Chapter 10 powerpoint Flashcards
1
Q
Current liability
A
A debt with two key features:
- Company expects to pay the debt from
a. existing current assets or
b. through the creation of other current liabilites - Company will pay the debt within one year of the operating cycle, whichever is longer
2
Q
Examples of current liabilities:
A
Notes Payable
Accounts Payable
Unearned Revenues
Accrued liabilities - taxes, salaries and wages, and interest payable
3
Q
Notes Payable - current liability
A
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
Q
Why are notes payable used instead of accounts payable?
A
Because notes payable give the lender written documentation of an obligation in case legal remedies are needed to collect the debt
5
Q
Journal entry accepting a notes payable
A
Cash XXX
Notes Payable XXX
6
Q
Journal entry accruing interest
A
Interest expense XXX
Interest Payable XXX
7
Q
Journal entry paying note payable at maturity
A
Notes Payable 100,000
Interest Payable 4,000
Cash 104,000
8
Q
Long-term notes payable
A
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:
- interst on unpaid balance of loan
- reduction of loan principal
9
Q
Journal entry accepting a mortgage loan
A
Cash XXX
Mortgage Notes Payable XXX
10
Q
Journal entry making firs installment on mortgage payments
A
Interest Expense 30,000
Mortgage Notes Payable 3,231
Cash 33,231
11
Q
Balance shet - long term notes payable
A
Reduction in principal for the next year - current liability in balance sheet
Remaining unpaid principal balance - long term liability in balance sheet
12
Q
Each payment on a mortgage note payable consists of:
A
Interest on the unpaid balance of the loan and reduction of loan principal
13
Q
Sales Taxes are expressed as ___________________
A
a stated percentage of the sales price
14
Q
The retailer collects tax from the ____________
A
customer
15
Q
The terailer serves as a _____________ for the taxing authority
A
collection agent
16
Q
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
A
seperately
17
Q
If Sales revenue and tax are together, to find sales revenue
A
Total cash received / (1 + Sales Tax Rate)
18
Q
Journal Entry for sales revenue with tax
A
Cash 10,600
Sales Revenue 10,000
Sales Tax Payable 600
19
Q
Unearned Revenue
A
Revenues that are received before the company delivers goods or provides services
Cash XXX
Unearned Revenue XXX
20
Q
Journal entry when company earns money
A
Unearned Revenue XXX
Sales Revenue XXX
21
Q
Current Maturities of Long-Term Debt
A
The portion of long-term debt that comes due in the current year
There is no adjusting entry required
22
Q
Payroll and Payroll Taxes Payable
A
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
Q
Salaries
A
Managerial, Administrative, and Sales Personnel
(Monthly or Yearly Rate)
24
Q
Wages
A
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
