Chapter 10

Your roommate says, "Sales taxes are reported as an expense in the income statement." Do you agree?

disagree The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government.

Tanner, Inc. issued a 10%, 5-year, $100,000 bond when the market rate of interest was 12%. At what value will the bond sell?

discount

Which of the following is not a typical current liability? a. interest payable b. current maturities of ong-term debt c. mortgages payable d. salaries payable

c. mortgages payable

Amanda's Cafe has cash proceeds from sales of $8,550. This amount includes $550 of sales taxes. Give the entry to record the proceeds.

cash 8550 sales revenue 8000 sales taxes payable 550

Graves Company borrows $90,900 on July 1 from the bank by signing a $90,900, 7%, 1-year note payable. Prepare the journal entries to record the proceeds of the note.

cash 90900 notes payable 90900

A corporation issues $1,000,000 of 8%, 5-year bonds. The 8% rate of interest is called the __________ rate.

contractual The interest rate printed on the bonds is the contractual, face, or stated rate. Yield, effective, and market rates are different terms to describe the interest rate that an investment can earn in the market.

On December 30, 2014, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2014, balance sheet?

$10,000 current liability; $40,000 long-term liability.

Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue?

$4,300. (The amount of sales can be computed by dividing total cash received by one plus the sales tax rate of 5%. The computation is as follows: $4,515/1.05 = $4,300)

If the Bonds Payable account has a balance of $700,000 and the Discount on Bonds Payable account has a balance of $36,000, what is the carrying value of the bonds?

$664000 The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds.

Rooney Corporation issued 3,520 8%, 9-year, $1,000 bonds dated January 1, 2014, at face value. Interest is paid each January 1. (a) Prepare the journal entry to record the sale of these bonds on January 1, 2014. (b) Prepare the adjusting journal entry on December 31, 2014, to record interest expense. (c) Prepare the journal entry on January 1, 2015, to record interest paid.

(a) 3520*1000 = 3520000 DB cash 3520000 CR bonds payable 3520000 (b) 3520000*0.08 = 281600 DB Interest expense 281600 CR interest payable 281600 (c) DB interest payable 281600 CR cash 281600

inton Company has these obligations at December 31. For each obligation, indicate whether it should be classified as a current liability, a noncurrent liability, or both. (a) A note payable for $100,000 due in 2 years. (b) A 10-year mortgage payable of $200,000 payable in ten $20,000 annual payments. (c) Interest payable of $15,000 on the mortgage. (d) Accounts payable of $60,000.

(a) A note payable due in two years is a long-term liability, not a current liability. (b) $20,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability & non-current liability (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future.

Riot Company issued $301,000, 15-year, 8% bonds at 98. (a) Prepare the journal entry to record the sale of these bonds on January 1, 2014. (b) Suppose the remaining Discount on Bonds Payable was $3,612 on December 31, 2019. Show the balance sheet presentation on this date.

(a) cash 294980 discount on bonds payable 6020 bonds payable 301000 (b) Long term liabilities bonds payable 301000 less disc. on bonds payable 3612 = 297388

Jenny Kanne and Cindy Travis borrowed $36,000 on a 7-month, 4% note from Golden State Bank to open their business, KT's Coffee House. The money was borrowed on June 1, 2014, and the note matures January 1, 2015. (a) Prepare the entry to record the receipt of the funds from the loan. (b) Prepare the entry to accrue the interest on June 30. (c) Assuming adjusting entries are made at the end of each month, determine the balance in the interest payable account at December 31, 2014. (d) Prepare the entry required on January 1, 2015, when the loan is paid back.

(a) cash 36000 notes payable 36000 (b) (36000*0.04) / 12 = 120 interest expense 120 interest payable 120 (c) 120*7 = 840 (d) notes payable 36000 interest payable 840 cash 36840

Canyon Company issued $556,000, 10-year, 5% bonds at 104. (a) Prepare the journal entry to record the sale of these bonds on January 1, 2014. (b) Suppose the remaining Premium on Bonds Payable was $13,344 on December 31, 2017. Show the balance sheet presentation on this date.

(a) cash 556000*1.04 = 578240 premium on bonds payable 22240 bonds payable 556000 (b) Long Term Liabilities Bonds Payable 556000 add Premium on bonds payable 13344 = $569344

Dakota University sold 9,000 season football tickets at $100 each for its five-game home schedule. What entries should be made: (a) when the tickets are sold? (b) after each game?

(a) cash 900000 unearned ticket revenue 900000 (b) unearned ticket revenue 180000 ticket revenue 1800000

Washburn University sells 4,060 season basketball tickets at $71 each for its 15-game home schedule. (a) Give the entry to record the sale of the season tickets. (b) Give the entry to record the revenue recognized after playing the first home game.

(a) db cash (4060 * 71) = 288260 cr unearned ticket revenue = 28826 (b) db unearned ticket revenue = 19217.3333 cr ticket revenue (288260/15) = 19217.33

Bluestem Supply does not does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $14,280. All sales are subject to a 5% sales tax. (a) Compute sales taxes payable. (b) Make the entry to record sales taxes payable and sales.

(a) sales => 14280 / 1.05 = 13600 sales tax => 13600*0.06 = 680 or 14280 - 13600 = 680 (b) db cash 14280 cr sales revenue 13600 cr sales taxes payable 680

Buttner Company borrows $88,500 on September 1, 2014, from Harrington State Bank by signing an $88,500, 12%, one-year note. How much is accrued interest at December 31, 2014?

3540 Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. At December 31, four months of interest should be accrued: $88,500 × 12% × 4/12 = $3,540.

If a 6%, 10-year, $800,000 bond is issued at face value and interest is paid annually, what is the amount of the interest payment at the end of the first period?

48000 $48,000. $800,000 X 6% X 1 year = $48,000.

On January 1, 2014, Slice Corp. issues $200,000 of 5-year, 7% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds? A. Credit to Bond Interest Expense of $14,000 B. Credit to Bonds Payable for $200,000 C. Credit to Cash for $14,000 D. Debit to Bonds Payable for $200,000

B. Credit to Bonds Payable for $200,000 The issuance entry for the bonds includes a debit to cash for $200,000 and a credit to bonds payable for $200,000.

Four-Nine Corporation issued bonds at par that pay interest every July 1 and January 1. Which one of the following is one effect of the entry to accrue bond interest at December 31?

Credit to Interest Payable. (Since the interest has been accrued but not yet paid, it has to be recognized as an increase in expenses and liabilities. The entry would be a debit to Interest Expense and a credit to Interest Payable.)

Cuso Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate? A. The market interest rate exceeds the contractual interest rate. B. No relationship exists between the market and contractual rates. C. The contractual interest rate and the market interest rate are the same. D. The contractual interest rate exceeds the market interest rate.

D. The contractual interest rate exceeds the market interest rate. When bonds are sold at a premium, the contractual interest rate is higher than the market interest rate

Which one of the following is not a typical current liability? A. Sales taxes payable B. FICA taxes payable C. Bonds payable D. Unearned revenue

C. Bonds payable Bonds payable is usually a long-term liability.

RS Company borrowed $70,000 on December 1 on a 6-month, 12% note. Which statement is true at December 31? A. The note payable is a current liability, but the interest payable is not. B. The interest payable is a current liability, but the note payable is not. C. Both the note payable and the interest payable are current liabilities. D. Neither the note payable nor the interest payable is a current liability.

C. Both the note payable and the interest payable are current liabilities. A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable and the note payable are expected to be paid within one year, they both will be considered current liabilities.

Hanlin Enterprises issued 2,000 bonds with a face value of $1,000 each at 97. What is the entry to record the issuance?

Cash 1,940,000 Discount on Bonds Payable 60,000 Bonds Payable 2,000,000 The debit to Cash is $1,000 × 2,000 bonds × 97%, which is $1,940,000. Discount on Bonds Payable is debited for $60,000, and Bonds Payable is credited for $2,000,000, the face amount of the bonds.

The cash register tape indicates cash sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information?

Cash 2,155 Sales 2,000 Sales Taxes Payable 155 The sales taxes obligation must be recognized separately as sales taxes are paid by the buyer of the product or service and must be submitted by the retailer to the governmental agency imposing them.

Saddle Inc. issues $261,000, 10-year, 8% bonds at 98. Prepare the journal entry to record the sale of these bonds on March 1, 2014.

DB Cash (261000*.98) = 255780 DB Discount on Bonds Payable = 5220 CR Bonds Payable 261000

Range Company issues $271,000, 20-year, 9% bonds at 102. Prepare the journal entry to record the sale of these bonds on June 1, 2014.

DB cash: (271000*1.02) = 276420 CR Premium on Bonds Payable= 5420 ^(276420-271000) or (27100*0.02) = both equal 5420 CR Bonds Payable= 271000

Susan Braun's regular hourly wage rate is $28, and she receives an hourly rate of $42 for work in excess of 40 hours. During a January pay period, Susan works 48 hours. Susan's federal income tax withholding is $89, and she has no voluntary deductions. Assume that the FICA tax rate is 7.65%. Prepare the employer's journal entries to record: (a) Susan's pay for the period (b) the payment of Susan's wages. Use January 15 for the end of the pay period and the payment date.

DB sal & wages expense (28*40)+(42*8)=1456 CR FICA taxes payable (1456*0.0765) = 111.38 CR federal income taxes payable = 89 CR salaries and wages payable (1456-11.38-89) = 1255.62 (b) DB salaries and wages payable = 1255.62 CR cash = 1255.62

Which accounts are debited and which are credited if a bond issue originally sold at a premium is redeemed before maturity at 97 immediately following the payment of interest? Debits 1. _____________ 2. _____________ Credits 1. _____________ 2. _____________

Debits: 1. bonds payable 2. premium on bonds payable Credit: 1. Cash 2. Gain on bond redemption Debits: Bonds Payable (for the face value) and Premium on Bonds Payable (for the unamortized balance). Credits: Cash (for 97% of the face value) and Gain on Bond Redemption (to balance entry).

To be classified as a current liability, how or when must a debt be expected to be paid?

Either out of existing current assets or by creating other current liabilities.

If the contractual rate of interest is lower than the market rate of interest, bonds will sell at a premium. T/F

F If the contractual rate of interest is lower than the market rate of interest, bonds will sell at a discount

Federal unemployment taxes are paid by both the employer and the employee. T/F

F Federal unemployment taxes are paid only by the employer, not both the employer and the employee

Sales taxes are an expense to the retailer. T/F

F Sales tax is an expense borne by the buyer and collected by the retailer who records the tax as a liability

A corporation issued a $50,000, 9%, 4-month note on July 1. The corporation's year-end is September 30. Which one of the following is the adjusting entry for interest on September 30?

Interest Expense 1,125 Interest Payable 1,125 Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding: $50,000 × 9% × 3/12 = $1,125.

On September 1, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Which journal entry will Banner Co. make on December 31 before issuing its financial statements?

Interest Expense 2,100 Interest Payable 2,100 Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding: $70,000 × 9% × 4/12 = $2,100.

What is the nature of a bond premium?

It reduces the cost of borrowing.

Jack and Lance are discussing how the market price of a bond is determined. Jack believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is he right?

No, Jack is not right. The market price on any bond is a function of three factors: (1) the dollar amounts to be received by the investor (interest and principal), (2) the length of time until the amounts are received (interest payment dates and maturity date), and (3) the market interest rate.

Samuel Engels says that liquidity and solvency are the same thing. Is he correct?

No, Samuel is not correct. Liquidity involves measuring the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency involves measuring the ability of a company to survive over a long period of time.

When recording payroll,

Payroll deductions are recorded as liabilities. Gross earnings are recorded as salaries and wages expenses. Net pay is recorded as salaries and wages payable.

When a bond premium is amortized over time, the carrying value of the bonds decreases over time. T/F

T The carrying value is equal to bond premium plus face value. Since the premium balance decreases over time and the face value remains constant, the carrying value decreases over time.

Unearned revenue is a type of current liability. T/F

T Unearned revenue indicates that a service or product needs to be provided in the future

The Jacksonville Jaguars sell season tickets to NFL football games. There are 10 home games during the season, which runs from August through December. During February, 65,000 season tickets were sold for $12,000,000 cash. Which account will be credited by the Jacksonville Jaguars upon receipt of the $12,000,000?

Unearned Ticket Revenue Since the tickets are for future performances, it should be credited to Unearned Ticket Revenue by the Jaguars team.

Susan Braun's regular hourly wage rate is $18, and she receives an hourly rate of $27 for work in excess of 40 hours. During a January pay period, Susan works 45 hours. Susan's federal income tax withholding is $98, and she has no voluntary deductions. Compute Susan Braun's gross earnings and net pay for the pay period. Assume that the FICA tax rate is 7.65%.

gross earnings: (18*40) + (27*5) = 855 FICA tax amount: 855*0.0765 = 65.4075 net pay: 855-98-65.4075 = 691.59

Graves Company borrows $90,900 on July 1 from the bank by signing a $90,900, 7%, 1-year note payable. Prepare the journal entries to record the accrued interest at December 31, assuming adjusting entries are made only at the end of the year.

interest 3182 interest payable 3182

Assume that Ziegler Inc. sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate? The market interest rate was ____ (more than, less than, equal to)_____ bonds' contractual interest rate.

less than - Investors were required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

The time period for classifying a liability as current is one year or the operating cycle, whichever is

longer Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer

What term is used for bonds that have specific assets pledged as collateral?

secured bonds