Accounting Chapters 9-11

In 2016, General Mills reported net income of $1,670 million and interest expense of $300 million, and income tax expense of $750 million. Let's calculate the times interest earned for 2016. evaluate using times interest earned ratio

($1,670 + $300 + $750)/$300 = 9.07 times

Cedar Fair sold one of its junior roller coasters for $50,000 cash at the end of its 6thyear of use. The equipment originally cost $100,000, and was depreciated using the straight-line method with zero residual value and a useful life of 10 years. What is the amount of depreciation:

($100,000 - $0) ÷ 10 Years = $10,000 per year

Solve using the Straight-line method: At the beginning of the year, Cedar Fair purchased a new go-kart Ride for $62,500. The ride has an estimated useful life of 3 years or 100,000 miles and an estimated residual value of $2,500.

(62,500-2.500) X 1/3 =$20,000 per year

Use the Units-of-production method: At the beginning of the year, Cedar Fair purchased a new go-kart Ride for $62,500. The ride has an estimated useful life of 3 years or 100,000 miles and an estimated residual value of $2,500. The ride has a 100,000-mile estimated useful life. If the ride is used 30,000 miles in the first year, what is the amount of depreciation expense?

(62500 -2500) X 30000/100000 = 18000

Times Interest Earned Ratio

(Net Income + Interest Expense + Income Tax Expense) / interest expense

Intangible Assets

- Noncurrent assets without physical substance. - Often provide exclusive rights or privileges. - Useful life is often difficult to determine. - Usually acquired for operational use.

small stock dividend

-Stock dividend that is 25% or less of a corporation's previously outstanding shares. -Record at current market value of stock

large stock dividend

-Stock dividend that is more than 25% of the previously outstanding shares. -Record at par value of stock

Key Elements of a Bond

1.Maturity date 2.Face value 3.Stated interest rate

The effects of $125 of depreciation on the accounting equation and the journal entry to record them follow:

Asset: Accumulated Depreciation (125) Stockholder's Equity: (125) Debit Depreciation expense 125 Credit Accumulated Depreciation 125

______________ are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.

Bonds

On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building($325,000), and land($175,000). How much of the $400,000 purchase price will be assigned to the building and land accounts?

Building: 65% Land: 35%

Initial Amount of the Liability

Cash Equivalent

Premium Equation

Cash proceeds - Face value = Premium

______________________________ are potential liabilities that arise from past transactions or events, but their ultimate resolution depends (is contingent) on a future event.

Contingent liabilities

What is treasury stocks normal account?

Contra-Equity

What are the four parts of stockholder's equity?

Contributed capital retained earnings treasury accumulated other comprehensive income (loss)reports unrealized gains and losses

____________________ any unpaid dividends from previous years(dividends in arrears) must be paid before common dividends are paid.

Cumulative Dividend Preference

___________ must be paid before paying any dividends to common stock.

Current Dividend Preference

Payments Made

Decrease Liability

Cash received in advance of providing services creates a liability of services due to the customer.

Deferred Revenue

Adam Palmer earned gross pay of $600 in the current payroll period. General Mills withheld $60.90 in Federal income taxes, $45.90 for FICA, and $10 for United Way, resulting in net pay of $483.20. Let's assume that General Mills has 1,000 workers just like Adam. Write a journal entry for what is on the employers record

Dr. Salaries and Wages Expense 600,000 Cr. Withheld Income Taxes Payable 60,900 Cr. FICA Payable 45,900 Cr. United Way Payable 10,000 Cr. Cash 483,200

This ratio measures the sales dollars generated by each dollar invested in fixed assets

Fixed asset turnover ratio

Cedar Fair sold one of its junior roller coasters for $50,000 cash at the end of its 6thyear of use. The equipment originally cost $100,000, and was depreciated using the straight-line method with zero residual value and a useful life of 10 years. The equipment's sale resulted in:

Gain = Cash Received - Book Value Gain = $50,000 - $40,000 = $10,000

Additional Liability Amounts

Increase Liability

Intangible assets that are amortized

Intangibles with a limited life, such as patents and copyrights, are subject to amortization.

Intangible assets that are not amortized

Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized.

Cash proceeds <Face value

Interest on Bonds Issued at a Discount

Interest expense > Cash interest paid

Interest on Bonds Issued at a Discount

Cash proceeds >Face value

Interest on Bonds Issued at a Premium

Interest expense < Cash interest paid

Interest on Bonds Issued at a Premium

Accrued Liabilities

Liabilities that have been incurred but not yet paid.

_______________________ grant limited permission to use a productor service according to specific terms and conditions.

Licensing rights

________________ is the amount that each share of stock will sell for in the market.

Market price

Fixed asset turnover ratio equation

Net Sales Revenue / Average Net Fixed Assets

_________________________ are issued shares that are owned by stockholders.

Outstanding shares

______________ is an arbitrary amount assigned to each share of stock when it is authorized.

Par value

What are Payroll Deductions

Payroll deductions are either required by law or voluntarily requested by employees and create a current liability for the company. Examples include: 1.Income tax 2.FICA tax 3.Other deductions (charitable donations, union dues, etc.)

What type of stock has: -Different voting rights -Usually has a fixed dividend rate -Priority over common stock

Preferred Stock

Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2018 and $10,000 in 2019. How much would the preferred and common stockholders receive in 2018 and 2019?

Preferred stock outstanding 6% par $20; 2000 shares Common stock outstanding, par $10; 5000 shares

Payments collected from customers at time of sale create a liability that is due to the state government.

Sales Tax Payable

No-Par Value Common Stock

Some states do not require a par value to be stated in the charter.

An increase in the number of shares and a corresponding decrease in par value per share. Retained earnings is not affected.

Stock Splits

_________________ allow employees to purchase stock at a later date from the corporation at a fraction of the stock's market price.

Stock options

Seasoned new issue

Subsequent issues of new stock to the public.

Cedar Fair sold one of its junior roller coasters for $50,000 cash at the end of its 6thyear of use. The equipment originally cost $100,000, andwas depreciated using the straight-line method with zero residual value and a useful life of 10 years. The equipment's book value at date of sale is:

The equipment's book value at date of sale is: Accumulated Depreciation = (6yrs. × $10,000) = $60,000 BV = Cost - Accumulated Depreciation BV = $100,000 - $60,000 = $40,000

Initial public offering (IPO)

The first time a corporation issues stock to the public.

What is a major advantage of corporates business?

The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership.

_______________________ are issued shares that have been reacquired by the corporation.

Treasury shares

Thornton Industries purchased a machine part-way through the year on July 1 for $45,000. and is depreciating it with the straight- line method over a life of 10 years, using a residual value of $3,000. Depreciation Expense for the machine for that year ended December 31 is a. $ 2,100 b. $2 2,250 c . $4,200 d . $4,500

a. $ 2,100

Assume Speedo International received $ 400,000 for long-term promissory notes that were issued on November 1. The notes pay interest on April 30 and October 31 at the annual rate of 6 percent, which was comparable to other interest rates in the market at that time. Which of the fol lowing journal entries would be required at December 31? a. Interest Expense .............. 4,000 Interest Payable .......4,000 b. Interest Expense ........ 4,000 cash 4,000 c. Interest Expense 4,000 Interest Payable ........... 8,000 Cash 12, 000 d. Interest Expense 8,000 Interest Payable 4,000 Cash 12, 000

a. Interest Expense .............. 4,000 Interest Payable .......4,000

Which feature is not applicable to common stock ownership? a. Right to receive dividends before preferred stock shareholders. b. Right to vote on appointment of external auditor. c. Right to receive residual assets of the company should it cease operations. d. All of the above are applicable to common stock ownership

a. Right to receive dividends before preferred stock shareholders.

Which of the following is ordered from the largest number of shares to the smallest number of shares? a. Shares authorized , shares issued, shares outstanding. b. Shares issued, shares outstanding , shares authorized . c. Shares outstanding , shares issued, shares authorized . d. Shares in treasury, shares outstanding , shares issued.

a. Shares authorized , shares issued, shares outstanding.

A journal entry is not recorded on what date? a . Date of declaration . b. Date of record . . c. Date of payment . d. A journal entry is recorded on all of the above dates.

b. Date of record . .

As of February 29, 2016, American Greetings Corp. had 7,000 full-time and 20,500 part-time employees . Assume in the last pay period of the year, the company paid $8,000,000 to employees after deducting $2,000,000 for employee income taxes, $612,000 for FICA taxes, and $700,000 for other purposes . No payments have been made to the government relating to these taxes. Which of the following statements is true regarding this pay period? a. FICA Taxes Payable should be $612,000. b. FICA Taxes Payable should be $1,224,000 . c. Salaries and Wages Expense should be $8,000,000 . d. None of the above is true.

b. FICA Taxes Payable should be $1,224,000 .

What assets should be amortized using the straight-line method? a. Land b. Intangible assets with limited lives c. Intangible assets with unlimited lives d. All of the above

b. Intangible assets with limited lives

Which of the following is false when a bond is issued at a premium ? a. The bond will issue for an amount above its face value. b. Interest expense will exceed the cash interest payments. c. The market interest rate is lower than the stated interest rate d. The issue price will be quoted at a number greater than 100.

b. Interest expense will exceed the cash interest payments

The Simon Company and the Allen Company each bought a new delivery truck on January Both companies paid exactly the same cost, $30,000 , for their respective vehicles. Two years later, on December 31, the book value of Simon's truck was less than the Allen Company's book value for the same vehicle. Which of the following are acceptable explanations for the difference in book value? a. Both companies elected straight -line depreciation , but the Simon Company used a longer estimated life. b. The Simon Company estimated a lower residual value, but both estimated the same useful life and both elected straight-line depreciation. c. Because GAAP specifies rigid guidelines regarding the calculation of depreciation , this situation is not possible . d. None of the above explain the difference in book value.

b. The Simon Company estimated a lower residual value, but both estimated the same useful life and both elected straight-line depreciation.

Accumulated Depreciation represents the depreciation taken on the asset since its purchase, and is deducted from the asset's cost on the ______________________

balance sheet.

Long-lived assets

business assets acquired for use over one or more years. These assets are not intended for resale. Instead, they are considered "productive" assets in the sense they produce the goods or services the business then sells to customers.

Big Hitter Corp. is facing a class-action lawsuit in the upcoming year. It is possible, but not probable , that the company will have to pay a settlement of approximately \$2,000,000 in the upcoming year. How would this fact be reported, if at all, in the financial statements prepared at the end of the current month using GAAP? a. Report $ 2,000,000 as a current liability b. Report $2,000,000 as a long- term liability. c . Describe the potential liability in the notes to the financial statements. d. Reporting is not required in this case .

c . Describe the potential liability in the notes to the financial statements.

A company wishes to report the highest earnings possible according to GAAP. Therefore, when calculating depreciation for financial reporting purposes , a. It will follow the MACRS depreciation rates prescribed by the IRS . b . It will estimate the shortest lives possible for its assets. c . It will estimate the longest lives possible for its assets . d. It will estimate lower residual values for its assets .

c . It will estimate the longest lives possible for its assets .

A bond is issued at a price of 103 and retired early at a price of 97. Which of the following is true? a. A gain will be reported on the income statement when the bond is issued. b. A loss will be reported on the income statement when the bond is issued . c. A gain will be reported on the income statement when the bond is retired . d. A loss will be reported on the income statement when the bond is retired

c. A gain will be reported on the income statement when the bond is retired .

Assume PVH, the makers of Calvin Klein underwear, borrowed $100,000 from the bank to be repaid over the next five years, with principal payments beginning next month. Which of the following best describes the presentation of this debt in the balance sheet as of today ( the date of borrowing)? a . $100,000 in the long -term liability section b. $100,000 plus the interest to be paid over the five-year period in the long-term liability section. c. A portion of the $ 100,000 in the current liability section and the remainder of the principal in the long-term liability section . d. A portion of the $100,000 plus interest in the current liability section and the remainder of the principal plus interest in the long-term liability section.

c. A portion of the $ 0, 000 in the current liability sec tion and the remainder of the principal in the long-term liability section .

Which of the following statements about the relative advantages of equity and debt financing is false? a. An advantage of equity financing is that it does not have to be repaid . b. An advantage of equity financing is that dividends are optional c. An advantage of equity financing is that new stock holders get to vote and share in the earnings of the company. d. An advantage of debt financing is that interest is tax deductible.

c. An advantage of equity financing is that new stock holders get to vote and share in the earnings of the company.

3. Under what depreciation method(s) is an asset's book value used to calculate depreciation each year? a. Straight -line method b. Units-of-production method c. Declining -balance method d. Weighted average-cost method

c. Declining-balance method

Which of the following best describes Accrued Liabilities? a. Long-term liabilities. b. Current amounts owed to suppliers of inventory . c. Expenses incurred but not paid at the end of the accounting period. d. Revenues that have been collected but not earned.

c. Expenses incurred but not paid at the end of the accounting period.

To determine if a bond will be issued at a premium, discount , or face value, one must know which of the following pairs of information ? a. The face value and the stated interest rate on the date the bonds were issued. b. The face value and the market interest rate on the date the bonds were issued. c. The stated interest rate and the market interest rate on the date the bonds were issued. d. You can't tell without having more information .

c. The stated interest rate and the market interest rate on the date the bonds were issued.

Which of the following does not impact the calculation of the cash interest payments to be made to bondholders? a. Face value of the bond. b. Stated interest rate. c. Market interest rate . d. The length of time between payments .

c. market interest rate

What are recording costs called

capitalizing the costs

Most issues of stock to the public are ________ transactions.

cash

A ______________ is an exclusive right granted by the federal government to protect artistic or intellectual properties.

copyright

Depreciation is a ____________________________ process that matches costs of operational assets with periods benefited by their use.

cost allocation

accumulated depreciation has a normal ____________ balance

credit

Which of the following statements about stock dividends is true? a. Stock dividends are reported on the income statement . b. Stock dividends increase total stockholders ' equity . c. Stock dividends decrease total stockholders ' equity . d . None of the above .

d . None of the above .

Barber, Inc., depreciates its building on a straight -line basis. A building was purchased on January 1 that had an estimated useful life of 20 years and a residual value of $20,000. The company's Depreciation Expense for that year was $20,000 on the building. What was the original cost of the building? a. $ 360,000 b. $380,000 c . $ 400,000 d. $420,000

d. $420,000

Land O' Lakes , Inc., reported ( in millions ) Income from Operations of $206, Net Income of $160 Interest Expense of $63, and Income Tax Expense of $15. What was this dairy company's times interest earned ratio (rounded) for the year? a. 1.49 b. 2.53 c. 3.27 d. 3.78

d. 3.78

ACME, Inc., uses straight-line depreciation for all of its depreciable assets. ACME sold a used piece of machinery on December 31 that it had purchased two years earlier on January 1 for $ 10,000 . When the asset was first acquired, its estimated life was five years and the estimated residual value was zero. At the time of disposal, Accumulated Depreciation was $4,000 . If the sales price of the used machine was $7,500 the resulting gain or loss on disposal was which of the following amounts? a. Loss of $2,500 b. Gain of $3,500 c . Loss of $1,500 d. Gain of $1,500

d. Gain of $1,500

Which statement regarding treasury stock is false? a. Treasury stock is considered to be issued but not outstanding b. Treasury stock has no voting dividend, or liquidation rights. c. Treasury stock reduces total stockholders ' equity on the balance sheet . d. None of the above are false .

d. None of the above are false .

How many of the following statements regarding goodwill are true? -Goodwill is not reported unless purchased in an exchange -Private companies can elect to amortize goodwill over 10 years or less. -Impairment of goodwill results in a decrease in net income. a. None b. One c. Two d. Three

d. Three

1. Which of the following should be capitalized when a piece of production equipment is acquired for a factory? a. Sales tax b. Transportation costs c. Installation costs d. All of the above

d. all of the above

When recording depreciation , which of the following statements is true? a. Total assets increase and stockholders ' equity increases . b . Total assets decrease and total liabilities increase . c . Total assets decrease and stockholders ' equity increases . d. None of the above are true.

d. none of the above are true

depreciation expense has a normal ____________ balance

debit

Transactions between two investors __________ affect the corporation's accounting records.

do not

Selling an asset with a low book value, resulting from accelerated depreciation, might result in a __________.

gain

An intangible asset called __________ can be created when one company buys another company.

goodwill

A(n) _____________ can be the result of a casualty, obsolescence, or the lack of demand for the asset's services

impairment

The current year's depreciation is an expense on the __________________

income statement

Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a ____________.

loss

If the preferred stock is _________________, any dividends not declared in previous years are lost permanently.

noncumulative

A ________ is an exclusive right granted by the federal government to sell or manufacture an invention.

patent

The total cost of a combined purchase of land and building is allocated in proportion to their _____________________________

relative market values.

issued shares

represent the total number of shares of stock that have been sold - Outstanding Shares - Treasury Shares

Because a corporation is a ____________________________, it can: §Own assets §Incur liabilities §Sue and be sued §Enter intocontracts

separate legal entity

Debt-to-Assets Ratio

total liabilities/total assets

A ______________ is a symbol, design,or logo associated with a business.

trademark

National Beverage repurchases its own stock

treasury stock

Advantages of equity

•Equity does not have to be repaid. •Dividends are optional.

Advantages of debt

•Interest on debt is tax deductible. •Debt does not change stockholder control.