ACCT - SMARTBOOK #10
Match the interest rates with the related bond prices.
6% stated interest rate and 4% market interest rate - Premium - Investors will pay more than face value 6% stated interest rate and 6% market interest rate - Investors will pay face value 6% stated interest rate and 8% market interest rate - Discount - Investors will pay less than face value
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
Bonds are financial _________ that outline the future payments a company promises to make in exchange for receiving a sum of money now.
instruments
A bond's issue price is determined by the ______.
investors
Assume ABC Company issues a bond with a stated interest rate above the market rate. Using the simplified effective-interest amortization, interest expense is ______ the cash interest payment.
less than Reason: Since the market rate is below the stated rate, the interest expense (based on the market rate) is less than the cash interest payments (based on the higher stated rate).
An installment note differs from an interest-only note in that it requires the borrower to ______.
pay equal amounts over the note's life to maturity with each payment consisting of interest and principal
Employees' gross earnings differ from their net pay because of ______.
payroll deductions
When using the straight-line method of bond amortization, Interest Expense ______ each payment.
stays the same
True or false: A classified balance sheet separates liabilities into current and non-current categories.
true
True or false: Companies issue bonds at a discount when the bond's stated interest rate is lower than the market interest rate.
true
Liabilities are classified as current if they ______.
will be paid within the company's operating cycle or within 1 year, whichever is longer
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 Reason: $1,028.80=$1,000 x 102.880%= $1,000 x 1.02880
The ______ method of amortization reduces the premium or discount by an equal amount each period.
straight- line
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 bonds are paid
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
What are the key events for the issuer of notes payable?
- Recording principal paid - Accruing interest incurred but not paid - Recording interest paid - Establishing the note
The debt-to-asset ratio indicates _____.
- a higher ratio means greater financing risk - the percentage of assets financed by debt
____________ 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
Which of the following are not required payroll deductions from an employees' gross earnings?
Charitable contributions Reason: Charitable contributions are an optional deduction, not a required deduction. Federal unemployment tax (FUTA) Reason: Federal unemployment tax is paid by the employer, not the employee, and thus is not deducted from employees' gross pay. State unemployment tax (SUTA) Reason: State unemployment tax is paid by the employer, not the employee, and thus is not deducted from employees' gross pay.
___________ Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated.
Contingent
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
Which accounts are credited when the journal entry to pay employees is recorded?
FICA payable Withheld income tax payable cash
What effect will issuing more bonds have on the times interest earned ratio over time?
It will decrease.
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.
Company Name Maturity Stated Interest Market Interest Bond Price Sea the World Cruises 2026 1.85 2.70 93.14 Lilly 2020 6.00 4.00 107.26 McDonald's 2045 4.88 4.10 112.89 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.
Which of the following statements is true about Sea the World Cruises' $1,000 bond price?
They sold for $931.40 each. Reason: The bond price is a percent, thus the bond price equals $931.40 (=$1,000 x 93.14%).
A bond's stated interest rate is ______.
always expressed as an annual interest rate used to calculate interest payments
The debt-to-asset ratio is calculated by dividing total liabilities by total __________
assets
The journal entry to record the payment of salaries and wages for work performed in the current accounting period causes ______.
assets to decrease liabilities to increase stockholder's equity to decrease
If an adjusting entry is required for interest owed, then the ______ will report ______
balance sheet; Interest Payable income statement; Interest Expense balance sheet; Notes Payable
The issue price of a bond is ______.
based on what the market is willing to pay based on a present value calculation
Bondholders are willing to pay a premium to acquire a bond because the ______.
bond's stated interest rate is higher than the market interest rate
The entry to record the initial borrowing of cash by issuing a promissory note includes a debit to ______ and a credit to ______.
cash; Notes Payable
For investors, the ______ provide independent, easy-to-use measurements of relative credit risk.
credit rating agencies
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
The entry to record the payment of previous purchases made on account includes a ______.
debit to Accounts Payable credit to cash
The journal entry to record the payment of salaries and wages to employees includes a ______.
debit to Salaries and Wages Expense credit to Withheld Income Tax Payable credit to Cash credit to FICA Payable
A company's debt-to-assets ratio is 0.7 or 70%. If the company issues common stock for cash, then the debt-to-assets ratio will ______.
decrease
When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a premium.
decreases
How are installment notes different from interest-only notes? Installment notes ______.
do not include a single "balloon" payment since a portion of the principal is paid each period
Which method of bond amortization amortizes the premiums/discounts accurately and is considered a conceptually superior method?
effective-interest
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 Reason: Accounts Payable balance = $3,000 - 1,000 + 4,000 = $6,000.
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 Reason: Net pay = $70,000 = $100,000 - 6,700 - 1,450 - 18,000 - 3,850
Match when bonds sell at face value, a premium or a discount.
PREMIUM - stated rate is greater than the market rate of interest DISCOUNT - stated rate is less than the market rate of interest FACE VALUE - stated rate equals the market rate of interest
Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?
Probable contingent liability that can be estimated
The entry to record the initial borrowing of cash by issuing a promissory note causes a(n) ______.
increase in assets & liabilities
If a bond's stated rate is 4% and the market rate is 6%, this bond will sell at ______.
a discount
The stated rate ______.
remains the same throughout the life of the bonds
Using the simplified effective-interest amortization, the debit to Interest Expense equals ______.
Bonds Payable, Net x Market Interest Rate x Time
The issue price of 1,000, 5%, $1,000 bonds issued at 100.00 equals ______.
$1,000,000 Reason: The bonds are issued at 100.00 which means the issuance price is 100% of the face value or $1,000,000 (=1,000 x $1,000 x 100%). See the "Bond Prices" spotlight in the textbook.
For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______.
Moody's Standard & Poor's
_____________ _____________ is a liability that represents the amount the company owes to others as a result of issuing a promissory note.
Notes Payable
A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.
excludes
Accruing a liability always involves ______ expenses and ______ liabilities.
increasing;increasing
If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?
it decreases
When the times interest earned ratio is less than 1.0, a company is ______.
not generating enough income to cover its interest expense