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Flashcards in Chapter 10 Deck (111):
1

Current liability

A debt that a company reasonably expects to pay

1.) from existing current assets or through creation of other current liabilities

2.) Within one year or the operating cycle, whichever is longer

2

Notes payable

An obligation in the form of a written note

3

Why notes payable instead of accounts payable

Give the lender written documentation of the obligation in case legal remedies are needed to collect the debt

4

Journal Entry accepting notes payable 

Cash XXX

                      Notes Payable XXX

5

Journal Entry for accrual of interest

Interest Expense XXX

           Interest Payable XXX

6

Journal Entry for Payment of Note Receivable

Notes Payable XXX

Interest Payable XXX

                     Cash     XXX

7

Sales Tax Journal Entry by Company before remitting it to the government

Cash       XXX

                   Sales Revenue XXX

                           Sales Taxes Payable XXX

8

Journal entry when company remits sales tax to government

Sales Taxes Payable    XXX

                                         Cash XXX

9

Cooley Grocery store serves only as a ______________ for the taxing authority

collection agent

10

Company rings up sales taxes seperately:

Total receipts of 10,600 with a 6% sales tax

find sales tax amount

10,600 / 1.06 = 10,000

10600 - 10000 = 600

11

Journal entry when a company receives an advance

Cash XXX

Current liability XXX

12

Journal entry when company earns the revenue

Unearned revenue account XXX

             Earned Revenue Account XXX

13

Airline

Unearned revenue: Unearned Passanger Ticket Revenue

Earned Revenue: Passenger Ticket Revenue

14

Magazine publisher

Unearned Revenue: Unearned Subscription Revenue

Earned Revenue: Subscription Revenue

15

Hotel

Unearned Revenue: Unearned Rental Revenue

Earned Revenue: Rental Revenue

16

Companies often identify current maturities of long-term debt on the balance sheet as _________________

long-term debt due within one year

17

account for social security

FICA Taxes Payable

18

Account for federal income tax

Federal Income Taxes Payable

19

Account for State Income Tax

State Income Taxes Payable

20

Account for unemployment federal taxes

Federal Unemployment Taxes Payable

21

Account for unemployment state taxes

State Unemployment Taxes Payable

22

Wages expense and Wages payable journal entry

Salaries and Wages Expense XXX

                          FICA Taxes Payable XXX

              Federal Income taxes Payable XXX

                 State Income Taxes Payable XXX

                   Salaries and Wages Payable XXX

23

Company's Payaroll Tax Expense Journal Entry

Payroll Tax Expense XXX

                                   FICA Taxes Payable XXX

            Federal Unemployment Taxes Payable XXX

              State Unemployment Taxes Payable XXX      

24

Long-term liabilities

Obligations that a company expects to pay more than one year in the future

25

Long term liabilities are often in the form of ________________________

bonds or long-term notes

26

Bonds

A form of interst-bearing note payable issued by corporations, universities, and governmental agencies

Sold in small denominations (1,000 or multiples of $1,000)

Attract many investors

27

Secured bonds

Bonds that have specific assets of the issuer pledged as collateral

28

Unsecured bonds

Bonds issued against the general credit of the borrower

29

Convertible bonds

Bonds that can be converted into common stock at the bondholder's option

Attractive to bondholder and the issuer

For the issuer, bonds sell at a higher price and pay a lower rate of interst than comparable debt securities that do not have a conversion option

30

Callable bonds

Bonds that the issuing company can retire at a stated dollar amount prior to maturity

31

Bond certificate

A legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual interest rate and the maturity date of the bonds

32

Face Value

Amount of principal due at the maturity date of the bond

33

Maturity date

The date on which the final pyament on a bond is due form the bond issuer to the investor

34

Contractual (stated) interest rate

Rate used to determine the amount of interest the borrower pays and the investor receives

35

The contractual rate is often referred to as the __________

stated rate

36

Time value of money

The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future

37

Present Value

The value today of an amount to be received at some date in the future after taking into account current interest rates

38

Market interest rate

The rate investors demand for loaning funds

39

Discounting the future amounts

The process of finding the present value

40

Market value of bond

Present value of all the future cash payments promised by the bond

41

Bond prices for both new issues and existing bonds are quoted as ________________________

a percentage of the face value of the bond

Face value is usually $1,000

Ex. $1,000 bond with a quoted price of 97 means $970

42

Journal Entry for issuing bonds

Cash      XXX

       Bonds Payable XXX

43

Interest adjusting entry on bonds

Interest expense   XXX

             Interest Payable XXX

44

Interest payable classified as

current liability

45

bond payable classified as

long-term liability

46

Payment of interest journal entry

Interest Payable   XXX

                           Cash    XXX

47

When the contractual interest rate and the market interest rate are the same, _______________

bonds sell at face value

48

Discount (of a bond)

The difference between the face value of a bond and its selling price, when a bond is sold for less than its face value

49

Premium (on a bond)

The difference between the selling price and the face value of a bond when a bond is sold for more than its face value

50

Bond prices ____________ with changes in the market interest rate

vary inversely

51

As market interest rates decline

bond prices will increase

52

If the market interest rate is below the contractual rate when a bond is issued ___________

the price will be higher than the face value

53

Zero-coupon bonds

pay no interest

sell at a deep discount to face value

54

Journal entry for issuance of bonds at a discount:

Cash XXX

             Discount on Bonds Payable XXX

                             Bonds Payable  XXX   

55

Discount on bonds payable

contra account to bonds payable

deducted from bonds payable on the balance sheet

56

Carrying value (book value)

Subtracting balance of the discount account from the balance of the Bonds Payable account

57

Amortizing the discount

Allocating bond discount to expense in each period in which the bonds are outstanding

58

Journal entry issuing bonds at a premium

Cash XXX

                     Bonds Payable XXX

    Premium on Bonds Payable XXX

59

Premium on bonds payable

added to the bonds payable on the balance sheet

60

Premium is considered to be a ___________________

reduction in the cost of borrowing that reduces bond interest expense over the life of the bonds

61

Amortization of the premium ___________ the amount of interest expense reported each period

decreases

62

63

Statement of Cash Flows: Debt

information regarding cash inflows and outflows during the year that resulted form the principal portion of debt transactions appears in the "financing activities"

Interest expense in the "operating activities" as a result of debt transactions

64

Bank line of credit

A prearranged agreement between a company and a lender that permits the company to borrow up to an agreed-upon amount

65

Times interest earned ratio

A measure of a company's solvency, calculated by dividing income before interest expense and taxes by interest expense

66

Times interest earned ratio:

Net income + Interest expense + Tax expense

Interest expense

*solvency ratio

**uses income before interest expense and taxes because this number best represents the amount available to pay interest

67

Off balance-sheet financing

An intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet

68

Two common types of off-balance sheet financing result from _______________________

unreported contingencies

lease transactions

69

Contingencies

Events with uncertain outcomes that may represent potential liabilities

ex. lawsuits - possilbe negative implications; warranties; environmental clean-up obligations

70

Two characteristics to record a contigency

Reasonable estimate

Probable outcome

*otherwise write it in notes to its financial statements

71

GAAP on leases

more rules-based

companies get get around the rules to listing it as an operating lease instead of a capital lease

72

debt covenants

Specific financial measures, such as minimum levels of retained earings, cash flows, that a company must maintain during the life of a loan

if a company violates a covenant, it violated the loan agreement and the creditor can demand immediate repayment

73

Straight-line method of amortization

A method of amortizing bond discount or bond premium that allocates the same amount to interest expense in each interest period

74

Bond discount amortization = 

Bond discount / Number of interest periods

75

Journal entry for recording amortization of a bond discount

Interest expense 10,400

                       Discount on Bonds Payable 400

                                          Interest Payable 10,000

76

Bond Premium Amortization =

= Bond Premium / Number of Interest Periods

77

Journal entry of amortization of bond premium

Interest Expense 9,600

Premium on Bonds Payable 400

                                       Interest Payable 10,000

78

Effective interest rate

Rate established when bonds are issued that remains constant in each interest period

79

Effective-interest method of amortization

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds

80

Bond interest expense

Carrying value of Bonds at Beginning of Period

x

Effective-interest rate

81

Bond interest paid

Face amount of bond

x

Contractual interest rate

82

Amortization amount in effective-interest method

Bond Interest Expense - Bond Interest Paid

83

When the amounts are materially different, GAAP requires ___________________

use of the effective-interest method

84

Discount on Bonds Payable account is often referred to as ________

Unamortized Discount on Bonds Payable

85

Amortizing a bond discount under effective-interest method

Interest Expense 10,319

                   Discount on Bonds Payable 319

                                      Interest Payable 10,000 

86

Amortizing a bond premium under effective-interest method

Interest Expense 9,670

Premium on Bonds Payable 330

                                     Interest Payable 10,000

87

Mortgage

Pledges title to specific asset as security for a loan

a document that secures a long-term note

88

Mortgage notes payable

A long-term note secured by a mortgage that pledges title to specific asset as security for the loan

89

Electronic spread sheet programs

Creat a schedule or installment loan pyaments

allows you to put in the data for your own mortgage loan and get an illustration that really hits home

90

Journal entry to record mortgage loan

Cash  XXX

                             Mortgage Payable XXX

91

Journal Entry to record semiannual payment on mortgage

Interest Expense XXX

Mortgage Payable XXX

                                  Cash XXX

92

Bond Discount Amortization =

Bond Discount / Number of interest periods

93

Journal entry: straight line method of amortization bond discount

Interest Expense 10,400

                                   Discount on Bonds Payable 400

                                                       Interest Payable 10,000

94

Journal entry: amortizing bond permium straight-line

Interest Expense 9,600

Premiumon Bonds Payable 400

                                           Interest Payable 10,000

95

Effective interest rate

 Rate established when bonds are issued that remains constant in each interest period.
 

96

Effective interest method of amortization

A method of amortizing bond discount or bond premium that results in periodic interest expense equal to a constant percentage of the carrying value of the bonds

97

present value

the value now of a given amount to be paid or received in the future, assuming compounding interest

98

Discounting the future amount

The process of determining the present value

99

Present value = 

Future value / (1 + i)^n

100

Present value gets smaller ________

as you move farther away from future

ex. 1 year to 5 years

101

Present value of an annuity

The value now of a series of future receipts or payments, discounted assuming compounded interest

102

Examples of a series of periodic receipts or payments

Loan agreements, installment sales, mortgage sales, lease contracts, and pension obligations

 

103

annuities

Periodic receipts or payments

104

To compute present value of an annuity, it is necessary to know:

1. Discount rate

2. Number of discount periods

3. Amount of the periodic receipts or payments

105

semiannually

twice a year

106

When market interest rate is equal to the bond's contractual interest rate___________________

the present value of the bonds will equal the face value of the bonds

107

Current cash debt coverage

Measure of liquidity

Net cash by operating activities / Average Current Liabilities

108

Direct write-off info:

No estimation

No "matching"

Gross A/R

Volitale

 

109

Allowance method results in ___________

Net Accounts Receivable

110

Aging receivables method:

Use different time periods

The longer outstanding, the higher % uncollectible

111

Contingent liabilities effect:

 If the contingent liabilities result in material losses for the company it will negatively impact the company’s financial results and affect the decisions made by the users of the financial statements.