What are accrued liabilities?
Expenses incurred but not yet paid (not yet received an invocie)
What is the difference between routine contractial liabilities and contingent liabilities?
Routine Contractual: Wages, unpaid interest, rent, utilies, ‘normal’ stuff
Conteingent: Depends on the occurance of a future uncertain event to determine whether a liability exists and what amount
When warranty claim is later settled through product repair, the accounting entry will:
A. Increase warranty expense.
B. Decrease warranty liability.
C. Increase warranty liability.
D. Have no effect on the liability account.
B) Decrease warranty liability
What is the initial J/E to record warranty estimation?
DR. Warranty Exp
CR. Warranty Liab.
What is the J/E when the claim is settled/company pays costs?
DR. Warranty Liability
CR. Cash/Inventory/ etc
Which of the following is true regarding the time value of money?
A. The present value of a fixed future amount increases as the discount rate increases.
B. The longer the wait to receive a fixed future amount, the less present value it is.
C. The present value of a fixed future payment decreases with lower discount rates.
D. Receiving money later is always more valuable than receiving it today.
B. The longer the wait to receive a fixed future amount, the less present value it is.
How do you use present value tables?
Using interest rate and period, find the decimal
Multiply the decimal * the amt. you want to turn into PV (given)
When do bonds sell at a discount?
When coupon rate is less than market rate
When do bonds sell at a premium?
When coupon rate is higher than market rate
What is “lump-sum”
Repayment of principal
What are interest payments called?
Annuity, because they are in equal amounts and made at regular intervals
How do you calculate annuity (for example) $100 received in the next 2 years as a PV
Year 1:
$100 x PV Multipler (period 1) = PV1
$100 x PV Multiplier (period 2) = PV2
PV = PV1+PV2
Calculating issue price of bond given formula: PV of (Interest Payments + Principal) discounted at market rate)
ASSUMING: $5,000,000, 8 percent, 10 year bonds dated May 1, 2025. Interest is paid semi-annually on October 31 and April 30. The market rate of interest was 6 percent.
- Calculate PV of principal
= 5,000,000 * PV table decimal (n=20 (10x2) and i = market rate of 6%/2 = 3%) - Calculate PV of interest
= 5,000,000*(8%/2) * PV(annuity, n=20, i=3%)
Issue price = sum of these two
How would you record the journal entry for bond at a discount?
DR. Cash #=PV of promised/issue price
DR. Discount on Bonds Payable #=difference between FV-PV
CR. Bond Payable #=FV/amt promised
How would you record the J/E for a bond at a premium?
DR. Cash #=issued price
CR. Bonds payable #=FV
CR. Premium of bond spayable #=difference between issued and FV
How do you find a book value of a bond?
What about over two periods?
One period:
Subtract interest payment by ammortization
Two periods:
Same, except
Interest expense = Previous BV of period 1 * interest
What is cash interest paid?
The interest payment
How do you find Interest payment
Interest payment = FV * CPN rate (adjusted for semiannual etc)
How do you find interest exp
= issue price * market interest
