and the note payable are expected to be paid within one year, they both will be considered current liabilities.)
RS Company borrowed $70,000 on December 1 on a 6-month, 12% note. Which statement is true at December 31? Both the note payable and the interest payable are current liabilities. Neither the note payable nor the interest payable is a current liability. The note payable is a current liability, but the interest payable is not. The interest payable is a current liability, but the note payable is not.
False
Sales taxes are an expense to the retailer. True False
Coghlan Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $15,392. All sales are subject to a 4% sales tax. Compute sales taxes payable Make the entry to record sales taxes payable and sales revenue
Sales taxes payable = 592 Sales = ($15,392 ÷ 1.04) = $14,800 Sales taxes payable = ($14,800 x 4%)= $592 Date March 16 Account Titles and Explanation Debit = Cash: 15392 Credit = Sales Revenue: 14800 Credit = Sales Taxes Payable: 592
a liability
Sales taxes recorded at the time the sale takes place is a revenue. a liability. an expense. unearned revenue.
$4,500 Since there are 3 months remaining on the insurance policy, the remaining liability is 3/12 of $18,000 or $4,500.
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Revenue at December 31? $18,000 $0 $4,500 $13,500
$244,000 Principal at maturity $400,000 Annual interest payments: $400,000 × 6% × 10 years 240,000 Cash paid to bondholders 640,000 Cash received from bondholders (99% × $400,000) 396,000 Total cost of borrowing $244,000 400000 +240000 ---------- 640000 -396000 ---------- $244000
Sosa Corporation issued 10-year bonds with a face value of $400,000 and a contractual rate of interest of 6% at 99 on July 1. What is the total cost of borrowing for Sosa Corporation? Entry field with correct answer $400,000 $640,000 $244,000 $240,000
A discount (Since the contractual interest rate is less than the market interest rate, the bond will sell at a discount.)
Tanner, Inc. issued a 10%, 5-year, $100,000 bond when the market rate of interest was 12%. At what value will the bond sell? Entry field with correct answer A premium A discount Par Face value
Unearned Ticket Revenue
The Jacksonville Jaguars sell season tickets to NFL football games. There are 10 home games during the season, which runs from August through December. During February, 65,000 season tickets were sold for $12,000,000 cash. Which account will be credited by the Jacksonville Jaguars upon receipt of the $12,000,000? Tickets Receivable Prepaid Tickets Ticket Revenue Unearned Ticket Revenue
Why is sales tax collected considered a liability?
The amount of sales tax collected is a business liability until paid to the government.
Cash 2,155 Sales 2,000 Sales Taxes Payable 155 (The sales taxes obligation must be recognized separately as sales taxes are paid by the buyer of the product or service and must be submitted by the retailer to the governmental agency imposing them.)
The cash register tape indicates cash sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information? Cash 2,155 Sales 2,000 Sales Taxes Payable 155 Cash 2,155 Sales 2,155 Cash 2,000 Sales Tax Expense 155 Sales 1,155 Cash 2,000 Sales 2,000
Major disadvantages of using bonds
The major disadvantages resulting from the use of bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity.
False The market price of a bond is the sum of the present value of the bond's principal and the present value of the interest payments discounted at the market interest rate.
The market price of a bond is equal to the present value of the bond's principal. True False
longer
The time period for classifying a liability as current is one year or the operating cycle, whichever is probable. possible. longer. shorter.
Either out of existing current assets or by crediting other current liabilities
To be classified as a current liability, how or when must a debt be expected to be paid? By creating other current liabilities Out of existing current assets Beyond one year Either out of existing current assets or by crediting other current liabilities
Under IFRS, companies will sometimes net current liabilities against current assets to show working capital on the face of the statement of financial position. True or False
True
True
Unearned revenue is a type of current liability. True False
It increases the carrying value of the bonds. (because as the discount is reduced, the net amount, or carrying value increases.)
What is the effect of amortizing a bond discount? It decreases bond interest expense. It decreases the maturity value of the bonds. It increases the carrying value of the bonds. There is no effect on the bond interest expense.
It reduces the cost of borrowing.
What is the nature of a bond premium? It increases the cost of borrowing. It reduces the cost of borrowing. None of these. It doesn't change the cost of borrowing.
Secured bonds
What term is used for bonds that have specific assets pledged as collateral? Convertible bonds Secured bonds Discount bonds Callable bonds
Carrying value (The face value is presented on the balance sheet with the amount of the unamortized premium added to it. When combined, these two values represent the carrying value of the bonds.)
When a bond is sold at a premium, at what amount is it reported on the balance sheet? Interest value Market value Carrying value Premium value
payroll deductions are recorded as liabilities.
When recording payroll, net pay is recorded as salaries and wages expense and payroll deductions are recorded as liabilities. payroll deductions are recorded as liabilities. net pay is recorded as salaries and wages expense. gross earnings are recorded as salaries and wages payable.
I and II
Which of the following is a criterion for the classification of a liability as current? I. It is a debt that can be paid from existing current assets. II. It is a debt that can be paid through the creation of other current liabilities. III. It must be paid within one year or the operating cycle, whichever is shorter. I and II II and III I and III I, II, and III
Listing current debt in the order of oldest first and then chronologically.
Which of the following is not a commonly used method of presenting current liabilities on the balance sheet? In order of magnitude or size. In order of their maturity. Listing current debt in the order of oldest first and then chronologically. Listing currently maturing long-term debt first.
Prepaid rent
Which of the following is not a typical current liability? Prepaid rent Unearned passenger ticket revenue Federal unemployment taxes payable Current maturities of long-term debt
Mortgages payable
Which one of the following is not a typical current liability? Interest payable Mortgages payable Current maturities of long-term debt Salaries payable
It is the rate investors demand for loaning funds.
Which statement describes the market interest rate? It is the contractual interest rate used to determine the amount of cash interest paid by the borrower. It is the rate stated on the bond certificate that determines the value at which bonds will sell. It is listed in the bond indenture. It is the rate investors demand for loaning funds.
On January 1, 2017, Howard Corporation signed a $500,000, 6%, 5-year mortgage note that is payable in annual installments of $118,698 every January 1. On December 31, 2017, the unpaid principal balance should be reported as
a $88,698 current liability and a $411,301 long-term liability.
cash receipts journal
a special journal used to record only cash receipt transactions
When will bonds sell at a discount?
a, The credit standing of the issuing company is not as good as other companies in a similar line of business. b. The stated rate of interest is less than the market rate of interest at the time of issue. c. The stated rate of interest is more than the market rate of interest at the time of issue. d. The stated rate of interest is same as the market rate of interest at the time of issue. answer: b
On January 1, 2012, Action Inc. issued $1,000,000 of 10% bonds at face value. These bonds are due in 10 years with interest payable semi-annually on June 30 and December 31. What is the amount of interest paid in 2012?
a. $ 10,000 b. $100,000 c. $ 25,000 d. $ 50,000 answer: b
On January 2, 2012, Senate Inc. issued $10,000,000 of 10-year, 9% bonds at 87. How much of the discount will be amortized in the first year under the straight-line method?
a. $ 870,000 b. $ 130,000 c. $1,300,000 d. $ 600,000 answer: b
Use the information provided in the time value of money tables in the text to answer the question(s) that follow. Refer to the Time Value of Money Tables. Homestead Company issued $1,000,000, 7-year, 8%, bonds with interest payable semiannually. The market rate was 6%. The issuance price of the bonds is:
a. $1,111,560. b. $1,000,000. c. $1,151,480. d. $1,112,944. answer: d
Moore Company has the following information for the pay period of December 15 - 31, 2012: Salaries $18,000 Federal income tax $2,700 State income tax $2,160 FICA $1,017 Salaries are paid on December 31, 2012. On December 31st, Cash would be recorded for:
a. $18,000. b. $13,140. c. $12,123. d. $15,300. answer: c
If a company's current ratio is 3.0 and the current liabilities are $100,000, then the current assets are:
a. $400,000. b. $300,000. c. $103,000. d. $ 33,333. answer: b
On January 2, 2012, Tyson Construction Inc. issued $1,000,000, 10-year bonds for $1,135,915. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. Refer to the information provided for Tyson Construction Inc. Determine the cash interest to be paid on June 30, 2012.
a. $50,000 b. $40,000 c. $42,400 d. $46,000 ansnwer: a
Paris Company issued bonds in the amount of $500,000 with a stated interest rate of 8%. If the interest is paid semiannually Modify Remove and the bonds are due in 10 years, what would be the total amount of interest paid over the life of the bonds?
a. $500,000 b. $200,000 c. $400,000 d. $ 40,000
On January 1, 2012, Flounder Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on June 30 and December 31. The market rate is 12%. Refer to the information provided for Flounder Inc. The interest expense on the bonds at June 30, 2012, is:
a. $79,482.77. b. $36,000.00. c. $39,741.38. d. $29,806.04. answer: c
On the issuance date, the Bonds Payable account had a balance of $80,000,000 and Premium on Bonds Payable had a balance of $5,000,000. What was the issue price of the bonds?
a. $80,000,000 b. $79,000,000 c. $85,000,000 d. $75,000,000 ansewer: c
The interest charged by the bank, at the rate of 9%, on a 3-month, discounted note payable for $100,000 is:
a. $9,000. b. $2,250. c. $750. d. $1,000. answer: b
Pointe Corporation's balance sheet showed the following amounts for its liability accounts: Notes payable, $130,000; Bonds Payable, $800,000; Accrued Expenses, $20,000; and Deferred Income Tax Liability, $120,000. Total assets was $1,470,000. The debt to assets ratio is:
a. 0.27 b. 1.37 c. 0.65 d. 0.73 answer: d
Refer to the financial information presented for Faultless, Inc. What is the company's current ratio for 2012?
a. 0.3 b. 3.0 c. 1.0 d. 0.9 answer: b
If current assets amount to $150, total assets are $350, current liabilities are $65, and total liabilities are $100, then the current ratio is:
a. 3.50. b. 3.03. c. 2.31. d. 2.12 answer: c
Barnes Company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the financial press are likely to report the bond issue price as:
a. 498.35. b. 100.00. c. 99.67. d. 49.84. answer: c
Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?
a. Accumulated depreciation on the leased asset. b. Capital lease liability in the current liability section. c. Capital lease liability in the long-term liability section. d. Rent expense on the leased asset. answer: d
Which of the following statements regarding amortization is true?
a. Amortization of the premium causes the Premium on Bonds Payable account to increase. b. Amortization of the premium causes the amount of interest expense to increase. c. Cash interest payments on bonds equals interest expense on the income statement when there is amortization of bond premium. d. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero. answer: d
Which of the following would describe a callable bond?
a. Borrower has the right to pay off the bonds prior to due date. b. Borrower has the right to issue more bonds prior to due date. c. Borrower has the right to call off the interest payments on the bonds. d. Investor has the right to call off the interest payments on the bonds. answer: a
International Corporation leased a building from Domestic Company. The 10-year lease is recorded as a capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true?
a. Depreciation expense of $6,710 will be recorded each year by International Corporation. b. Depreciation expense of $10,000 will be recorded each year by International Corporation. c. No depreciation expense will be recorded by International Corporation. d. No rent expense will be recorded by International Corporation. answer: a
Which of the following statements regarding contingent liabilities is true?
a. If they are probable and estimable, then they must be recorded even before the outcome of the future event. b. If they are probable and estimable, then they should be disclosed in the notes to the financial statements. c. The accounting principle that determines whether a contingent liability is to be recorded is that of historical cost. d. Contingencies that are not estimable should not be recorded or disclosed in the financial statements even if they are probable. answer: a
On January 2, 2012, Golden Corporation sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. Golden properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2012?
a. The carrying value will be less than $785,000. b. The carrying value will be $785,000. c. The carrying value will be greater than $785,000. d. The unamortized premium will be more than $15,000. answer: c
Which of the following statements about bond accounting under the effective interest method is correct?
a. The cash interest paid is calculated as the bond face value u the market rate. b. The interest expense is calculated as the carrying value u the market rate. c. The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium. d. The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount. answer: b
Which of the following lease conditions would result in a capital lease to the lessee?
a. The lessee will return the property to the lessor at the end of the lease term. b. The lessee obtains enough rights to use the asset and is in substance the owner. c. The leased asset is not capitalized on the balance sheet. d. The lease term is 70% of the property's economic life. answer: b
Banister Company wishes to issue $600,000 of 10-year, 7% bonds, with interest paid annually at the end of the year. the market rate of interest is currently 5%. What information is needed in order to determine the issue price of the bond?
a. The market rate of interest, the stated rate of interest, the bond rating, and the bond life. b. The face value of the bonds, the stated rate of interest, the market rate of interest, and the bond life. c. The life of the bonds, the market rate of interest, the bond rating, and the face value of the bonds. d. The face value of the bonds, the market rate of interest, the purpose of the issue, and the bond life. answer: b
When determining the amount of interest to be paid on a bond, which of the following information is necessary?
a. The market value of the bonds after one year. b. The selling price of the bonds. c. The stated rate of interest on the bonds. d. The effective rate of interest on the bonds. answer: c
Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's balance sheet in 2012?
a. Total liabilities increased 8.7% during 2012. b. The total of liabilities & equity is $500,000 in 2012. c. Total liabilities is 27.6% of total assets in 2012. d. Total liabilities is 30% of total liabilities & equity in 2012. answer: d
Which of the following would most likely be classified as a current liability?
a. Two-year notes payable b. Bonds payable c. Mortgage payable d. Portion of long-term debt due within one year answer: d
If bonds are issued at 101.25, this means that:
a. a $1,000 bond sold for $101.25. b. the bonds sold at a discount. c. a $1,000 bond sold for $1,012.50. d. the bond rate of interest is 10.125% of the market rate of interest. answer: c
The Premium on Bonds Payable account is shown on the balance sheet as:
a. a contra asset. b. a reduction of an expense. c. as an increase in equity for the premium provided. d. an addition to a long-term liability. answer: d
The Discount on Bonds Payable account is shown on the balance sheet as:
a. an asset. b. an expense. c. a contra-liability. as a reduction in equity for d. the discount provided. answer: c
The portion of long-term debt due within one year should:
a. be classified as a long-term liability. b. not be separated from the long-term portion of debt. c. be paid immediately. d. be reclassified as a current liability. answer: d
On January 1, Hurley Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a a. credit to Discount on Bonds Payable, $4,000. b. credit to Discount on Bonds Payable, $8,000. c. debit to Interest Expense, $60,000. d. debit to Interest Expense, $120,000
a. credit to Discount on bonds payable, $4000
The journal entry to record the issuance of a note for the purpose of borrowing funds is:
a. debit Accounts Payable; credit Notes Payable. b. debit Cash; credit Notes Payable. c. debit Notes Payable; credit Cash. d. debit Cash and Interest Expense; credit Notes Payable. answer: b
The journal entry to record the payment of an ordinary note is:
a. debit Cash; credit Notes Payable. b. debit Cash; credit Accounts Payable. c. debit Notes Payable and Interest Expense; credit Cash. d. debit Notes Payable and Interest Receivable; credit Cash. answer: c
Victor Corporation issues $1,000,000, 10-year, 8% bonds at 96. The journal entry to record the issuance will show a:
a. debit to Cash of $1,000,000. b. credit to Discount on Bonds Payable for $40,000. c. credit to Bonds Payable for $960,000. d. debit to Cash for $960,000
The Miracle Corporation issues $1,000,000, 10-year, 8% bonds at 96. The journal entry to record the issuance will show a:
a. debit to Discount on Bonds Payable for $40,000. b. debit to Cash of $1,000,000. c. credit to Bonds Payable for $960,000. d. credit to Cash for $960,000. answer: a
If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will:
a. decrease as the bonds approach their maturity date. b. increase as the bonds approach their maturity date. c. remain constant throughout the bonds' life. d. fluctuate throughout the bonds' life. answer: b
If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will:
a. decrease as the bonds approach their maturity date. b. increase as the bonds approach their maturity date. c. remain constant throughout the bonds' life. d. fluctuate throughout the bonds' life. answer: a
Under the effective interest method, the cash paid on each interest payment date will:
a. decrease if bonds are issued at a premium. b. increase if bonds are issued at a premium. c. remain constant regardless of the issuance price. d. increase if bonds are issued at a discount. answer: c
Current liabilities are:
a. due, but not receivable for more than one year. b. due, but not payable for more than one year. c. due and receivable within one year. d. due and payable within one year. answer: d
When bonds are issued by a company, the accounting entry shows an:
a. increase in liabilities and a decrease in equity. b. increase in liabilities and an increase in equity. c. increase in assets and an increase in liabilities. d. increase in assets and an increase in equity. answer: c
With the effective interest method of amortization, the amortization of a bond premium results in a(n)
a. increase in liabilities. b. decrease of stockholders' equity. c. increase in interest expense. d. decrease in interest expense. answer: d
With the effective interest method of amortization, the amortization of a bond discount results in a(n):
a. increase in stockholders' equity. b. decrease in liabilities. c. increase in interest expense. d. decrease in interest expense. answer: c
Bonds are sold at a premium if the:
a. issuing company has a better reputation than other companies in the same business. b. market rate of interest was less than the stated rate at the time of issue. c. market rate of interest was more than the stated rate at the time of issue. d. market rate of interest was same as the stated rate at the time of issue. answer: b
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount:
a. less than face value. b. equal to the face value. c. greater than face value. d. that cannot be determined. answer: c
Long-term liabilities generally include:
a. liabilities related to long-term assets. b. accounts payable, because they are interest-bearing. c. obligations that extend beyond one year. d. accrued expenses. answer: c
When bonds are sold for less than the face amount, this means that the:
a. maturity value will be less than the face amount. b. maturity value will be greater than the face amount. c. bonds are sold at a premium. d. stated rate of interest is less than the market rate of interest. answer: d
The amount of federal income taxes withheld from an employee's gross pay is recorded as a:
a. payroll expense. b. contra account. c. current asset. d. current liability. answer: d
The market price of a bond is the: a. present value of its principal amount at maturity plus the present value of all future interest payments b. present value of its principal amount only c. principal amount plus the present value of all future interest payments d. principal amount plus all future interest payments
a. present value of its principal amount at maturity plus the present value of all future interest payments
The bond issue price is determined by calculating the:
a. present value of the stream of interest payments and the future value of the maturity amount. b. future value of the stream of interest payments and the future value of the maturity amount. c. future value of the stream of interest payments and the present value of the maturity amount. d. present value of the stream of interest payments and the present value of the maturity amount. answer: d
If a company's bonds are callable:
a. the bondholder has the right to sell an option on the bond. b. the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%. c. the bonds are never allowed to remain outstanding until the maturity date. d. the investor never knows what the redemption price will be until the bonds are actually called. answer: b
registered bonds
bonds issued in the names and addresses of their holders/owners
bearer (coupon) bonds
bonds not registered in the name of the owner
callable bonds
bonds that a corporation reserves the right to redeem before their maturity
On January 1, Besalius Inc. issued $1,000,000, 9% bonds for $939,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Besalius uses the effective-interest method of amortizing bond discount. At the end of the first year, Besalius should report unamortized bond discount of a. $51,000. b. $54,900. c. $57,100. d. $51,610
c. 57,1000 The beginning balance of unamortized discount is $61,000 ($1,000,000 - $939,000). The discount amortization is $3,900, the difference between the cash interest payment of $90,000 ($1,000,000 x 9%) and the interest expense recorded of $93,900 ($939,000 x 10%). The discount amortization of $3,900 is subtracted from the beginning balance of unamortized discount of $61,000, to arrive at a balance of $57,100 at the end of the first year.
When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the a. maturity value of the bonds b. original selling price of the bonds c. carrying value of the bonds d. face value of the bonds
c. carrying value of the bonds
Which of the following is not a payroll deduction? a. state income tax b. federal income tax c. federal unemployment taxes c. FICA taxes
c. federal unemployment taxes
The major disadvantage resulting from the use of bonds are that a. interest is not tax deductible and the principle must be repaid b. neither interest nor principal is tax deductible c. interest must be paid and the principal must be repaid d. the principal is tax deductible and interest must be paid
c. interest must be paid and the principal must be repaid
Howard Corporation issued a 20-year mortgage note payable on January 1. On December 21, the unpaid principle balance will be reported as a. a current liability b. a long-term liability c. part current and part long-term liability d. interest payable
c. part current and part long-term liability Howard Corporation reports the reduction in principle for the next year as a current liability, and it classifies the remaining unpaid principal balance as a long-term liability
Four-Nine Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31st includes a
credit to Interest Payable.
From a liquidity standpoint, which is more desirable for a company to have?
current assets exceed current liabilities
All of the following are current liabilities except a. sales taxes payable b. unearned rental revenue c. current maturities of long-term debt d. all of these are answer choices for current liabilities
d. all of these are answer choices for current liabilities
If a company issues a $100,000, 12%, 10-year bond, that pays interest semiannually when market interest rate is 10%, the bond would sell at an amount: a. less than face value b. equal to face value c. that cannot be determined based on the information given d. greater than face value
d. greater than face value
Bond price is found by
determining the present value of the cash flows for the face value and interest payments, discounted at the market rate of interest.
A bond with a face value of $130,000 was redeemed at 99 when the carrying value of the bond was $126,000. The entry to record the redemption would include a
loss on bond redemption of $2,700. The amount paid upon redemption is 99% of face value, which computes to 0.99 x $130,000 = $128,700. A loss is recorded when the cash paid is greater than the carrying value. The loss is the difference between the cash paid of $128,700 and the carrying value of the bonds of $126,000, which equals a $2,700 loss.
Which one of the following amounts increases each month when accounting for a long-term mortgage payable that is repaid in installments?
monthly principal reduction
Lily's Boutique has total cash receipts for the month of $21,000. If the sales tax rate is 5%, what is Lily's sales revenue for the month?
$20,000 $21,000 ÷ 1.05 = $20,000
Bridget would like to purchase a Wright Industries bond with a face value of $1,000 on the bond market. If the bond listing shows a quoted price of 98.2, how much will Bridget pay for the bond?
$982
List the five steps for posting transactions to accounts receivable ledger forms.
1. write the date 2.Write the sales journal page number in the Post. Ref. column of the ledger account. 3.Enter the debit and credit amounts. 4.Calculate and record the new account balance. 5.Write the customer account number in the Post. Ref. column of the sales journal.
Which accounts are impacted, and how, by the posting of the special columns of a sales journal?
1.Accounts Receivable is debited. 2.Sales is credited. 3.Sales Tax Payable is credited.
4. A company issued five-year, 5% bonds with a par value of $100,000. The company received $95,735 for the bonds. Using the straight-line method, the company's interest expense for the first semiannual interest period is a. $2,926.50. b. $5,853.00. c. $2,500.00. d. $5,000.00. e. $9,573.50.
4. a; Cash interest paid = $100,000 × 5% × ½ year = $2,500 Discount amortization = ($100,000 - $95,735)/10 periods = $426.50 Interest expense = $2,500.00 + $426.50 = $2,926.50
Northeast Company has the following financial statement information for the fiscal year ending December 31st, 2017: current assets: 825000 Long-term assets: 375000 Stockholders equity 500000 net income 80000 What is Northeast's debt to assets ratio?
58.3% Debt to equity ratio is calculated by dividing total liabilities by total assets. Total assets are $1,200,000 ($825,000 + 375,000). Using the formula: Assets = Liabilities + Stockholders' Equity, it can be determined that total liabilities are $700,000 ($1,200,000 - 500,000); $700,000 ÷ $1,200.000 = 58.3%
How are sales tax rates usually stated?
As a percent of sales.
1. A bond traded at 97½ means that a. The bond pays 97½% interest. b. The bond trades at $975 per $1,000 bond. c. The market rate of interest is below the contract rate of interest for the bond. d. The bonds can be retired at $975 each. e. The bond's interest rate is 2½%.
B
12.When $100,000 of 6% annual interest, 10-year bonds are sold at 103.5, what will be the total interest expense on the bonds? A) $ 6,000 B) $56,500 C) $60,000 D) $63,500 E) None of the above
B) $56,500 Feedback: The total interest expense can be determined by subtracting the amount of the premium from the result of multiplying the annual interest by the number of periodic interest payments ($100,000 x 0.06 x 10). The total interest expense is $60,000 - $3,500 = $56,500. (Learning Objective P3)
debenture bonds
Bonds that are unsecured (i.e., not backed by any collateral such as equipment).
convertible bonds
Bonds that can be converted into common stock at the bondholder's option
secured bonds
Bonds that have specific assets of the issuer pledged as collateral.
3. A company issues 8%, 20-year bonds with a par value of $500,000. The current market rate for the bonds is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is a. $40,000. b. $0. c. $20,000. d. $800,000. e. $400,000.
C 500000 x 0.08 x 1/2=20000
8.The straight-line method of amortizing bond discounts and premiums results in which of the following? A) An equal portion of bond interest expense is charged to each period. B) The discount or premium account is reduced to zero by the end of the bond's life. C) The Interest Expense account is debited when a discount is amortized; alternatively, the Interest Expense account is credited when a premium is amortized. D) All of the above. E) None of the above.
D) All of the above. Feedback: When the straight-line method is used, choices A, B, and C are correct statements. (Learning Objectives P2 and P3)
5.A company issues $400,000 of 8% bonds, which mature in 10 years, at par on January 1, 2011. The bonds pay interest semiannually on each June 30 and December 31. What entry should be made on December 31, 2009? A) Debit Bond Interest Expense $32,000; Credit Bond Interest Payable $32,000. B) Debit Bond Interest Expense $32,000; Credit Cash $32,000. C) Debit Bond Interest Expense $16,000; Credit Bond Interest Payable $16,000. D) Debit Bond Interest Expense $16,000; Credit Cash $16,000. E) None of the above
D) Debit Bond Interest Expense $16,000; Credit Cash $16,000. Feedback: A semiannual interest payment must be made on December 31, 2009. The following entry will be recorded: debit Bond Interest Expense for $16,000 (or $400,000 x .08 x 6/12) and credit Cash for $16,000. (Learning Objective P1)
9.Which of the following statements are not correct regarding bonds sold at a discount? A) The carrying amount gets larger each year. B) The Discount on Bonds Payable account gets smaller each year. C) At maturity, the face value and carrying value will be equal. D) The balance of Bonds Payable account will get larger each year. E) At maturity, the balance of the Discount on Bonds Payable will be zero.
D) The balance of Bonds Payable account will get larger each year. Feedback: When bonds are sold at a discount, the carrying amount (which equals the par value less the unamortized discount) gets larger each year. The Discount on Bonds Payable account is reduced to zero over the life of the bonds; as such, the account balance gets smaller (rather than larger) each year and, at maturity, the face (or par) value and the carrying value will be equal. (Learning Objective P2)
13.Bonds with a par value of $100,000 and a carrying value of $103,600 are retired at a call price of $101,000. The journal entry to retire the bonds would include which of the following? A) A credit to the Cash account for $101,000 B) A debit to the Bonds Payable account for $100,000 C) A credit to the Gain on Retirement of Bonds account for $2,600 D) A debit to the Premium on Bonds Payable account for $3,600 E) All of the above
E) All of the above Feedback: The journal entry to retire the bonds would include a debit to the Bonds Payable account of $100,000; a debit to the Premium on Bonds Payable account of $3,600 (or $103,600 - $100,000); a credit to the Cash account of $101,000; and a credit to the Gain on Retirement of Bonds account of $2,600 (or $103,600 - $101,000). (Learning Objective P4)
6. Which of the following statements is correct regarding the issuance of bonds at par? A) The proceeds for bonds issued at par equals the par value of the bond. B) The stated interest rate equals the market interest rate for bonds issued at par. C) When bonds are issued at par, the Cash account is debited and the Bonds Payable account is credited for the bonds' par value. D) On each semiannual interest payment date, bond interest expense is calculated as bond par value multiplied by the bond contract rate multiplied by 1/2 year. E) All of the above.
E) All of the above. Feedback: All of the above statements are correct regarding bonds sold at par. (Learning Objective P1)
3. Which type of bond gives the issuing corporation the option of retiring the bond, at a predetermined price, prior to the bond's maturity date? A) Debenture B) Convertible bond C) Serial bond D) Secured bond E) Callable bond
E) Callable bond Feedback: A callable bond has an option exercisable by the issuer to retire the bonds at a stated dollar amount prior to maturity. (Learning Objective A2)
4. The debt-to-equity ratio is 6.0. If total equity is $10,000, what is the amount of total liabilities? A) $600,000 B) $6,000 C) $100,000 D) $60,000 E) None of the above
Feedback: The debt-to-equity ratio is computed by dividing total liabilities by total equity. Letting X represent total liabilities, X divided by total equity of $10,000 = 6.0 (or, X = $10,000 x 6 = $60,000). (Learning Objective A3)
Foremost Manufacturing wants to buy $50,000 of sheet metal from Ore Industries on credit. Before agreeing to the sale, Ore decides to evaluate Foremost's financial status. Of the following potential findings, which would lead Ore to refuse to sell the metal on credit?
Foremost's current assets are $450,000 and its current liabilities are $575,000.
Why might a company choose to issue bonds over stocks for its long-term capital needs?
Why might a company choose to issue bonds over stocks for its long-term capital needs?
How are bond prices quoted?
as a percentage of face value (usually a 1000)amount (i.e., the amount which must be repaid when the bonds mature). For example, a bond price of 96 indicates that a bond is selling at 96% of its face value (a discount), while a bond price of 103 indicates that the bond is selling at 103% of its face amount (a premium).
Last fiscal year, Todd Manufacturing reported current assets of $760,000; current liabilities of $185,000; long-term assets of $301,500; long-term liabilities of $325,000; and stockholders' equity of $551,500. Two days after the fiscal year ended, Todd paid off a current liability of $85,000 with cash. As a result,
the firm's debt to assets ratio decreased from 48% to 43.5%. At the end of the fiscal year, Todd's debt to assets ratio was 48% ($185,000 + $325,000) ÷ ($760,000 + $301,500). After the payment of the liability, the ratio was reduced to 43.5% (100000 + 325000) / (675000 + 301500)
Diana's Dresses just received an invoice from a supplier for fabric that was delivered 45 days ago. Diana's Dresses does not plan to sell any clothing made from this fabric until early next year. In this situation,
there is not enough information to determine whether the invoice is a current liability or a long-term liability.
Term Bonds
they are called this When all bonds of an issue mature at the same time,
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1, 2017. What amount should Sensible report as a current liability for Unearned Service Revenue at December 31st, 2017?
$4,500 To find the amount to report as a current liability for Unearned Service Revenue, first determine the monthly amount earned by dividing the total by 12 months, which computes to $18,000 / 12 = $1,500. Then, determine the number of months remaining on the policy. From April 1 - December 31, 9 months have passed, and thus, three months remain. The remaining balance is $1,500/month x 3 months = $4,500.
Mike Kohl, an employee of Spotswood Company, had gross earnings for the month of October of $8,000. FICA taxes were 7.65% of gross earnings, federal income taxes amounted to $1,270 for the month, state income taxes were 2% of gross earnings, and Mike authorized voluntary deductions of $20 per month to the United Fund. What is the net pay for Mike Kohl?
$5,938 Net pay is gross earnings minus taxes and other deductions. First determine total amount of deductions, FICA tax, plus federal income tax, plus state tax, plus voluntary deduction [($8,000 x .0765) + $1,270 + ($8,000 x .02) + $20 = $2,062]. This amount is subtracted from gross earnings ($8,000 - $2,062 = $5,938), resulting in the Mike's net pay of $5,938
5. A company issued eight-year, 5% bonds with a par value of $350,000. The company received proceeds of $373,745. Interest is payable semiannually. The amount of premium amortized for the first semiannual interest period, assuming straight-line bond amortization, is a. $2,698. b. $23,745. c. $8,750. d. $9,344. e. $1,484.
5. e; ($373,745 - $350,000)/16 periods = $1,484
If $400,000 bonds were issued on January 1 at face value and they pay $24,000 interest annually, what is the contractual rate of interest?
6% The formula for annual interest = bond face value x interest rate. In this case, solve for interest rate by dividing the annual interest by the total bond amount ($24,000 ÷ $400,000 = 0.06); therefore, the interest rate is 6%
What is meant by 2/10, n/30 credit terms?
If a customer pays the amount owed within 10 days, the sales invoice amount is reduced 2%. Otherwise, the net amount is due in 30 days.
You are examining the current ratio of two customers to determine whether extending credit to them makes sense. You review the financial information provided and calculate their current ratios. One company has a 2.3:1 ratio and the other has a 1.75:1 ratio. Which assessment is true for these two customers?
The 2.3:1 ratio is an indicator of good financial condition, the other company may not be as strong, but, you should look into it further to confirm their ability to pay future obligations.
batching out
The process of preparing a batch report from a point-of-sale terminal.
bond indenture
The terms of the bond issue are set forth in a legal document .In addition to the terms, the indenture summarizes the rights of the bondholders and their trustees, as well as the obligations of the issuing company.
What is the relationship between the accounts receivable ledger and its controlling account?
The total of the accounts in the accounts receivable subsidiary ledger equals the balance in the controlling account, Accounts Receivable.
How are transactions between a bondholder and other investors recorded in the journal?
Transactions between a bondholder and other investors are not journalized by the issuing corporation. A corporation only makes journal entries when it issues or buys back bonds, and when bondholders convert bonds into common stock.
3 advantages bonds have over common stock
a. Stockholder control is not affected. b. Tax savings result. c. Earnings per share on common stock may be higher.
Betty purchased an airline ticket from WorldWide AirLines on January 1, 2018 for $500. Her trip to Palm Beach is over spring break, March 10 to March 17, 2018. How should WorldWide AirLines record the receipt of cash on January 1, 2018?
debit Cash for $500 and credit Unearned Ticket Revenue for $500
Bent Corporation issued 500, 10-year, 6%, $4,000 bonds dated January 1, 2017, at 96. The journal entry to record the issuance should include a
debit to Cash for $1,920,000.
Order of liquidity and order of magnitude are two methods of
presenting current liabilities on the balance sheet.
How are bonds classified
term bonds registered bonds callable bonds Bearer(coupon) bonds serial bonds debentures convertible corporate
In authorizing the bond issues
the board of directors must stipulate the number of bonds to be authorized, total face value, and contractual interest rate.
Last fiscal year, Widgets Inc. reported current assets of $970,000; current liabilities of $275,000; long-term assets of $650,000; long-term liabilities of $805,000; and stockholders' equity of $540,000. Two days after the fiscal year ended, Widgets signed a one-year, 10% note payable in exchange for equipment costing $78,000. As a result,
the firm's debt to assets ratio increased from 66.7% to 68.2%.
Corporate Bonds
like capital stock, are traded on national securities exchanges. Thus, bondholders have the opportunity to convert their holdings into cash at any time by selling the bonds at the current market price.
bonds
like common stock, are sold in small denominations (usually a thousand dollars), and as a result, they attract many investors.
Carrying value < Retirement Price =
loss
Carlton Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $21,000. If the sales tax rate is 5%, what amount must be remitted to the state for February's sales taxes?
$1,000 $21,000 /105% X 5% = 1,000.
If bonds with a face value of $500,000 and a carrying value of $476,000 were redeemed at 97, how much gain or loss should be recognized?
$9,000 loss Redemption price = $500,000 x 0.97 = $485,000. Carrying value minus redemption price = $476,000 - $485,000 = negative $9,000. Loss of $9,000.
A condensed income statement for Ben's Bakery is shown below: Income from operations: 196000 Interest expense: 11000 income before income tax: 185000 income tax expense: 62000 net income 123000 what is the times interest earned ratio for Ben's Bakery?
17.8 times Times interest earned is calculated by dividing the sum of net income, interest expense, and income tax expense by interest expense: (123000 + 11000 + 62000) / 11000 = 17.8 times
batch report
A report of credit card sales produced by a point-of-sale terminal
cash sale
A sale in which the customer pays for the total amount of the sale at the time of the transaction
10.A total of $100,000 of 6%, 10-year bonds, with semiannual interest are sold at 98. What is the amount of periodic bond discount amortization using the straight-line method? A) $100 B) $10,000 C) $200 D) $9,900 E) None of the above
A) $100 Feedback: The amount of the discount of $2,000 (or $100,000 x 2% (or 100% - 98%)) divided by the number of interest periods of 20 (or 2 times per year x 10 years) equals periodic bond discount amortization of $100. (Learning Objective P2)
Admire County Bank lent Givens Brick Company $600,000 on January 1st, 2017. Givens Brick Company signed a $600,000, 8%, 9-month note. Assuming that interest has already been accrued through September 30th, what entry will Givens Brick Company make to pay off the note and interest at maturity on October 1, 2017?
Notes Payable 600000 Interest Payable 36000 Cash 636000
Which of the following illustrates the difference between a secured and an unsecured bond?
Secured bonds have specific assets pledged whereas unsecured bonds are issued against the general credit of the borrower.
Port Enterprises recently signed a mortgage note payable to finance the purchase of a new warehouse. The current rate on the note is 6%, but this rate may change if the Federal Reserve changes the federal funds rate at its next meeting. Port's mortgage would be classified as a(n) ________rate note.
adjustable
serial bonds
bonds that mature in installments at regular intervals
How should bonds payable be reported on the balance sheet?
face value with any premium or discount, netted to a carrying value
Newton Company does not ring up sales taxes separately on the cash register. Total receipts for January amounted to $31,500. If the sales tax rate is 5%, what amount must be remitted to the state for January's sales taxes?
$1,500 ($31,500 ÷ 1.05) × .05 = $1,500
Circle Industries has $35,000 in salaries payable; $400,000 in bonds payable three years from now; and $900,000 in a note payable due in ten years. If the discount on the bonds payable is $40,000, what are Circle's total long-term liabilities?
$1.260 million
7. When bonds are quoted at "95", which of the following is true? A) The bonds are being sold at 95% of their par value. B) The bonds are being sold at 95% of the maturity value. C) The bonds are being sold at a 5% premium. D) All of the above. E) None of the above.
A) The bonds are being sold at 95% of their par value. Feedback: When bonds are quoted at "95," the bonds are being sold at 95% of their par value. (Learning Objective P1)
What is the title of the general ledger account used to summarize the total amount due from all charge customers?
Accounts Receivable.
2. Which of the following is false? A) Both IFRS and U.S. GAAP allow companies to account for bonds and notes using fair value. B) Fair value of bonds is the same as the amortized value described in this chapter. C) Both IFRS and U.S. GAAP require companies to distinguish between operating leases and capital leases. D) Both IFRS and U.S. GAAP require companies to record costs of retirement benefits as employees work and earn them. E) All of the above.
B) Fair value of bonds is the same as the amortized value described in this chapter. Feedback: Fair value of bonds is different from the amortized value described in this chapter. (Learning Objective Global View)
1. Which of the following describes a disadvantage of bonds? A) The interest on bonds is tax deductible. B) Bonds can increase return on equity. C) Bonds require payment of periodic interest and maturity value. D) Bonds do not affect stockholder control. E) None of the above.
C) Bonds require payment of periodic interest and maturity value.Feedback: There are two major disadvantages of bonds: (1) bonds can decrease return on equity (when a company earns a lower return with the borrowed funds than it pays in interest), and (2) bonds require payment of both periodic interest and the par value at maturity. Advantages of bonds include (1) bonds do not affect owner control, (2) interest on bonds is tax deductible, and (3) bonds can increase return on equity (when the company earns a higher return with borrowed funds than it pays in interest on those funds). (Learning Objective A1)
Apex Corporation issued a $525,000, 8%, 10-year mortgage note to purchase a new warehouse. Apex's semi annual mortgage payments are $38,630. How should Apex record the issuance of this mortgage loan?
Cash = Debit of $525,000; Mortgage Payable = Credit of $525,000
15. Lack-Luster Corporation borrowed money by issuing a $100,000 installment note payable that required $10,000 annual payments plus interest of 12% on the unpaid balance prior to the payment. What was the interest expense at the end of the third year? A) $8,400 B) $7,200 C) $9,600 D) $18,400 E) None of the above
D) $18,400 Feedback: The unpaid balance at the end of the third year, prior to payment, is $80,000 (or $100,000 - ($10,000 X 2)). The interest expense would be 12% x $80,000 = $9,600. (Learning Objective P5)
11. When $500,000 of 2-year, 8% bonds that pay interest semiannually are sold when the market rate of interest is 12%, which of the following lines describes the calculation of the selling price of the bonds? (Refer to the present value tables in your textbook as needed.) A) (0.7921 x $500,000) + (3.4651 x $30,000) = bond selling price B) (0.7972 x $500,000) + (3.3121 x $30,000) = bond selling price C) (0.7972 x $500,000) + (3.4651 x $50,000) = bond selling price D) (0.8900 x $500,000) + (1.8334 x $50,000) = bond selling price E) (0.7921 x $500,000) + (3.4651 x $20,000) = bond selling price
E) (0.7921 x $500,000) + (3.4651 x $20,000) = bond selling price Feedback: Since interest is paid semiannually, i = 6% (or the market rate of 12% divided by 2) and n, the number of interest periods, equals 4 (or 2 times per year multiplied by the 2 year-life); i = 6% and n = 4 are used to determine the present value factors. The present value of $1 table is used to compute the present value the par value of the bond. The present value of an annuity of $1 table is used to compute the present value the series of semiannual interest payments. The selling price of the bonds equals (1) the present value of the bonds' par value (determined by multiplying the par value of $500,000 by the related present value of $1 factor of 0.7921) plus the present value of the semiannual interest payments (determined by multiplying the semiannual payments of $20,000 (or $500,000 multiplied by the contract rate of 8% multiplied by 1/2 year) by the present value of an annuity of $1 factor of 3.4651). (Learning Objective P2)
When a company issues bonds, what is one disadvantage it faces by using bonds for long-term financing?
Interest must be paid on a periodic basis regardless of earnings.
By combining the present value of the principal paid at maturity and the present value of all interest payments to be made over the term of the bond, you can determine the ________ of bonds.
market price
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on its sales. If the sales tax rate is 5% and the balance in the Sales Revenue account totaled $262,500, what is the amount of the sales taxes owed to the taxing authority?
$12,500 Sales tax liability = 262,500 x (0.05/1.05) = $12,500
Veronique Inque issued $2,000,000 in bonds with a stated rate of 10%, due in 10 years. What is the total amount of cash interest to be paid over the life of the loan when the market interest rate is 12%?
$2,000,000 Annual interest is found by multiplying the stated rate by the total face value of the bonds issued ($2,000,000 x 0.10 = $200,000). Multiply that by 10 years to get $2,000,000.
A bakery has total cash receipts for the month of $24,150. If the sales tax rate is 5%, what is the bakery's sales revenue for the month?
$23,000.00 $24,150 ÷ 1.05 = $23,000
Nelson Pottery has total cash receipts for the month of $26,250. If the sales tax rate is 5%, what is Nelson Pottery's sales revenue for the month?
$25,000.00 $26,250 ÷ 1.05 = $25,000
Maggie Sharrer Company borrowed $88,500 on September 1, 2017, from Sandwich State Bank by signing an $88,500, 12%, 1-year note. What is the accrued interest at December 31, 2017?
$3,540 Accrued interest can be found by using the formula for computing interest; face value of note multiplied by annual interest rate, multiplying this amount by months of interest owed, and divide that by a 12 month year ($88,500 x 12% x 4/12 = $3,540).
Beta Corporation issued a $300,000, 8%, 20-year note. Beta's annual payments are $30,556. How should Beta journalize the first installment payment?
Interest Expense = Debit of $24,000; Notes Payable = Debit of $6,556; Cash = Credit of $30,556
Jordan Corporation issued 100, 5-year, 8%, $2,000 bonds dated January 1, 2017, at 96. The journal entry to record the issuance will show a
debit to Cash for $192,000. If Jordan Corporation issues 100, $2,000 bonds, the total amount issued is (100 x $2,000 = $200,000), which is credited to Bonds Payable. Bond prices for both new issues and existing bonds are quoted as a percentage of the face value of the bond. Thus, bonds issued totaling $200,000 with a quoted price of 96 means the selling price of the bonds (and thus, cash collected) is 96% of face value ($200,000 x 0.96 = $192,000) or $192,000. The difference of $8,000 ($200,000 - $192,000) is debited to Discounts on Bonds Payable.
