This liability exists until the goods have been delivered, in this case until November 20. T/F: The operating cycle is the time that elapses between a company's cash payment to suppliers for inventory purchases and the collection of cash from sale of inventory to customers. Daring Dolls, Inc. received an order to provide SuperDolls for a big department store. ", When a business enterprise enters into what is referred to as off-balance-sheet financing, the company. Interest expense represents an amount of interest payable on any borrowings which includes loans, bonds or other lines of credit and its associated costs are shown on the income statement. Which of the following accounts normally have a debit balance? The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. TRUE; Financial statements issued under cash basis accounting are not very useful to external users. June's Printing Shop had the following information for office supplies: B; One-half of goods ordered were received = $600. During 2016, Sigma Company earned service revenue amounting to $700,000, of which $630,000 was collected in cash; the balance will be collected in January, 2017. T/F: Under accrual accounting, rent expense for February, 2016 would be recognized on the income statement in February, 2016 even though it had been paid for in January of 2016. T/F: Under accrual basis accounting, revenues are recognized when goods or services are transferred to customers, and expenses are recognized when incurred to generate that revenue. Interest expenses are considered to be tax-deductible, so tax shields are very important, as firms can get benefits from the structuring of such arrangements. Interest expense calculations Every six months, XYZ Corp. will naturally have to pay its bondholders cash coupons of $5,000. T/F: Unearned revenues are reported as liabilities on the balance sheet. Note disclosures for long-term debt generally include all of the following except, The times interest earned ratio is computed by dividing. c. be accumulated in a deferred charge account and amortized over the life of the bonds. Interest expense for the year will be $5000—the total amount incurred. Gains are a result of an increase in assets or decrease in liabilities from selling operating assets, other than inventory, such as plant and equipment, and also from selling investment assets. Administrative expenses are the expenses an organization incurs not directly tied to a specific function such as manufacturing, production, or sales. TRUE; Collecting cash increases assets (debit), and if collection occurs before services are provided, the liability "unearned revenue" increases (credit). This is clearly interest expense. (B) Interest Payable is credited for the total amount of interest incurred during the full term of the note. T/F: Reporting revenues on the income statement that were previously reported as unearned revenues on the balance sheet results in a decrease in liabilities and an increase in net income, retained earnings, and stockholders' equity. An interest expense is usually paid to the lenders or the debt holders by a firm on the basis of the debt balance amount and the applicable interest rate. T/F: Revenue accounts have credit balances because they increase stockholders' equity. C; Unearned revenue is a liability account and therefore has a credit balance. These expenses highlight interest accrued during the period and not the interest … A; Income tax expense is not classified as an operating expense and is deducted after the calculation of operating income. Net interest income is a financial performance measure that reflects the difference between the revenue generated from a bank's interest-bearing assets and expenses … TRUE; Revenues increase stockholders' equity through the account Retained Earnings and therefore have credit balances. D; The revenue recognition principle requires that revenue be recognized once goods have been transferred to customers, usually upon delivery. Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. Interest expense that is properly allocable to a passive activity. The most common types of non-operating expenses are interest charges and losses on the disposition of assets. d. The amount of interest expense will remain constant over the 10-year period. So that $416.67 ($5000 / 12) must be entered as interest payable, since it’s money owed but not yet paid. Which of the following does not correctly describe the impact on the financial statements when the supplies are used during future months? Which of the following is correct for the 2016 year-end balance sheet? D; Operating income (income from operations) = $92,000 = $199,700 + $3,300 - $111,000. Borrowing money is a financing activity. The store paid Daring Dolls in advance for the order of SuperDolls. The interest tax shield is positive when the EBIT is greater than the interest payment. Boone's Cleaning Service performed cleaning services during December 2016, but had not collected any cash from its customers as of December 31, 2016. The profit or.A company … If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a, When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be. The land was a component of property and equipment on the balance sheet. B; The expense recognition principle requires that expenses be recorded when incurred in generating revenue. Interest expense is a non-operating expense shown on the income statement. So that $416.67 ($5000 / 12) must be entered as interest payable, since it’s money owed but not yet paid. Interest Expense: Bond issued at par: The interest expense reported on income statement for the period will be equal to the coupon payment. It is accounted for when companies record the loss in value of their fixed assets through depreciation. Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser such as Wal-Mart Stores? A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred. Interest expense related to tax-exempt interest income under section 265. A corporation borrowed money from a bank to build a building. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to. Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service? 2/3 of loan proceeds were used to purchase tax-exempt bonds, 2/3 of the bank interest is nondeductible. It is also important to keep in mind that the interest tax shield value is the present value of all the interest tax shields. FALSE; Interest expense results from the cost of borrowing money. Interest Expense: Bond issued at par: The interest expense reported on income statement for the period will be equal to the coupon payment. Interest earned on investments is synonymous with investment income, an account increased with a credit. A company purchased $20,000 of inventory during February and will pay for it during March. Cost of goods sold should be recorded when the inventory is sold, which in this case is during March. A; In purely service-oriented companies in which no products are produced or sold, the cost of using employees to generate revenue is usually the largest expense. Zeppelin Company received cash during January for services to be provided in February. Toby Toy Store has noticed the following items that need to be considered for its income statement for the year ended December 31, 2016: A; Commissions $3,000 are expensed in December when the sales were made. c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. Which of the following is correct when land costing $20,000 is sold for $29,000? Interest Payable is also the title of the current liability account that is used to record and report this amount. Which of the following journal entries is prepared by an auto repair shop when a customer will pay cash subsequent to delivery of goods or services? Interest Expense. Assets are not affected. Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. Generally, a passive activity is any trade or business activity in which you do not materially participate. Which of the following statements is correct? T/F: An income statement with each line divided by net sales and shown as a percentage is called a common statement. TRUE; Recording revenues increases net income, which flows through the financial statements to increase retained earnings and stockholders' equity. Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements? When unearned revenue is earned, the liability account decreases. A company purchased supplies for cash, which will be consumed during future months. Is Interest Expense an Asset? November and December advertising will be expensed in the total amount of $1,000. Interest payable is the amount of interest the company has incurred but has not yet paid as of the date of the balance sheet. Allowing customers more time to pay increases the time it takes to collect cash and finish the operating cycle. B; $700,000 of service revenue was earned during 2016; therefore that amount should be reported on the income statement. C; Revenue is recognized on the income statement when it has been earned, regardless of whether cash has been collected. C; Expenses are recorded when incurred in generating revenues and revenues are recorded when goods or services have been transferred to customers. C; When services are provided to a customer on account, a debit to accounts receivable is required. Cash, utilities expense, and accounts receivable are all classified as either assets or expenses. c. calculate its loss using the historical effective rate of the loan. T/F: According to the revenue recognition principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future. Wages owed to employees for work during a period need to be recorded as an expense during that period. Examples of Interest Expense and Interest Payable. Following the same process, we can work out total payment, interest expense, repayment of principal and closing balance for each period and create the following amortization schedule: Which of the following journal entries is prepared when cash is received from a customer prior to delivery of the goods or services? Unearned revenues are liabilities reported on the balance sheet. The debt to total assets ratio is computed by dividing. D; The operating cycle can be described as cash-to-cash. Interest expense is a nonoperating expense when it is not part of a company's main operations. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? b. the nominal rate of interest exceeded the market rate. Which of the following businesses would most likely not report cost of goods sold on their income statement? D; A prepaid expense is an asset account with a debit balance. The interest rate written in the terms of the bond indenture is known as the. TRUE; Inventory sold on account increases accounts receivable, an asset, and sales revenue. b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding. C; The revenue recognition principle specifies that a company recognizes revenue when goods or services are transferred to customers. Interest expense related to tax-exempt interest income under section 265. T/F: According to the expense recognition principle, wages expense is recognized on the income statement when the wages are paid rather than when the employee provides the work. T/F: When the board of directors declares a cash dividend, the retained earnings account is debited. Is Interest Expense an Asset? An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. The advertising is for three months and will be expensed for $500 for each month. Advertising for January will be expensed in January. McNeil Company owed its employees for services performed and recorded a liability for the wages owed the employees. C; Other items = Interest expense = $3,400. FALSE; Expenses are recognized when incurred. C; Operating expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000. During 2016, Sensa Corporation incurred operating expenses amounting to $100,000 of which $75,000 was paid in cash; the balance will be paid during 2017. FALSE; At the date of purchase a six-month insurance policy does not result in a debit to insurance expense, but instead results in a debit to prepaid insurance, which is an asset account. Dividends declared are debited to the account Retained Earnings as a distribution to stockholders from all past revenues and expenses. C; When the wages are paid, the liability account is reduced, as is the cash account. Yelena Company received cash from a customer in advance of providing the service to the customer. Interest expense on the income statement represents interest accrued during the period covered by the financial statements, and not the amount of interest paid over that period. For example, assume a company enters into a legal services contract that requires an upfront payment of $12,000 for a year of services. Cash payments for long-term assets result in assets being reported on the balance sheet; there is not immediate expense recognition. A; When supplies are consumed during the course of business, supplies expense is recognized and the supplies account is reduced; thus, expenses will increase and assets will decrease. T/F: Dividends declared decrease net income. C; The excess cash received over the cost of the land is recognized as a gain on sale of land. It is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers. Examples of Interest Expense and Interest Payable. B; Wages payable is recorded when a wages expense has been incurred but not yet paid. Which of the following statements is false, assuming the inventory was sold during March? Likelyto stay the same when sales change. Next calculate avoidable interest ($72,500) and actual interest (($500,000 x 12%) + ($800,000 x 10%) = $140,000). B; When cash is received before goods or services have been provided, cash is debited and unearned revenue (a liability account) is credited. Any interest expense that is capitalized, such as construction interest subject to section 263A. FALSE; An income statement with each line divided by net sales and shown as a percentage is called a common-sized income statement. Then the financial statements can be prepared. Interest deductible as an itemized deduction. B; Assets and expenses are on the left side of the accounting equation and are all increased with a debit. In the valuation of the interest tax shield, it capitalizes the value of the firm and it also limits the tax benefits of the debt. Which of the following transactions will result in an increase in operating income as of the date of the transaction? 100% (5 ratings) PreviousquestionNextquestion. B; When assets other than investments are sold, gains or losses will result. This is because the premium collected (Carrying value – Face value) is amortized over the life of the bond. Bond issued at premium: Interest expense will be less than the coupon payment. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. Which of the following journal entries is correct when a company has incurred an expense for work performed but has not yet paid for theses wages to employees? Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 8,000 Based on this information, Sammy has: a. AGI of $90,000. Which of the following correctly applies the revenue recognition principle? a. exceed what it would have been had the effective-interest method of amortization been used. Interest expense is one of the core expenses found in the income statement Income Statement The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The core revenue recognition principle has two requirements for recognizing revenue. FALSE; Gains resulting from the sale of operating assets are included in the income statement section of operating income. A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20. Interest expenses are incurred from deposits, short-term and long-term loans, and trading account liabilities. A noninterest expense is an expense other than interest payments on … C; Operating revenues = $203,000 = $199,700 + $3,300. A noninterest expense is an expense other than interest payments on … B; The utilities expense account needs to be increased with a debit, and because the bill will be paid at a later date, the utilities payable account needs to be increased with a credit. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. This is recorded by crediting the gain on sale of land account for the amount the sales price exceeded cost. T/F: The expense recognition principle requires expenses to be recorded on the income statement in the same period they are incurred in generating revenues. Which of the following is true with respect to the landlord's financial statements using generally accepted accounting principles? (D) Interest Expense is debited for the total amount of interest incurred during the full term of the note. Interest expense that is properly allocable to a passive activity. B; When assets other than investments are sold or disposed for less than the undepreciated cost, losses result and these losses are reported in the operating expenses section of the income statement which results in Income from Operations. Interest expense (Not reported-no cash effect) Insurance expense $(37) Decrease in bond discount: $4: Cash paid for interest $(17) Loss on sale of land $(14) Decrease in prepaid insurance: $17: D; The operating cycle can be described as cash-to-cash. Any interest expense that is capitalized, such as construction interest subject to section 263A. Which of the following does not correctly describe the cash basis of accounting? D; Accrual basis accounting is required by GAAP for use when providing financial statements to external decision makers. A; When goods or services are transferred to a customer, on account, an account receivable (an asset) is created at the time of sale or service. D; In February, the unearned revenue account is reduced with a debit and revenue is increased with a credit. Which of the following statements is false? Which of the following statements is true? Of the following choices, which will Trend report on its income statement when it sells the equipment? C; Upon the receipt of the cash deposit, a liability (unearned revenue) must be reported on the balance sheet. It represents interest payable on any borrowings – bonds, loans, … Lantz Company has provided the following information: A; Operating revenues = $734,000 = $255,000 + $479,000. For example, a retailer's main operations are the purchasing and sale of merchandise, and a manufacturer's main operations are the production and sale of goods. TRUE; The account that is debited when a cash dividend is declared is retained earnings. B; Reduction of the liability account, unearned revenue, occurs once goods or services have been provided and does not require a cash payment. Mama June Pizza Company determined that dough, sauce, cheese and other ingredients costing $8,700 were used to make pizzas during July. d. increased by accrued interest from May 1 to June 1. Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future? This method is not acceptable for external reporting purposes. C; Revenue is recognized at the time of delivery of goods and services to customers regardless of when the cash is received. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. Interest expense is not: Incurred on current liabilities. c. a new effective-interest rate must be computed. Trend sold equipment that it had been using to create decorations. Bond issued at premium: Interest expense will be less than the coupon payment. At the time of reacquisition, The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as. Revenues can also be generated regularly from investments as dividends and interest. c. income before income taxes and interest expense by interest expense. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will. Theoretically, the costs of issuing bonds could be, The printing costs and legal fees associated with the issuance of bonds should. Neither has an impact on operating income. A landlord collected $5,000 cash from a tenant for December 2016's rent but the tenant's rent for December is $8,000. Which of the following is not a proper application of the revenue recognition principle? The most common types of non-operating expenses are interest charges and losses on the disposition of assets. Which of the following journal entries is correct assuming that Mama June Pizza Company received cash for interest earned on investments? d. coupon rate, nominal rate, or stated rate. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. Generally, a passive activity is any trade or business activity in which you do not materially participate. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should. Which of the following expenses does not affect the reporting of operating income? C; Losses reduce net income and stockholders' equity and therefore loss accounts have a debit balance. Physical assets, such as machines, equipment, or vehicles, degrade over time and reduce in value incrementally. TRUE; In accrual basis accounting, revenues are recognized when the company transfers promised good or services to customers, and expenses are recognized in the same period that costs are incurred to generate that revenue. Which of the following is one of these requirements? This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). Deductions do not apply to small businesses, farms, real … 70. This is often the time when the goods are delivered. TRUE; The expense recognition principle requires that expenses incurred to generate revenues be recognized in the same period as the revenue it helped to generate. Which of the following best describes the expense recognition principle? c. AGI of $99,500. TRUE; Unearned revenues are payments provided to a company before the promised goods or services are transferred to customers. Which of the following journal entries correctly records the receipt of a utility bill, which will be paid for in later weeks? D; Cash basis accounting results in revenues being recorded when cash is received, and expenses are recorded when cash is paid. Which of the following best describes operating revenues? d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years. Interest expense for the year will be $5000—the total amount incurred. A; The cash account is increase with a debit because cash is received. Interest Payable is also the title of the current liability account that is used to record and report this amount. T/F: Purchasing a six-month insurance policy results in a debit to insurance expense and a credit to cash at the date of purchase. D; Losses reduce net income and stockholders' equity and therefore loss accounts have a debit balance. The credit to cash indicates these wages have been paid and to reduce the payable a debit is required. C; When an asset is sold for more than its cost, a gain on the sale is reported. A; Cash decreases by the same amount for which supplies increase; both are asset accounts and therefore total assets remain unchanged. T/F: Interest revenue is reported as operating revenue and therefore increases operating income. T/F: Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues. C; Interest expense is a cost resulting from financing activities, not operating activities, and thus results in a reduction after the operating income caption of the income statement. Which of the following statements does not properly describe the accrual basis of accounting? The interest expense for the second period equals $373,379 (=$9,334,478 × 8% × ½) and the principal repayment equals $692,143 (=$1,065,522 - $373,379) and so on. Colby Corporation has provided the following information: D; Operating revenues = $203,000 = $199,700 + $3,300. FALSE; Revenue is recognized when the company transfers promised goods or services to its customer in the amounts it expects to receive. Which of the following liability accounts is likely to be satisfied without a future cash payment? Which of the following describes the transaction resulting in a journal entry with a debit to Wages Payable and a credit to Cash? FALSE; Interest expense results from the cost of borrowing money. FALSE; Dividends do not affect net income. An expense is recognized and a liability is recorded. D; Expense accounts decrease net income, retained earnings, and stockholders' equity and thus have debit balances. The following information has been provided by Hable Company: C; Operating expenses = $56,000 = $9,900 + $12,000 + $5,700 + $21,300 + $7,100. C; Operating revenues are increases in assets (cash or accounts receivable) or settlements of liabilities (unearned revenues) from central ongoing operations. See the answer. A factor in determining a company'sborrowing risk. Borrowing money is a financing activity. B; Operating revenues = $734,000 = $255,000 + $479,000. Which of the following accounts normally have a credit balance? My Thoughts on Life, Travels and Culture. C; Collecting cash from customers increases assets. This transaction should be recorded as follows by Avery: C; The insurance is for future periods, so it is considered prepaid insurance, an asset account increased with a debit. Therefore, they have debit balances. Operating revenues result from the sale of goods or services to a customer, even if it is on account and will not be collected until a later date. The primary difference between revenues and gains is: A; Revenues are defined as increases in assets or settlements of liabilities from ongoing operations. accrued revenues quizlet General News January 20th, 2021 January 20th, 2021 If the bonds were issued at a premium, this indicates that. The portion paid in cash reduces assets and the unpaid portion of the expense must be recognized as an increase to liabilities. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. FALSE; Interest revenue is a result of investing activities. Interest payable is the amount of interest the company has incurred but has not yet paid as of the date of the balance sheet. a. greater than if the straight-line method were used. c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. T/F: Using cash to purchase office supplies, which will be consumed later, results in an increase in expenses and a decrease in assets at the time of purchase. Depreciation Expense and Accumulated Depreciation . 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