Financial Accounting Test 3 Review Questions
Are contingent liabilities recorded on a company's books? Explain.
Only contingent liabilities that are probable and reasonably estimated are recorded on the books.
What is the difference between wages and salaries?
Wages generally refers to compensation earned based on the number of hours work. Salaries generally refers to compensation earned based on a set amount for a week, month, or other period.
What is a contingent liability?
A contingent liability is a potential liability arising from a past event.
What is a promissory note?
A promissory note is a legal document that sets forth credit terms such as interest rate, payment amounts, and maturity date. Promissory notes are commonly used when credit extended is for a large amount or for a long period of time.
What is accrued interest?
Accrued interest is interest that has been earned but not yet collected.
What is a basket purchase of assets? When a basket purchase is made, how is cost assigned to individual assets?
A basket purchase of assets is the purchase of a group of assets for a single purchase price. For example, building, land and equipment could be purchased for one price, $80,000. When a group of assets are purchased together, the purchase price must be allocated among the different assets. One of the more common methods of making the allocation is the relative fair market value method. The fair market value of each asset is determined and then its ratio to the total fair market value of all assets is applied to the total purchase price.
What does the term warranty mean?
A warranty is a guarantee of a product or service.
What type of account is the Allowance for Doubtful Accounts?
Allowance for Doubtful Accounts is a contra asset account.
What is the difference in accounting procedures for a liability that is probable and estimable and one that is reasonably possible but not estimable?
Contingent liabilities that are recognized in the financial statements, but contingent liabilities that are reasonably possible are only disclosed in the footnotes to the financial statements.
What is the difference between gross pay and net pay for an employee?
Gross pay is the total amount of salaries or wages earned before any deductions. Net pay is the employee's gross earnings less all deductions (withholdings).
What is the formula for computing interest revenue?
Interest is computed as: Principal x annual interest x time outstanding
What is salvage value?
Salvage value is the estimated value of a plant asset at the end of its useful life to the business
What is the net realizeable value of receivables?
The net realizable value is the amount expected to be collected from accounts receivable. It is the face amount of receivables less an allowance for estimated uncollectible accounts.
When is warranty cost reported on the statement of cash flows?
Warranty cost is not shown on the statement of cash flows until the business experiences a cash outlay for warranty repairs.
In which section of the statement of cash flows will Big report the cash collected in f question 23?
When Big Corp. collects the $12,720, $12,000 will be reported as inflow from investing activities, and $720 will be reported as inflow from operating activites.
What is the difference between an employee and an independent contractor?
A business supervises, directs, and controls the work of an employee. When a business pays an individual for a specific service, but does not supervise or control the work, that individual is generally an independent contractor.
What is a classified balance sheet?
A classified balance sheet is one that separates assets and liabilities into current and concurrent items.
What is the effect on the accounting equation of writing off an uncollectible account receivable when the allowance method is used? When the direct write-off method is used?
A write-off of an uncollectible account when the allowance method is used has no effect on the accounting equation because the allowance account, a contra asset account, is reduced and the accounts receivable account, also on the asset side, is reduced. When the direct write-off method is used, a write-off of an uncollectible account reduces assets (accounts receivable) and reduces retained earnings (increases uncollectible accounts expense).
How is the accounts receivable turnover ratio computed? What information does the ratio provide?
Accounts Receivable = Sales Turnover Accounts Receivable The A/R turnover tells how many times during the year on average accounts receivable is collected (i.e., converted to cash)
What is the difference between accounts receivable and notes receivable?
Accounts receivable are the expected future receipts when a company permits its customers to buy now and pay later. The credit is usually short term to maturity. Notes Receivable usually have longer terms to maturity than accounts receivable and are legal documents that have specific items which must be in writing on the document. The note specifies the maturity date, interest rate, and other credit terms.
What type of account (classification) is Accumulated Depreciation?
Accumulated depreciation is a contra asset account. As the cost of a plant asset is expensed, a contra asset account is credited, rather than a direct reduction of the related asset account. This method is used because the cost allocation is an estimate, not an exact amount. In addition, this method provides more information to financial information users, in that the original cost is shown in the asset account and the allocated cost is shown as accumulated depreciation.
Define amortization. What kind of assets are amortized?
Amortization is the systematic allocation of the cost of intangible assets over their estimated useful lives.
How does the amortization of a discount affect the income statement, balance sheet, and statement of cash flows?
Amortization of discount reduces net income on the income statement, increases the carrying value of notes payable on the balance sheet, and does not affect the statement of cash flows.
Why are amounts withheld from employees' pay considered liabilities of the employer?
Amounts withheld from an employee's pay is a liability because these withholdings must be paid to the appropriate parties, e.g. withholding for federal income tax is paid to the federal government, withholding for medical insurance is paid to the insurance company.
Why is it necessary to make an adjusting entry at the end of the accounting period for unpaid interest on a note payable?
An adjusting entry for accrued but unpaid interest is necessary for the accounting records to reflect the correct amount of liability and the correct amount of interest expense.
How is the average number of days to collect accounts receivable computed? What information does the ratio provide?
Average days to collect = 365 Accounts Receivable Accounts Receivable Turnover This ratio tells the user how many days on average it takes a company to collect its accounts receivable.
Assume that a piece of equipment cost $5,000 and had accumulated depreciation recorded of $3,000. What is the book value of the equipment? Is the book value equal to the fair market value of the equipment? Explain.
Book value is computed as the cost of an asset less the accumulated depreciation of that equipment, $5,000 -$3,000 = $2,000. This does not represent the fair market value of the equipment because the accumulated depreciation is only an allocation of the cost based on estimates. In addition, the value of the equipment may not be related to its original cost.
How is the book value of an asset determined?
Book value of an asset is its historical cost less any accumulated depreciation.
What type of transaction is a cash payment to creditors? How does this type of transaction affect the accounting equation?
Cash payments to creditors is an asset use transaction. This type of transaction will reduce both assets and liabilities.
When a business collects sales tax from customers, is it revenue? Why or why not?
Collection of sales tax is not revenue. The retailer is merely acting as a collection agency for the state. The retailer collects the sales tax and periodically remits it to the state.
What type of liabilities are not recorded on a company's books?
Contingent liabilities that are possible but not reasonably estimated are not recorded on the books but are disclosed in the notes to the financial statements. Contingent liabilities that are remote are not recorded or disclosed in the financial statements.
What is a current liability? Distinguish between a current liability and a long-term debt.
Current liabilities are liabilities that are payable within one operating cycle.
Define deferred taxes. Where does the account Deferred Taxes appear in the financial statements?
Deferred income taxes are taxes that will be paid in future years that result from different accounting methods being used for financial statement reporting and income tax reporting. Deferred income taxes are generally shown as a liability on the balance sheet.
Define depletion. What is the most commonly used method of computing depletion?
Depletion is the process of systematically allocating the cost of natural resources to expense based on estimated production of the asset. The most common method used to calculate depletion is units-of-production. An estimated cost per unit of resource is determined by dividing the cost of the asset by the estimated production. The amount of expense for each period is based on the number of units extracted and sold.
Define depreciation. What kind of asset depreciates?
Depreciation is the systematic allocation of the cost of property, plant and equipment to the accounting periods over which they are to be used. Some examples of assets that are depreciated include buildings, machinery, and office equipment.
What type of account is Discount on Notes Payable?
Discount on Notes Payable is a contra-liability account that is subtracted from the face value of the note to determine the carrying value of the liability.
What are two ways in which estimating uncollectible accounts improves the accuracy of the financial statements?
Estimating uncollectible accounts expense improves the accuracy of financial statements by 1) reporting expected realizable value of receivables (i.e., future cash flows) and 2) presenting a better matching of expenses with related revenues. This provides a better measure of managerial performance.
Give two examples of fringe benefits.
Example of fringe benefits include vacation pay, sick pay, medical, dental and life insurance, maternity leave pay, disability pay and pension costs.
What are some factors considered in estimating the amount of uncollectible accounts receivable?
Factors for use in estimating uncollectible accounts include: 1) the percentage of uncollectible accounts from years past 2) adjustment for new circumstances that are anticipated to be experienced in the future 3) industry averages or experiences of similar businesses 4) examination of current accounts and company credit policies
How do companies determine the percentage estimate of uncollectible accounts when using the percent of revenue method?
If the company is an established business, it will examine its credit history; that is, the actual write-offs for the previous year as a percentage of sales. A new business must rely on trade publications and others experienced in the industry to determine an appropriate percent. This percent is then adjusted at least annually to reflect current conditions.
Assume that on July 1, 2016, Big Corp. loaned Little Corp. $12,000 for a period of one year at 6 percent interest. What amount of interest revenue will Big report for 2016? What amount of cash will Big receive upon maturity of the note?
Interest revenue refers to the revenue earned from investments by the company irrespective of whether received or not, recorded in the books of accounts under accrual basis of accounting.
How does issuing an $8,000 discount note with an 8 percent discount rate and a one-year term to maturity affect the accounting equation?
Issuing Discount Note: Increase in Cash (asset); Increase in Notes Payable (liability); Increase in Discount on Notes Payable (contra liability) Amortization of Discount: Decrease in Discount on Notes Payable (contra liability); Decrease in Retained Earnings (equity) Payment of Note at Maturity: Decrease in Cash (asset); Decrease in Notes Payable (liability)
Why is it generally beneficial for a business to accept major credit cards as payment for goods and sendees even when the fee charged by the credit card company is substantial?
It is generally beneficial to accept major credit cards because the business then avoids the risk of bad debts as well as the cost of maintaining credit records. The business may also attract more customers.
Is land a depreciable asset? Why or why not?
Land is not a depreciable asset because land has an infinite life. Land is not destroyed by its use. Natural resources can be removed but the land will remain. When land and natural resources are purchased together, the cost of each must be accounted for separately.
What is the difference between the liquidity and the solvency of a business?
Liquidity refers to a business's ability to generate short-term cash flows. Solvency is the ability to repay liabilities in the long run.
What is the difference between the functions of long-term operational assets and investments?
Long-term operational assets are those assets that are used by a business to generate revenue. In contrast, investments are simply held for the production of interest and dividends and/or for price appreciation.
Explain MACRS depreciation. When is its use appropriate?
MACRS, Modified Accelerated Cost Recovery System, is the prescribed method to be used for tax purposes. Under MACRS, useful lives are classified in set recovery periods. The prescribed method of MACRS uses, in most cases, the double-declining balance method switching to straight-line in the later years. The straight-line method of MACRS can also be used. MACRS is generally required for tax reporting. It is not GAAP.
Define the following terms: maker payee principal interest maturity date collateral
Maker: the borrower or debtor Payee: the person to whom the note is made payable Principal: the amount of money loaned by the payee to the borrower Interest: the economic benefit earned by the payee for loaning the principal to the maker Maturity date: the date on which the maker must repay the principal and any unpaid interest Collateral: assets belonging to the maker assigned as security for the note in the event of the maker's default on the note
List some differences between U.S. GAAP and GAAP of other countries.
Most countries have developed accounting principles that they apply to financial statements. While there are many similarities, some significant differences do exist. For example, in Britain, any purchased goodwill is charged to retained earnings in the year of the purchase, while in the U.S., goodwill is set up as an asset. Japanese accounting principles report research and development expense differently from U.S. GAAP. In Japan, R&D is set up as an asset and expensed over a period of time, whereas, in the US, R&D is expensed in the year incurred.
Why are natural resources called wasting assets?
Natural resources are assets that are produced by nature. Some examples include oil, coal, minerals, timber, etc. They are called wasting assets because their value "wastes away" as the resources are removed from the earth.
Is accounting terminology standard in all countries? What term is used in the United Kingdom to refer to sales? What term is used to refer to inventory? What is a gearing ratio? Is it important to know about these differences?
No, accounting terminology is not standard even in English-speaking countries. In the U.K. sales is called "turnover," inventory is "stocks," and the "gearing ratio" refers to the debt-to-assets ratio. Knowing this terminology is important for companies involved in international trade.
What is the purpose of the Federal Unemployment Tax? What are the maximum amount of wages subject to the tax?
Proceeds from the Federal Unemployment Tax are used to finance temporary relief to qualified umemployed persons. The maximum earnings subjects to the tax is $7,000 per employee.
What effect does the recognition of depreciation expense have on total assets? On total equity?
Recognition of depreciation expense reduces total assets; while the asset account containing the asset that is being depreciated is not changed, the contra asset account, accumulated depreciation, is increased which, in turn, reduces total assets. Total equity is decreaed when an expense is recognized.
What effect does recognizing future warranty obligations have on the balance sheet? On the income statement?
Recognizing future warranty obligations will increase liabilities and decrease equity. It has the effect of increasing expenses thereby decreasing net income.
What is the effect on the accounting equation of recognizing uncollectible accounts expense?
Recognizing uncollectible accounts expense reduces accounts receivable on the asset side and reduces retained earnings on the equity side.
Why is depreciation that has been recognized over the life of an asset shown in a contra account? Why not just reduce the asset account?
Recording the depreciation recognized in the contra asset account allows the total cost of the asset and the total amount expensed to be shown in the accounts and on the balance sheet. This provides more information to the reader of the financial statements, e.g., some judgement can be made about the age and use of the asset. The use of the contra account is also required by GAAP.
How do differences in expense recognition and industry characteristics affect financial performance measures?
Some industries are very capital intensive while others are labor intensive. When evaluating managerial performance, one must understand the industry that a company is in and compare within the industry.
List several common intangible assets. How is the life determined that is to be used to compute amortization?
Some of the most common intangible assets include patents, copyrights, and goodwill. Amortization is generally based on the legal life of the asset, the useful life of the asset, or, in the case of goodwill, the amount of any impairment. The asset is generally amortized over the shortest of these possible lives. The period over which an intangible asset can be amortized for tax purposes is generally determined according to terms specified by tax law. Goodwill is not amortized for financial statement purposes but is amortizable for income tax reporting purposes. These terms are generally different from those used for financial accounting.
What is the difference between goodwill and specifically identifiable intangible assets?
Specifically identifiable intangible assets are those assets that are purchased for a specific value or have a known value. Examples include patents, leases, and copyrights. Intangible assets that are not specifically identifiable are those acquired as part of the acquisition of a whole business or group of assets. The value of these assets is determined by the excess of the purchase price of the group over the value of the specifically identifiable assets acquired. The most common assets in this group include goodwill and covenants not to compete.
Explain straight-line, units-of-production, and double-declining-balance depreciation. When is it appropriate to use each of these depreciation methods?
Straight-line depreciation. This method allocates an equal amount of depreciation to each period over the useful life of the asset. Example: Asset cost of $4,000 with a 4-year life and no salvage value would produce a depreciation expense of $1,000 per year. This method is appropriate when the usefulness of an asset is consistent over the asset's life. Units-of-production depreciation. When this method of depreciation is used, depreciation is calculated for each estimated unit of use, e.g. cost per mile. This estimated unit cost is then applied to the actual use of the asset for the period. Example: Asset cost of $4,000 with estimated use of 20,000 miles would produce a cost per mile of $.20. If the asset was used 4,000 miles in the year, the depreciated would be $800 ($.20 x 4,000). This method is more appropriate when the usefulness of an asset is related to the amount of use. Double-declining balance depreciation. This is an accelerated depreciation method that allocates more of the cost of an asset to expense in the early years of the asset's life. It is called double-declining balance because the method applies twice the straight-line rate to the book value of the asset. Example: asset cost of $4,000 with an estimated useful life of 4 years would produce an expense of $2,000 in the first year [$4,000 x (2 x .25)]. The amount of depreciation expense will decrease each year of the asset's life. This method is appropriate when the usefulness of an asset decreases more in the early years of life than it does in the later years of the asset's life.
What is the difference between tangible and intangible assets? Give an example of each.
Tangible assets are those assets that have a physical existence. Some examples include buildings and equipment. Intangible assets are those assets that represent some rights and privileges associated with owning the asset. Some examples include copyrights, leases, and trademarks.
Who pays the FICA tax? Is there a ceiling on the amount of tax that is paid?
The FICA tax is paid one half by the employee and one half by the employer. Social Security tax is only paid on approximately the first $110,000 for 2010. This amount is usually indexed each year. There is no cap on Medicare wages.
What is the purpose of the W-2 form? What is the purpose of the W-4 form?
The W-2 form provides the employee and the federal and state government the amount of gross earnings and amounts withheld by the employer. The W-4 form is filled out by the employee and specifies the number of withholding allowances for that employee. The W-4 is used by the employer in determining the amount of federal income tax to be withheld from gross wages or salaries.
What types of costs do businesses avoid when they accept major credit cards as compared with handling credit sales themselves?
The acceptance of major credit cards enables a business to avoid the cost of uncollectible accounts and the clerical costs of maintaining accounts receivable records. In addition, the business avoids the implicit cost of lost opportunities due to delayed cash flows.
When is an adjusting entry for accrued interest generally recorded?
The adjusting entry for accrued interest is generally only recorded when financial statements are prepared. At this time the accounts are adjusted to reflect the interest that has been earned, but not yet collected.
What is the advantage of using the allowance method of accounting for uncollectible accounts? What is the advantage of using the direct write-off method?
The advantage of using the allowance method is that it improves the accuracy of the financial statements; the advantage of using the direct write-off method is that it is convenient to use.
What is the difference between the allowance method and the direct write-off method of accounting for uncollectible accounts?
The allowance method is a method of accounting for bad debts where bad debts are estimated and expense in the same period in which the corresponding sales are recognized. The receivables are reported at net realizable value in the financial statements. The direct write-off method is the practice of recognizing bad debt expense only when specific accounts are determined to be uncollectible.
How is the carrying value of a discount note computed?
The carrying value of a discount note is computed by subtracting the amount of unamortized interest held in the discount on notes payable account from the face value amount shown in the notes payable account.
What different kinds of expenditures might be included in the recorded cost of a building?
The cost of a building includes the amount paid for the building plus any amounts that are paid to put it to its intended use. Some common costs include the purchase price, title search fee, legal fees, sales commissions, remodeling, and improvements.
Assume that on October 1, 2016, Big Company borrowed $10,000 from the local bank at 6 percent interest. The note is due on October 1, 2017. How much interest does Big pay in 2016? How much interest does Big pay in 2017? What amount of cash does Big pay back in 2017?
The cost of debit which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate. It is calculated by the following formula: Interest expense = Principal amount x Interest rate x Interest time period Calculate the amount of interest that B pays in 2016 and 2017: B does not pay any interest in 2016. It pays all the interest at the date of maturity in 2017. Interest paid in 2017 is calculated as below: Interest expense = Principal amount x Interest rate x Interest time period = $10,000 x 6% x 1 year = $600 Calculate the amount of cash that B pays back in 2017. Amount of cash that B pays back in 2017 = Principal amount of note = $10,000
When is it acceptable to use the direct write-off method of accounting for uncollectible accounts?
The direct write-off method is not GAAP, but is allowed if the amount of uncollectible accounts is immaterial (i.e., insignificant).
Will the effective rate of interest be the same on a $10,000 face value, 6 percent interest-bearing note and a $10,000 face value, 6 percent discount note? Is the amount of cash received upon making these two loans the same? Why or why not?
The effective rate of interest is higher on the discounted note because the actual amount of interest paid is more than the amount of the discount rate applied to the amount of cash received at issue. The amount received when making discount notes is less than that of interest-bearing notes because the interest portion is subtracted. This can be illustrated using a note with a face value of $10,000 and 12% rate of interest.
What is included in the entry to record accrued interest expense? How does it affect the accounting equation?
The entry to record accrued interest consists of a debit to Interest Expense and a credit to Interest Payable. The transaction is a claims exchange transaction and reduces equity and increases liabilities.
What is the going concern assumption? Does it affect the way liabilities are reported in the financial statements?
The going concern assumption is based upon the premise that since companies believe they will continue to operate, they assume that they will be responsible for paying the full balance of their obligations.
Explain the historical cost concept as it applies to long-term operational assets. Why is the book value of an asset likely to be different from the current market value of the asset?
The historical cost concept requires that long-term operational assets be recorded at the amount paid for them. This is the amount that will be shown on the balance sheet as long as the asset is owned. As time passes the asset may increase or decline in value, but this change is not reflected on the books of the company. However, the historical cost of assets may be reduced by depreciation over their lives.
What are the stages in the life cycle of a long-term operational asset?
The life cycle of a long-term operational asset simply describes the process of acquiring, using, and retiring the asset. This process includes obtaining the funding to acquire the asset, acquiring the asset, using the asset, and disposing of the asset.
Who is the maker of a note payable?
The maker of a note is sometimes called the issuer. It is the party giving the note to the payee, i.e. the maker is the party lending the money.
Why would a company choose to depreciate one piece of equipment using the double-declining-balance method and another piece of equipment using straight-line depreciation?
The method of depreciation chosen should represent as closely as possible the pattern of usage of that piece of equipment. For instance, double-declining balance may be used for an asset that will decline in usefulness more in the early years of the life of the piece of equipment. Straight-line depreciation should be used when the asset's usefulness declines at a constant rate.
Does the method of depreciation required to be used for tax purposes reflect the use of a piece of equipment? Can you use double-declining-balance depreciation for tax purposes?
The method required for tax purposes, MACRS, does not necessarily reflect the use of the asset. The recovery period and method is set by the Internal Revenue Service with no regard for how each piece of equipment will be used. This method promotes consistency in recovery periods and methods in similar assets regardless of use or type of business. For most property, MACRS is based on the double-declining balance method, switching to straight line. Generally, other methods may not be used for tax purposes.
What is the most common format for reporting accounts receivable on the balance sheet? What information does this method provide beyond showing only the net amount?
The most common format for reporting accounts receivable on the balance sheet is gross receivables less the allowance for doubtful accounts. This format allows the users to see both the total amount owed by the customers and the amount the company expects to collect.
What is the operating cycle of a business?
The operating cycle is the length of time it takes to convert inventory to accounts receivable plus the time it takes convert accounts receivable to cash.
What is an advantage of using the percent of receivables method of estimating uncollectible accounts expense?
The percent of receivables is a more accurate measure because it uses the actual receivables and the amount of time they have currently been outstanding. Those receivables that have been outstanding for a longer time are less likely to be collected.
Why is it necessary to make an entry to reinstate a previously written off account receivable before the collection is recorded?
The practice of reestablishing a previously written off account, then recording its collection as a payment on account, reflects a complete record of account activity. Such a record provides an accurate picture of the source of cash flows and improves the portrayal of the customer's credit history.
Does the recognition of depreciation expense affect cash flows? Why or why not?
The recognition of depreciation expense does not affect cash flows. Depreciation recognition is simply the allocation of part of a previously acquired asset to expense. Cash is affected when the asset is purchased, when an improvement is made to the asset, and when is it sold.
How does the recovery of a previously written-off account affect the income statement when the allowance method is used? How does the recovery of a previously written-off account affect the statement of cash flows when the allowance method is used?
The recovery of an uncollectible account when the allowance method is used does not affect the income statement. Only accounts receivable, cash, and allowance for doubtful accounts are affected. Cash flow from operations increases as a result of the collection.
List the three categories of contingent liabilities.
The three categories of contingent liabilities are: 1. Probable and reasonably estimated 2. Reasonably possible 3. Remote
What two taxes are components of the FICA tax? What programs do they fund?
The two components of the FICA tax are the Social Security tax and the Medicare tax. The Social Security tax funds the social security program for qualified individuals with old age, survivors, and disability insurance. The Medicare tax provides health insurance for qualified individuals.
The higher the company's current ratio, the better the company's financial condition. Do you agree with this statement? Explain.
This is generally true. A high current ratio indicates the ability of a company to meet its short-term debt obligations. However, if the current ratio is too high, the company may have excess current assets which may be invested to yield a higher return for owners. If its assets are under invested, the company may not be maximizing its earnings potential.
MalMax purchased a depreciable asset. What would be the difference in total assets at the end of the first year if MalMax chooses Straight-line depreciation versus double-declining-balance depreciation?
Total assets will be lower at the end of the first year of teh asset's life if MalMax chooses the double -declining balance method of computing depreciation rather than straight-line. This results because more expense is recognized in the early years of an asset's life, total assets will be the same regardless of the method chosen because the amount of total depreciation recognized over the asset's life is the same regardless of the depreciation method chosen.
What items are included in compensation cost for a company in addition to the gross salaries of the employees?
Total compensation cost includes salaries and wages, the employer's share of payroll taxes, and fringe benefits.
When a long-term operational asset is sold at a gain, how is the balance sheet affected? Is the statement of cash flows affected? If so, how?
When a long-term operational asset is sold for a gain, total assets and equity increase by the amount of the gain. The gain is the amount the asset is sold for in excess of the book value of the asset. However, the cash flow from the sale of the equipment is the amount for which the asset is sold (assuming it is sold for cash). The total amount of cash received is shown as a cash inflow in the investing section of the statement of cash flows.
Why may it be necessary to revive the estimated life of a plant asset? When the estimated life is revised, does it affect the amount of depreciation per year? Why or why not?
When an asset is purchased and put into service, an estimate is made of the expected useful life of the asset. However, as the asset is used, it may become apparent that the estimate was incorrect or circumstances may have changed (e.g., the asset is used more than expected) to cause the estimate to be incorrect. When these situations arise, it is necessary to revise the estimated useful life of the asset and , consequently, the amount of depreciation expense per period. The revised estimated useful life will affect the amount of depreciation per year. If the estimated life is longer than originally expected, the amount of depreciation per year will decrease; if the estimated useful life is shorter than originally expected, the amount of depreciation per year will be larger.
How are capital expenditures made to improve the quality of a capital asset accounted for? Would the answer change if the expenditure extended the life of the asset but did not improve quality? Explain.
When an expenditure improves the quality of an asset, this improvement is accounted for as if a new asset is purchased; the equipment account in debited. The improvement is depreciated over the remaining life of the original asset since the life of the asset is not extended; only the quality is improved. When an expenditure extends the life of the asset, this expenditure in effect reduces some of the depreciation already taken on the asset. This is accomplished by reducing the accumulated depreciation account (a debit to accumulated depreciation). Depreciation is recalculated by spreading the remaining book value, reduced by salvage value, over the remaining estimated life of the asset.
John Smith mistakenly expense the cost of a long-term tangible fixed asset. Specifically, he charged the cost of a truck to a delivery expense account. How will this error affect the income statement and the balance sheet in the year in which the mistake is made?
When the total cost of an asset is expensed in the year acquired, total expense will be overstated and net income will be understated. Because all of a plant asset's cost is erroneously expensed, assets will be understated and retained earnings will be
What is "aging of accounts receivable"?
When using an aging schedule for estimating uncollectible accounts, accounts receivable is divided into categories based on due dates. Different percentages are then applied to each category. For instance a higher percentage would be applied to the group of accounts that are more than 90 days past due than to the group that is only 30 days past due.
When using the allowance method, why is uncollectible accounts expense an estimated amount?
When using the allowance method, uncollectible accounts expense is matched with current revenues. A company does not know which accounts will not be collectible at the time a sale is made; consequently, in order to record the expense currently, an estimate is used.
What is the difference between an interest-bearing note and a discount note?
With an interest-bearing note, accrued interest is added to the face value of the note at maturity. In contrast, the interest on a discount note is included in the face value of the note. In other words, the interest is deducted from the face value of the note when the note is made.