ACC Chapter 10 Material

For an investor, bonds are attractive investments because ______.

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

Assume ABC Company issues a bond with a stated interest rate above the market rate. Using the simplified effective-interest amortization, interest expense is ______ the cash interest payment.

less than

Accounts (or trade) Payable is debited when ______ and credited when ______.

paid; purchases are made on credit

The ______ method of amortization reduces the premium or discount by an equal amount each period.

strait-line

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 (Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).)

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 (= $3,000 - 1,000 + 4,000 = $6,000.)

Under US GAAP, a contingent liability should:

-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 -be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated

Using the simplified effective-interest amortization, the debit to Interest Expense equals ______.

Bonds Payable, Net x Market Interest Rate x Time

__________ 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

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______.

Moody's Standard & Poor's

Which type of note requires the borrower to pay interest and principal to the lender over the note's life to maturity with no balloon payment at maturity?

Installment notes

Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?

Probable contingent liability that can be estimated

The debt-to-assets ratio best answers which financial question?

What is the percentage of assets financed by debt?

_______ _________ is a current liability that represents the amount owed for goods or services purchased on credit and is generally interest free. (Enter one word per blank.)

account(s) payable

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

credit rating agencies

When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a discount.

increases

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

asset

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

assets

Which of the following are long-term liabilities? (Check all that apply.)

20-year Mortgage Payable Note Payable due in 3 years

ABC purchased $500 of merchandise on account. ABC's journal entry to record this transaction includes a ______. (Check all that apply.)

debit to Inventory of $500 credit to Accounts Payable of $500

When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a premium.

decreases

How are installment notes different from interest-only notes? Installment notes ______.

do not include a single "balloon" payment since a portion of the principal is paid each period

Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?

effective-interest

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% (Beginning liabilities equal $60,000 or $120,000 x 0.5. Ending liabilities equal $96,000 or $60,000+$36,000. Debt-to-assets equals 0.6 or $96,000/($120,000+$40,000).)

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

It will decrease.

The straight-line method of _________ reduces the premium or discount by an equal amount each period. (Enter one word per blank.)

amortization

Assets are financed with ___ and stockholders' equity.

liabilities / debt / credit

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

not generating enough income to cover its interest expense

Liabilities are classified as current if they ______.

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