chapter 5 and 6

valuation adjustment

amount of accounts receivable estimated to be uncollectible has been determined then the valuation adjustment can be recorded

accumulated depreciation

another contra asset and the balance in this account is the cumulative total of all thedepreciation expense that has been recorded over the life of the asset up to the balance sheet date

materiality concept

applied to the issue of accounting for capital expenditures

for bank reconciliation deposits in transit:

are added to the bank's indicated balance

NSF (not sufficient funds) checks

are checks that have bounced from the makers bank because the account did not have enough funds to cover the check

installation and shakedown costs

are costs that are associated with adjusting and preparing the equipment to be used in poduction

buildings and equipment

are recorded at their original cost, purchase price+ all the ordinary and necessary costs incurred to get the building or equipment ready to use in the operations of the firm

cash equivalents

are short-term investments readily convertible into cash with a minimal risk of price change due to interest rate movements

if expenditure is capitalized

plant assets increase

collateral

pledged by the borrower to support the loan, penalties to be assessed if it is not paid of the maturity dat and most important the interest rate associated with the loan.

collateral

pledged by the borrower to support the loan, penalties to be assessed if it is not paid of the maturity date, agreements or covenants made by the borrower

Which of the following items are capitalized as part of the cost of land acquired

purchase price of the land, cost of razing an old building on the land, net of salvage proceeds, legal fees, title fees

when an original cost has two or more noncurrent assets that acquire a single transactions for a lump-sum

purchase price, the cost of each asset acquired must be measured and recorded separately

outstanding checks

recorded as credits (reductions) to the company's cash balance, but which have not yet presented to the bank of payment

Deposits in transit

recorded in the company's cash account but have not yet been added to the company's balance in the bank records

expenses that could be prepaid and included in this category of current assets include

rent, office supplies, postage, and travel expense advances to salespeople and other employees

accelerated depreciation method

results in greater depreciation expense and lower net income than straight-line depreciation during the early years of the asset's life

gain (if the differene is positive) or loss (if negative)=

sales price (of the fixed asset)-net book value (original cost-accumulated depreciation)

if an appropriate allowance for bad debts is not provided

Accounts receivable and net income will be overstated and the and the ROI, ROE, and liquidity measures will be distorted

Tax Reform Act of 1986

Congress changed the orginial ACRS provisions, which is now the Modified Accelerated Cost Recovery Systems (MACRS) cost recovery periods are specified based on the type of asset and its class life. 150% declining-balance method is required for some longer-lived assets and the straight-line methodis specified for buildings

Which of the following accounts are examples of intangible assets?

Copyrights Goodwill Leaseholds Customer lists

buildings and equipment are recorded at their original cost, which includes the purchase price plus:

Material, labor, overhead costs for equipment made by a firms own employee, interest costs incurred during the construction phase of a building, installation and shakedown costs

Regarding the MACRS rules of calculating depreciation for income tax purposes, which of the following statements are true?

The MACRS rules eliminate the need to estimate an asset's salvage value. The MACRS rules simplify the calculation of the useful life of assets relative to the straight-line alternative. The MACRS rules provide accelerated deductions relative to the straight-line alternative.

identify the true statements regarding the balance sheet presentation of accounts receivable

The allowance for bad debts is subtracted from accounts receivable while presenting the accounts receivable in the balance sheet/net accounts receivable is the net realizable value reported on the balance sheet/net accounts receivable represents the balance of an asset account less the balance of a contra asset account

Internal control

The effectiveness and efficiency of the operations of the organization, reliability of the organizations financial reporting, the organizations compliance with applicable laws and regulations

A lease is a financing lease if it has any of the following characteristics:

The lease term is at least 75% of the economic life of the asset. It transfers ownership of the asset to the lessee at the end of the lease term.

Which of the following factors are normally considered in determining whether to capitalize or to expense an expenditure?

The potential income tax reduction in the current year that results from expensing the item, whether the purchased item will provide economic benefits to the entity that extend beyond the current year, whether the purchased item represents a material expenditure of the company

Identify the true statements regarding debt and equity securities that fall in the trading and available-for-sale categories

Their accounting treatment shows the application of matching concept. They are reported on the balance sheet at the market value of the securities and any unrealized gains or losses are recognized

note recivable

a formal document that includes specific provisions with respect to its maturity date, agreements or covenants made by the borrower

financing lease if it has any of the characteristics:

a) transfers ownership of the asset to the lessee at the end of the lease term b) permits the lessee to purchase the asset for a nominal sum at the end of the lease term c)the lease term is primarily for the remaining economic life of the leased asset d) the present value of the lease payments and reidual value guarantees is equal to or more than substantially all of the fair value of the leased asset e) the leased asset has no alternative use to the lessor at the end of its lease term because of its specialized nature

construction in progress

accumulate the costs oc facilities that are being constructed to the firms specifications until the completed assets are placed in service

bank service charges

against the company's account and interest income added to the company's balance during the period by the bank. bank service charges are subtracted from the company's indicated balance; interest income is added to the company's indicated balance

if the asset is depreciable

all plant assets except land are depreciable

if employee built equipment

all the material, labor, and overhead costs that would ordinarily be recorded as inventory costs (were the machine being made for an outside customer would capitalized as equipment costs

bank reconciliation and service charges

are subtracted from the company's book balance

Land

at original cost, title fees, legal fees. and other costs related to the acquisition

straight-line depreciation method

because in the early years of an assets life it results in lower depreciation expense and hence higher reporte net income than accelerated depreciation

Bank reconciliation

bring the bank's reported balance and the cash account balance into agreement

interest costs associated with loans used to finanace the construction of the building are

capitalized until the building is put into operation

In practice, most accountants decide in favor of expensing rather than capitalizing for several reasons, including:

capitalizing requires a revision of estimates for useful life and salvage value. expensing an item avoids the need of keeping depreciation records. expensing an item yields an immediate deduction for income tax purposes.

business in practice

capitalizing versus expensing because all these costs were incurred to get the land ready for its inteded use

if ending inventory was overstated at the end of year 1 but counted correctly at the end of year 2 and this error was not discovered unitl sometime in year 3 then:

cost of goods sold was understated in year 1 and overstated in year 2 but the error would have self-corrected in total

selling land

differeince between the selling price and cost will be a gain or loss to be reported in the income statement of the period in which the sale occured

net book value (carrying value) of the asset

difference between the cost of an asset and the accumulated depreciation on the asset

in the bank reconciliation process, error are:

either added to or subtracted from the bank balance, if the error was made by the bank. either added to or subtracted from the company's book balance, if the error was made by the company

an expenditure should be capitalized if the acquired item will have an economic benefit to the entity that extends beyond the current fiscal year

example would be of wages paid to labor

petty cash

funds undeposited receipts (including currency, checks, money orders, and bank drafts) and any funds immediately available to the firm in its bank accounts

Relative to the straight-line method, the effects of using an accelerated depreciation method during inflationary times are:

greater amounts reported as depreciation expense and lower amounts reported as net income.

identify the true statements regarding a bank recociliation

in a bank reconciliation, outstanding checks are subtracted from the bank balance/in a bank reconciliation deposits in transit are added to the bank balance

cost of a purchased or manufactured product

is an asset and carried in the asset account until the product is sold. the cost becomes an expense to be reported in the income statement

lower of cost or market

is inventory carrying values on the balance sheet

depreciable expense

is recognized over the estimated useful life of the asset

a basket purchase transaction results when two or more noncurrent assets are purchased for a lump-sum purchase price that is:

less than the total appraised fair value of the indvidual assets acquired

intangible assets (goodwill)

long lived assets that differ from property, plant, equipment that have been purchased outright or acquired under a financing lease-either because the asset is represented by a contractual right or because the asset results from a purchase transaction but is not physically identifiable. Ex: of the first type of intangible asset are leaseholds, licenses, fanchises, brand names, customer lists/ relationships, patents, copyrights, and trademarks

cash

money on hand in change funds

NSF and bank reconciliation

nsf checks are subtracted from the company's book balance

carrying value

of the asset and recognize the bad debt expense.

other than prepaid insurance, expenses that could be treated as prepaid and included in current assets include

office supplies, rent, postages

inventory errors can effect:

on the balance sheet and the income statement for each period affected

for bank reconciliation outstanding checks:

outstanding checks are subtracted from the bank's indicated balance

The amount in the cash account, which is reported as an asset on the balance sheet, includes:

savings account balances, undeposited receipts including checks, money on hand in petty cash funds, checking account balances

held-to-maturity

short-term marketable debt securities that are reported on the balance sheet at the entities cost. which is usually about the same as market value, because of their high quality and the short time until maturity

ependitures

should be capitalized if the item acquired will beave an economic benefit to the entity that extends beyond the end of the current fiscal year

For income tax purposes, most firms use the MACRS rates for determining depreciation deductions because:

the MACRS rates provide accelerated deductions relative to the straight-line alternative.

for bank reconciliation bank service charges:

the bank service charge and interest income should be recognized by the company in the period incurred or earned, respectively, because both of these items affect the cash balance at the end of the period. Which at the end of the reconciliation process, bank service charges are subtracted from the companys indicated balance

short-term marketable debt securities that are in the held-to-maturity category are reported on the balance sheet at:

the entity's cost of the securities

debt and equity securities that fall in the trading and available-for-sale categories are reported on the balance sheet at

the market value of thesecurities and any unrealized gains or losses are recognized

Buildings and equipment are recorded at their original cost, which includes the purchase price plus all ordinary and necessary costs incurred

to get the building or equipment ready for its use in the operations of the firm

debt and equity securities fall in the categories of :

trading and available-for-sale as reported as market value

total depreciation expense

using the straight line method will still be less than under an accelerated method if the amount invest in new assets has grown each year