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ACT 230 - Principles of Accounting > Chapter 10: Accounting for Liabilities > Flashcards

Chapter 10: Accounting for Liabilities Flashcards

1
Q

Define liabilities

A

Obligations resulting from past transactions or events that require a company to pay money or provide goods or services in the future.

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2
Q

Define current liabilities

A

Liabilities that come due within the coming year or normal operating cycle

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3
Q

What two accounts are current liabilities?

A

Accounts payable and notes payable.

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4
Q

What is the difference between accounts payable and notes payable regarding credit periods?

A

Accounts payable: short-term creditors

Notes payable: Longer credit period, 30-60 days

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5
Q

What is the difference between accounts payable and notes payable regarding interest?

A

Accounts payable: Non-interest bearing

Notes payable: Interest bearing

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6
Q

Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.

How do you record the purchase of equipment?

A

Debit equipment 10,000
Credit notes payable 10,000

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7
Q

Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.

How do you calculate accrued interest expense for this example?

A

Equipment cost * interest * 2/12

10,000 * 0.6 * 2/12 = 100

(I have no idea where the 2/12 comes from)

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8
Q

Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.

How do you record the accrued interest expense (100)

A

Debit interest expense 100
Credit interest payable 100

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9
Q

Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.

How do you record the payment of notes and interest?

A

Debit interest expense 50
Debit interest payable 100
Debit Notes payable 10,000
Credit cash 10,150

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10
Q

Payroll expenses are a _____ cost for most firms

A. Major
B. Minor

A

A. Major

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11
Q

What 3 things are included in payroll expenses?

A
  1. Salaries and wages
  2. Withheld employee paychecks
  3. Payroll taxes/benefits
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12
Q

What four taxes can employers withhold from employee paychecks?

A
  1. Federal tax
  2. State tax
  3. Social Security tax
  4. Medicare tax
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13
Q

Other than taxes, what other payments can employers withhold from employee paychecks?

A

Health insurance, union dues, and retirement

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14
Q

Which payroll taxes are paid by the employer?

A

FICA, federal and state unemployment taxes

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15
Q

How do you calculate net pay?

A

Net pay = gross pay - amounts withheld

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16
Q

What 5 accounts are “amounts withheld”?

A
  1. Health insurance premiums
  2. FICA
  3. Federal income tax
  4. State income tax
  5. Union dues
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17
Q

Calculate net pay with the following information:

Federal income tax: 1,200
FICA: 459
Gross Pay: 6,000
Health insurance premiums: 320
State income tax: 405
Union dues: 100

A

Net pay = gross profit - amounts withheld

Net pay = gross profit - (health insurance premiums + FICA + Federal income tax +state income tax + union dues+

Net pay = 6,000 - (+2,484)

Net pay = 6,000 - 2,484

Net pay = 3,516

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18
Q

Define unearned revenue

A

Revenue that had not been earned

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19
Q

What type of account is unearned revenue?

A

Liability

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20
Q

Southwest Airlines sells a ticket on June 1 for travel on July 15 for $300.

How do you record the advance sale of the ticker?

A

Debit cash 300
Credit unearned revenue 300

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21
Q

Southwest Airlines sells a ticket on June 1 for travel on July 15 for $300.

How do you record ticked revenue earned?

A

Debit unearned revenue 300
Credit ticket revenue 300

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22
Q

Which of the following is NOT a current liability?

A. Account payable
B. Unearned revenue
C. Payroll taxes payable
D. Bonds payable

A

D. Bonds payable

Explanation: bonds payable is a non-current liability, not current liability, because it is payable after one accounting period. (longer credit period)

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23
Q

Define bond

A

A long-term debt instrument that promises to pay periodic interest in addition to the principal amount at maturity

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24
Q

What are the 5 types of bonds?

A
  1. Secured bonds
  2. Debenture bonds
  3. Serial bonds
  4. Convertible bonds
  5. Zero-coupon bonds
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25
Q

Define secured bond

A

Bonds that pledge specific property as collateral in case of default

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26
Q

Define debenture bond

A

Bonds rely on the borrower’s general creditworthiness rather than specific collateral.

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27
Q

Define serial bonds

A

Bonds that mature over a series of years

28
Q

Define convertible bonds

A

Bonds that grant the bondholder the right to convert the bonds into the company’s common stick as a specific conversion rate

29
Q

Define zero-coupon bonds

A

Bonds that pay no periodic interest but are issued at a large discount

30
Q

What effect does “call provision” have on bonds?

A

Allows the issuer to pay the bond before it’s due

31
Q

What is a sinking fund provision?

A

An account containing money set aside to pay off a debt or bond

32
Q

Define face value regarding bonds.

A

The amount paid back was the expected amount

Ex: I lend you $1,000, you pay it back at fave value for $1,000

33
Q

Define coupon rate regarding bonds.

A

Paying back a bond with the interest agreed upon

For example, I will lend you $1,000 with a 2% interest over 12 months. In a year, you pay me back $1,020.

34
Q

Define market rate regarding bonds.

A

A representation of what the market will pay for similar bonds.

For example, I’m willing to sell a bond for $1,000. You offer to pay for it at a face value of $1,000 on the agreed date, but the market value is a 10% increase. That means I can likely sell the same bond for $1,000 to someone but get paid a premium value of $1,100 instead of the face value of $1,000.

35
Q

If you have a bond coupon rate of 8%, what value will the bond sell if the market interest rate is 10%?

A. Discount value
B. Face value
C. Premium value

A

A. Discount value

Explanation: If the market sells bonds for $100 at a 10% bond coupon rate, the buyer will have to pay back $110. But if you’re selling a bond of $100 for an 8% coupon rate, your bond is sold for $108 instead, and thus at a discounted value compared to the market value of $110.

36
Q

If you have a bond coupon rate of 8%, what value will the bond sell if the market interest rate is 8%?

A. Discount value
B. Face value
C. Premium value

A

B. Face value

Explanation: The market value and face value are the same. You sell your bond for precisely what you expected to.

37
Q

If you have a bond coupon rate of 8%, what value will the bond sell if the market interest rate is 6%?

A. Discount value
B. Face value
C. Premium value

A

C. Premium value

Explanation: If the market has bonds of $100 selling for a 6% coupon rate, the buyer will only have to pay back $106. But if you sell a bond for 8%, you will be paid back $108, a higher (premium) value than the market value of $106.

38
Q

How do you record a bond issuance of face value price? (Assume bond cost $1,000)

A

Debit cash 1,000
Credit bonds payable 1,000

39
Q

How do you record bond issuance at a discounted value? (Assume the bond costs $1,000 for a 3% discount)

A

Debit cash 970
Debit discount on bonds payable 30
Credit bonds payable 1,000

40
Q

How do you record a bond issuance for a premium value? (Assume the bond costs $1,000 and is sold for a 5% increase)

A

Debit cash 1,050
Credit bonds payable 1,000
credit premium on bonds payable 50

41
Q

How long does a bond mature before it appears on the balance sheet as a long-term liability?

A

One year

42
Q

Does a discount appear as a reduction of a bond (liability) or an addition to the bond (liability)?

A

Reduction

43
Q

Does the premium appear as a reduction of a bond (liability) or an addition to the bond (liability)?

A

Addition

44
Q

Define leverage regarding bonds.

A

When income increases by earning more on the use of bonds than the cost of those bonds

Ex: If you buy a bond for $1,000 to purchase equipment and pay the bond back for 1,000, but the equipment earns you $1,500, you gain a $500 leverage.

45
Q

Three advantages of bonds

A
  1. No ownership interest dilution
  2. Bond interest expense is tax deductible
  3. Leverage to common shareholders
46
Q

Define debt covenants

A

When a bond restricts what actions a company can take

Ex: Choosing to pay back a bond over advertising for a new product

47
Q

3 disadvantages of bonds

A
  1. Bond interest must be paid (unlike dividends)
  2. Have a specific repayment date
  3. Debt covenants
48
Q

Jones Co. issued a $1,000 face amount 20-year bond and received a $950 at the time of issuance. The bond sold at…

A. A premium
B. A discount
C. Face value
D. Cannot be determined without knowing interest rates

A

B) Discount

Would have earned $1,000 but only earned $950 instead

49
Q

Define contingent liabilities

A

Liabilities are obligation resulting from past events BUT ALSO need a future event to take place

Ex: Lawsuits, environmental cleanup costs, credit guarantees, etc.

50
Q

What is the challenge when recording contingent liabilities?

A

Predicting the likelihood of future events and the ability to measure the pay amount

51
Q

What conditions must be met to record contingent liabilities?

A
  1. The likelihood of the event taking place is probable
  2. A reasonable estimate of obligation can be made
52
Q

What do you do with a contingent liability whose future event is possible but not probable, and no reasonable estimation can be made?

A

Disclose it in the notes, but DO NOT RECORD IT

53
Q

Can a contingent liability be ignored?

A. No, all liabilities must be recorded
B. No, contingent liabilities should still be recorded
C. Yes, but only if the future event is slim to occur
D. Yes, but only if the estimation couldn’t be calculated

A

C. Yes, but only if the future event is slim to occur

54
Q

Define working capital

A

The estimation between the difference of current assets and current liabilities

55
Q

Does a company want a high working capital or low working capital?

A

High, as it’s a sign of a stronger financial position

56
Q

What are the 2 ways to measure working capital?

A

Current ratio and quick ratio

57
Q

Define current ratio

A

The total of current assets divided by current liabilities

58
Q

How do you calculate the current ratio?

A

Current ratio = current assets / current liabilities

Ex:

Current ratio = 10 current assets / 5 current liabilities

Current ratio = 2

Ideally, 2 or higher, but businesses with less than two have been able to stay successful

59
Q

How is quick ratio different from current ratio?

A

Some current assets are challenging to convert to cash, and the quick ratio only contains liquid current assets instead of all assets.

60
Q

How do you calculate the quick ratio?

A

Quick ratio = (cash/cash equivalents + short-term investments + accounts receivable) / current liabilities

61
Q

What is the times-interest earned ratio?

A

A ratio that shows a company’s ability to pay back credits (like a business’s credit score).

Ideally, within a 3-4 range

62
Q

How is the times-interest-earned ratio calculated?

A

Times-interest-earned ratio = (income before interest expense and income taxes) / interest expense

63
Q

Norton Co. reports the following for the current year: Cash, $300; short-term investments, $500; accounts receivable, $1,000; inventory, $700, total current assets, $2,500; and total current liabilities, $1,000.

Which of the following is true regarding the current ratio and the quick ratio?

	    Current ratio      Quick ratio
        A.        1.8:1                  2.5:1
	B.        2.5:1                  1.8:1
	C.        2.5:1                  0.8:1
            D.        2.5:1                  2.5:1
A

B. 2.5:1 1.8:1

(I have no idea why)

64
Q

Bonds are usually sold in units of…

A. $2,000 face value
B. $1,500 face value
C. $1,000 face value
D. $500 face value

A

C. $1,000 face value

65
Q

What is the “proper accounting term” for being paid more for a bond?

A

Premium value

66
Q

What is the “proper accounting term” for being paid less for a bond?

A

Discount value

67
Q

What is the “proper accounting term” for being paid face value for a bond?

A

Maturity value

ACT 230 - Principles of Accounting (8 decks)

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