ACCT2110 EXAM 4

Depletion =

depletion rate X units recovered

Capital v revenue expenditures

Revenue Expenditures are expenditures that do not increase the future benefit of an asset and are expensed as incurred Capital Expenditures extend the life of the asset, expand productive capacity, increase efficiency, or improve the quality of the product. Capital exp endures are added to the asset account and are subject to depreciation

Journal entry for recording sales tax

Sale: Accounts receivable XX Sales revenue XX sales tax payable XX Taxes paid: Sales taxes payable XX cash XX

Depreciation Methods

Straight line (most widely used), declining balance, units of production

___________ and __________ ARE allowed by the IRS.

Straight line and MACRS (modified accelerated cost recovery system)

Accounts payable do NOT require ...?

a formal agreement or contract

Impairment

a permanent decline in the fair value (market value) of an asset

Declining balance method

accelerated method of depreciation that produces a declining amount of depreciation that produces a declining amount of depreciation expense each period by multiplying the declining book value of an asset by a constant depreciation rate (computed as a multiple of the strait line rate of depreciation)

Examples of current liabilities

accounts payable, notes payable, taxes payable, unearned revenues, other accrued liabilities <- if not met it is long term

On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called

accumulated depreciation

Average age of fixed assets

accumulated depreciation/depreciation expense; older assets are less efficient, measures overall condition of assets

capitalized expenditures are

added to an asset account and are included in the asset cost

Intangible Assets - Goodwill

all favorable attributes of a business, only relates to business as a whole, only recorded when a whole business is purchased, indefinite life

Strait-line method

allocates an equal amount of the assets cost to each year of the assets useful life by dividing the assets depreciable cost (cost - residual) by the assets useful life

Process of recording an impairment of a fixed asset

an impairment loss, the difference between the book value and fair value of the asset, is recognized and the asset is reduced

Contingent liabilities

an obligation whose amount, timing, or recipient depends on future events, not recognized in the accounts unless the event on which it is contingent is probable and reasonable estimate of liability can be made

Current Liabilities

any debt that can reasonably expect to be satisfied or paid by: existing current assets or other current liabilities, preforming a service, within one year of operating cycle

Property, Plant, & Equipment (aka fixed assets or plant assets)

are tangible assets; include land, land improvements, buildings, equipment, and automobiles; DEPRECIATION EXPENSE

Accounts payable

arises when a business purchases goods or services on credit, generally require payment within 30 to 60 days and seldom require payment of interest, do NOT require formal agreement or contract

loss on retirement =

asset retirement - net book value

Straight-line Depreciation

calculates an equal amount of depreciation expense each year Depreciable cost=cost-salvage value, annual depreciation expense (depreciable cost/useful life (years)), annual depreciation rate: 1/useful life, BASICALLY: a constant amount of depreciation expense each period corresponding a constant rate of decline in service potential

Disposal of assets

can be sold, exchanged or retired

Revisions of Depreciation are....?

changes in estimates and capital improvements and additions; based on estimates (useful life/salvage), revision of depreciation-prospective application

Sales Tax

collected by seller on behalf of retail companies; include usage taxes or excise taxes; are liabilities until they are paid to the taxing authority

Net book value =

cost - accumulated depreciation

double declining balance

depreciation expense is calculated on declining book value; accelerated depreciation = more depreciation in early years of assets life, double the straight line rate, annual calculation ignores depreciable cost, but NBV is never allowed to be bellow salvage, BASICALLY: accelerated depreciation in early years of the assets life corresponding to a decreasing rate of decline in service potential

Revenue Expenditures

do not increase future economic benefits of an asset (usefulness or life); maintain the level of benefits provided by the asset, relate only to the current period, occur frequently, and typically involve relatively small dollar amounts (ex ordinary repair and maintenance

Use of fixed of assets

efficiency of used analyzed by using the fixed asset turnover ratio (net sales/average net fixed assets), condition of a company's assets can be examined by computing the average age of fixed assets )accumulated depreciation/depreciation expense)

Notes payable

formal debt instruments- used in place of accounts payable, LEGAL, current or long term, short-term financing/varying terms, can occur when open account terms cannot be met, usually require interest

Capital Expenditures =

included in assets on the balance sheet

Operating assets with no physical properties are called

intangible assets

Contingent Liabilities

liabilities that may or may not end up turning into actual obligations but depend on the outcome of a future event

Units of Production/Activity

life of asset is expressed in terms of total units of production, depreciation is proportional to activity for the period, BASICALLY: depreciation expense rises and falls with assets use

Operating Assets

long lived assets that are used by the company in the normal course of operations, represent future economic benefit to the company (GENERATE REVENUE), recorded at cost

Contingent Liabilities

measurement of liabilities described so far was not affected by uncertainties about the amount, timing, or recipient of future outflows, lawsuits filed against a business are classic examples of contingent liabilities

Liability recognition and measurement criteria

most liabilities are recognized in exchange for goods and services or the borrowing of money, the amount reported on the balance sheet should not include interest that has not yet accrued, unaccrued interest is deemed immaterial, so most current liabilities are recorded and reported at the total amount

depreciation expense must be prorated for the portion of the year that .....?

the asset was in service

cost in each type of prop, plant, and equip: Land

purchase price, real estate commissions, delinquent property taxes, closing costs (attorney title and survey fees), clearing and grading costs, demolition of unwanted buildings, minus any salvage

cost in each type of prop, plant, and equip: Land improvement

purchase price, sales taxes, installation costs

Explain how the historical cost principle applies to recording the cost of a fixed asset

cost of a fixed asset is any expenditure necessary to acquire the assert and to prepare the asset for use, this amount is generally the cash paid, if non cash consideration is involved, cost is the fair value of the asset whichever is more clearly determinable

3 factors necessary to compute depreciation expense

cost, useful life, residual value

Factors to compute depreciation

cost, useful life, salvage value

Cost Principle applied to plant assets

cost= all expenses necessary to acquire and make an asset ready to use

Generally operating assets are recorded at _______

costs

Cash Flow =

current assets/ current liabilities

Common ratios used to analyze a company ability to meet its current obligations are:

current ratio, quick ratio, cash ratio, cash ratio, operating cash flow ratio

the kinds of activities that produce current liabilities

purchasing goods or services on credit (accounts payable), completed portion of activities that are in process at the end of the period such as wages or interest (accrued liabilities), sales tax collected from customers, notes payable, payroll taxes withheld from employees and social security, unearned revenues, portion of long term debt due within the year

unearned revenue (other current liability)

receiving cash BEFORE revenue is EARNED

Units-of-Production method

recognizes depreciation expense based on the actual usage of the asset

revenue expenditures are

reported in total on the income statement

Natural Resources and Depletion

represents the cost of the natural resource that is removed during the period, computation is similar to that for the units of production method of depreciation

How to measure warranty liabilities and warranty expense

since warranties help generate sales, the estimated future cost of servicing the warranty must be recorded in the sales period (matching principle), as warranty claims are paid to customers or related expenditures are made, the estimated liability is reduced

measurement and reporting of natural resources

the cost of natural resources is any cost necessary to acquire and prepare the resource for the separation from the earth, as the natural resource is removed the cost is allocated to each unit of the natural resource that is removed and recorded in an inventory account (depletion), Depletion is calculated using a procedure similar to the units of production depreciation method

Contingent liabilities are only recognized when:

the event on which it is contingent is probable and a reasonable estimate of the loss can be made

alternatives for contingent liability recognition and measurement

the potential obligation is not reordered as a liability, but may be disclosed in the footnotes

Depreciation, Amortization and Depletion depend on...?

type of operating asset

Process of recording the disposal of a fixed asset

when a fixed asset is disposed of a gain or loss is recognized, the Gian or loss is the difference between the proceeds from the sale and the book value of the asset, the gain or loss is reported on the income statement as "other revenues or gains" or "other expenses and losses" respectively

Warranty

when goods are sold, the consumer is often provided with a warranty against certain benefits, usually guarantees the repair or replacement of defective goods during a period following the sale.

Understand and account for revisions in depreciation

when new or additional information becomes available, a company will revise its calculation of depreciation expense, a revision in depreciation will be recorded in current and future periods

impairment of a fixed asset

when the future cash flows expected to be generated by an asset are less than the book value of the asset

Impaired Assets

written down in a period of decline, FASB requires immediate recognition of write downs,

T/F When a company sells goods or provides services for a customer but the customer intends to pay later, the company must record a current liability

False

A fixed asset has a historical cost of $20,000, a net book value of $12,000 and a salvage value of $2,500. What is the gain or loss on disposal of the fixed asset if it is sold for $15,000?

$5,000 loss

Natural Resources

Include timberlands and deposits such as coal, oil, and gravel; DEPLETION EXPENSE

Effects of depreciation on financial statements

Income statement - depreciation expense; balance sheet - accumulated depreciation

A company purchased a patent for $100,000 at the beginning of the current year which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year?

$20,000

Depletion rate =

(cost - residual value)/recoverable units

Cost per unit =

(cost-residual value)/expected usage; multiply by actual usage of asset to get depreciation expense

the two sources of payroll taxes

1. Employees, must pay certain taxes that are "withheld" from their paycheck, this is the difference between gross and net pay 2. The business itself, must pay certain taxes based on employee payrolls... like matching contributions of social security and medicare and fringe benefits

To revise depreciation expense, the following steps are preformed:

1. obtain book value of the asset at the date of revision of depreciation 2. compute depreciation expense using the revised amounts for book value, useful life, and/or residual value

selling price > net book value

= gain on disposal

selling price < netbook value

= loss on disposal

cost in each type of prop, plant, and equip: Equipment

Purchase price, sales taxes, transportation, costs, insurance during transportation, instillation costs, cost of trial runs

Journal entry for note payable from a payment extension

Accounts Payable XX Notes Payable XX

Which of the following costs related to the purchase of production equipment would be considered a revenue expenditure?

Repair and maintenance costs during the equipments first year of service

Operating assets consists of three categories:

property, plant, and equipment; intangible assets; natural resources

journal entry for an accrued liability (wages payable)

Before payed: Wages Expense XX Wages Payable XX After: Wages Expense XX Wages Payable XX Cash XX

Journal entry for unearned revenue

BeforeL cash XX Unearned Revenue XX After: Unearned revenue XX revenue XX

cost in each type of prop, plant, and equip: Building

purchase price, closing costs, architectural fees, cost of building permits, excavation costs, remodeling fees

Journal entry for note payable

Cash XX Note payable XX

working capital =

Current assets - Current liabilities

T/F Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the useful life or the asset's productivity.

False

T/F Federal income taxes payable is NOT a current liability

False

T/F Liquidity relates to a company ability to sell its assets for amounts that exceed the assets book values

False

T/F Research and Development costs should be added to the cost of patents.

False

Depreciation Expense =

Declining balance rate X book value

This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance sheet?

Depreciation expense-- buildings

Revenue expenditures =

Expenses on the income statement

Capital Expenditures

Extend the life of an asset, expand the productive capacity, increase efficiency, or improve the quality of the product; increase future economic benefits in both current and future periods- added to an asset account and are subject to depreciation, these expenditures typically involve relatively large dollar amounts (ex extraordinary or major repairs, additions, remodeling of buildings, improvements)

T/F A probable loss from a lawsuit that can be reasonably estimated should NOT Bre reported on the balance sheet as a current liability

False

T/F Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over its useful life.

False

T/F All intangible assets are subject to amortization

False

T/F An expenditure that does not increase the future economic benefits of the asset is referred to as a capital expenditure.

False

Depreciation does NOT occur with

LAND

Both investors and creditors are interested in a company's ________.

Liquidity, this means its ability to meet its short term (current) obligations

Journal entry for an impaired asset

Loss on impairment XXX Fixed Asset XXX

DDB is _____ allowed by the IRS.

NOT

Fixed asset turnover ratio

Net sales/average NBV of fixed assets; measures how efficiency company is using its fixed assets, more efficient; higher ratio

journal entry for payment of note payable

Note payable XX Interest Expense XX Cash XX

Define, classify, and describe the accounting for operating assets

Operating assets are long lived asserts used by the company in the normal courses of operations to generate revenue, as the service potential of the asset is used the assets cost is allocated as an expense (called depreciation, amortization, or depletion)

kinds of intangible assets

Patent (price payed, legal fees, and amortization over lifetime, 20 years), R and D costs (expensed), Copyright (cost of acquiring and defending, useful life is usually less than legal life, 70 years)

How depreciation expense is computed

The strait line method, declining balance method, and the units of production method

T/F Contingent liabilities must be recorded in the accounting records if they are probable and the amount can be reasonably estimated

True

T/F Employers withhold taxes from their employees gross pay and later pay these amounts withheld to the taxing authority

True

T/F Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing

True

T/F Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority

True

What is the impact on the accounting equation of recording a payment to a supplier on account?

both assets and liabilities decrease

withholding payroll taxes

businesses are required to withhold taxes from employees earnings and to pay taxes based on wages and salaries paid to employees, liability until they are paid to the taxing authority

Intangible Assets

no physical substance, include patents, copyrights, trademarks, licenses, and goodwill; AMORTIZATION EXPENSE

Intangibles

no physical substance, rights, privileges or competitive advantages, recorded at cost, limited life (amortization), indefinite life (no amortization)

Which of the following is NOT classified as a current liability account

note payable, due in 2 years (accounts payable, income taxes payable, salaries and wages payable)

current liabilities

obligations to outsiders that require the firm to pay cash or another current asset or provide goods or services within the longer 1 year of the operating cycle

Accrued Liabilities

originate from adjusting entries, usually represent the completed portion of a activities that are in process at the end of the period

Interest =

principle X annual rate of interest X time

Liabilities

probable future sacrifices of economic benefits, debts or obligations arising from a activities that have already occurred, represent creditors claims on total assets

Depreciation

process of allocating the cost of a tangible asset to expense the assets useful life. Not an attempt to measure fair value, instead is designed to capture the declining service potential of a fixed asset

Depreciation

process of allocating to expense the cost of an asset over its useful life, systematic and rational to properly match expenses with revenues