AC 210 Ch. 10 Learnsmart

If an entry is recorded that debits Interest Payable and Interest Expense and credits Cash, what must be the case?

Interest incurred from the current and prior period is being paid.

The entry to record the initial borrowing of cash by issuing a promissory note causes a(n) ______. (Select all that apply.)

increase in liabilities increase in assets

The stated rate is the rate used to determine the ______.

interest payment

The stated rate ______.

remains the same throughout the life of the bonds

At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year?

0.6 or 60%

Under US GAAP, a contingent liability should ______. (Enter one word per blank.)

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

The carrying value of bonds payable equals ______.

Bonds Payable minus Discount on Bonds Payable.

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles. The flights will not occur until the next accounting period. How should ABC Airlines record the $300 collected in advance?

A debit to Cash of $300 and a credit to Deferred Revenue of $300

Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)

Charitable contributions Federal unemployment tax (FUTA) State unemployment tax (SUTA)

Assets are financed with ___ and stockholders' equity.

liabilities

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

notes payable

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

remains the same

On November 1, Deli Llama, Inc. issued 2 notes payable at 12% per year for $10,000 each. One is a 3-month note and the other is a 2-year note. The amount of interest owed at December 31 will be ______.

the same amount for both notes

____ Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated. (Enter one word per blank.)

contingent

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

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

The issue price of 1,000, 5%, $1,000 bonds issued at 100.00 equals ______.

$1,000,000 (Reason: The bonds are issued at 100.00 which means the issuance price is 100% of the face value or $1,000,000 (=1,000 x $1,000 x 100%).

On the maturity date, the bondholders of $100,000 of bonds that were issued at a $90,000 will receive ______.

$100,000 in cash plus the interest owed

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record the payroll deductions?

Current liabilities increase $113.90.

Which accounts are credited when the journal entry to pay employees is recorded? (Select all that apply.)

FICA Payable Withheld Income Tax Payable Cash

True or false: The bond issue price is determined by the company issuing the bonds.

False

What kind of account is Deferred Revenue?

Liability account

Which of the following are current liabilities? (Check all that apply.)

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

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______. (Check all that apply.)

Standard & Poor's Moody's

A $1,000 bond was issued at 107.26. The 107.26 is ______.

a percent and means the bond sold for $1,072.60

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

amortized; decreases

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

assets

The issue price of a bond is ______. (Select all that apply.)

based on a present value calculation based on what the market is willing to pay

Accrued Liabilities are ______.

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

Accounts (or trade) Payable is a ______ and increases when ______ and decreases when ______.

current liability; purchases are made on credit; bills are paid

A company recorded the issuance of its bonds with a debit to Cash for $98,260 and a credit to Bonds Payable for $100,000, and a ______ on Bonds Payable for the difference.

debit to Discount

The entry to record the issuance of 100, $1,000 bonds for 98.000 includes a ______. (Select all that apply.)

debit to Discount on Bonds Payable for $2,000 credit to Bonds Payable for $100,000 debit to Cash for $98,000

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

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

Accruing a liability always involves recording both a(n)______ and a liability.

expense

The ____ ____ is the payment made when a bond matures.

face value

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

face value

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

face value

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

not generating enough income to cover its interest expense

The ____ rate on a bond is the rate used to determine the interest payments. (Enter one word per blank.)

stated

Net pay is calculated by ______.

subtracting payroll deductions from gross pay

A bond's maturity date is ______.

the date on which the face value of the bond will be repaid in full

For an investor, bonds are attractive investments because ______.

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

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

true

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

true

The entry to record the cash sale of a $100 pair of jeans in a state that requires charging a 5% sales tax will include a ______. (Select all that apply.)

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

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income tax $58; and State income tax $10. What is John's net pay?

$486.10

Deli Llama operates in a state with a sales tax. What will be the effect if it records a cash sale to a customer? (Select all that apply.)

Stockholders' equity will increase. Assets will increase. Liabilities will increase.

The discount on a bonds payable becomes ______.

additional interest expense over the life of the bonds

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

amortized

The journal entry to record the payment of salaries and wages for work performed in the current accounting period causes ______. (Select all that apply.)

assets to decrease stockholders' equity to decrease liabilities to increase

The entry to record the issuance of 100 bonds at their $1,000 face value causes ______. (Select all that apply.)

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

A $1,000 bond's carrying value will be greater if the bond is sold ______. (Select all that apply.)

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

If ABC Company issues 100 of its $1,000 bonds at a price of 110.00, i.e., $1,100 each, the journal entry to record the transaction includes a ______. (Select all that apply.)

credit to Premium on Bonds Payable of $10,000 credit to Bonds Payable of $100,000 debit to Cash of $110,000

A company's debt-to-assets ratio is 0.7 or 70%. If the company issues common stock for cash, then the debt-to-assets ratio will ______.

decrease

Liabilities are classified as current if they ______.

will be paid within the company's operating cycle or within 1 year, whichever is longer

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?

$0

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

$6,000

Payroll deductions ______. (Check all that apply.)

Are amounts subtracted from employees' gross earnings to determine their net pay Decrease the amount of cash an employee receives

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

Interest Expense and credit Interest Payable

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

It will decrease.

On November 1, ABC Corp. borrowed $100,000 cash on a 1-year note payable with a 6% annual rate that requires ABC to pay all the interest as well as the principal on October 31 of the following year. Assuming the November 1 transaction was properly recorded, how would the December 31, year-end adjusting entry affect the accounting equation?

Liabilities increase and stockholders' equity decreases.

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

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

If ABC Company issues 100 of its $1,000 bonds at a price of 105.00, i.e., 105%, the journal entry to record the transaction includes ______. (Select all that apply.)

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

If ABC Company issues 100 of its $1,000 bonds at a price of 110.00, i.e., $1,100 each, the journal entry to record the transaction includes ______.

a credit to Premium on Bonds Payable of $10,000

The debt-to-asset ratio indicates _____. (Check all that apply.)

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

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

a premium

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

credit rating agencies

The journal entry to record the payment of salaries and wages to employees includes a ______. (Select all that apply.)

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

The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.)

credit to Cash debit to Accounts Payable

On November 1, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 of the following year. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, ABC's year end, would include a ______. (Check all that apply.)

debit to Interest Expense of $1,000 credit to Interest Payable of $1,000

Amortizing a bond premium will ______ the premium balance and ______ the carrying value of the bond so that when the bond matures the carrying value will ______ the face value.

decrease; decrease; equal

When recording the adjusting entry to accrue the interest owed on a bond that was issued at face value, the debit to Interest Expense will be ______.

equal to the credit to Interest Payable

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

increase in assets and an increase in liabilities

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

investment