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57 Cards in this Set
- Front
- Back
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Liability |
a probable future sacrifice of economic benefits arising form present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events |
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What are 3 common characteristics of all types of liabilities? |
1) Present obligations entailing probable future transfers or uses of cash goods or services 2) Unavoidable obligations 3) transaction or event obligating the entity must have already happened |
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Current Liability |
obligations expected to require use of current assets or creation of other current liabilities |
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Discount |
cost of borrowing (interest charges;e to future periods) |
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What are callable bonds classified as? |
current liability |
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Long term debt due within a year is classified as a current liability unless what? |
1) it is to be retired using noncurrent assets 2) it is to be refinanced by proceeds of long term debt 3) it is to be converted into capital stock |
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When does a company owe interest and report it on the the balance sheet? |
a company does not owe interest until time goes by. It is not a present obligation, but if there is unpaid accrued interest, the interest payable would be a current liability |
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What is a debt covenant? |
provisions in a contract, it protects the lender. |
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How does one demonstrate the ability to refinance ? |
1) actually refinancing long term debt after the balance sheet dat but before its issuance 2) entering a financing agreement that clearly permits long term refinancing on a readily determinable basis |
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What are cash dividend a current liability? |
when they are declared |
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When are preferred dividends in arrears a liability? |
when the board authorizes the payment, then it is disclosed but not accrued |
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Are stock dividends ever a liability? |
no they to not require an outlay of assets or services, it is reported in the stockholders equity section; does not change net asset |
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What is the Journal entry for the declaration of an ordinary cash dividend? |
Dr. Retained Earnings Cr. Dividends Payable |
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What is the journal entry when a company pays the cash dividend? |
Dr. Dividends Payable Cr. Cash |
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Unearned Revenue |
cash is received before criteria necessary for recognizing revenue has been satisfied. |
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Is unearned revenue recognized as current or long term liability? |
either, it depends on the situation |
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What are gift card reported as on the Balance sheet? |
a liability for the retailer until they are redeemed |
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10 employees paid $200 per day, each employee earn 2 weeks of vested vacation pay 5 vested sick days after 1st full year. How do you accrue the leave? |
Dr. Wage Exp. (15X10X200) 30,000 Cr. Vacation Payable (10X10X200) 20,000 Sick Day Payable (5X10X200) 10,000 |
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A company earn 4 million before taxes and bonuses. What amount of this should be contributed to bonuses if the company decided to 10% of NI assuming 40% income tax rate? |
Bonus=.10(4,000,000-Bonus-Tax) Tax=.4(4,000,000- Bonus =1,600,000-.4Bonus Plug into 1st equation Bonus= 226,415 |
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Vested Rights |
employees has an obligation to make payment to an employee even after terminating their employment |
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Contingencies |
an existing condition, situation, or set of circumstances involving uncertainty as to a possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur |
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Are gain contingencies recognized? |
no because of conservatism; exception is tax loss carryforwards |
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When do you accrue loss contingencies? |
if it is 1) probable and 2) reasonably estimable |
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When the amount for a loss contingency is estimable in a range what end of you accrue and which to you disclose? |
accrue the low end of the range and disclose the high end of the range |
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What journal entry should you make if a litigation is probable and reasonably estimable? |
Dr. Loss on Litigation Cr. Litigations Liability Footnote: describe the nature of the litigation of the event, liability, etc. |
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What is the main difference between the two methods of accounting for warranties? |
expense warranty approach the warranty is part of the sale, white the sales warranty approach is sold separately. |
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When using the warranty expense method what journal entry do you make at the point of sale? |
Dr. Cash Cr. Sales Rev. Dr. Warranty Exp. (estimated amount) Cr. Estimated Liability under warranty |
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Long-term Debt |
a probable future sacrifice of economic benefits arising from present obligations that are not payable within one year or the operating cycle of the business |
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What are the 2 cash flows on a bond? |
1) periodic interest payments (annuity) 2) payment at maturity (lumpsum) |
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What is true if the market rate is greater than the stated rate? |
there is a discount |
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What is true if the market rate is less than the stated rate? |
there is a permium |
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If a bond is issued between interest dates does it change the discount or premium amount on the bond? |
no, there is no affect |
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What journal entry should you make when a bond is issued between interest dates? assuming no discount or premium |
Dr. Cash (face) Cr. Bond payable (face) Dr. Cash (interest months missed (FaceX IR X 2/12) Cr. Interest Exp. (Same as above) |
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What 2 things does amortization of discounts and premiums do? |
1) adjusts the amount of interest expense to the effective interest rate 2) gradually adjusts the bond's CV so it ultimately equals maturity value |
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When doing an amortization table what do you do to find the interest paid? |
multiple the face value of the bond times the stated rate |
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When doing an amortization table what do you do to find the interest expense? |
multiple the book value of the bond times the effective rate |
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What is Unamortized Bond Issue Cost considered to be on the balance sheet? |
an asset |
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If a company is going to redeem a bond bond before maturity, what must is do before? |
1) update the carrying value to the date of redemption 2) if there is any unamortized bond issue costs at the redemption date, the balance must be cleared as well |
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How do journal accrued interest for a partial redemption of a bond? |
1) find the percentage of the bond being redeemed over face value 2) accrue the bond interest expense for the period between the last interest payment and the date of redemption. Take the interest expense amount for the next period X percentage being redeemed X months incurred 3) Do the same for discount or premium, credit cash |
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How do you journal the partial redemption of a bond? |
1) Amount being paid - cash recorded to accrue interest expense (this is the amount of cash paid to bond holders) 2) Find book value of the amount being redeemed. Book value of total bond X percentage being redeemed -/+ premium/discount accrued for interest above) 3) Take amount being paid to bond holders - BV of partial redemption= if - gain if + loss Dr. Bond Payable (face) Premium (BV-face) Cr. Cash (amount paid to bondholders) Gain on redemption (amount calculated in 3) |
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after a partial redemption, how do you journal interest? |
can keep the same amortization table, multiply by the remaining percentage of bond |
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If a company uses the fair value option and the fair value if less then the carrying value, what journal entry should the company make? |
Dr. Notes Payable Cr. Unrealized holding gain- Income |
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If a company uses the fair value option and the fair value if more then the carrying value, what journal entry should the company make? |
Dr. Unrealized holding Loss- Income Cr. Notes Payable |
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What journal entry would a company make to record the interest expense on a mortgage? |
Dr. Interest Expense(face X Monthly rate) Mortgage Payable (difference) Cr. Cash (monthly payment) |
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If there are modifications of terms, what does the creditor do? |
their loss is based on expected cash flows discounted at the historical effective rate |
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If there are modifications of term, what does the debtor do? |
calculates a gain based on undercounted amounts |
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When there is a modification of terms does the debtor's gain equal the creditor's loss? |
No |
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How do you calculate the debtor's gain when there is a modification of terms? |
BV-(reduced Principal+total interest to be paid) |
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How would a debtor record a gain on a modification of terms? |
Dr. Notes Payable Cr. Gain on restuctoring |
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After a modification of terms how would a debtor record interest paid? |
Dr. Notes Payable Cr. Cash |
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When there is a modification of terms how does the creditor write off the loss? |
BV-(PV-SS+ PV-OA)
Dr. Bad Debt Expense Cr. ADA |
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After a modification of terms, how would creditor record interest revenue? |
Dr. Cash ADA Cr. Interest Revenue (PV of note X historical interest rate) |
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When discuss a mortgage what do points mean? |
they are equal to 1% of the face of the note |
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What happens when the creditworthiness of a company declines? |
the value of its debt declines as well. |
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Debt to Assets |
measures the percentage of the total assets provided by creditors
= Total Liabilities/ Total Assets |
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What does a high percentage mean in a debt to assets ratio? |
high risk |
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Times Interest Earned |
company's ability to meet interest payments as they come due
= Income before taxes and interest expense/ Interest Expense |
