Ch. 8+9 Liabilties – Flashcards
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In each succeeding payment on an installment note:
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The amount of interest expense decreases.
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The rate quoted in the bond contract used to calculate the cash payments for interest is called the:
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stated rate
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A company's liquidity refers to its:
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Ability to pay currently maturing debts.
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The current ratio is
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Current assets divided by current liabilities.
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Working capital is
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Current assets minus current liabilities.
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The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?
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Interest payments are tax deductible to the company, while dividends are not; expansion is achieved without surrendering ownership control.
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The price of a bond is equal to:
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The present value of the face amount plus the present value of the stated interest payments.
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Interest expense on bonds payable is calculated as the:
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Carrying value times the market interest rate.
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Bonds payable should be reported as a long-term liability in the balance sheet at:
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face value (?)
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A $500,000 bond issue sold for $510,000. Therefore, the bonds:
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Sold at a premium because the stated interest rate was higher than the market rate.
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A $500,000 bond issue sold for $490,000. Therefore, the bonds:
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Sold at a discount because the market interest rate was higher than the stated rate.
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The true interest rate used by investors to value a bond is called the:
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Market interest rate.
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Sales taxes collected by a company on behalf of the state and local government are recorded by:
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A credit to a liability account. FIX
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Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc. record?
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Debit Cash, $8,000; Credit Notes Payable, $8,000.
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Liability
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present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past
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Current liabilities
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payable within one year; accounts payable, notes payable, salaries payable, interest payable, dividends payable
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Long-term liabilities
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payable more than one year; bonds payable, notes payable more than 1 year, mortgage payable
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The current ratio is a measure of:
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liquidity
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Current ratio equation
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Current ratio = total current assets / total current liabilities
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Working capital equation
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Working capital = Current assets - current liabilities
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Current ratio and working capital shows...
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if a company is liquid or not
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liquidity
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have enough cash to run a business
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A bond issue with a face amount of $550,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:
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more than 500,000
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A $500,000 bond issue sold for $510,000. Therefore, the bonds:
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Sold at a premium because the stated interest rate was higher than the market rate.
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A $500,000 bond issue sold for $490,000. Therefore, the bonds:
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Sold at a discount because the market interest rate was higher than the stated rate.
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The Pita Pit borrowed $100,000 on November 1, 2015, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2016. In connection with this note, The Pita Pit should report interest expense at December 31, 2015, in the amount of:
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$2,000.
100,000 x .12 x 2/12
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The Pita Pit borrowed $100,000 on November 1, 2015, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2016. In connection with this note, The Pita Pit should report interest expense in 2016 for the amount of:
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$6,000
100,000 x .12 x 6/12
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The ________ the current ratio, the greater the company's liquidity
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higher
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Acid Test Ratio
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cash, current investments, and accounts recievable / current liabilities; measures the availability of liquid current assets to pay current liabilities
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Bond definition
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formal debt instrument that obligates the borrower to repay a stated amount; referred to as the principal or face amount at a specified maturity date
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How to price a bond
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we calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments
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market interest rate
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represents the true interest rate, used by investors to value the bond issue
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stated interest rate
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the rate quoted in the bond contract used to calculate the cash payments for interest
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Bonds issued below face amount are said to be issued at _________.
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discount
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Bonds issued above face amount sell at ____________.
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premium
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A bond issue with a face amount of $505,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:
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Less than $505,000.
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A bond issue with a face amount of $498,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:
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More than $498,000.
