ACC 201 Chapter 10 Learn Smart
A bond that can be exchanged for shares of common stock is a
Convertible Bond
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
Accrued liabilities are
Current liabilities resulting from adjusting entries that record amounts incurred but not yet paid
True or False: All payroll deductions are required by law.
False: Some payroll deductions such as retirement savings are voluntary
True or False: The bond issue price is determined by the company issuing the bonds.
False: The investors in the market determine the price they are willing to pay and is based on a present value calculation using the current market rate of interest.
What does the IRS call a corporate income tax return?
Form 1120
True or False: Companies issue bonds at a discount when the bond's stated interest rate is lower than the market interest rate.
True
Market rates of interest
fluctuates due to changes in economic events
The stated rate is the rate used to determine the
interest payment
The entry to record the issuance of 100 bonds at their $1,000 face value causes
liabilities to increase by $100,000 assets to increase by $100,000
Whether a bond is issued at par, premium, or discount, when the bond matures the amount paid equals the
face value
A bond's maturity date is the date on which the
face value of the bonds are paid
Acme Enterprises began the 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.
As of December 31, 2015, $110 of interest had been accrued on a 12%, 1-year, $1,000 note payable. On January 31, 2016, the entry to record the payment of the note's principal and interest requires a
- $110 debit to interest payable - $10 debit to interest expense - $1,000 debit to Notes Payable - $1,120 credit to cash
Match the interest rates with the related bond prices
- 6% stated interest rate and 4% market interest rate - premium - investors will pay more than face value - 6% stated interest rate and 6% market interest rate - investors will pay face value - 6% stated interest rate and 8% market interest rate - discount - investors will pay less than face value. premium - stated rate is greater than the market rate of interest discount - stated rate is less than the market rate of interest par - stated rate is equal to the market rate
Under US GAAP, a contingent liability should
- Be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated - Be reported on the balance sheet if the loss will probably occur and can be reasonably estimated - Not be reported if the loss is remote and unable to be estimated
XYZ borrowed $50,000 on December 31,2018. Half of the loan will be repaid in 2019 and the remainder will be paid the following year, which is longer than XYZ's operating cycle. On its balance sheet at the end of this year, XYZ will show:
- Current portion of long term debt of $25,000 - Long term debt of $25,000
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
- Debit Cash $105 - Credit Sales Revenue $100 - Credit Sales Tax Payable $5
The entry to record the payment of 6-months of interest on a note in which 2 months of interest was recorded as an adjusting in the prior period includes
- Debit interest expense for 4 months of interest - Debit interest payable for 2 months of interest - Credit cash for 6 month's of interest
On November 1, 2018, 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, 2019. The journal entry on November 1, 2018 would include which of the following?
- Debit to Cash $100,000 - Credit to Note Payable $100,000
If ABC Company issues 100 of it's $1,000 bonds at a price of 105, i.e., 105%, the journal entry to record the transaction includes
- Debit to Cash of $105,000 - Credit to Premium on Bonds Payable of $5,000 - Credit to Bonds Payable of $100,000
John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income Tax $58; and State Income Tax $10. Assuming the payroll deductions are paid in the following month, ABC would record John's pay with a journal entry that includes a
- Debit to Salaries and Wages Expense of $600 - Credit to State and Federal Income Tax Payable $68 - Credit to FICA (includes social security and medicare) Payable of $45.90 - Credit to cash $486.10
ABC company issues a bond with a face value of $100,000 at par on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes:
- Debit to interest expense of $6,000 - Credit to cash of $6,000
Which of the following are not required payroll deductions from an employees gross earnings?
- Federal unemployments tax (FUTA)(Paid by employer) - State unemployment tax(SUTA)(Paid by employer) - Charitable contributions(Optional)
Bond carrying value equals bonds payable
- Plus premium on bonds payable - Minus Discount on bonds payable
Which of the following are current liabilities? Select all that apply.
- Salaries and Wages Payable - Note Payable due in 3 months - Accounts Payable
For an investor, bonds are attractive investments because
- They can be traded on and established bond exchanges - Interest is higher thank bank savings account
A bond with a face value of $1,000 has a current price quote of 102.880. What is the bond's current price in dollars?
1,028.80 1000 x 102.880% 1000 x 1.02880
A bond discount is
A result of the interest payments being less than the cost of borrowing
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 law requires _____ to pay fica taxes.
Both the employee and the employer
What is the normal balance on the discount on bond payable?
Debit It is a contra liability account!
The entry to record the early retirement of bonds when the cash paid is more than the bonds' carrying value will include a
Debit to a Loss on Early Retirement
Under US GAAP, a contingent liability are recorded if the estimated loss is probable. Under IFRS, contingent liabilities are recorded if the estimated loss is "more likely then not." Which framework will report more contingent liabilities on the balance sheet?
IFRS
Accruing a liability always involves _____ expenses and _____ liabilities
Increasing;Increasing
The journal entry to record employer payroll taxes affects
Liabilities and stockholders' equity
On November 1, 2018, 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, 2019. Assuming the November 1 transaction was properly recorded, how would the December 31, 2018, year-end adjusting entry affect the accounting equation?
Liabilities increase and Stockholders' Equity decreases
A liability that represents the amount the company owes to others as a result of issuing a promissory note
Note payable
On November 30, Burrows, Inc. issued 2 notes payable at 6% per year for $10,000 each. One is a 3-month, 6%, note and the other is a 6-month, 6% note. The amount of interest owed at December 31 will be
The same amount for both notes
Net pay is calculated by
subtracting payroll deductions from gross pay
