Accounting Chapter 10
will the stated interest rate be higher than the market interest rate or will the market interest rate be higher than the stated interest rate when a bond is issued at (a) face value, (b) a discount, and (c) a premium?
(a) stated = market (b) stated < market (c) stated > market
if a company has a long-term loan that has only two years remaining unit it matures, how is it reported on the balance sheet (a) this year and (b) next year?
(a) the company reports only the accrued interest on the loan as a current liability in the balance sheet (b) the loan becomes a current liability.
what is a contingent liability? how is a contingent liability reported under GAAP? how does this differ under IFRS?
- potential liabilities that arise as a result of past transactions or events, but their ultimate resolution depends (is contingent) on a future event. - GAAP: recorded if the estimated los is "probable" - IFRS: recorded if the estimates loss is "more likely than not" to occur. Lower threshold; more used
describe three ways in which liabilities are used to finance business activities
- when a company buys goods and services on credit - obtains short-term loans to cover gaps in cash flows - issues long-term debt to obtain money for expanding into new regions and markets.
what three factors influence the dollar amount reported for liabilities?
1. the initial amount of the liability 2. additional amounts owed to the creditor 3. payments or services provided to the creditor
define liability. whats the difference between a current liability and a long term liability?
Liability: something a person or company owes, usually a sum of money. Current liabilities are due within one year.
your company plans to hire an employee at a yearly salary of $70,000. Someone in your company says the actual cost will be lower because of payroll deductions. Someone else says it will be higher. Who is right? what is likely to be the total cost to the company? explain.
The total cost would be higher. There would be deductions from the salary like Employees share of FICA.
define accrued liability. Give an example of a typical accrued liability.
accrued liability: liabilities for expenses that have been incurred but not paid at the end of the accounting period. - Salaries and Wages Payable, Interest Payable
over the period to maturity, why does yearly interest expense decrease on an installment note?
because the borrower repays some of the principal as part of each installment payment, so multiplying the fixed interest rate by the remaining principal balance results in a smaller dollar amount of interest expense in each following year.
what are the reasons that some bonds are issued at a discount and others are issued at a premium?
discount: - they must if they want to issue it. -increases the return bondholders earn on their initial investment premium: - the bond offers something attractive: high interest rate
what is the difference between a secured bond and a debenture? which type carries more risk for the lender?
secured: backed by collateral debentures: not backed by collateral (riskier)
what is the difference between the stated interest rate and the market interest rate on a bond?
stated interest rate: what the bond pays in cash market interest rate: the return that bondholders require
what is the carrying value of a bond payable?
the net amount between the bond's face value plus any un-amortized premiums or minus any amortized discounts.
why are payroll taxes and sales taxes considered liabilities?
they are liabilities to the employer, who is obligated to remit those deductions to another organization or the government.
why is Deferred Revenue considered a liability?
to represent the company's obligation to provide future services. It reflects revenue that has not been earned and represents products or services that are owed to a customer.
