Accounting Quiz #4

Chapters 10-12

Study Guide

Chapter 10

Current Liabilities

Definition: debt that will be paid out of current assets and are due within one year

Examples: accounts payable, current portion of long-term debt, and notes payable

Defined Contribution Plan(401k plans are an example)

The company invests contributions on behalf of the employee during the employee’s working years
Normally, both employee and employer contribute to the plan
Pension depends on the total contributions and the investment returns earned on those contributions
Journal entry: debit pension expense, credit cash easy

Defined Benefit Planthese are disappearing--just know the concept:

The company pays the employee a fixed annual pension based on a formula

Formula is based on factors such as the employee’s years of service, age, and past salary
Example: Annual Pension = 1.5% * Years of Service * Highest 3-Year Average Salary

Employer is obligated to pay for (fund) the employee’s future pension benefits
Journal entry: debit pension expense, credit both cash and unfunded pension liability

Unfunded pension liability is any unfunded amount
If it is paid within one year, it is reported as a current liability on the balance sheet

Form 941

Employer’s Quarterly Federal Tax Return
All employers must withhold federal taxes from employee’s compensation
Taxes include: federal income tax, social security tax, and Medicare tax

“Employee’s Withholding Allowance Certificate”
Employee indicates marital status and the number of withholding allowances
Each allowance reduces the federal income tax withheld from the employee’s check

Tax form issued by employers and stating how much an employee was paid in a year
Calculate taxes to be paid to the federal government

Payroll

**Definition: amount paid to employees for services they provided during the period

**Journal entry: debit sales salaries expense and office salaries expense, credit (employee) social security tax payable, (employee) Medicare tax payable, employees federal income tax payable, salaries payable

Gross Pay/Net Pay

Definition: total earnings of an employee for a payroll period, includes any overtime pay
From this amount is subtracted one or more deductions to arrive at the net pay which is the amount paid to employees

Internal Control Procedures

If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft or misuse
The hiring and firing of employees should be properly authorized and approved in writing
All changes in pay rates should be properly authorized and approved in writing
Employees should be observed when arriving for work to verify that employees are “checking in” for work only once and only for themselves
Payroll checks should be distributed by someone other than employee supervisors
A special payroll bank account should be used

Payroll Taxes

Payroll taxes are recorded as liabilities when the payroll is paid to employees
Social Security: 6% on the first $100,000 of annual earnings(matches withholding)
Medicare: 1.5% on all earnings (matches withholding)
Journal entry: debit payroll tax expense, credit social security tax payable, Medicare tax payable, state unemployment tax payable, federal unemployment tax payable

Quick Assets

Cash, receivables, and other currents assets that can quickly be converted into cash

Chapter 11

Corporation Characteristics

Finance their operations using:

Debt such as purchasing on account or issuing bonds or notes payable
Equity such as issuing common stock or preferred stock

Corporations generate more than 90% of the total business dollars in the United States
Definition: legal entity, distinct and separate from the individuals who create and operate it
As a legal entity, a corporation may acquire, own, and dispose of property in its own name
Corporations may sell shares of ownership called stock

Par value Stock

Definition: indication on stock certificate of the dollar amount assigned to each share of stock (but it is NOT related to what the stock is actually worth)

Stock Split

Definition: process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares
Applies to all common shares including unissued, issued, and treasury shares
Objective: reduce the market price per share of stock to attract more investors to the stock and broadens the types and numbers of stockholders
Examples on page 502

Treasury Stock

Definition: stock that a corporation has issued and then reacquired
Corporations may reacquire stock:

To provide shares for resale to employees
To reissue as bonuses to employees, or
To support the market price of the stock

The cost method is normally used for recording the purchase and resale of treasury stock
Journal entry purchase: debit treasury stock, credit cash
Journal entry sell: debit cash, credit both treasury stock and paid-in capital from sale of treasury stock (to be illustrated in class)

A sale of treasury stock may result in a decrease in paid-in capital—to an extent that the paid-in capital from sale of treasury stock may have a credit balance so it is debited for the decrease and the reaming decrease is then debited to the retained earnings account

**Journal entry: debit both cash and paid-in capital from sale of treasury stock, credit treasury stock

Stockholder’s Equity

Statement of stockholder’s equitya summary of the changes in the stockholders’ equity in a corporation that have occurred during a specific period of time
Two methods on balance sheet(not important)

Method One: each class of stock is reported, followed by its related paid-in capital accounts, retained earning sis then reported followed by a deduction for treasury stock
Method Two: the stock accounts are reported, followed by the paid-in capital reported as a single item, Additional paid-in capital and retained earnings is then reported followed by a deduction for treasury stock

Issuing Stock Journal Entry(to be illustrated in class)

Debit cash, credit both preferred stock and common stock

Chapter 12

Time Value of Money Problems

12 types
Study handout

Mortgages

Mortgage Notesinstallment note secured by a pledge of the borrower’s assets

At the end of the note, the principal will be repaid in full
Often used to purchase assets such as equipment and usually issued by an individual bank
Fail to pay: the lender has the right to take possession of the pledged asset and sell it to pay off the debt
Installment Journal Entry: debit cash, credit notes payable
Annual Payment Journal Entry: debit interest expense and notes payable, credit cash

Bonds

Virtually all bonds work on a semiannual basis
Bond indentureunderlying contract between the company issuing bonds and the bondholders
Face value of each bond is called the principal
The price of a bond is quoted as a percentage of the bond’s face value

Example: a $1,000 bond quoted at 98 could be purchased or sold at 980 ($1,000 * .98)

Bonds quotes at 109 could be purchased or sold for $1.090 ($1,000 * 1.09)
When all bonds of an issue mature at the same time, they are called term bonds
If the bonds mature over several dates, they are called serial bonds
Bonds that may be exchanged for other securities like common stock are called convertible bonds
Bonds that a corporation reserves the right to redeem before their maturity are called callable bonds
Bonds issued on the basis of the general credit of the corporation are called debenture bonds
Proceeds from issuing bonds—study page 528
Bond price quote: 98 3/8 means 983.75
Bonds sold when contract rate is above market rate is premium

Compute proceeds and interest expense: study homework example #6

Bonds sold when contract rate is below market rate is discount

Compute proceeds and interest expense: study homework example #5

Bonds sold when contract rate is equal to market rate is par
A debenture bonddocument that either creates a debt or acknowledges it

In corporate finance, the term is used for a medium to long term debt instrument used by large companies to borrow money

Sinking Fund

Helps assure the investors that there will be adequate cash to pay the bonds at their maturity date

Journal Entries

Bond issued at face amount: debit cash, credit bonds payable
Interest Payment: debit interest expense, credit cash
Maturity date: debit bonds payable, credit cash
Bond at discount: debit cash and discount on bonds payable, credit bonds payable
Bond at premium: debit cash, credit bonds payable and premium on bonds payable