acc chapter 10

time interest earned ratio

measures a company's ability to meet interest obligations as they come due income before interest and tax/ interest expense

debt to equity ratio

measures the proportion of a company's debt to its equity total liabilities/ total stockholder's equity

$500,000

on jan 2, 2015 roof master construction inc issued $500,000, 10 year bonds for $574,540. the bonds pay interest on june 30 and dec 31. the face rate is 8% and the market rate is 6%. at the maturity date, in addition to the last interest payment, roof master would repay the bondholders how much???

criteria for lease capitalization

one or more of the following criteria must be met: -transfer of ownership of property to the lessee at the end of the lease term -contains a bargain-purchase option to purchase the asset for lower than its fair market value -the lease term is 75% or more of property's economic life -the present value of payments is 90% or more of property's fair market value at the inception of the lease

off balance sheet financing

the lessee has arraigned the right to use property but has not recorded that right, or the accompanying obligation, on the balance sheet.

cash, discount on bonds payable, and bonds payable

to record the issuance of bonds when the face rate of interest is less than the market rate, the company would increase ____.

interest expense and decreases cash and discount on bonds payable

to record the semiannual payment of interest on bonds sold at a discount, the company increase ____.

leasing

u.s accounting standards: rule based. if lease meets any of the criteria-capital lease. does not meet any criteria-operating lease

the cash flows from operating activities section

using the indirect method depreciation on factory equipment would be reported in

net income, increase to accounts payable

using the indirect method, cash flows from operating activities would include

the interest expense is calculated as the carrying value x the effective (market) value

what happens in bond accounting under the effective interest method....

operating

what type of lease does not result in recording a long term liability?

issuance of a long term debt

what would be reported on the statement of cash flows

a decrease in the amount of liability

when amortizing the premium on bonds payable a ____ occurs.

increase in assets and increase in liabilities

when bonds are issued by a company, the accounting entry shows an

depreciation on the equipment, a loss on the sale of a machine, a decrease in inventory

when preparing the operating activities section of the statement of cash flows using the indirect method, what would be added to the net income

premium

when the stated interest rate on bonds is higher than the market rate of interest, the bonds sell at a _____.

face rate, market rate of interest

you should be able to determine whether a bond will set at a premium or a discount by the relationship that exists between the _____ and the _____.

lease

a contractual arrangement between two parties, allows one party the lessee, the right to use an asset in exchange for making payments to its owner, the lessor.

gain on redemption of bonds is increased

as callable bonds are redeemed below carrying value, what is true

convertible bonds

can be converted into common stock at a future time

interest expense

carrying value X effective rate

gain

carrying value- redemption price

premium amortized

cash interest- interest expense

ifrs

criteria are used as "guidelines" rather than rigid rules. more flexibility in applying the lease standards

effective rate

= annual interest expense/ carrying value

a separate schedule

a company issues a 10 yr bonds payable in exchange for preferred stock. this transaction is included in...

temporary difference

a difference that affects both book and tax records but not in the same time period

permanent difference

a difference that affects the tax records but not the accounting records, or vice versa

operating lease

a lease that does not meet any of the four criteria and is not recorded as an asset by the lessee. off balance sheet- financing -the lessee acquires the right to use an asset for a limited period of time -the lessee is not required to record the right to use the property as an asset or record the obligation for payments as a liability

capital lease

a lease that is recorded as an asset by the lessee. the lessee has the right of ownership and control

bond

a security or financial instrument that allows firms to borrow large sums of money and repay the loan over a long period of time. the borrower (issuing company) agrees to pay interest on specific dates, usually semiannually or annually. the borrower also agrees to repay the principal at the maturity, or due date, of the bond. bonds are usually in denominations of $1,000 called face value or par value. bond contracts can have other features concerning the collateral or due date and features that make the bonds convertible to stock or callable by the issuer.

long term liability

a ten year obligation appears on the balance sheet of generic products company. how would it most likely be classified on the balance sheet?

long term liability

an obligation that will not be satisfied within one year or the current operating cycle components: bonds or notes payable, leases, deferred taxes

cash interest

bond face value X face rate

$60,000

bonds in the amount of $100,000 and a life of 10 years were issued by the focus com pay. if the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

debenture bonds

bonds that are not backed by specific collateral

serial bonds

bonds that do not have the same due date; a portion of the bonds comes due each time period

callable bonds

bonds that may be redeemed or retired before their specified due date

total liabilities/ stockholders equity

debt to equity

total liabilities/ total stockholders equity

debt to equity ratio

term bonds

entire principal amount is due on a single date

carrying value premium instead of discount

face value+ unamortized premium

carrying value discount instead of premium

face value- unamortized discount

as a long term asset, a current liability, and a long term liability

how is a capital lease presented by the lessee?

on the income statement as a gain

in 2012, harley co. decides to retire bonds due in 2014. the carrying value of the bonds is higher than the call price to be paid. how will the company shows the difference in the financial statements on 12/31/2012?

ignored since it is a non cash activity

in the direct method, depreciation is

discount amortized

interest expense- cash interest

effective interest method

produces a constant effective interest rate from period to period. =annual interest expense/ carrying value

loss

redemption price- carrying value

redemption

retirement of bonds by repayment of the principal.

redemption of bonds

retirement of bonds by repayment of the principal. if redeemed at maturity, no gain or loss occurs. if retired before maturity, a gain or loss occurs the gain or loss on bond redemption is shown on the income statement

deferred tax

the account used to reconcile the difference between the amount recorded as income tax expense and the amount that is payable as income tax

present value of the stream of interest payments and the present value of the maturity amount

the bond issue price is determined by calculating the

secured bond

the certificate indicates specific assets that serve as collateral in case of default

25,000

the charter provides for the issuance of 100,000 shares of common stock. if 40,000 shares were issued and 15,000 were subsequently reacquired, what is the number of shares outstanding?

gain or loss on redemption

the difference between the carrying value and the redemption price at the time bonds are redeemed

discount

the excess of the face value of bonds over the issue price

premium

the excess of the issue price over the face value of the bonds

carrying value

the face value of a bond plus the amount of unamortized premium or minus the amount of unamortized discount.

lessor

the party who legally owns a leased asset in a capital lease is a _____.

bond issue price

the present value of the annuity of interest payments plus the present value of the principal

face value

the principal amount of the bond as stated on the bond certificate

effective interest method of amortization

the process of transferring a portion of the premium or discount to interest expense; this method results in a constant effective interest rate

amortization

the process of transferring an amount from the discount or premium account to interest expense each time period to adjust interest expense.

face rate of interest

the rate of interest on the bond certificate. it is also called the stated rate, nominal rate, contract rate, coupon rate

market rate of interest

the rate that investors could obtain by investing in other bonds that are similar to the issuing firm's bonds. also called the effective rate, bond yield

inverse

the relationship between interest rates and bond prices is always ____.

addition to cash flows from financing activities

the statement of cash flows reports a long term liability account increase as a

if market rate > face rate

then bonds are issued at a discount

if market rate < face rate

then bonds are issued at a premium

if market rate=face rate

then bonds are issued at face value amount

income before interest and tax/ interest expense

time interest earned ratio

net income + tax expense + interest expense / interest expense

times interest earned

premium on bonds payable and increase interest expense

to record the amortization of a premium on bonds payable a company will decrease _____.