ACCT 302 Exam 1
company plans to pay off a long-term debt in the future by placing purchased securities in an irrevocable trust
in-substance defeasance
pay no interest unless the issuing company is profitable
income bonds
blasio company collects a deposit form a customer when a custom piece of machinery is ordered. Blasio uses a periodic inventory system. The entry to record collection of the deposit increases assets and increases liabilities increases assets and increases equity has no effect on assets, liabilities, or equity increases liabilities and decreases equity
increases assets and increases liabilities
Foxtrot CO. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply $10,000 by the table value for 10 periods and 5% from the present value of an annuity table multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table
multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table
interest is paid from specified revenue sources, are most frequently issued by airports, school districts, counties, toll-road authorities, and governmental bodies
revenue bonds
on December 31st,2024, Nolte Co. is in financial difficulty and cannot pay a note due that day. it is a $3,000,000 note payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000 an original cost of $2,400,000 and accumulated depreciation of $1,150,000. Nolte should recognize a gain or loss on the debt restructure of $1,550,000 gain $200,000 gain $1,750,000 gain $1,550,000 loss
$1,550,000 gain (3,000,000-1,450,000)
On January 1, 2024, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. The issue price of the bonds is $5,301,874 $5,310,410 $6,000,000 $5,999,984
$5,301,874
acid-test ratio
(cash+short-term investments+accts. Rec (net))/current liabilities
times interest earned ratio
(net income+interest exp+income tax exp) / interest exp
in a troubled debt restructuring in which the debt is continued with modified terms and carrying amount of the debt is less than the total future cash flows, the creditor should compute a new effective-interest rate not recognize a loss calculate its loss using the historical effective rate of the loan calculate its loss using the current effective rate of the loan
calculate its loss using the historical effective rate of the loan
secured by stocks and bonds of other corporations
collateral trust bonds
current ratio equation
current assets/current liabilities
unsecured bond
debenture bond
doesn't provide any interest payments until its maturity
deep discount bonds
a troubled debt restructuring will generally result in a loss by the debtor and a gain by the creditor loss by both debtor and creditor gain by both debtor and creditor gain by the debtor and loss by the creditor
gain by the debtor and loss by the creditor
debt to asset ratio
total liabilities/total assets
PWT Inc. sells gift cards valued at $500,000 during December. Based on experience, PWT estimates that 30% of the gift cards will not be redeemed. Which of the following statements is true regarding accounting for this breakage estimated breakage revenue is recognized in promotion to gift card redemptions estimated breakage revenue is recorded at the time of the sale the liability for the gift cards is not adjusted for breakage unearned gift card revenue related to the breakage is reported as a long-term liability
estimated breakage revenue is recognized in promotion to gift card redemptions
goodwill
excess of the cost of purchase/ fair value of the identifiable net assets (assets-liabilities) purchased
On January 1, 2020, Ryan Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2030 but were callable at 101 any time after December 31, 2023. Interest was payable semiannually on July 1 and January 1. On July 1, 2025, Ryan called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, which of the following is Ryan's gain or loss in 2025 on this early extinguishment of debt?
ANS: $16,000 gain The net carrying value of the bonds is $2,080,000, but the face value is only $2,000,000 (2,000$1,000). Therefore, the total amount to be amortized as a premium is $80,000 ($2,080,000 - $2,000,000). To find the amount per period to be amortized, divide $80,000 by the number of periods (10 years 2 periods/year = 20 periods), or $80,000/20 =$4,000. This particular bond has accrued over the period of 5.5 years, or 11 periods, so $4,000 X 11 = $44,000. Then subtract this number from the amount received at the time of issuance: $2,080,000 - $44,000 = $2,036,000. This is the carrying value at the time of recall. Next find the repurchase price: $2,000,000 X 1.01 = $2,020,000 and subtract this from the net carrying value: $2,036,000 - $2,020,000 = $16,000. Because they paid less than the carrying value, they report a gain of $16,000.
Reardon Pharmaceuticals issued a $2.7 million note payable to Nagel Chemicals in exchange for chemical products. Similar notes have an interest rate of 8 percent. Nagel Chemicals plans to pay Reardon in chemicals equally over the five years, thus equaling five annual payments of $540,000. What should Nagel record as their Discount on Notes Payable when the note is issued?Assume that the PVF-OA5, 6% = 4.21236, PVF-OA5, 8% = 3.99271, PVF5, 6% = 0.74726, and PVF5, 8% = 0.68058.
ANS: $543,936.60 The present value of five annual payments of $540,000 at 8% interest is $540,000 * 3.99271 (PVF-OA5, 8%) = $2,156,063.40. Therefore, the discount is $2,700,000 - $2,156,063.40 = $543,936.60
Delta darlings salon sells gift cards for its services. based on experience, the company estimates that 25% of the gift cards will not be redeemed. The entry to record the redemption of a gift card will include a credit to service revenue and a debit to unearned gift card revenue a debit to cash and a credit to unearned gift card revenue a debit to unearned gift card revenue and credits to service revenue and gift card breakage revenue a debit to cash and a credit to service revenue
a credit to service revenue and a debit to unearned gift card revenue
appalachian ski mountain sold 2,000 season passes at $750 before the start of the 2025 ski season. Appalachian recognizes the revenue equally over the 5-month season which runs from November through March. The adjusting entry needed at December 31, 2025 for its annual financial statements will include a debit to unearned season pass revenue for $600,000 a credit to season pass revenue for $300,000 a credit to unearned season pass revenue for $1,500,000 a debit to unearned season pass revenue for $900,000
a debit to unearned season pass revenue for $600,000
in a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a new effective interest rate must be computed no interest expense or revenue should be recognized in the future a gain should be recognized by the debtor a loss should be recognized by the debtor
a new effective interest rate must be computed
in a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructuring, but no expense should be recognized over the remaining life of the debt when the carrying amount of the pre-restructure debt is less than the total future cash flows carrying amount of the pre-restructure debt is greater than the total future cash flows present value of the pre-restructure debt is less than the present value of the future cash flows present value of the pre-restructure debt is greater than the present value of the future cash flows
carrying amount of the pre-restructure debt is greater than the total future cash flows
Excom manufactures high-end whole-home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs of $10.4 million at the beginning of the current year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? $3,733,333 $6,000,000 $16,400,000 $18,000,000
$16,400,000 (10.4 mil + 18 mil [300*60,000]-12mil)
Eddy Co. is indebted to Cole under a $1,000,000, 12%, three-year note dated December 31, 2016. Because of Eddy's financial difficulties developing in 2018, Eddy owed accrued interest of $120,000 on the note at December 31, 2018. Under a troubled debt restructuring, on December 31, 2018, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $900,000. Eddy's acquisition cost of the land is $725,000. Ignoring income taxes, on its 2018 income statement Eddy should report as a result of the troubled debt restructuring Gain on Disposal Restructuring Gain a. $395,000 $0 b. $275,000 $0 c. $175,000 $100,000 d. $175,000 $220,000
$175,000 and $220,000 (1,120,000-900,000)
blasio company collects a deposit from a customer when a custom piece of machinery is ordered. blasio uses a periodic inventory system. the entry recorded when the machinery is delivered to the customer decreases assets and decreases equity increases assets and increases equity has no effect on assets, liabilities, or equity decreases liabilities and increases equity
decreases liabilities and increases equity
a company buys extraction equipment for $5,000,000 on January 1, 2019. The life of the equipment is 10 years, the expected cost to dismantle it at the end of 10 years is $800,000 (present value at 8% is $370,552) and straight line depreciation is used. 8% is an appropriate interest rate for this company. What expenses should be recorded for 2019 as a result of these events? depreciation expense of $537,052 and interest expense of $29,642 depreciation expense of $40,000 and interest expense of $29,642 depreciation expense of $500,000 and interest expense of $37,522 depreciation expense of $540,000
depreciation expense of $537,052 and interest expense of $29,642
ortiz co., a manufacturer of houseware products, is preparing annual financial statements for the year. Because of a recently proven health hazard in one of its products, the government has clearly indicated its intention of having Ortiz recall all of these products sold in the last six months of this year. Management estimates that this recall would cost about $800,000. What accounting recognition, if any, should be accorded this situation no recognition footnote disclosure only expense of $800,000 and liability of $800,000 and footnote disclosure appropriation of retained earnings of $800,000
expense of $800,000 and liability of $800,000 and footnote disclosure
in a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value that is less than the carrying amount of the debt, the debtor would recognize no gain or loss on the restructuring a gain on the restructuring a loss on the restructuring none of these answers are correct
gain on restructuring
a corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? the balance of mortgage payable at a given balance sheet date will be reported as a long-term liability the balance of the mortgage payable will remain a constant amount over the 10-year period the amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period the amount of interest expense will remain constant over the 10-year period
the amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period
the purpose of the times interest earned ratio is to indicate the proportion of debt to equity of an organization the company's ability to meet all debt payments as they come due the existence of any off-balance-sheet financing the company's ability to meet interest payments as they come due
the company's ability to meet interest payments as they come due
the total interest recorded on a zero-interest bearing note is equal to the difference between the maturity value of the note and the cash proceeds received the maturity value of the note multiplied by the effective interest rate the cash proceeds multiplied by the imputed interest rate there is no interest recorded for a non-interest-bearing note
the difference between the maturity value of the note and the cash proceeds received