ACCT 2110 Exam 4
current ratio
current assets/current liabilities
to get current assets
current liabilities x current ratio
The journal entry to record the issuance of a note for the purpose of borrowing funds is
debit cash, credit notes payable
The journal entry to record the payment of an ordinary note is
debit notes payable and interest expense, credit cash
f bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will
decrease as bonds approach their maturity rate
With the effective interest method of amortization, the amortization of a bond premium results in a(n)
decrease in interest expense
determine cash interest to be paid
face value x stated rate x month rate (6/12)
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount
greater than face value
Bonds are sold at a premium if the
market rate of interest was less than the stated rate at the times of the issue
sales taxes
money collected from the customer for the governmental unit levying the taxes
current liabilities
obligations that require a firm to pay cash or another current asset, create a new current liability, or provide goods or services within one year or one operating cycle, whichever is longer
The bond issue price is determined by calculating the
present value of the stream of interest payments and the present value of the maturity amount
When determining the amount of interest to be paid on a bond, which of the following information is necessary
the stated rate of interest on the bonds
debt to asset ratio
total liabilities/total assets
Pointe Corporation's balance sheet showed the following amounts for its liability accounts: Notes payable, $130,000; Bonds Payable, $800,000; Accrued Expenses, $20,000; and Deferred Income Tax Liability, $120,000. Total assets was $1,470,000. The debt to assets ratio is:
$130,000 (Notes payable) + $800,000 (Bonds Payable) + $20,000 (Accrued Expenses) + $120,000 (Deferred Income Taxes) / $1,470,000 (Total Assets) =$1,070,000 / $1,470,000 = 0.73
To find discount amortized under Straight Line Method
Discount Amortized = Discount at Issuance/Number of Interest Payments
Rating Corporation's balance sheet showed the following amounts for its liability accounts: Accounts Payable, $100,000; Bonds Payable, $150,000; Taxes Payable, $20,000; and Deferred Income Tax Liability, $5,000. Total assets was $500,000. The debt to assets ratio is:
$100,000 (Accounts Payable) + $150,000 (Bonds Payable) + $20,000 (Taxes Payable) + $5,000 (Deferred Income Taxes) / $500,000 (Total Assets)$275,00/$500,000 = .55
Which of the following statements regarding contingent liabilities is true
If they are probable and estimable, then they must be recorded even before the outcome of the future event.
The Collins Company sold $200,000 of 10-year bonds for $190,000. The stated rate on the bonds was 8% and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)
Interest Expense Discount on Bonds Payable Cash
To find premium amortized under Straight Line Method
Premium Amortized = Premium at Issuance/ Number of Interest Payments
The Discount on Bonds Payable account is shown on the balance sheet as
a contra-liability
warranty
a guarantee to repair or replace defective goods during a period (ranging from a few days to several years) following the sale
note payable
a payable that arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract
The Premium on Bonds Payable account is shown on the balance sheet as
an addition to long term liability
describe a callable bond
borrower has the right to call on the bond before the due date
effective interest method/interest expense
carrying value x market rate x month rate (6/12)
Which of the following lease conditions would result in a capital lease to the lessee
The lessee obtains enough rights to use the asset and is in substance the owner
unearned revenue
a liability that occurs when a company receives payment for goods that will be delivered or services that will be performed in the future
interest rate
a percentage of the principal that must be paid in order to have use of the principal. it is multiplied by the beginning of period balance to yield the amount of interest for the period
account payable
an obligation that arises when a business purchases goods or services on credit
contingent liability
an obligation whose amount or timing is uncertain and depends on future events. For example, a firm may be contingency liable for damages under a lawsuit that has yet to be decided by the courts.
witholding taxes
businesses are required to withhold taxes from employees' earnings; standard withholdings include federal, state, and possibly city or county income taxes, as well as Social Security and Medicare. Employees may also have amounts withheld for such things as retirement accounts and health insurance
The amount of federal income taxes withheld from an employee's gross pay is recorded as a
current liability
If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will
increase as bonds approach maturity date
When bonds are issued by a company, the accounting entry shows an
increase in both assets & liabilities
With the effective interest method of amortization, the amortization of a bond discount results in a(n)
increase in interest expense
accrued liabilities
liabilities that usually represent the completed portion of activities that are in process at the end of the period
liabilities
probable future sacrifices of economic benefits; liabilities usually require the payment of cash, the transfer of assets other than cash, or the performance of services
The portion of long-term debt due within one year should
reclassified as a current liability
Under the effective interest method, the cash paid on each interest payment date will
remain constant regardless of the issuance price
Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?
rent expense on the leased asset
When bonds are sold for less than the face amount, this means that the
stated rate of interest is less than the market rate of interest
payroll taxes
taxes that businesses must pay based on employee payrolls; these amounts are not withheld from employee pay, rather they are additional amounts that must be paid over and above gross pay
when will bonds sell at a discount
when the stated rate of interest is less than the market rate at the time of the issue