accounting ch 8/9/10/11

a contingent liability is recorded ONLY if

1. The loss is probable AND 2. The amount is reasonably estimable

If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?

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

employee costs

Federal and state income taxes FICA taxes

employer costs

Federal and state unemployment taxes employer matching portion of Social Security and Medicare

Advantages of a corporation

Limited liability Easier to raise capital

times interest earned ratio

Net income + Interest expense + Tax expense Interest expense

notes payable

Note signed by a firm promising to repay the amount borrowed plus interest

long-term liability

Payable in more than one year from the balance sheet date

current portion of long-term debt

Portion of long-term debt due within one year or the operating cycle, reported under current liabilities

Initial public offering (IPO)

The first time a corporation issues stock to the general public

reasons companies buy back their own stock

To boost the underpriced stock. To distribute surplus cash without paying dividends. To boost earnings per share. To satisfy employee stock ownership plans

Debt to Equity Ratio

Total liabilities Stockholders' equity

Angel investors

Wealthy investors, like those featured on the television show Shark Tank.

stock dividends

additional shares of a company's own stock given to stockholders

A bond will be issued at a premium when the market rate of interest is ______ the stated rate

less than

market interest rate

represents the true interest rate used by investors to value a bond

Bonds Retired at Maturity

the carrying value will equal the face amount. The bond payable is debited and cash is credited

articles of incorporation

the document filed with a state government to establish the existence of a new corporation

liquidity

the ease with which an asset can be converted into cash

Treasury Stock

the purchase of a corporation's own stock, and we record it as a reduction in stockholders' equity

line of credit

- Informal agreement - Permits a company to borrow up to a prearranged limit

serial bonds

bonds that mature in installments

Debt financing

borrowing money

Working Capital

current assets - current liabilities

The return on assets is calculated by dividing ____ by _______.

net income; average total assets

three essential characteristics of liabilities

- probable future sacrifices of economic benefits - arising from present obligations to other entities - resulting from past transactions or events

Why Do Many Companies Lease Rather Than Buy?

1. Leasing reduces the upfront cash needed to use an asset. 2. Lease payments often are lower than installment payments. 3. Leasing offers flexibility and lower costs when disposing of an asset. 4. Leasing may offer protection against the risk of declining asset values

3 liquidity measures

1. working capital 2. current ratio 3. acid-test ratio

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should record a contingent liability and loss of

250,000 When no amount within the range appears more likely than others, we record the minimum amount.

Susan, a recent college graduate, makes a base salary of $70,000 per year. Susan has federal income tax withholding of $12,000, and state tax withholding of $4,000. Employers are required to withhold a 6.2% Social Security tax and a 1.45% Medicare tax. What is Susan's take-home pay?

48,645

Deferred Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?

Investors are willing to pay 12 times the current year's earnings per share of stock.

par value

Legal capital per share of stock that's assigned when the corporation is first established has no relationship to the market value of the common stock

Venture capital firms

Provide additional funding and business expertise.

Large stock dividends

Records a decrease in retained earnings and an increase in common stock; recorded at par value

stock split

Reduces par value per share and increases shares outstanding; no need to record the transaction.

Sales Tax Payable

Sales tax collected from customers by the seller, representing current liabilities payable to the government

outstanding stock

Share issued and held by investors

issued stock

Shares actually sold (= Outstanding + Treasury)

authorized stock

Shares available to sell (= Issued + Unissued)

treasury stock

Shares issued and repurchased by the company

On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash?

The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.

Disadvantages of a corporation

additional taxes and more paperwork

stock splits

an action by a company that gives stockholders two or more shares of stock for each one they own

contingent gain

an existing uncertain situation that might result in a gain

Contingent Liability

an existing uncertain situation that might result in a loss depending on the outcome of a future even

Which of the following is not a primary source of corporate debt financing?

common stock

The two types of adjustments to net income for the indirect method are adjustments for

components of net income that do not affect cash. changes in operating assets and liabilities during the period that affected cash and were not in net income.

Features of Preferred Stock

convertible, redeemable, cumulative

Current Ratio

current assets / current liabilities

On the date of declaration of the dividend, we _____.

debit DividendsThe declaration of a cash dividend creates a binding legal obligation for the company declaring the dividend. On that date, we increase Dividends, a temporary account that is closed into Retained Earnings at the end of each period, and increase the liability account, Dividends Payable.

installment payment

debt owed to someone that is paid monthly 1. Interest on borrowed amount 2. Reduction of outstanding loan balance

current liability

debt that is payable within one year of the balance sheet date

dividend dates

declaration date, record date, payment date

cash dividends

distributions by a corporation to its stockholders

interest =

face value x annual interest rate x fraction of the year

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate

Capital structure

mixture of liabilities and stockholders' equity a business uses

in a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:

more than in the fourth year

When accounts receivable decrease

net sales are less than cash receipts from customers

equity financing

obtaining investment from stockholders

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings

Stockholder Rights

right to vote, right to receive dividends, right to share in the distribution of assets

Profits generated by the company are a(n):

source of internal financing.

A corporate charter

specifies the shares of stock to be issued names the board of directors describes the business activities

Equity Investment

the purchase of stock in another corporation, and we record it as an increase in assets.

stated interest rate

the rate quoted in the bond contract used to calculate the cash payments for interest

When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.

true

the source of the most commonly reported contingent liability

warranties

retained earnings

•Earnings retained in the corporation and not paid out as dividends. • = net income - all dividends since the company began operations. • a normal credit balance

cost of financing

Debt: interest expense (tax-deductible) Equity: dividends (not tax-deductible)

Duties of Board of Directors

Establish corporate policies. Appoint officers to manage the corporation.

fringe benefits

Any financial extras beyond the regular pay check, such as health insurance, life insurance, paid vacation and/or retirement

commercial paper

Borrowing from another company rather than a bank Sold with maturities ranging from 30 to 270 days Interest rate is usually lower than on a bank loa

Acid Test Ratio

Cash + current investments + accounts receivable / current liabilities measures the availability of liquid current assets to pay current liabilities

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Debit interest expense $5,705 Credit discount on bonds payable $705 Credit cash $5,000

Bonds retired before maturity

Exercising the call feature included in the bond contract or buying the bonds in the open market Retirement before maturity is called early extinguishment of debt and may result in a gain or loss equal to the difference between the book value of the bond and the price paid to retire the bonds