Study_Guide_Test_3_2011f - TEST 3 The list below is not...

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TEST 3 The list below is not complete – all class notes, book, etc. may be on test unless it was specifically eliminated. You should do all study questions and brief exercises at the end of the chapter, as well as, the homework exercises quizzes, etc. Do the Wiley Plus Homework Chapter 10 study guide Know all current liabilities and entries Sales taxes payable – who is paying? Who is acting for taxing authority? Salaries payable – all associated current liabilities with Salaries Expense/Salaries Payable – FICA, Income Tax (state and fed), Union dues, etc. Payroll Taxes – Employer FICA Match, Unemployment taxes (state and Fed) Unearned Revenue Interest Payable (how to calculate and accrue interest) Current Maturity of Long Term Debt Current Ratio – liquidity Solvency – difference from liquidity Definition of contingent liability – estimable, probable loss, etc. Notes Payable – all entries Date proceeds are received, interest accrual, date of payment Bonds – concepts and theories, selling at face, premium or discount, straight-line amortization of discount and premium Chapter 10 Bond Notes – long handout given out in class ABC Water Company decides to sell bonds. On January 1, 2007 they sell a $100,000, 5 year bond that pays 10% interest annually. The bond sells for 90. Compute the selling price of the bond. Write the journal entry for ABC Company on the date of sale. Is the market rate of interest higher or lower than the stated rate? Market rate is HIGHER than the stated rate. Thought Process - If people are only willing to pay 90% of the face value of the bond, then they must be able to earn a higher level of interest than the bond is paying in the open market. Selling Price: $100,000 * 90% = $90,000 DR Cash 90,000 DR Discount on Bond 10,000 CR Bond Payable 100,000 Thought process – (1) How much cash came in? Selling Price: $90,000. (2) What is the face value of the bond which needs to be paid back (bond payable): $100,000 (3) Now I have a DR and a CR. How can I balance the entry? Need a 10,000 DR. Thus, Discount on Bond $10,000. On December 31 of each year, ABC pays interest on the bonds. Write the journal entry for the interest payment below.
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DR Interest Expense 12,000 CR Discount on Bond 2,000 CR Cash 10,000 Thought Process – (1) How much cash is paid? Face Value * annual interest rate: 100,000 * 10% = 10,000. (2) Need to portion out discount over life of bond: 10,000 / 5 years = 2,000 each year. Since discount is a DR, to reduce it must be a CR. (3) If there is a 10,000 CR and a 2,000 CR, then interest expense must be 12,000 DR to balance Discou nt on Bond 10,000 1/1/200 7 2,000 12/31/2 007 8,000 What is the book value of the bonds at the end of year 3? (net liability, carrying value) Discou nt on Bond 10,000 1/1/2007 2,000 12/31/20 07 2,000 12/31/20 08 2,000 12/31/20 09 4,000 Bond Payable ($100,000) – Discount on Bond Balance ($4,000) = Book Value (96,000) NOTE: Bond Payable is a CR and Discount is a DR so the discount is subtracted
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This note was uploaded on 12/05/2011 for the course ACCT 207 taught by Professor Hudchinson during the Fall '08 term at University of Delaware.

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Study_Guide_Test_3_2011f - TEST 3 The list below is not...

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