Reporting and analyzing liabilities

Question 1

Accounts payable

Answer 1

Obligations to other for amounts owed on purchases of goods and services

Question 2

Accrued liabilities

Answer 2

Obligations for expenses incurred that have not been paid as of the end of the current period

Question 3

Deferred performance liabilities

Answer 3

Obligations that will be satisfied not by paying cash by instead by providing products or services to customers. Ex: customer deposits, unearned gift card revenues for retail companies, and liabilities for frequent flier miles.

Question 4

Short-term interest-bearing debt

Answer 4

Short-term borrowings expected to mature in whole or in part during the upcoming year

Question 5

Current maturities of long-term debt

Answer 5

Long-term borrowings that are scheduled to mature in whole or in part during the upcoming year

Question 6

Debt-to-equity

Answer 6

Total Liabilities / Total stockholders’ equity

Question 7

Times interest earned (TIE)

Answer 7

Earnings before interest and taxes / Interest

Question 8

Net-of-discount method

Answer 8

When discounts are offered, the inventory purchase should be recorded at its cost. Inventory is capitalized at the net cost, assuming that the discount will be taken by the buyer.

Question 9

Entry for $4,000 purchase of inventory with 1/10 n/30 terms

Answer 9

Inv 3960 AP 3960

Question 10

Entry for when you don’t take the discount on a $4,000 purchase of inventory with 1/10 n/30 terms

Answer 10

AP 3960 Interest expense, discount loss 40 Cash 4000

Question 11

When do you record contingent liabilities?

Answer 11

When the likelihood of paying is probable and the amount is estimable

Question 12

Do you record a contingent liability for something that is reasonably possible?

Answer 12

No

Question 13

How do you record warranties that are a separate performance obligation from the purchase?

Answer 13

As unearned

Question 14

How do you record warranties that are not separate performance obligations?

Answer 14

A liability accrual for the warranty obligation must be made at the time of purchase

Question 15

Entry for warranty

Answer 15

Warranty Expense Warranty Liability

Question 16

How do you decrease a warranty liability?

Answer 16

Inventory (Replacement Parts) Warranty Liability

Question 17

Interest expense

Answer 17

Principal x Annual Rate x Portion of Year Outstanding

Question 18

Installment loan

Answer 18

Loans that require a fixed periodic payment for a fixed duration of time

Question 19

Present Value

Answer 19

Payment x Present Value Factor

Question 20

Payment

Answer 20

Present Value / Present Value Factor

Question 21

How do you calculate the quarterly payments on a loan?

Answer 21

Payment = PV / PVF

Question 22

Face amount of a bond

Answer 22

The principal amount

Question 23

Coupon (contract or stated) rate

Answer 23

The rate of interest is stated in the bond contract. It is used to compute the dollar amount of (semiannual) interest payments that are paid to bondholders during the life of the bond issue.

Question 24

Market (yield) rate

Answer 24

The market rate is the interest rate that investor expect to earn on the investment for this debt security

Question 25

What are the coupon and yield rates used for?

Answer 25

The coupon rate is used to compute interest payments and the market (yield) rate is used to price the bond

Question 26

Bond price

Answer 26

The present value of the expected cash flows to the bondholder

Question 27

Cash flows from bonds

Answer 27

Periodic interest payments - typically in the form of equal payments at periodic intervals, called an annuity Single payment - the face (principal) amount of the bond at maturity

Question 28

When a bond is issued at par...

Answer 28

The coupon rate is identical to the market rate. Ex: $1,000 bond sells for $1,000 in the market.

Question 29

When do bonds sell at a discount?

Answer 29

Whenever the coupon rate is less than the market rate

Question 30

When do bonds sell at a premium?

Answer 30

Bonds sell at a premium when the coupon rate is greater than the market rate

Question 31

Issuer's cost when a bond sells at a discount

Answer 31

The cash interest paid and the discount incurred

Question 32

The issuer's cost when a bond sells at a premium

Answer 32

The cash interest paid and a cost reduction due to the premium received

Question 33

Entry for bond issued at par

Answer 33

Debit Cash Credit Bonds Payable

Question 34

Entry for bonds issued at a discount

Answer 34

Debit cash Debit bond discount Credit Bonds payable

Question 35

Entry for bonds issued at a premium

Answer 35

Debit cash Credit Bond premium Credit Bonds payable

Question 36

How do you calculate the interest expense on bonds

Answer 36

For bonds issued at par, interest expense equals the cash interest payment. For bonds issued at a discount or a premium, interest expense reported on the income statement equals interest paid adjusted for the amortization of the discount or premium.

Question 37

Record bond discount

Answer 37

Debit interest expense Credit Cash Credit Bond discount

Question 38

Record bond premium

Answer 38

Debit interest expense Debit Bond premium Credit Cash

Question 39

The Fair Value Option

Answer 39

Companies may elect to report some or all of its financial liabilities at fair value.

Question 40

Record a fair value adjustment

Answer 40

Debit Unrealized Loss Credit Fair value adjsutment

Question 41

Call provision

Answer 41

Gives the company the right to repurchase its bond by paying a small premium above face value

Question 42

Gain or loss on bond repurchase

Answer 42

Gain or loss on bond repurchase = Book value of the bond - repurchase payment

Question 43

Options

Answer 43

Ex: Convert debt into stock. Repurchase debt before maturity.