Chapter 5

Question 1

P5-5 - bakery - incorp recently

Answer 1

1. calculate the expenses for the IS to date
2. interest expense is on the IS
3. bank loan payable is on BS - CURRENT (calculate for a year if the loan is long term) + long term ( total amount - what was paid - less current maturities= the portion you calculate in Current Liabilities
4. interest payable (what was accrued because of this entry:
   Dr. Interest Exp (goes on IS)
   Cr. Interest Payable (goes on BS)

Question 2

P5-4 (1. two FV through NI and AOCI; 2. record capital assets - appreciation capital; 3. goodwill; 4. reserved cash; 5. reclassify notes payable)

Answer 2

1. Investments are reported at fair value! FV-NI => the difference goes in net income => Retained Eranings
   FV - AOCI => the difference goes in S.E account: AOCI
2. capital assets are recorded at cost! No adding value, no appreciation capital account;
3. Goodwill always involves a transaction (when you buy a new company - the difference in cost); you CAN NOT measure Goodwill on your internal assets!
4. if you reserve cash for a future expansion in a trust - it becomes a Long Term Asset.
5. Don’t forget when you have a long term Note Payable to put the portion for a year in Current Liabilities.

Question 3

PPE

Answer 3

has to be physical assets

Question 4

Goodwill

Answer 4

you record it only when there is a transaction; when you buy a new company and you pay more than its current assets

Question 5

FV-NI

Answer 5

you always record it at fair value (market value) and the difference between the cost and the fair value goes first in Net Income and of course in Retained Earnings

Question 6

FV - OCI

Answer 6

you always record it at fair value (market value) and the difference between the cost and the fair value goes into the AOCI (Shareholder Equity account)

Question 7

Long term bank loan

Answer 7

1. calculate the current portion (for a year) in Current Liabilities
2. the expense for the principal doesn’t go in the IS! - is a liability
   Dr. Cash
   Cr Bank loan Payable
3. Subtract from the Bank loan:
   - what you have paid so far
   - the current potion that you put into the Current Liabilities
4. calculate the interest payable because you have this transaction
   Dr. Interest expense (this one goes on IS)
   Cr. Interest Payable (this one goes on BS)

Question 8

Two important ratios for a banker to approve a bank loan

Answer 8

current ratio = current assets/current liabilities
times interest earned = Income before interest charges and taxes/interest charges
=> measures the ability to meet interest payments as they come due

Question 9

Discount on Bond Payable

• what kind of accoun
• what is the journal entry

Answer 9

• it has a debit balance and is a contra-account (contra liability) to Bonds Payable
• Journal entry to record the amortization:
  Dr. Interest Expense
  Cr. Discount on Bonds Payable
  Cr Cash (the semi- annual expense you have to pay back to whoever borrowed money and got the Bond Payable)