Accounting ch 7, 8, 9
current liabilites
accounts payable ( inventory and expense), subject to state sales taxes and federal taxes, unearned revenue, notes payable, current portion of long term debt.
Amortization
allocating the cost of intangible assets to expense ( use straight line method)
Depletion
allocation of the cost of a natural resource over its service life
convertible bond
allows the investor to transfer each bond into shares of common stock
callable bond
allows the issuer to pay off the bonds early at a fixed price
residual value
amount the company expects to receive from selling the asset at the end of its useful life
accounts payable
amount the company owe to suppliers
interest
annual percentage rate to be applied to the face value of the loan
riskiness of a businesses obligations
classifying liabilities as either current or long term helps investors and creditors assess this
Asset disposal
depreciate to date of disposal 1. sell asset 2.retire 3. trade in
how do you record depreciation?
depreciation .................... $ accumulated depreciation .......... $
profit margin
earnings per dollar of sales = net income / net sales
installment payment
includes $ for interest and amount that represents a reduction of outstanding balance
bond issue costs
includes underwriting, legal, accounting, registration and printing fees
interest expese
incurred on notes payable
accrual accounting
interest expense is recorded in the period interest is incurred rather than the period it is paid
Depreciation
on property, plant and equipment- allocation of the costs of a tangible asset over its service life
book value
original cost of asset minus current balance in accumulated depreciaiton
amortization schedule
summary of cash paid, interest expense, changes in carrying value for each semi annual interest period
secured bond
supported by specific assets pledged as collateral by the issuer
FICA
taxes based on federal insurance contributions act, taken out of employees paychecks and matched by the employer for social security ( 6.2 %) and medicare (1.45% )= 7.65% * employer must double the tax on each employees salary (15.3 %)
The problem with borrowing from one lender?
their is a limited amount of $ they can lend
market interest rate
true interest rates used by investors to value the bond issue
commercial paper
unsecured notes sold in minimum denominations of $25,000 with maturities up to 270 days
serial bond
matures in installents
term bond
matures on a single date
debentures bond
maturity date is when you pay full price
sinking fund
money set aside to pay debts as they come due
warrenties
most common contingent liability, need to record expense in the same period it sells product
retire bonds @ maturity / before
*@- face value bonds payable........# cash ........ # * before- record gain or loss bonds payable ......... # loss/gain.....................# cash..................................#
Double declining balance
*book value x doubled depreciation rate *record the same
straight line method
*cost- residual (depreciable cost) / service life = # * take depreciable cost and multiply by depreciation rate to get expense * To find rate= 100/ # of years * continue every year until you reach depreciation cost Record as: asset.......... # cash ........... # Depreciation expense........# accumulated depreciation ....... #
activity based
*depreciation cost / total units expected to produce = rate * rate x miles driven/time used = expense * record as the same
Intangible assets
-not subject to amortization= unlimited life, goodwill & trademarks ( test for impairments and loss) -subject to amortization = limited life, franchise, patent,copyrights
Tangible assets
-property, plant and equipment -buildings + equipment = subject to depreciation -natural resources= not subject to depletion (land) -timber forest, oil,mines = subject to depletion
bonds issued at discount, premium, face amount
1. discount- issue price is below face amount, stated interest rate < market interest rate 2. premium= issue price above face amount , stated interest rate > market interest rate 3. face amount- equal, stated = market rates
what are the 3 characteristics of liabilities?
1. probable future sacrifices of economic benefits 2. arising rom present obligations to other entities 3. past transactions or events
how do corporations get money?
1. sell stock ( preferred or common stock) 2. borrow from lender ( notes, secured and unsecured) 3. borrow from many lenders (bonds)
3 types of depreciation methods
1. straight line- takes equal amount each year, most common 2. double declining balance- accelerated method, more is taken in earlier years than in later years 3. activity based- based on the use of the assets life, common for natural resources.
Long term assests
1. used in operations : tangible and intangible 2. not used in operations: investments/ notes recievable
carrying value
balance in bonds payable, = face value of bonds payable
3 primary sources of long term debt
bonds, notes and leases
Why would a company choose a bond over borrowing from the bank?
by borrowing by issuing bonds effectively bypasses the bank and borrows directly from investing public= lower interest rate.
interest expense for discount and premium
carrying value x market rate
annuity
cash payments of equal amounts of equal periods of time
Copyright
exclusive right of protection for the creator of a published work.
Patent
exclusive right to manufacture a product or use it, usually lasts around 20 years.
principal
face value of a bond, amount that is being lent or borrowed
bond
formal debt instrument that obligates the borrower to repay a stated amount and called face amount or principal at specific maturity date
matching
getting expenses into the same period as revenue
net pay
gross pay - deductions
liquity
having some sufficient cash to pay currently maturing debts
service life
how long the company expects to receive benefit from the asset
early extinguishment of debt
issuer retires debt before its maturity date, record loss or gain
what is the problem with operations?
it makes it tough for businesses to grow
goodwill
largest intangible asset, represents the value of a company as a whole * purchase price- fair value of all its net assets
unearned revenue
liability account that records cash received in advanced for a future sale or service
notes payable
liability that creates interest expense, written promise to repay amounts borrow plus interest
franchise
local outlet that pays for the right to use the companies name and sell their products
current portion of long term debt
long term debt maturing within one year.
recording a contingent liability
payment is probable and can be estimated
disclosure of a contingent liability
payment is reasonably possible and can be estimated
liability
present responsibility to sacrifice assets in the future due to a transaction that happened in the past
issue price
present value of face amount plus present value of periodic interest payments
Basket purchase
purchasing more than one asset at the time for one purchase price ( record all separately)
stated interest rate
rate quoted in the bond used to calculate the cash payments for interest
big bath
recording all losses in one year to make a bad year look even worse and to make future years look good
Captitalize
recording an expenditure as an asset or future benefit
materiality
relates to the size of an item that is likely to influence a decision
cash paid for discount & premium
remains the same = face amount x stated rate
asset
represents any future benefit
sales tax payable
sales tax collected from customers by the seller, current liabilities payable to government
unsecured bond
secured only by the full faith credit of the issuing corporation
when do you record a gain or loss?
when you sell for more the original price or less for less then the original cost.
trademark
word, slogan or symbol that identifies a company or service.