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Flashcards in Chapter 10 powerpoint Deck (132):
1

Current liability

A debt with two key features:

1. Company expects to pay the debt from

a. existing current assets or

b. through the creation of other current liabilites

2. Company will pay the debt within one year of the operating cycle, whichever is longer

2

Examples of current liabilities:

Notes Payable

Accounts Payable

Unearned Revenues

Accrued liabilities - taxes, salaries and wages, and interest payable

3

Notes Payable - current liability

Written as promissory notes

Require the borrower to pay interest

Those due within one year of the balance sheet are classified as current liabilites

4

Why are notes payable used instead of accounts payable?

Because notes payable give the lender written documentation of an obligation in case legal remedies are needed to collect the debt

5

Journal entry accepting a notes payable

Cash XXX

                               Notes Payable XXX

6

Journal entry accruing interest

Interest expense XXX

                 Interest Payable XXX

7

Journal entry paying note payable at maturity

Notes Payable 100,000

Interest Payable 4,000

                                     Cash 104,000

8

Long-term notes payable

It may be secured by a mortgage that pledges title to specific assets (usually real estate) as security for a loan

Typically, terms require the borrower to make installment payments over the term of the loan. Each payment consists of:

1. interst on unpaid balance of loan

2. reduction of loan principal

9

Journal entry accepting a mortgage loan

Cash XXX

                           Mortgage Notes Payable XXX

10

Journal entry making firs installment on mortgage payments

Interest Expense 30,000

Mortgage Notes Payable 3,231

                                                       Cash 33,231

11

Balance shet - long term notes payable

Reduction in principal for the next year - current liability in balance sheet

Remaining unpaid principal balance - long term liability in balance sheet

12

Each payment on a mortgage note payable consists of:

Interest on the unpaid balance of the loan and reduction of loan principal

13

Sales Taxes are expressed as ___________________

a stated percentage of the sales price

14

The retailer collects tax from the ____________

customer

15

The terailer serves as a _____________ for the taxing authority

collection agent

16

The selling company is usually required to ring up ______________ on the cash register the amount of the sale and the amount of the sales tax collected

seperately

17

If Sales revenue and tax are together, to find sales revenue

Total cash received / (1 + Sales Tax Rate)

18

Journal Entry for sales revenue with tax

Cash 10,600

                                      Sales Revenue 10,000

                                      Sales Tax Payable 600

19

Unearned Revenue

Revenues that are received before the company delivers goods or provides services

Cash XXX

                                        Unearned Revenue XXX

20

Journal entry when company earns money

Unearned Revenue XXX

                      Sales Revenue XXX

21

Current Maturities of Long-Term Debt

The portion of long-term debt that comes due in the current year

There is no adjusting entry required

22

Payroll and Payroll Taxes Payable

The term "payroll" pertains to both:

Salaries - monthly or yearly rate

Wages - hourly rate

*A company will withold amounts to pay various governmental authorities

23

Salaries

Managerial, Administrative, and Sales Personnel

(Monthly or Yearly Rate)

24

Wages

Store Clerks, Factory Employees, and Manual Laborers

(Hourly rate)

25

Determining the payroll involves computing three amounts:

1. gross earnings

2. payroll deductions

3. net pay

26

Journal entry for payment of payroll

Salaries and Wages Payable 67,564

                                                                 Cash 67,564

27

Payroll Tax Expense

Governmental agencies levy on employers

3 taxes:

1. FICA Tax

2. Federal Unemployment Tax

3. State Unemployment Tax

28

Journal Entry for payroll on employees

Salaries and Wages Expense XXX

                                     FICA Tax Payable XXX

                                  Federal Tax Payable XXX

                                      State Tax Payable XXX

                      Salaries and Wages Payable XXX

29

Journal entry on payroll employers

Payroll Tax Expense XXX

                                           FICA Tax Payable XXX

                   State Unemployment Tax Payable XXX

                Federal Unemployment Tax Payable XXX

30

Payroll and Payroll Tax Liabilities are classified as ____________ because they must be paid to employees or remitted to taxing authorities periodically and in the near term

current liabilities

31

Long-Term Obligations

The obligations a company expect to pay more than one year in the future

32

Bonds

A form of interest-bearing notes payable issued by corporations, universities, and governmental agencies

*usually denominations of $1,000 or multiples of $1,000 so they attract many investors

33

Secured

The specific assets of the issuer pledged as collateral for bonds

34

Unsecured

It is issued against the general credit of the borrower

35

Convertible

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

36

Callable

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

37

Bond Certificate

Issued to the investor

Provides information such as:

1. Name of company issuing bonds

2. Face value

3. Maturity date

4. Contractual interest rate (stated rate)

38

Face Value

The principal due at the maturity

39

The Maturity Date

The date final payment is due

40

Contractual interest rate

The rate (usually annual) to determine cash interest paid, generally semiannually

41

Time Value of Money

Used to indicate the relationship between time and money

i.e a dollar received today is worth more than a dollar promised at some time in the future

42

The market value is a function of the three factors that determine present value:

The dollar amounts to be received

The length of time until the amounts are received

The market rate of interest (rate investors demand for loaning funds)

43

Discounting

The process of finding the present value is referred to as discounting the future amounts

44

Simple interest

Computed on the principle amount only

The return on the principle for one period

45

Compound interest

Computed on the principal AND on any interest earned that has not been paid or withdrawn

46

Present Value formula

Present Value = Future Value / (1 + i)n

 

p = principal or present value

i = interest rate for one period

n = number of periods

47

Present value of an annuity

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

Necessary to know:

1. Discount Rate

2. Number of Discount Periods

3. Amount of Periodic Receipts or Payments

48

What happens to interest rate when discounting is semiannual

divide by 2

49

When discount rate is identical to the interest payment

Present value of bond = principal

50

A corporation records bond transactions when it:

Issues or Retires (Buys Back) Bonds

Converts Bonds into Common Stock (Bond Holders)

51

If bond holders sell their bond investments to other investors, ___________________

the isue firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction

52

Bonds may be issued at:

Face Value

Below Face Value (Discount)

Above Face Value (Premium)

*bonds are quoted as a percentage of face value 

53

The rate of interest investors demand for loaning funds to a corporation

Market Interest Rate

54

Journal Entry when issue a bond 

Cash XXX

                              Bonds Payable XXX

55

Journal entry when a bond you issue accrues interest

Bond Interest Expense XXX

                         Bond Interest Payable XXX

56

Journal entry when you pay interest you accrued on a bond

Bond Interest Payable XXX

                                       Cash XXX

57

Assume Contractual rate of

10%

58

Market interest 8%

Premium

59

Market interest 10%

Face Value

60

Market Interest 12%

Discount

61

If a bond is sold at a premium, it means the contractual interest rate ____________________

exceeds the market interest rate

62

Journal entry issuing a bonds payable

Cash 98,000 

Discount on Bonds Payable 2,000

                                         Bonds Payable 100,000

63

Discount on Bonds Payable

Debit balance

Contra account deducted from Bonds Payable

64

Journal entry issuing bond at premium

Cash 102,000

                                  Bonds Payable 100,000

                    Premium on Bonds Payable 2,000

65

Premium on Bonds Payable is an ________________ added to Bonds Payable

adjunct

66

Amortizing the Discount/Premium

To follow the expense recognition principle, companies allocate the bond expense in each period in which bonds are outstanding

67

The amortization of a _____________ INCREASES the amount of interest expense reported each period

discount

i.e additional cost of borrowing

68

The amortization of a _________ DECREASES the amount of interest expense reported each period

premium

i.e reduction in the cost of borrowing

69

Effective interest method

The amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value

1. Compute the Bond Interest expense

2. Compute the Bond interest paid or accrued

3. Compute the Amortization amount

70

GAAP requires the use of ___________________

effective-interest method

71

Journal entry amortizing a bond discount

Bond Interest Expense 10,319

                            Discount on Bonds Payable 319

                                        Bond Interest Payable 10,000

72

Journal entry amortizing bond premium

Bond interest expense 9,670

Premium on Bonds Payable 330

                                 Bond Interest Payable 10,000

73

Which type of amortization increases the Interest Expense?

Discount

74

Which type of amortization decreases the Interest Expense?

Premium

75

Regardless of the issue price of bonds, the book value of the bonds at maturity will ________________

equal their face value

76

Journal entry when a company pays bonds payable

Bonds Payable 100,000

                                        Cash 100,000

77

A company may retire bonds before maturity to ____________________________

reduce interest cost and remove debt from its balance sheet

78

When a company retires bonds before maturity, it is necessary to:

1. Eliminate the carrying value of the bonds at the redemption date

2. Record the cash paid

3. Recognize the gain or loss on redemption

79

Carrying value of bonds

Face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date

80

When bonds are redeemd before maturity, the gain or loss on redemptionis the difference between the cash paid and the:

Carrying value of the Bonds

81

Loss paid on Bond Redemption

Cash Paid - Carrying Value

103,000 - 100,400

82

Journal entry for redemption of bond with a loss on bond redemption

Bonds Payable 100,000

Premium on Bonds Payable 400

Loss on Bond Redemption 2,600

                                                             Cash 103,000

83

When bonds are converted into common stock

The carrying value of the bonds is transferred to paid-in capital accounts

84

Times Interest Earned (Definition)

An indication of a company's ability to meet interest payments as they come due

85

Times Interest Earned Formula

Net Income + Interest Expense + Tax Expense

Interest Expense

86

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

87

Two types of off-balance-sheet financing

Contingencies

Lease Transacctions

- operating lease

- capital lease

88

Contingencies

An event with uncertain outcomes that may represent potential liabilities

ex. lawsuit

89

Example of contingency: lawsuit

Lawsuit is recorded if can determine a reasonable estimate of the loss and if it is probable that it will lose

-if not, disclose in the notes

90

Operating Leases

These leases are treated like rentals with no assets or liabilites on the books

91

Capital leases

These leases are treated like debt-financed purchase that increases both assets and liabilities

92

What kind of leases do companies NOT want?

Capital lease, so they purposely structure their lease agreement to meet operating lease requirements

93

The matching principle....

necessiatates the recording of an estimated amount for bad debts

94

Under the allowance method, when a specific account is written off _______________

total assets will be unchanged

95

Allowance for doubtful accounts: effect on a/r

Contra-asset account

It is subtracted from the gross amount of accounts receivable so A/R is reported at cash realizable value

96

The cost of an intangible asset with an indefinte life should _____________________

not be amortized

97

Unearned Rental Revenue is __________________

reported as a current liability

98

The carrying value of bond will equal the market price _______________

on the date of issuance

99

Depreciation notes

A process of cost allocation

Provides for proper matching of expenses with revenues

100

Balance in Accmumulated Depreciation:

The total cost that has been charged to expense

101

Depreciation applies to three classes of plant assets:

1. Land improvements

 2. Buildings

3. Equipment

102

Journal entry when receiving a note receivable plus interest

Cash 7500

                         Notes Receivable 7000

                           Interest Revenue 500

103

Journal entry when accruing interest you will receive

Interest receivable XXX

                     Interest Revenue XXX

104

Received 5,800 on cash sale. The cost of the goods sold was 3000

Effects?

Current ratio => increase

Receivables Turnover => No effect

Average Collection period => No effect

105

Recorded bad debts expense of $580 using the allowance method

Effects?

Current ratio => Decrease

Receivables Turnover => Increase

Average Collection Period => Decrease

 

106

Wrote off a $116 account receivable as uncollectible (uses allowance method)

Effects?

Current ratio => No effect

Receivables Turnover => No effect

Average Collection period => No effect

107

Recorded $2,902 sales on account. The cost of the goods sold was $1,741

Effects?

Current ratio => Increase

Receivables Turnover => Decrease

Average Collection Period => Increase

108

Two advantages of having assets and liabilities not reported on balance sheet:

ROA higher if less assets

Less liabilities = Less risky

109

If listed as Revenue Expenditure when it should be a Capital Expenditure

Expenses overstated

Assets Understated

Net Income understated

110

If listed as a Capital Expenditure instead of a Revenue Expenditure

Assets Overstated

Expenses Understated

Net income overstated

111

Journal entry when buying a vending machine

Eqipment 11050

Prepaid ins. 1500

Liscence exp. 50

                                  Cash 12,600

112

Which depreciation method best matches benefits to expense?

Units of activity

113

Which depreciation method has higher net income at first?

Straight-line method

Used for book purposes

114

Which depreciation method results in lower net income at first?

Declining balance

- lower net income

- lower taxes

*Used for tax purposes

115

Book value = 

Cost - Accmumulated depreciation

116

How do we know if there is a gain or loss on disposal of assets?

Compare book value (cost - acc. dep) to what we sold it for

If book value is greater than cost we sold it for => loss

If book value is less than cost we sold it for => gain

117

Title of accounts for gain/loss 

Gain on disposal of plant assets

Loss on disposal of plant asset

118

Why can we never have a gain on retiring an asset?

Because Accmulated depreciation will never be bigger than the asset and we have gains when debits are more than credits before gain/loss is inserted

119

Copyrights last for

the life of the creator plus 70 years

120

Profit Margin ratio

Net income / Net Sales

*How much sales is being retained as income

121

Asset Turnover ratio:

Net Sales / Average Total Assets

*Shows how efficiently we use assets to generate sales

122

Return on Assets ratio:

Net Income / Average Total Assets

*Shows amount of net income generated on each dollar of assets

*The bigger => the more profitable

123

Are intangible assets often overstated or understated on a company's books?

Understated because a company cannot record internally developed goodwill on its balance sheet

*Since balance sheet is at historical cost instead of fair value, it is often understated

124

Explain how amortization is different than depreciation?

What type of assets do we amortize?

In amortization there is no contra account so the credit goes directly to the asset instead of using a contra account such as accumulated depreciation, which is used in depreciation

We amortize INTANGIBLE ASSETS

125

3 main factors of fraudulent activity

Opportunity

Financial Pressure

Rationalization

126

The control activity of establishing responsibilities includes ___________________________

aurhorizing and approving transactions

127

What only happens mid-period with respect to receivables?

Only write-offs mid period

128

Bank Reconciliation Heading

Wellmeyer Company

Bank Reconciliation

December 31, 2012

129

Journal entry for a $30 bank service charge

Miscelaneous expense 30

                                         Cash 30

130

Journal entry:

The bank collected a note receivable for $1,000, plus $48 of interest revenue

Cash 1048

                                Note Receivable 1000

                                   Interest Revenue 48

131

Journal entry:

A NSF check for $328 from Brittney Spears, a customer, was returned with the statement.

Dr. Accounts Receivable 328

                                         Cr. Cash 328

132

Journal Entry:

Note for $1,504 collected for Ghose in July by the bank, plus interest $36 less fee $20. The collectionhas not been reorded by Ghose and no interest has been accrued

Dr. Cash 1520

Dr. Misc. Expense 20

                                    Cr. Notes Receivable 1504

                                         Cr. Interest Revenue 36