T/F: Unearned revenues are reported as liabilities on the balance sheet. 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. Therefore, they have debit balances. An expense is recognized and a liability is recorded. This is recorded as wages expense. A troubled debt restructuring will generally result in a. d. gain by the debtor and a loss by the creditor. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. What amount should the 2016 income statement report for service revenue? 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. 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: A company purchased supplies for cash, which will be consumed during future months. Which of the following statements is false? FALSE; Gains resulting from the sale of operating assets are included in the income statement section of operating income. B; Wages payable is recorded when a wages expense has been incurred but not yet paid. When such a transaction takes place. Which of the following accounts normally have a debit balance? Advertising for January will be expensed in January. (D) Interest Expense is debited for the total amount of interest incurred during the full term of the note. C; When the wages are paid, the liability account is reduced, as is the cash account. Interest expense related to tax-exempt interest income under section 265. T/F: Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues. Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. T/F: Interest revenue is reported as operating revenue and therefore increases 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. 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. 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: Expense accounts have debit balances because they decrease net income, retained earnings, and stockholders' equity. Deferred expense is generally associated with service contracts that require payment in advance. FALSE; Interest expense results from the cost of borrowing money. TRUE; Inventory sold on account increases accounts receivable, an asset, and sales revenue. a. the present value of the debt instrument must be approximated using an imputed interest rate. 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. Assets are not affected. Next calculate avoidable interest ($72,500) and actual interest (($500,000 x 12%) + ($800,000 x 10%) = $140,000). Theoretically, the costs of issuing bonds could be, The printing costs and legal fees associated with the issuance of bonds should. Interest is capitalized in order to obtain a more complete picture of the total acquisition cost associated with an asset, since an entity may incur a significant interest expense during the acquisition and start-up phases of the asset. 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; 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; Expenses are defined as decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period. Neither has an impact on operating income. B; Assets and expenses are on the left side of the accounting equation and are all increased with a debit. 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: Therefore, GAAP requires accrual basis accounting for financial reporting purposes. A non-operating expense is a business expense unrelated to the core operations. Depreciation Expense and Accumulated Depreciation . Interest expense is a nonoperating expense when it is not part of a company's main operations. It is accounted for when companies record the loss in value of their fixed assets through depreciation. C; Operating income is increased by operating revenue. D; Cash basis accounting results in revenues being recorded when cash is received, and expenses are recorded when cash is paid. C; The two requirements for revenue to be recognized according to the core revenue recognition principle are: 1) when goods or services are transferred to customers 2) in the amount the company expects to receive. 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. Allowing customers more time to pay increases the time it takes to collect cash and finish the operating cycle. Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. Revenues can also be generated regularly from investments as dividends and interest. Which of the following statements does not properly describe the accrual basis of accounting? 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? B; Expenses are recorded (with a debit entry) when incurred. A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred. 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. B; Gains or losses on the sale of assets, both those used in operations and those from sale of investments, are reported on the income statement. TRUE; The operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers. 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. C; The revenue recognition principle specifies that a company recognizes revenue when goods or services are transferred to customers. Which of the following is correct when land costing $20,000 is sold for $29,000? Which of the following statements is false, assuming the inventory was sold during March? 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. 2/3 of loan proceeds were used to purchase tax-exempt bonds, 2/3 of the bank interest is nondeductible. D; Liability, retained earnings, and revenue accounts are all on the right side of the accounting equation and are all increased with a credit. 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 is a non-operating expense shown on the income statement. d. All of these are examples of "off-balance-sheet financing. TRUE; Expenses decrease net income, thus decreasing retained earnings and stockholders' equity. 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. Borrowing money is a financing activity. Which of the following journal entries is prepared when cash is received from a customer prior to delivery of the goods or services? Likelyto stay the same when sales change. The interest rate written in the terms of the bond indenture is known as the. FALSE; Interest revenue is a result of investing activities. Thus, the expenses resulting from this are not classified as operating expenses. The most common types of non-operating expenses are interest charges and losses on the disposition of assets. The portion paid in cash reduces assets and the unpaid portion of the expense must be recognized as an increase to liabilities. These expenses highlight interest accrued during the period and not the interest … TRUE; Unearned revenues are payments provided to a company before the promised goods or services are transferred to customers. Which of the following statements is false when Mama June Pizza Company paid $47,000 cash on accounts owed to suppliers? T/F: Dividends declared decrease net income. 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. The most common types of non-operating expenses are interest charges and losses on the disposition of assets. Interest expense for the year will be $5000—the total amount incurred. See the answer. The bonds are sold to yield 8%. Thus, the asset account of cash decreases by the same amount that the asset account of supplies increases. The supplies are to be used later. Is Interest Expense an Asset? c. a new effective-interest rate must be computed. An expense is recorded as the supplies are consumed. Losses from the disposal of assets other than investments are reported in the Operating expenses section of the income statement. c. AGI of $99,500. Note disclosures for long-term debt generally include all of the following except, The times interest earned ratio is computed by dividing. Lantz Company has provided the following information: A; Operating revenues = $734,000 = $255,000 + $479,000. D; Net income = $46,800 = $203,000 - $111,000 - $9,200 - $36,000. Which of the following is an example of "off-balance-sheet financing"? A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. One-third of supplies received were used = $600 × 1/3 = $200. Which of the following is not reported as an operating expense on the income statement? The profit or.A company … 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. 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 accounts does not have a debit balance? Cash, utilities expense, and accounts receivable are all classified as either assets or expenses. Interest earned on investments is synonymous with investment income, an account increased with a credit. Daring Dolls, Inc. received an order to provide SuperDolls for a big department store. 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. This is because the premium collected (Carrying value – Face value) is amortized over the life of the bond. D; The operating cycle can be described as cash-to-cash. If the bonds were issued at a premium, this indicates that. 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. C; Operating revenues are increases in assets (cash or accounts receivable) or settlements of liabilities (unearned revenues) from central ongoing operations. FALSE; Expenses are recognized when incurred. Smith Corporation has provided the following information: A; Operating revenues = $415,000 = $125,000 + $279,000 + $11,000. 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. Which of the following correctly describes the impact on the financial statements when the employee wages are subsequently paid? 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. Is Interest Expense an Asset? D; Revenues result in an increase in net income and retained earnings. D; Operating income (income from operations) = $92,000 = $199,700 + $3,300 - $111,000. Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future? B; Reduction of the liability account, unearned revenue, occurs once goods or services have been provided and does not require a cash payment. A non-operating expense is a business expense unrelated to the core operations. TRUE; Revenues increase stockholders' equity through the account Retained Earnings and therefore have credit balances. The store rent of $2,000 for January will be expensed in January. A noninterest expense is an expense other than interest payments on … b. carrying amount of the pre-restructure debt is greater than the total future cash flows. D; Supplies is an asset account and is reduced with a credit for $8,700. D; The full operating expense amount reduces net income, which reduces stockholders' equity through the retained earnings account. 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 expenses does not affect the reporting of operating income? Depreciation expense is an income statement item. Zeppelin Company received cash during January for services to be provided in February. a. exceed what it would have been had the effective-interest method of amortization been used. Which of the following statements does not accurately describe the impact on the financial statements when Zeppelin provides the services during February? November and December advertising will be expensed in the total amount of $1,000. 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. C; Losses reduce net income and stockholders' equity and therefore loss accounts have a debit balance. 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. Any interest expense that is capitalized, such as construction interest subject to section 263A. This is clearly interest expense. FALSE; Revenue is recognized when the company transfers promised goods or services to its customer in the amounts it expects to receive. Interest Expense. TRUE; Financial statements issued under cash basis accounting are not very useful to external users. The core revenue recognition principle has two requirements for recognizing revenue. This method is not acceptable for external reporting purposes. B; In companies with a merchandising focus, cost of goods sold is usually the most significant expense on the income statement. Any interest expense that is capitalized, such as construction interest subject to section 263A. T/F: When the board of directors declares a cash dividend, the retained earnings account is debited. TRUE; Collecting cash increases assets (debit), and if collection occurs before services are provided, the liability "unearned revenue" increases (credit). Interest expense for the year will be $5000—the total amount incurred. Of the following choices, which will Trend report on its income statement when it sells the equipment? (B) Interest Payable is credited for the total amount of interest incurred during the full term of the note. The primary difference between revenues and gains is: A; Revenues are defined as increases in assets or settlements of liabilities from ongoing operations. Interest expenses are incurred from deposits, short-term and long-term loans, and trading account liabilities. 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). Which of the following best describes operating revenues? Physical assets, such as machines, equipment, or vehicles, degrade over time and reduce in value incrementally. This liability exists until the goods have been delivered, in this case until November 20. Interest expense related to tax-exempt interest income under section 265. This is because the premium collected (Carrying value – Face value) is amortized over the life of the bond. Generally, a passive activity is any trade or business activity in which you do not materially participate. c. calculate its loss using the historical effective rate of the loan. On December 31, 2016, Avery Corporation paid $10,000 for next year's insurance policy. TRUE; In accrual accounting, expenses are recognized in the same period in which they are incurred to generate revenue. 100% (5 ratings) PreviousquestionNextquestion. Interest is found in the income statement, but can also is the direct interest expense paid to the deposits used to fund the loans, and does not include interest expense … 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; A prepaid expense is an asset account with a debit balance. A noninterest expense is an expense other than interest payments on … 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. D; Losses reduce net income and stockholders' equity and therefore loss accounts have a debit balance. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to. The advertising is for three months and will be expensed for $500 for each month. C; Operating expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000. Also in 2016 there were collections of cash prior to the delivery of goods/services totaling $10,000. The debt to total assets ratio is computed by dividing. The investment interest expense calculator is fairly straightforward. The phone bill of $400 was incurred in December and will be expensed in December. Even though cash was not collected, assets increased (through an account receivable) because the services have been performed. With the passage of the Tax Cuts and Jobs Act of 2017, many itemized deductions previously available to taxpayers were either limited or eliminated. This is recorded by crediting the gain on sale of land account for the amount the sales price exceeded cost. Then the financial statements can be prepared. 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. A; The cash account is increase with a debit because cash is received. A corporation borrowed money from a bank to build a building. Interest expense that is properly allocable to a passive activity. 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. D; Expense accounts decrease net income, retained earnings, and stockholders' equity and thus have debit balances. TRUE; Under the accrual basis of accounting, the revenue recognition principle states that revenues are recognized when goods or services are transferred to customers. This is paid for with cash resulting in a cash outflow, recorded with a credit to the cash account. Treasury bonds should be shown on the balance sheet as. B; When assets other than investments are sold, gains or losses will result. Likely tofluctuate when sales change. Generally, a passive activity is any trade or business activity in which you do not materially participate. Interest expense that is properly allocable to a passive activity. Mama June Pizza Company determined that dough, sauce, cheese and other ingredients costing $8,700 were used to make pizzas during July. Which of the following correctly applies the revenue recognition principle? A fixed expense. However, the December payment won’t be made until January 15 of the following year. (C) Interest Expense is debited for the amount of interest incurred in the current fiscal year. Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service? d. increase if the bonds were issued at either a discount or a premium. 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. My Thoughts on Life, Travels and Culture. 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