Intro To Accounting Chapter 10

Debt to assets Ratio

Total Debt / Total Assets

Shows what portion of a company’s assets is paid for with debt

Higher ratio = more debt, more financial risk

Times Interest Earned

Earnings Before Interest and Taxes / Interest Expense

Shows how many times a company’s income can cover its interest.

Higher = Safer. Below 1 = trouble paying interest

Current Ratio

Current Assets / Current Liabilities
Shows if a company can pay short-term debts with short-term assets

Above 1 = generally safe. Very high = possible inefficiency

Working Capital

Current Assets - Current Liabilities
Shows if a company’s short-term assets can cover short-term debts

Positive = healthy. Negative = Possible liquidity problems

Acid-Test Ratio

Current Asset - Inventory / Current liabilities

Shows if a company can pay short-term debts using only its most liquid assets

Higher = safer. Below 1 = May struggle to cover short-term obligations

Discounted Note

Loan issued for less than its face value

The discount is extra interest cost, since the borrower repays full face value at maturity.

No interest

Face Value

Amount printed on a bond or note (principal)

Company or bank is called the … who receives is called the…

…Creditor (Lender), …, Debtor (Borrower)

Long-Term Liability

Liability over one year

Current Liabilities 

Liabilities due in 1 year

Installment Notes

Debt required to make equal periodic payments

Current Portions

A slice of long term debt, usually the principal that’s due within one year

Payroll

Amount paid to employees for services provided during the period

Salary

Payment for managerial and admin services, terms of months or a year

Wages

Payment for employee manual labor, biweekly

Companies engaging in interstate commerce must pay a minimum rate of…

…1 and a half times regular rate for hours excesses of 40 hours per week

Gross pay

total earnings plus overtime

Net pay

Gross pay subtracted by deductions, amount paid to employees

W-4

document that authorizes pay to be deducted by income tax

FICA

Tax that contributes to social security and Medicare 

FUTA and SUTA

Federal and State Unemployment compensation tax, temporary payments to the unemployed

Fringe Benefits

Benefits for employees like vacation, medical and retirement
Cost of employee fringe benefits is an expense

Employee Vacations are…

…accrued as a liability at the end of each pay period

Pension

Cash payment to retired employees
Accrued by employees as they work
Two basic types: Defined contribution plan and Defined benefit plan

Defined Contribution Plan

Company invests contributions on behalf of the employee during working years
(401k)

401k

Contribution is deducted before tax, not taxeduntil withdrawn

Defined Benefit Plan

Company pays employee a fixed annual pension based on a formula

Contingent Liabilities

Potential obligations, recorded only if the event is probable and the amount can be reasonably estimated

Bonds

Long-term debt devices where a company borrows money from investors, promise to pay principal at maturity and periodic interest

Corporations record bond transactions when it:

a. Issues
b. Buys back bonds

IF bondholders sell their bonds to another investor the issuing company…

… does NOT journalize this transaction (obligation hasn’t changed)

Bond Discount

When a bonds issue price is less than face value, additional interest 

Discount on bond payable is a…

…Discount on bonds payable is a contra liability

Bond Premium

When a bond’s issue price is more than its face value

If the market is offering more than the contract, the company needs to…

…offer bonds at a discount

If the market is offering lower than the contract, the company needs to..

…raise prices and sell the bond at a premium

Mortgage

Legal agreement where the borrower pledges property as security

Default

Fails to meet legal obligations of the loan agreement

Liquidity

The ability to pay maturing obligations and meet unexpected needs for cash

Solvency

The ability of a company to survive over a long period of time

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

…Market Interest Rate

Discount on bonds payable:

…is a contra account

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

When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the: 

…Carrying value of the bonds

Each payment on a mortgage note payable consists of: 

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