BA 221 Chpater 10

From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n) _______.

Asset

The _______ _______ is the payment made when a bond matures

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

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

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

The amortization of a bond discount makes the carrying value of the bond ______ over time.

increase

The journal entry to record employer payroll taxes affects ______.

liabilities and stockholders' equity

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 ______.

liabilities to be understated assets to be understated

A $1,000 bond's carrying value will be greater if the bond is sold ______.

at a premium when the stated rate is greater than the market rate of interest

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

Discounts on Bonds Payable are recorded with a debit and are ______.

contra-liabilities

The entry to record the employer's obligation for FICA and state unemployment taxes includes a ______.

credit Unemployment Tax Payable debit Payroll Tax Expense credit to FICA Payable

For investors, the ______ provide independent, easy-to-use measurements of relative credit risk.

credit rating agencies

When a bond is sold at a premium and is amortized using the straight-line method, each subsequent interest payment will result in a ______ compared to the prior payment.

credit to Cash for the same amount lower carrying value debit to Premium on Bonds Payable for the same amount debit to Interest Expense for the same amount

On November 1, ABC Corp. borrowed $100,000 cash on an 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 in the following year. The last adjusting journal entry was made on December 31, ABC's year end. The entry to record the payment on October 31 would include a ______.

credit to Cash of $106,000 debit to Interest Payable of $1,000 debit to Note Payable of $100,000 debit to Interest Expense of $5,000

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

a discount

ABC Corporation issued bonds that pay interest each March 1 and September 1. The corporation's December 31 adjusting entry may include a ______.

credit to Interest Payable

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

interest payment

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

investors

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

________ 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

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

The issue price of 1,000, 5%, $1,000 bonds issued at 100.00 equals ______.

$1,000,000 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.

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

When recording the 1st annual interest payment on 5%, $100,000, 2-year bonds that were issued at $102,070 when the market rate of interest was 4.25% includes a debit to Premium on Bonds Payable of ______ assuming the straight-line method of amortization is used.

$1,035

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

On January 1, Oodles of Noodles purchased a vehicle in exchange for a $10,000, 3-year, 5% installment note. The note requires annual payments of $3,672 on December 31 of each year. In the 1st payment, how much reduces the Notes Payable balance?

$3,172

Calculate the amount of Interest Expense for the 2nd installment payment on a $10,000 installment note with a 6% interest fully repaid in 4 annual installments of $2,886. Round to the nearest whole dollar.

$463 The 1st payment of $2,886 paid for $600 of interest (=$10,000 x 6%) and $2,286 repayment of the principal (=$2,886 - 600). The Note Payable balance after the payment was reduced to $7,714 (=$10,000 - 2,286). Thus, Interest Expense in the 2nd payment is less and equals $463 (=$7,714 x 6%).

The entry to record the cash sale of a $100 pair of jeans in a state that requires charging a 5% sales tax will include a ______.

$5 credit to Sales Tax Payable $105 debit to Cash $100 credit to Sales Revenue

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.

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

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.

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.

What kind of account is Deferred Revenue?

Liability account

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

The _______ rate on a bond is the rate used to determine the interest payments.

Stated

True or false: When using the straight-line amortization method, Premium on Bonds Payable decreases with each interest payment for bonds sold at a premium.

True

Which accounts are credited when Payroll Tax Expense is debited?

Unemployment Tax Payable FICA Payable

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

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

If ABC Company issues its $5,000,000, 8% bonds payable at a premium and uses the straight-line method of amortization, then the ______.

debit to Premium on Bonds Payable will be the same each payment market rate of interest must be less than the stated rate of interest debit to Cash is greater than the credit to Bonds Payable

If a company issues its bonds at a premium and uses the straight-line method of amortization, then the carrying value of the bond will ______ with each interest payment.

decrease by the same amount

Amortizing a bond premium will ______ the premium balance and ______ the carrying value of the bond so that when the bond matures the carrying value will ______ the face value.

decrease; decrease; equal

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

An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.

revenue The credit is to Revenue (+SE) and represents the amount of Deferred Revenue (a liability) that is no longer owed because the seller satisfied its obligation by providing the services or goods owed to its customers.

A bond's maturity date is ______.

the date on which the face value of the bond will be repaid in full

For an investor, bonds are attractive investments because ______.

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

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles. The flights will not occur until the next accounting period. How should ABC Airlines record the $300 collected in advance?

A debit to Cash of $300 and a credit to Deferred Revenue of $300

Which of these payroll taxes are paid only by the employer?

FUTA SUTA

Whether a bond is issued at par, premium or discount, when the bond matures the amount paid equals the _______ value.

Face

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

False

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

False Some payroll deductions such as retirement savings are voluntary.

The discount on a bonds payable becomes ______.

additional interest expense over the life of the bonds

_______ 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

Accrued Liabilities are ______.

current liabilities resulting from adjusting entries that record amounts incurred but not yet paid

The entry to record the issuance of 100, $1,000 bonds for 98.000 includes a ______.

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

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 ______.

debit to Cash of $110,000 credit to Premium on Bonds Payable of $10,000 credit to Bonds Payable of $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

ABC Company issues a bond with a face value of $100,000 at par on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes a ______ of $6,000.

debit to Interest Expense credit to Cash

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.

Accruing a liability always involves ______ expenses and ______ liabilities.

increasing; increasing

The journal entry to record the payment of salaries and wages for work performed in the current accounting period causes ______.

liabilities to increase stockholders' equity to decrease assets to decrease

Current portion of Long-Term Debt reports the amount of ______ and is reported on the ______.

long-term debt that is reclassified because it is due within the year; balance sheet

When a company records a debit to Bonds Payable and a credit to Cash, it is the bonds' ______.

maturity date

Premium on Bonds Payable will be ______ with each interest payment causing the Premium on Bonds Payable balance to ______ when the bonds mature.

amortized; decrease to a $0 balance

Bonds, Inc. issued $10,000 7%, 5-year bonds that pay interest annually receiving $10,420 given a 6% market rate of interest. Rounding to the nearest $1, the entry to record the first interest payment, using the straight-line method includes a ______.

credit to Cash of $700 debit to Premium on Bonds Payable of $84 debit to Interest Expense of $616

ABC Company received $9,500 for its 5-year, 10% bonds with a total face value of $10,000. The bonds pay interest annually on December 31. Using the straight-line method and assuming no adjusting entries during the period have been recorded, the journal entry to record the first bond interest payment would include a ______.

credit to Discount on Bonds Payable of $100 debit to Interest Expense of $1,100 credit to Cash of $1,000

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 ______.

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

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

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

debit

The journal entry to record the payment of salaries and wages to employees includes a ______.

credit to Withheld Income Tax Payable credit to FICA Payable credit to Cash debit to Salaries and Wages Expense

XYZ borrowed $50,000 on December 31, 2020. Half of the loan will be repaid in in the following year and the remainder will be paid in the year after that, which is longer than XYZ's operating cycle. On its balance sheet at December 31, 2020, XYZ will show ______.

current portion of long-term debt of $25,000 long-term debt of $25,000

Texable, Inc. is required to match $45,900 for its portion of FICA and to pay $4,700 for federal and state unemployment taxes. The entry to record Texable's payroll taxes includes ______.

debit to Payroll Tax Expense for $50,600 credit to Unemployment Tax Payable of $4,700 credit to FICA Payable for $45,900

With each installment payment on an installment note, the debit to Interest Expense ______.

decreases

Amortizing a bond discount will ______ the discount balance and ______ the carrying value of the bond so that when the bond matures the carrying value will ______ the face value.

decrease; increase; equal