ACIS 2115 Ch 10

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

101.000 Bond prices are quoted as a percent of the face value. Thus, these bonds sold at 101% or 101.000 of their face value.

_______ _________on a classified balance sheet report the obligations that will be paid or met within the company's operating cycle or within 1 year, whichever is longer.

current liabilities

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

effective-interest

The stated rate ______.

remains the same throughout the life of the bonds

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. What is the net pay to employees?

$70,000 Net pay = $70,000 = $100,000 - 6,700 - 1,450 - 18,000 - 3,850

True or false: All payroll deductions are required by law.

false Some payroll deductions such as retirement savings are voluntary.

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

- standard & poor's - moody's

face value

stated rate equals the market rate of interest

The debt-to-asset ratio indicates _____.

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

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

Interest Expense and credit Interest Payable

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 $1,028.80=$1,000 x 102.880%= $1,000 x 1.02880

Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______.

$100,000 A liability is first recorded at $100,000, representing the amount of cash a creditor would accept to immediately settle the liability, which excludes interest charges. Interest arises only when time passes.

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 ______.

credit to cash debit to accounts payable

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

Cash; Bonds Payable

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

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

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

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

expense

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

face value

Stated/coupon rate on bond

is the rate used to determine the interest payments.

A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is ______.

issued

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

liabilities to increase stockholders' equity to decrease assets to decrease

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

not generating enough income to cover its interest expense

If an adjusting entry for interest owed is recorded then the company must have issued____ _____

notes 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

The following 12%, $1,000 notes have varying periods to maturity but all were issued on December 1. Which of the following are the correct calculations of interest for these notes on December 31 of this same year?

A 3-month note's interest equals $1,000 x 12% x 1/12 A 2-year note's interest equals $1,000 x 12% x 1/12 A 4-month note's interest equals $1,000 x 12% x 1/12

What are the key events with notes payable?

Accruing interest incurred but not paid Recording interest paid Establishing the note Recording principal paid

For an investor, bonds are attractive investments because ______.

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

The normal balance for Discount on Bonds Payable is a ______.

debit contra-liability account.

Bond premium is the amount by which a bond's issue price ______ its face value.

exceeds

If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?

It decreases.

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

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

Which accounts are credited when the journal entry to pay employees is recorded?

FICA Payable Withheld Income Tax Payable Cash

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.

Which of the following statements is true?

Sea the World Cruises' bonds sold at a discount because the stated rate is less than the market rate of interest.

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 ______.

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

A company recorded the issuance of its bonds with a debit to Cash for $107,260 and a credit to Bonds Payable for $100,000, and a ______ on Bonds Payable for $7,260.

credit to Premium

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 the payroll deductions are paid in the following month, ABC would record John's pay with a journal entry that includes a ______. (Check all that apply.)

credit to State and Federal Income Tax Payable of $68 credit to Cash of $486.10 credit to FICA (Social Security and Medicare) Payable of $45.90 debit to Salaries and Wages Expense of $600

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

Which of the following are long-term liabilities?

20-year Mortgage Payable Note Payable due in 3 years

premium

stated rate is greater than the market rate of interest

discount

stated rate is less than the market rate of interest

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

The entry to record the initial borrowing of cash by issuing a promissory note includes a debit to ______ and a credit to ______.

The entry to record the initial borrowing of cash by issuing a promissory note includes a debit to ______ and a credit to ______.

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.

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

What is the percentage of assets financed by debt?

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

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 ______.

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

On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, ABC's adjusting entry at December 31 would include a ______.

debit to Interest Expense of $1,000 Interest Expense=$50,000 x 0.06 x (4/12)=$1,000. The interest rate, 6%, is an annual rate, not a 9-month rate. In the current year, 4/12 of 6% will be expensed and the remaining 5/12 (for a total of 9/12) will be expensed in the following year.

On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. The entry ABC would record at maturity when the note is repaid, assuming adjusting entries were made correctly at December 31 but have not been made since then, would include a(n) ______. (Check all that apply.)

debit to Notes Payable of $50,000 debit to Interest Payable of $1,000 debit to Interest Expense of $1,250 credit to Cash of $52,250

Employees' gross earnings differ from their net pay because of ______.

payroll deduction

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

will decrease

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. The journal entry to record wages paid includes a ______.

$100,000 debit to Salaries and Wages Expense

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 Net pay = $600 - $37.20 - $8.70 - $58 - $10 = $486.10.

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 Net pay = $600 - $37.20 - $8.70 - $58 - $10 = $486.10.

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. The deductions of $113.90 (=$37.20 + 8.70 + 58 + 10) are current liabilities to the company and represent the amount the company owes and must pay on behalf of the employee.

The discount on a bonds payable becomes ______.

additional interest expense over the life of the bonds

The entry to record the issuance of a note for cash was recorded with a debit to Cash and a credit to Notes Receivable instead of Notes Payable. The effect of recording this entry causes ______.

assets to be understated liabilities to be understated

The entry to record the issuance of 100 bonds at their $1,000 face value causes__________

assets to increase by $100,000 liabilities to increase by $100,000 The entry includes a debit to Cash (+A) and credit to Bonds Payable (+L) for $100,000 (100 x $1,000 x 100%).

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 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

are financial instruments, traded on established exchanges, that specify future payments a company promises to make in exchange for receiving a sum of money now.

bonds

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. The journal entry on November 1, would include which of the following? (Select all that apply.)

debit to Cash $100,000 credit to Note Payable $100,000

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 ______

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

If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?

decreases

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

decreases

True or false: Both installment notes and interest-only notes require periodic payments of interest and repayment of a portion of the principal.

false Installment notes require periodic payments that include interest and repayment of a portion of the principal. Interest-only notes require periodic interest payments and a single "balloon" payment of the principal at maturity.

If a company forgets to record the journal entry to accrue interest expense, then its net income is too ______ and its liabilities are too ______.

high; low

If an adjusting entry is required for interest owed, then the ______ will report ______.

income statement; Interest Expense balance sheet; Notes Payable balance sheet; Interest Payable

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

increase in liabilities increase in assets

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

increases

Accruing a liability always involves ______ expenses and ______ liabilities.

increasing; increasing

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

interest payment

A bond's issue price is determined by the ______.

investors

The Discount on Bonds Payable account ______.

is a contra account to Bonds Payable

If a bond's stated rate is 6% and the market rate is 4%, this bond will sell at ______.

premium

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 Accounts Payable balance = $3,000 - 1,000 + 4,000 = $6,000.

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 Both notes cost 12% per year, or 1% per month. Thus, the interest will be the same for both notes since both notes have been outstanding for 2/12 of a year.

A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.

excludes

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 his gross pay?

Salaries and Wages Expense increases $600. Cash decreases by the amount of net pay, not gross pay, because payroll deductions are not yet paid.