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Chapter 10 study guide

Terms in this set (42)

1. Operating cycles are generally longer than a year.
Answer: False

Feedback: Most companies have operating cycles shorter than one year.
2. The principal of a loan does not include any interest charges.
true

Feedback: The principal amount of a loan is the amount of the note payable; the amount owed as of the day the note is established. A liability is first recorded at the amount initially owed, which excludes interest charges. Interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan
3. An entertainment company received $6 million in cash for advance season ticket sales. Prior to the beginning of the season, these sales should be recorded as a liability.
true

Feedback: When a company receives cash before it provides goods or services to customers, a liability called Unearned Revenue is created.
4. Bonds allow a company to borrow large sums of money from many different investors.
Answer: True

Feedback: Occasionally, governments and very large companies need to borrow more money than any single lender can provide. Because issuing a promissory note for a very large amount of money is impractical, the company instead issues bonds to thousands of different investors.
5. If the market rate exceeds the stated interest rate, a bond will sell at a premium.
Answer: False
Feedback: If the bonds pay interest (stated rate) at a lower rate of interest than the market demands (market rate), the bonds will sell at a discount (rather than a premium).
6. At the maturity date, the carrying value of a bond should always be equal to the face value.
Answer: True
Feedback: At maturity, the carrying value of a bond equals its face value
7. The net amount of a bond liability that appears on the balance sheet is equal to the face value of the bond plus any related discount or minus any related premium.
Answer: False

Feedback: The total face value of a bond plus any related premium or minus any related discount is reported in the liabilities section of the balance sheet.
8. The entry to record a bond retirement at maturity usually involves no gain or loss.
Answer: True

Feedback: If bonds are retired at maturity, the carrying value of a bond equals its face value and no gain or loss would be recorded.
9. Bonds that are backed by a company's assets are referred to as "secured" bonds.
Answer: True

Feedback: Bonds that are backed by collateral are referred to as "secured" bonds.
10. Bonds that are not backed by collateral are referred to as "debentures."
Answer: True

Feedback: Bonds that are not backed by collateral are referred to as "debentures."
11. Callable bonds can be converted to stock.
Answer: False

Feedback: A bond that an issuing corporation can call in and exchange for cash is referred to as a "callable" bond. A bond that can be converted into shares of its stock is referred to as a "convertible" bond.
12. When a company issues bonds that include no periodic interest payments, the bonds are referred to as "zero-coupon" bonds.
Answer: True

Feedback: Bonds that include no periodic interest payments are called "strips" or "zero-coupon" bonds.
13. The gross earnings for all employees is credited to Salaries and Salaries and Wages Payable.
Answer: False

Feedback: Gross earnings is debited to Salaries and Salaries and Wages Expense; net pay is debited to Salaries and Wages Payable.
14. FICA payments consist of Social Security taxes and Medicare taxes.
true

Feedback: Federal Insurance Contributions Act (FICA) requires that each employee support Medicare and Social Security through employee payroll deductions called FICA taxes. Like their employees, all employers are required to pay FICA taxes.
15. Contingent liabilities arise from past transactions, but depend on future events.
true

Feedback: Contingent liabilities are potential liabilities that have arisen as a result of a past transaction or event; their ultimate outcome will not be known until a future event occurs or fails to occur.
16. If the likelihood of a loss is reasonably possible, a contingent liability is recorded by making an appropriate journal entry.
Answer: False

Feedback: If the likelihood of loss is only reasonably possible, no journal entry is recorded; the contingent liability is disclosed in the notes to the financial statements. If the loss is probable and can be reasonably estimated, the liability and estimated loss is recorded in a journal entry.
17. The threshold for recording contingent liabilities under IFRS is higher than that under GAAP.
Answer: False

Feedback: Under GAAP, contingent liabilities (and corresponding losses) are recorded if the estimated loss is probable. Under IFRS, contingent liabilities (and corresponding losses) are recorded if the estimated loss is "more likely than not" to occur. The threshold under IFRS is lower than that under GAAP, causing more contingent liabilities to be reported under IFRS than under GAAP.
18. The debt-to-assets ratio indicates financing risk by computing the proportion of total assets financed by debt.
Answer: True

Feedback: The debt-to-assets ratio indicates financing risk by computing the proportion of total assets financed by debt.
19. When the times interest earned ratio increases, the likelihood of default on liabilities decreases.
Answer: True

Feedback: The times interest earned ratio measures whether sufficient resources are generated from operations to cover interest costs. In general, a high times interest earned ratio is viewed more favorably than a low one. A high ratio indicates an extra margin of protection should the company's profitability decline in the future.
20. The straight-line method of amortization allocates the amount of bond premium or discount over each period of a bond's life in amounts corresponding to the bond's carrying value.
Answer: False

Feedback: The straight-line method of amortization evenly allocates the amount of bond premium or discount over each period of a bond's life to adjust interest expense for differences between its stated interest rate and market interest rate.
21. The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds.
Answer: True

Feedback: The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds because it correctly calculates interest expense by multiplying the true cost of borrowing times the amount of money actually owed to investors.
22. Current liabilities could include all of the following except:
C) a bank loan due in 18 months.
23. Current liabilities are due:
D) and payable within the current operating cycle or one year, whichever is longer.
24. Obligations due to be paid within one year or the company's operating cycle, whichever is longer, are classified as:
B) current liabilities.
25. A typical classified balance sheet provides no information about which of the following items?
A) To whom the company owes money
26. Which of the following events does not create a liability?
D) Remitting sales tax to the government
27. A company typically records the amount owed to suppliers for goods or services when:
D) the goods or services are received.
28. Which of the following statements about payroll liabilities is correct?
A) Accrued payroll includes liabilities required by law or voluntarily requested by employees that have not yet been paid (or remitted).
29. During one pay period, your company distributes $130,500 to employees as net pay. The income tax withholdings were $19,000 and the FICA withholdings were $5,000. Total payroll costs to the company for this pay period, excluding any unemployment taxes, was:
D) $159,500.
30. If a company's gross salaries and wages are $12,000, and it withholds $1,800 for income taxes and $800 for FICA taxes, the journal entry to record the employees' pay should include a:
D) credit to Salaries and Wages Payable for $9,400.
31. Use the information above to answer the following question. What would be the amount of Darling's payroll check for the first week of January?
A) $683.80
32. Use the information above to answer the following question. What is the employer's payroll tax expense for the week?
B) $119.20
33. Payroll taxes paid by employees include which of the following?
D) Federal income tax withheld, state income tax withheld, and Medicare
34. Which of the following statements about payroll is correct?
D) Gross earnings are computed by multiplying the time worked by the pay rate promised by the employer.
35. Which of the following must be paid by both the employee and the employer?
A) FICA taxes
36. Employer payroll taxes:
C) are an added payroll expense beyond the wages and salaries earned by employees.
37. In October, you sign a note for $50,000 in order to buy new equipment. The note is due in five years, at 8% annual interest. Semiannual interest payments are due each March and September. Assuming no other long-term debt, what is the initial balance in the related long-term debt account?
B) $50,000
38. A company purchased equipment by issuing a $200,000, one-year, 8% note payable. The transaction would be recorded in the accounting records with a credit to Notes Payable for:
A) $200,000.
39. On October 1, Angelica Inc. signs a note for $200,000 to provide the funds needed to build a new facility. The note is due in 10 years, includes an annual interest rate at 7%, and requires semiannual interest payments each April and October. The journal entry to record the issuance of the promissory note should debit:
C) Cash and credit Notes Payable for $200,000.
40. Interest on an obligation is recorded:
A) as time passes.
41. A one-year, $15,000, 12% note is signed on April 1. If the note is repaid on September 1 of the same year, how much interest expense is incurred?
C) $750
42. The total amount of interest that will be paid on a four-month, $6,500, 9% note payable equals:
D) $195
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