Chapter #9 - Reporting And Understanding Liabilities

Front 1

How do you record the issuance of a bond

Back 1

See above

Front 2

What is a definitely dterminable liability?

Back 2

Definitely determinable liabilities are obligations that can be measured exactly, like the amount of a note payable.

Front 3

What are the three component of a payroll liability?

Back 3

Gross pay does not equal what the employee takes home as deductions must be taken out.
Deductions include federal income tax, FICA taxes and other withholdings.
Net pay = Gross pay – Deductions.

Front 4

What is an estimated liability?

Back 4

Estimated liabilities are obligations whose amount is not certain.

Front 5

What is a warranty liablity?

Back 5

Warranty liabilities are the estimated future costs for repair and replacement to honor a product’s warranty.

Front 6

When is the warranty expense and liability firt recorded?

Back 6

A company should estimate the amount of the warranty expense and warranty liability either at the time of the sale or when it is time to prepare financial statements.

Front 7

When is the cost of repairing or replacing a product with a warranty written off against the liability?

Back 7

The cost of repairing or replacing a product with a warranty is written off against the liability when the item is actually repaired or replaced.

Front 8

Define a long-term note.

Back 8

A long-term note is when a company borrows money for longer than one year.

Front 9

What is a mortgage loan?

Back 9

A mortgage loan is a note payable because it gives the lender a claim against that property if the borrower does not make payments.

Front 10

What is the theory of calculating annula payments on loans called?

Back 10

The calculation of the annual payment is based on the time value of money.

Front 11

How do you caluclate interest?

Back 11

Interest = Principal x Rate x Time

Front 12

What are the three components of an interest payment journal entry?

Back 12

Each interest payment entry has three parts:
A debit to Interest Expense for the amount of interest incurred.
A debit to Note Payable or Mortgage Payable for the reduction in principal.
A credit to Cash for the payment.

Front 13

Define a bond.

Back 13

A bond is an interest-bearing, long-term note payable issued by corporations, universities, and governmental agencies.

Front 14

Define a bond certificate.

Back 14

The bond certificate is a written agreement that specifics the company’s responsibilities to pay interest and repay the principal to the bondholders at the end of the term of the bond. The bond certificate will show the interest rate, the face amount of the bond, and the term of the bond.

Front 15

What is a another name for the face amount of a bond?

Back 15

The face amount of the bond is also called the stated value or the par value of the bond.

Front 16

What is the normal face value of a bond?

Back 16

Most bonds are issued with a face value in multiples of $1,000.

Front 17

What does the term market rate of interest mean?

Back 17

The market rate of interest is the interest rate investors demand for lending money to the firm.

Front 18

How do you calculate the price of a bond?

Back 18

The price of a bond is calculated by using present value techniques.

Front 19

What are the three steps in calculating the present value of a bond?

Back 19

Calculate the present value of the principal of the bond, using the market rate of interest.
Calculate the present value of the interest payments, using the market rate of interest.
Add the two present values to arrive at the price of the bond.

Front 20

When a bond is priced at face value, what do we say about the bond?

Back 20

If the price of a bond is equal to the face value, the bond is sold at par value.

Front 21

When a bond is priced above face value, what do we say about the bond?

Back 21

If the price of a bond is above the face value, the bond is sold at a premium.

Front 22

When a bond is priced below face value, what do we say about the bond?

Back 22

If the price of a bond is below the face value, the bond is sold at a discount

Front 23

How do you caluclate interest expense, and what is the journal entry to put it on the books?

Back 23

To record interest
Interest = Face value x Face rate x Time
Interest Expense is debited and Cash is credited.

Front 24

When will the interest payments on a bond not be equal to the firm's interest expense?

Back 24

If a bond is issued at a discount or premium, the interest payments to the bondholders will not be equal to the firm’s interest expense.

Front 25

How do you amortize the premium or discount of a bond?

Back 25

The premium or discount must be amortized over the life of the bonds using either the straight-line method or the effective interest method.

Front 26

What is the straight-line method of amortizing the premium or discount of a bond?

Back 26

Straight-line method
Premium or discount/Number of interest payment periods = Amount of amortization.
Interest expense =
Cash paid + Amortization of discount – Amortization of premium

Front 27

What is the effective interest method of amortizing the premium or discount of a bond?

Back 27

Effective interest method
Interest expense = Carrying value x Market rate x Time.
Cash = Face value x Face rate x Time
Amortization = Interest expense – Cash

Front 28

What does the term "capital structure" mean?

Back 28

Effective interest method
Interest expense = Carrying value x Market rate x Time.
Cash = Face value x Face rate x Time
Amortization = Interest expense – Cash

Front 29

What does the term "Financial Leverage" mean?

Back 29

Financial leverage – using borrowed funds to increase leverage.

Front 30

What does the term "debt-to-equity" raio mean, and how do you compute it?

Back 30

Debt-to-equity ratio equals total liabilities divided by total shareholders’ equity. This ratio compares the amount of creditor claims to the assets of the firm.

Front 31

What is the times interest earned ratio, and how do you compute it?

Back 31

Times-interest-earned is a ratio that measures a company’s ability to make the interest payments on its debt. It equals income from operations divided by interest expense.

Front 32

What is the primary rist associated with long-term debt?

Back 32

The primary risk for a company associated with long-term debt is the risk of not being able to make the debt payments.

Front 33

How can you minimize the risk associated with long-term debt?

Back 33

There are two things a company can do to minimize the risk associated with long-term debt:

Be sure a thorough business analysis accompanies any decision to borrow money.

Study the characteristics of the various types of debt – terms, interest rates, and ease of obtaining the money – and evaluate their attractiveness in your specific circumstances, given the purpose of the loan and the financial situation of the company.