AC 224 (chapter 10)

Question 1

What is a Current Liability?

Answer 1

A debt that a company expects to pay within one year using current assets.

Question 2

Name the most common types of current liabilities.

Answer 2

• Accounts payable
• Current portion of notes payable
• Unearned revenues
• Accrued liabilities (Taxes payable, Salaries and wages payable, Interest payable)

Question 3

What is a Note Payable?

Answer 3

The amount of a note payable that is due within one year.

Question 4

True or False: There is an entry necessary to reclassify debt from long-term to current.

Answer 4

False

Question 5

What is Sales Tax Payable?

Answer 5

The amount of sales tax the company has collected from customers on behalf of the government.

Question 6

Fill in the blank: Sales taxes are not an expense to the company, they are an expense to the _______.

Answer 6

customer

Question 7

What is Unearned Revenue?

Answer 7

The liability a company recognizes when it receives cash from a customer in advance of providing a service.

Question 8

When is a liability recognized for Payroll and Payroll Taxes Payable?

Answer 8

When the company incurs salaries and wages expense.

Question 9

What are Bonds?

Answer 9

Notes payable that are issued directly by the company.

Question 10

What is the typical face value of bonds?

Answer 10

$1,000

Question 11

What are the two types of bonds based on security?

Answer 11

• Secured
• Unsecured

Question 12

What does a Convertible bond allow bondholders to do?

Answer 12

Convert the bond into the issuing company’s stock.

Question 13

What are Debt Covenants?

Answer 13

Outlined terms and financial benchmarks that the company must meet during the bond’s outstanding period.

Question 14

What happens in case of Default?

Answer 14

The bond purchaser has the right to demand immediate repayment of the bond.

Question 15

What is Bond Issuance?

Answer 15

The day the bond is purchased by an outside party.

Question 16

What is the Maturity Date of a bond?

Answer 16

The date the final bond payment is due to the bond purchaser.

Question 17

What is the Stated Rate of a bond?

Answer 17

The rate used to determine the amount of cash paid for interest each year the bond is outstanding.

Question 18

What determines Bond Pricing?

Answer 18

The present value of the bond’s expected future cash flows.

Question 19

Fill in the blank: A dollar today is worth more than a dollar _______.

Answer 19

tomorrow

Question 20

What is Present Value?

Answer 20

The value of $1 in the future, expressed in today’s dollars.

Question 21

What is Future Value?

Answer 21

The value of $1 today, expressed as its value in the future.

Question 22

What factors affect Bond Price?

Answer 22

• The dollar amounts expected to be received
• The timing of cash receipts
• The market rate of interest

Question 23

What is meant by Bonds Issued at Face Value?

Answer 23

The stated rate of the bond is equal to the market rate.

Question 24

What happens when Bonds are Issued at a Premium?

Answer 24

The stated rate is greater than the market rate.

Question 25

What is Amortization of a premium?

Answer 25

It decreases interest expense.

Question 26

What characterizes Bonds Issued at a Discount?

Answer 26

The stated rate is less than the market rate.

Question 27

What is a bond issued at a discount?

Answer 27

A bond where the stated rate is less than the market rate.

Question 28

What happens to interest payments for bonds issued at a discount?

Answer 28

They are less than those of comparable bonds on the market.

Question 29

What does a bond purchaser give the bond issuer when purchasing a bond at a discount?

Answer 29

Less cash upon purchase of the bond.

Question 30

How is the discount on a bond amortized?

Answer 30

Over the life of the bond.

Question 31

What is the normal balance of discounts in accounting?

Answer 31

Debit balance.

Question 32

What is the effect of amortizing a discount on interest expense?

Answer 32

It increases interest expense.

Question 33

What is recorded in the journal entry for amortization of a discount?

Answer 33

Dr. Interest Expense, Cr. Discount on Bonds Payable, Cr. Cash/Interest Payable.

Question 34

What occurs when bonds are redeemed at maturity?

Answer 34

The bond issuer repays the bond purchaser the face value of the bond.

Question 35

What are long-term notes payable?

Answer 35

Interest-bearing notes whose terms exceed one year.

Question 36

What are mortgage notes?

Answer 36

Notes tied to a specific asset that is pledged as security for the loan.

Question 37

What are the two types of interest rates for mortgage notes?

Answer 37

* Fixed interest rate * Adjustable interest rate

Question 38

How are payments on mortgage notes typically made?

Answer 38

In installments, including both interest and principal.

Question 39

What is a lease liability?

Answer 39

Arises from a contractual agreement between a lessor and a lessee.

Question 40

What does the lessee record for leases that exceed one year?

Answer 40

An asset (right-to-use) and a liability (obligation to pay the lease).

Question 41

What is liquidity in the context of accounting?

Answer 41

A measure of a company’s ability to pay obligations as they come due.

Question 42

How is working capital calculated?

Answer 42

Current Assets - Current Liabilities.

Question 43

What does the current ratio measure?

Answer 43

The relationship between current assets and current liabilities.

Question 44

What does times interest earned indicate?

Answer 44

A measure of the company’s ability to meet interest payments.

Question 45

What is solvency in accounting?

Answer 45

The ability of a company to survive over a long period of time.

Question 46

How is the debt to assets ratio calculated?

Answer 46

Total Liabilities / Total Assets.

Question 47

What are the two main ways a company can finance its operations?

Answer 47

* Debt * Equity