Principles of Financial Accounting Exam 3

Changes in Estimates for Depreciation

(book value - revised salvage value) / revised remaining useful life Over the life of an asset, new info may come to light that indicates the original estimates were inaccurate

Straight-Line Method

(cost - salvage value) / useful life in periods

Credit Card Sales Advantages

-Customers' credit is evaluated by the credit issuer -Sales increase by providing purchase options to customer -Risks of extending credit are transferred to credit card issuer -Cash collections are quicker

Intangible Assets

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

Double Declining Balance Method

1) Straight line rate = 100 / Useful life (%) 2) Double declining balance rate = 2 x straight line rate 3) Depreciation Expense = Double declining balance rate x beginning period book value

Units of Production

1. Depreciation per unit = (cost - salvage value) / total units of production 2. Depreciation expense = Depreciation per unit x # of units produced in the period

What are the depreciation methods?

1. Straight line method 2. Units of Production 3. Declining Balance

Disposal of Plant Assets

1. Update depreciation 2. Gain/Loss = Cash received - book value 3. Record the transaction

Factors in computing Depreciation

1. cost 2. useful life 3. salvage value

Estimating Bad Debt Expense

2 Methods 1. Percent of Sales Method 2. Accounts Receivable Methods

Book Value

= cost - accumulated depreciation

Total Asset Turnover

= net sales / average total assets (Provides info about a company's efficiency in using its assets)

Direct Write-off Method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. Advantages: Records estimated bad debts expense in the period when the related sales are recorded. Reports accounts receivables on the balance sheet at the estimated amount of cash to be collected

Percent of Sales Method

A method of estimating uncollectible receivables that calculates bad debts expense based on a percentage of net credit sales. (Debit Bad Debts Expense; Credit Allowance for Doubtful Accounts)

Decline in Asset Value over its useful life

Acquisition 1. Compute cost Use 2. Allocate cost to periods benefited 3. Accounts for subsequent expenditures Disposal 4. Record Disposal

Cost Determination

Acquisition Cost -Purchase price -All expenditures needed to prepare the asset for its intended use

Bonus

Assume bonus will be paid equal to 5% of the companies annual income of 210,000. B = .05(210,000 - B) = 10,000 (Debit Employee Bonus Expense, Credit Bonus Payable)

Capital Expenditure

Betterment and extraordinary repairs. Major overhaul or partial replacements, extends life beyond original estimate

Gain/Loss of Plant Assets

Cash > BV record gain (credit) Cash < BV record loss (debit) Cash = No gain/loss

Sales on Credit

Debit Accounts Receivable; Credit Sales for sale amount

Actual Warranty Service

Debit Estimated Warranty Liability, Credit Inventory

Estimate Warranty expense

Debit Warranty Expense, Credit Estimated Warranty Liability

Sales tax payable

Debit cash; credit sales, credit sales tax payable (% sales tax x amount sold)

Natural Resource-Depletion

Depletion per unit = (cost - salvage value) / total units of capacity Depletion expense = depletion per unit x units extracted and sold in period (DR depletion expense, CR accumulated depletion)

Employer payroll taxes

FICA taxes, Medicare taxes (pays equal amounts as employee for both), Federal and State Unemployment taxes

Land and Land Improvement

Land (not depreciable) -purchase price, real estate commissions, title insurance premiums, title search and transfer fees, delinquent taxes, surveying fees Land Improvements -Parking lots, driveways, fences, walks, shrubs, and lighting systems -Depreciate over useful life of improvements

Long-term liability

Not expected to be paid within one year of the company's operating cycle, whichever is longer

Revenue Expenditure

Ordinary repair. Maintains normal operating conditions, doesn't increase productivity, doesn't extend life beyond original estimate

How much to pay when the note is due

Pay the amount of the note with interest added

Accounts Receivable Methods

Percent of Accounts Receivable, Aging of Accounts Receivable

Decreciation

Process of allocating the cost of plant asset to expense in the accounting periods benefiting from its use.

Accounts Receivable Turnover

Ratio provides useful info for evaluating how efficient management has been in granting credit to produce revenue (=net sales / average accounts receivable, net)

Cost Determination and Amortization

Record at current cash equivalent cost, including purchase price, legal fees, and filing fees (patents, copyrights, franchises, licensing, etc.)

Employee payroll deductions

Social Security Taxes, Medicare Taxes, Federal Income Tax, State and Local Income Taxes, and Voluntary Deductions.

Plant Assets

Tangible in nature---> Actively Used in Operations--> Expected to Benefit Future Periods--> Called Property, Plant and Equipment

Interest earned ratio

Times interest earned = income before interest and income taxes / interest expense -If income before interest and taxes varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return an be unable to pay interest charges.

Allowance Method

Transactions Sales Collection Estimate bad debt Write off A/R Receive payments for written-off account

Accounts Receivable-Uncollectible

Uncollectible amounts are referred to as bad debts

Notes Receivable

Written promise (as evidenced by a formal instrument) for amounts to be received.

Contingent Liability

a potential liability that depends on some future event

Warranty

a seller's obligation to replace or correct a product (or service) that fails to perform as expected within a specified period

Note payable

a written promise to pay a creditor a certain amount in the future (Dr cash, Cr notes payable; when its repaid Dr notes payable & interest expense, Cr cash)

Unearned Revenue

debit unearned revenue, credit revenue

Current Liabilities

expected to be paid within one year or the company's operating cycle, whichever is longer

Acquisition Cost excludes...

financing charges and cash discounts

How to calculate interest

principal of note x annual interest rate x time expressed in fraction of year

Interest expense formula

principal x rate x time

Partial Year Depreciation

when a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned