Interest earned on investments is synonymous with investment income, an account increased with a credit. ", When a business enterprise enters into what is referred to as off-balance-sheet financing, the company. Which of the following is correct for the 2016 year-end balance sheet? C; Revenue is recognized when earned, not upon the collection of cash. If the bonds were issued at a premium, this indicates that. Which of the following correctly applies the revenue recognition principle? Also in 2016 there were collections of cash prior to the delivery of goods/services totaling $10,000. 100% (5 ratings) PreviousquestionNextquestion. This is recorded by crediting the gain on sale of land account for the amount the sales price exceeded cost. C; Expenses are recorded when incurred in generating revenues and revenues are recorded when goods or services have been transferred to customers. This is often the time when the goods are delivered. Neither of these transactions increases total assets. Note disclosures for long-term debt generally include all of the following except, The times interest earned ratio is computed by dividing. d. coupon rate, nominal rate, or stated rate. 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. Which of the following statements concerning the land sale is correct? The portion paid in cash reduces assets and the unpaid portion of the expense must be recognized as an increase to liabilities. Depreciation expense is an income statement item. Thus, the expenses resulting from this are not classified as operating expenses. 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. A factor in determining a company'sborrowing risk. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to. Interest expense for the year will be $5000—the total amount incurred. D; Cash basis accounting results in revenues being recorded when cash is received, and expenses are recorded when cash is paid. This method is not acceptable for external reporting purposes. 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. This is paid for with cash resulting in a cash outflow, recorded with a credit to the cash account. Of the following choices, which will Trend report on its income statement when it sells the equipment? Which of the following describes the reporting of interest expense on the income statement? 56. An expense is recognized and a liability is recorded. Bond issued at premium: Interest expense will be less than the coupon payment. T/F: Cash received prior to the providing of the goods or service results in an increase in both assets and liabilities. This is clearly interest expense. Dividends declared are debited to the account Retained Earnings as a distribution to stockholders from all past revenues and expenses. 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. C; When the wages are paid, the liability account is reduced, as is the cash account. FALSE; Dividends do not affect net income. What amount should the 2016 income statement report for service revenue? B; Expenses are recorded (with a debit entry) when incurred. A non-operating expense is a business expense unrelated to the core operations. 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. B; Wages payable is recorded when a wages expense has been incurred but not yet paid. FALSE; Interest expense results from the cost of borrowing money. Is Interest Expense an Asset? B; Operating revenues = $734,000 = $255,000 + $479,000. However, the December payment won’t be made until January 15 of the following year. For example, assume a company enters into a legal services contract that requires an upfront payment of $12,000 for a year of services. A non-operating expense is a business expense unrelated to the core operations. 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 … Interest Expense. Which of the following journal entries is prepared when cash is received from a customer prior to delivery of the goods or services? (D) Interest Expense is debited for the total amount of interest incurred during the full term of the note. 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: c. calculate its loss using the historical effective rate of the loan. Cost of goods sold should be recorded when the inventory is sold, which in this case is during March. D; Revenues result in an increase in net income and retained earnings. Expert Answer. d. increased by accrued interest from May 1 to June 1. Bond issued at premium: Interest expense will be less than the coupon payment. FALSE; Expenses are recognized when incurred. 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. Treasury bonds should be shown on the balance sheet as. Which of the following businesses would most likely not report cost of goods sold on their income statement? (B) Interest Payable is credited for the total amount of interest incurred during the full term of the note. B; In companies with a merchandising focus, cost of goods sold is usually the most significant expense on the income statement. T/F: A gain resulting from the sale of buildings and equipment is not reported as operating income on the income statement. Mama June Pizza Company determined that dough, sauce, cheese and other ingredients costing $8,700 were used to make pizzas during July. This liability exists until the goods have been delivered, in this case until November 20. d. increase if the bonds were issued at either a discount or a premium. C; Other items = Interest expense = $3,400. Which of the following transactions will result in an increase in operating income as of the date of the transaction? The debt to total assets ratio is computed by dividing. Which of the following journal entries correctly records the receipt of a utility bill, which will be paid for in later weeks? The credit to cash indicates these wages have been paid and to reduce the payable a debit is required. Physical assets, such as machines, equipment, or vehicles, degrade over time and reduce in value incrementally. Therefore, the normal balance for these accounts are credit balances. 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. D; Operating income (income from operations) = $92,000 = $199,700 + $3,300 - $111,000. Interest Expense: Bond issued at par: The interest expense reported on income statement for the period will be equal to the coupon payment. Which of the following statements does not properly describe the accrual basis of accounting? The advertising is for three months and will be expensed for $500 for each month. So that $416.67 ($5000 / 12) must be entered as interest payable, since it’s money owed but not yet paid. A; Cash decreases by the same amount for which supplies increase; both are asset accounts and therefore total assets remain unchanged. Even though cash was not collected, assets increased (through an account receivable) because the services have been performed. D; Net income = $46,800 = $203,000 - $111,000 - $9,200 - $36,000. 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? For services to be provided in the future, an increase in the unearned revenue (a liability) account is also recorded. This is recorded as wages expense. Lantz Company has provided the following information: A; Operating revenues = $734,000 = $255,000 + $479,000. 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. TRUE; Expenses decrease net income, thus decreasing retained earnings and stockholders' equity. Examples of Interest Expense and Interest Payable. 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. A; The cash account is increase with a debit because cash is received. The rate of interest actually earned by bondholders is called the. The phone bill of $400 was incurred in December and will be expensed in December. Interest payable is the amount of interest the company has incurred but has not yet paid as of the date of the balance sheet. This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). D; Losses reduce net income and stockholders' equity and therefore loss accounts have a debit balance. C; Unearned revenue is a liability account and therefore has a credit balance. c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust. B; Reduction of the liability account, unearned revenue, occurs once goods or services have been provided and does not require a cash payment. D; The full operating expense amount reduces net income, which reduces stockholders' equity through the retained earnings account. 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. 1- Expenses incurred in connection with TRADE or BUSINESS 2- Expenses incurred by an individual in connection with the PRODUCTION OF INCOME 3- Other types of expenses; interest expense, taxes, bad debts, and others by individuals for personal reasons; medical expenses, alimony, and moving cost Trend sold equipment that it had been using to create decorations. Theoretically, the costs of issuing bonds could be, The printing costs and legal fees associated with the issuance of bonds should. Examples of Interest Expense and Interest Payable. So that $416.67 ($5000 / 12) must be entered as interest payable, since it’s money owed but not yet paid. The following information has been provided by Hable Company: C; Operating expenses = $56,000 = $9,900 + $12,000 + $5,700 + $21,300 + $7,100. 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. Interest expense related to tax-exempt interest income under section 265. Interest Expense: Bond issued at par: The interest expense reported on income statement for the period will be equal to the coupon payment. Interest expense related to tax-exempt interest income under section 265. TRUE; The account that is debited when a cash dividend is declared is retained earnings. c. a new effective-interest rate must be computed. Which of the following best describes operating revenues? The amount that can be capitalized is $72,500. d. The amount of interest expense will remain constant over the 10-year period. An expense is recorded as the supplies are consumed. Which of the following statements is correct? T/F: When the board of directors declares a cash dividend, the retained earnings account is debited. T/F: Selling inventory to a customer on account results in an increase in both assets and revenues. TRUE; Under the accrual basis of accounting, the revenue recognition principle states that revenues are recognized when goods or services are transferred to customers. Which of the following statements is false, assuming the inventory was sold during March? Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. 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. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. Which of the following is an example of "off-balance-sheet financing"? FALSE; Total assets remain unchanged from this transaction and no expense is recorded. b. the nominal rate of interest exceeded the market rate. 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? T/F: Unearned revenues are reported as liabilities on the balance sheet. Which of the following statements is false? 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: C; Revenue is recognized on the income statement when it has been earned, regardless of whether cash has been collected. With the passage of the Tax Cuts and Jobs Act of 2017, many itemized deductions previously available to taxpayers were either limited or eliminated. Assets are not affected. 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. A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred. Losses from the disposal of assets other than investments are reported in the Operating expenses section of the income statement. Which of the following statements does not accurately describe the impact on the financial statements when Zeppelin provides the services during February? Interest Payable is also the title of the current liability account that is used to record and report this amount. 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 expense for the year will be $5000—the total amount incurred. Smith Corporation has provided the following information: A; Operating revenues = $415,000 = $125,000 + $279,000 + $11,000. Interest expense is a non-operating expense shown on the income statement. a. greater than if the straight-line method were used. Interest expense is not: Incurred on current liabilities. 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. 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. A noninterest expense is an expense other than interest payments on … 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. 2/3 of loan proceeds were used to purchase tax-exempt bonds, 2/3 of the bank interest is nondeductible. D; The revenue recognition principle requires that revenue be recognized once goods have been transferred to customers, usually upon delivery. D; A prepaid expense is an asset account with a debit balance. Which of the following is an example of revenue or expense to be recognized in the current period's income statement? In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less than the carrying amount of the debt, the debtor would recognize, In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. 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. Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service? 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. TRUE; Financial statements issued under cash basis accounting are not very useful to external users. T/F: An income statement with each line divided by net sales and shown as a percentage is called a common statement. A; Recording revenue results in an increase in either cash or accounts receivable (both asset accounts) or the reduction of unearned revenue (a liability account). Neither has an impact on operating income. C; Revenue is recognized at the time of delivery of goods and services to customers regardless of when the cash is received. Interest Payable is also the title of the current liability account that is used to record and report this amount. 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. Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. Allowing customers more time to pay increases the time it takes to collect cash and finish the operating cycle. The store paid Daring Dolls in advance for the order of SuperDolls. Unearned revenues are liabilities reported on the balance sheet. The investment interest expense calculator is fairly straightforward. Cash, utilities expense, and accounts receivable are all classified as either assets or expenses. C; Operating revenues = $734,000 = $255,000 + $479,000. Boone's Cleaning Service performed cleaning services during December 2016, but had not collected any cash from its customers as of December 31, 2016. Colby Corporation has provided the following information: D; Operating revenues = $203,000 = $199,700 + $3,300. Which of the following best describes the expense recognition principle? 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: C; Upon the receipt of the cash deposit, a liability (unearned revenue) must be reported on the balance sheet. T/F: Application of generally accepted accounting principles requires that the accrual basis of accounting be used for reporting revenues and expenses on the income statement. Therefore, the normal balance for these accounts are debit balances. 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