Financial Accounting Chapter 10 Liabilities

Flashcards based on Financial Accounting Chapter 10 Liabilities lecture notes.

What is a current liability?

A debt that a company expects to pay within one year or the operating cycle, whichever is longer.

What is the difference between Notes Payable and Accounts Payable?

Notes payable are formalized in writing with a set due date and interest rate, while accounts payable typically is just a vendor offering a customer 30 days to pay an invoice as a courtesy.

On September 1, 2022, First National Bank agrees to lend $100,000 if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1. What is the journal entry on September 1?

Cash 100,000, Notes Payable 100,000

On September 1, 2022, First National Bank agrees to lend $100,000 if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1. What is the adjusting entry on December 31?

Interest Expense 4,000, Interest Payable 4,000

On September 1, 2022, First National Bank agrees to lend $100,000 if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1, 2023. What is the entry at maturity?

Notes Payable 100,000, Interest Payable 4,000, Cash 104,000

What is the responsibility of the selling company regarding sales taxes?

Collect sales tax on behalf of the state, and remit the collections to the state’s department of revenue.

The March 25 cash register reading for Cooley Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%). What is the journal entry?

Cash 10,600, Sales Revenue 10,000, Sales Taxes Payable 600

What are the two components of payroll

Salaries (monthly or yearly) and Wages (rate per hour)

Determining the payroll involves computing which three amounts?

(1) gross earnings, (2) payroll deductions, and (3) net pay.

What is the payroll equation?

Gross Pay – Payroll Deductions = Net Pay

What taxes are included in the employer's payroll tax expense?

Employer’s share of FICA (Social Security and Medicare) taxes, Federal unemployment taxes, State unemployment taxes

What are unearned revenues?

Revenues received before the company delivers goods or provides services.

Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. What is the entry for the sale of season tickets?

Cash (10,000 x $50) 500,000, Unearned Ticket Revenue 500,000

Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. What is the entry as each game is completed?

Unearned Ticket Revenue 100,000, Ticket Revenue 100,000

Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, 2022. This note specifies that each January 1, starting January 1, 2023, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2022, what amount should be reported as a current liability and what amount should be reported as a long-term liability?

$5,000 should be reported as a current liability, and $20,000 should be reported as a long-term liability.

What are long-term liabilities?

Obligations that are expected to be paid more than one year in the future.

What are the types of bonds?

Secured Bonds, Unsecured Bonds, Convertible Bonds, Callable Bonds

What is a bond indenture?

A legal document that contain Bond terms

What promise does a bond represent?

Sum of money at designated maturity date, plus periodic interest at a contractual (stated) rate on the maturity amount (face value).

How are bond prices quoted?

Bond prices are quoted as a percentage of the face value.

What three factors determine the current market (present) value of a bond?

Dollar amounts to be received, length of time until the amounts are received, and market rate of interest.

On January 1, 2022, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). What is the entry to record the sale?

Cash 100,000 Bonds Payable 100,000

On January 1, 2022, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable annually on January 1. What is the entry at December 31, 2022 recognizing interest expense incurred?

Interest Expense 10,000, Interest Payable 10,000

On January 1, 2022, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable annually on January 1. What entry is recorded for the payment on January 1, 2023?

Interest Payable 10,000 Cash 10,000

On January 1, 2022, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $98,000 (98% of face value). Interest is payable annually January 1. What is the entry to record the issuance?

Cash 98,000, Discount on Bonds Payable 2,000, Bonds Payable 100,000

Sale of bonds below face value (discount) means that the following is true:

Total cost of borrowing is greater than interest paid.

Discount on Bonds Payable:

Is a contra account.

On January 1, 2022, Candlestick, Inc. sells $100,000, five- year, 10% bonds for $102,000 (102% of face value). Interest is payable annually January 1. What is the entry to record the issuance?

Cash 102,000, Bonds Payable 100,000, Premium on Bonds Payable 2,000

Sale of bonds above face value (premium) means that the following is true:

Total cost of borrowing is less than interest paid.

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:

The contractual interest rate exceeds the market interest rate.

Long-Term Notes Payable may be secured by a __ that pledges title to specific assets as security for a loan.

Mortgage

Each payment on a long-term note consists of:

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

Porter Technology Inc. issues a $500,000, 8%, 20-year mortgage note on December 31, 2022. Prepare the entry to record the mortgage.

Cash 500,000, Mortgage Payable 500,000

Porter Technology Inc. issues a $500,000, 8%, 20-year mortgage note on December 31, 2022. The terms provide for annual installment payments of $50,926. Prepare the entry to record the first payment.

Interest Expense 40,000, Mortgage Payable 10,926, Cash 50,926

Each payment on a mortgage note payable consists of:

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

On the balance sheet, where are current liabilities presented?

Current liabilities are the first category.

What is liquidity?

Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash.

Companies do what with current liabilities regarding the different types and categories?

Companies list each of the principal types of current liabilities separately within the category.

What is working capital?

Working capital is the excess of current assets over current liabilities.

What is solvency?

Solvency refers to the ability of a company to survive over a long period of time.

What ratio provides information about long-run solvency and the ability to meet obligations?

Debt to Assets Ratio

The higher the percentage of debt to assets, the greater the risk that the company:

May be unable to meet its maturing obligations.

What method is used to amortize Bond Discount and Bond Premium?

Straight-Line Method

Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2022, for $98,000 (discount of $2,000). Interest is payable on January 1. What is the journal entry to record the first accrual of bond interest and the amortization of bond discount on December 31?

Interest Expense 10,400, Discount on Bonds Payable 400, Interest Payable ($100,000 x 10%) 10,000

Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2022, for $102,000 (premium of $2,000). Interest is payable on January 1. What journal entry is recorded for the first accrual of interest on December 31?

Interest Expense 9,600, Premium on Bonds Payable 400, Interest Payable ($100,000 x 10%) 10,000