ACC 210 Exam 3 (Ch. 7, 8, TVM)

Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.)

Social Security Medicare

Which of the following are commonly used depreciation methods?

Straight-line Declining-balance Activity-based

Long-lived assets are typically classified in two categories:

Tangible Intangible

What is the cost of equipment?

The actual purchase price plus all other costs necessary to prepare the asset for use.

Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?

The current ratio will remain the same.

Working capital:

The difference between current assets and current liabilities.

How to record the cost of a franchise?

The franchisee records the initial fee as an intangible asset.

Straight-line, declining-balance, and activity-based refer to methods commonly used to _________ property, plant, and equipment

depreciate

An asset that has no physical substance is referred to as a(n)

intangible asset.

A(n) ___________ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events. (Enter one word per blank)

liability

Deferred revenue should be classified as a(n) ___________________ on the balance sheet

liability

Otto Inc. retires old equipment with a book value of $2,400. Otto should

recognize a loss of $2,400

A loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

For accounting purposes, depreciation is

an allocation of a cost of an asset.

In accounting, the term impairment refers to

an asset's significant decline in value.

What is the formula for the profit margin ratio?

Net income divided by net sales.

Addition

Occurs when a new major component is added to an existing asset. Ex. Adding a refrigeration unit to a truck provides future benefits.

A(n) ________ is the exclusive right to manufacture a product or use a process granted for a period of _______ years

Patent; 20

Which of the following is an important criteria used to determine the reporting of a contingent liability?

The likelihood of future payment or loss

Depreciation method

The pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time.

Gift card breakage:

The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote.

Depreciation:

The process of allocating the cost of a long-term asset to expense over its useful life. Applies to property, plant, and equipment.

discount rate:

The rate at which someone would be willing to give up current dollars for future dollars.

General rule for recording long term assets

We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

Straight-line and declining balance methods allocate the cost of a long-term asset based on ____ , while an activity-based method allocates the cost of an asset based on its ____

time; use

A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)

liability

Deferred revenue is classified as

liability

The flipside of a contingent gain is a contingent

loss

The mathematical formula for working capital is current assets ______ current liabilities.

minus

The term used to describe the amount the company expects to receive for an asset at the end of its service life is

residual value.

An asset __________ occurs when an asset is no longer useful, but cannot be sold.

retirement

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ____ life of the asset.

service

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight-line method.

Long-term assets are classified as

tangible. intangible.

The formula for calculating declining balance depreciation is the depreciation rate per year times

the book value at the beginning of the year.

The depreciable cost is

the cost of the asset minus the residual value.

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset.

The service life or useful life of an asset is

the estimated use that the company expects to obtain from the asset before disposing of it.

The allocation of the cost of a tangible fixed asset is referred to as ________ , whereas the allocation of the cost of an intangible asset is referred to as ___

depreciation; amortization

For intangible assets that are developed internally, we...

expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs.

Obtaining a note payable for cash results in a(n) ______.

increase in assets and an increase in liabilities

Amortization refers to the allocation of the cost of ________ assets to expense.

intangible

An asset that has no physical substance is called a(n) ___ asset

intangible

The original cost of the asset less the accumulated depreciation is the _________ ______________ of the asset.

book value

The formula for calculating the double-declining-balance method is

book value at beginning of year x 2/estimated service life

The original cost of an asset minus accumulated depreciation is

book value.

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should

credit notes payable $5,000.

The journal entry to retire old equipment that is not fully depreciated includes a:

credit to equipment debit to accumulated depreciation debit to loss

Deferred revenues and sales tax payable typically are reported as _________ liabilities

current

The allocation of the cost of a tangible asset over its service life is referred to as _______

depreciation

Companies use accelerated depreciation for tax purposes because

it reduces taxable income in the early years of the asset's life and provides better cash flows.

Depreciation is a process of cost ____ , and not a process of valuation.

allocation

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

The formula for straight-line depreciation is

(cost - residual value)/service life.

Acid-test ratio formula

Acid-test ratio = (quick assets or) (Cash + Current Investments + Accounts receivable) / Current Liabilities

What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.

Acid-test ratio will increase Current ratio will increase

Accumulated Depreciation:

A contra asset account represents the total depreciation taken to date.

What is it when we sell an asset for less than its book value?

A loss

Liability

A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.

Fringe benefits:

Additional employee benefits paid for by the employer. Ex) Free flights for airline employees, free skiing for ski resort employees. These are not usually recorded in accounting records

Which of the following are expenditures for assets subsequent to acquisition?

Additions Repairs and maintenance Improvements

Accelerated depreciation method:

Allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years.

Intangible assets

Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. The evidence of their existence often is based on a legal contract. Google's copyrights are intangible assets.

Natural resources:

Assets like oil, natural gas, and timber that we can physically use up or deplete.

FICA taxes:

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

Commercial paper:

Borrowing from another company rather than from a bank.

annuity

Cash payments of equal amounts overtime periods of equal length. Ex) Monthly payments for a car loan, house loan, or apartment rent

Current ratio formula

Current Ratio = Current Assets / Current Liabilities

Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries? Debit loss on exchange $30,000 Debit equipment $32,000 Credit equipment $120,000 Debit accumulated depreciation $40,000 Debit equipment $50,000 Credit accumulated depreciation $40,000

Debit loss on exchange $30,000 Credit equipment $120,000 Debit accumulated depreciation $40,000 Debit equipment $50,000

Liquidity

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.

1) We capitalize an expenditure as an asset if it increases future benefits. 2) We expense an expenditure if it benefits only the current period.

How do we choose to debit either an asset or an expense?

Future value:

How much an amount today will grow to be in the future.

Which statement is true about the straight-line method of depreciation?

It allocates an equal amount of depreciation to each year the asset is used.

What does a firm record when purchasing a patent?

It records the patent as an intangible asset at its purchase price plus other costs such as legal and filing fees to secure the patent.

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

Material

Large enough to influence a decision. Ex. If a company incorrectly capitalizes rather than expenses a material expenditure, then in the current period both total assets and net income will be overstated.

refers to a company's cash position and overall ability to obtain cash in the normal course of business. (Enter one word per blank)

Liquidity

What do assets represent?

Probable future benefits

What do liabilities represent?

Probable future sacrifices of benefits

Which of the following may be classified as contingent liabilities?

Product warranties Frequent flyer program awards Future litigation losses

Basket purchase:

Purchase of more than one asset at the same time for one purchase price.

Capitalize

Record an expenditure as an asset.

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?

Remote Probable Reasonably possible

Depreciable cost formula

The asset's cost minus its estimated residual value. Asset's cost - estimated residual value

Recoverable amount

The cash expected to be received from using the asset over its remaining useful life.

How to record the advertising costs that help create value for the trademark?

They are recorded as advertising expenses.

Straight-line depreciation

This method allocates an equal amount of depreciation to each year. The implication is that the asset is used evenly over its useful life. this method is by far the simplest and most common depreciation method used in financial accounting.

Activity-based depreciation

This method calculated depreciation based on the activity associated with the asset. For example, a vehicle can be depreciated based on the miles driven, or a machine can be depreciated based on the hours used. The method is commonly used to allocate the cost of natural resources.

Which of the following does not differ among the different depreciation methods?

Total depreciation recognized over the asset's service life.

Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for financial reporting. Most companies use straight-line depreciation for financial reporting and an accelerated method called MACRS for tax reporting.

What depreciation methods are accepted and which is used most?

A(n) ___________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)

accounts

A(n) _____________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)

accounts

An interest rate, unless otherwise specified, is typically a(n) ________ rate

annual

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

annual, 12 month rate.

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides

benefits

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.

book

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.

capitalized

A transaction or event in which the outcome is uncertain is referred to as a(n) ___________

contingency

A(n) ________ gain is an existing uncertainty that might result in a gain.

contingent

An existing uncertain situation that might result in a loss depending on the outcome of a future event is a ___________ liability

contingent

Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___________ liabilities

contingent

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.

current-year activity or production

Liabilities that are payable within one year commonly are classified as __________ liabilities, while those payable more than one year from now commonly are classified as ___________ liabilities

current; long-term

Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:

debit to loss credit to contingent liability

Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ________ BENEFITS

fringe

When an asset has a significant decline in value and is written down, this is called

impairment

The profit margin ratio is defined as ________ _________ divided by net sales.

net income

A retirement or abandonment of an asset is different from a sale of an asset because

no cash is received. a loss must be recognized for the remaining book value.

The exclusive legal right to manufacture a product or to use a process is called a(n)

patent

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings.

When a contingent event that may give rise to a future loss is likely to occur, it is said to be

probable

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset

provides benefits to the company.

Other terms used for an activity-based depreciation method are:

units of production method units of output method

For a manufacturer, the most commonly reported contingent liabilities relate to product

warranties

Which of the following tends to be the source of the most commonly reported contingent liability?

warranties

Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n)

warranty

Current assets minus current liabilities equals

working capital

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

Line of credit:

An informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork.

Tangible assets

Assets in this category include land, land improvements, buildings, equipment, and natural resources. Krispy Kreme's land, buildings, and equipment fall into this category.

Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries?

Debit accumulated depreciation $60,000 Debit equipment $80,000 Credit gain on exchange of asset $40,000 Credit equipment $100,000

True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.

False

True or false: Current liabilities are always payable within one year.

False

True or false: Depreciation is a valuation method for property and equipment.

False

True or false: Your employer is allowed to keep the amounts withheld from your gross pay.

False

Amortization

For intangible assets, the cost allocation process is called?

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

The ability to estimate the amount of payment The likelihood of payment

A contingent liability is recorded if which conditions are met?

The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.

Residual value:

The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value.

Allocating the cost of intangible assets to expense is referred to as

amortization

Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a

credit to contingent liability for lawsuit $10,000.

Current portion of long-term debt:

Debt that will be paid within one year from the balance sheet date.

Patent

An exclusive right to manufacture a product or to use a process.

Contingent gain:

An existing uncertain situation that might result in a gain.

Contingent liability:

An existing uncertain situation that might result in a loss. Only recorded if a loss is probable and the amount is reasonably estimable

Which of these payroll taxes are paid only by the employer? (Check all that apply.)

SUTA FUTA

Which of the following items are initially recorded as an expense on the income statement?

Research and development costs Advertising costs

What 4 elements does your employer withhold from your paycheck?

1) Federal and state income taxes; 2) Social Security and Medicare; 3) Health, dental, disability, and life insurance premiums; 4) Employee investments to retirement or savings plans

Deferred revenue:

Cash received in advance from a customer for products or services to be provided in the future.

Acid-test ratio (Quick ratio)

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

Activity-Based Depreciation Formula

Compute the average depreciation rate per unit by dividing the depreciable cost (cost minus residual value) by the number of units expected to be produced. (Cost - Residual value) / number of units to be produced

Notes payable is classified as a liability that has which of the following effects?

Creates interest expense on the income statement

Current ratio:

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?

Debit to Cash $100,000 Credit to Note Payable $100,000

Repairs and maintenance:

Expenses that maintain a given level of benefits in the period incurred. The cost of an engine tune-up, oil change, or repair would count towards the current period. Repairs that increase the future benefit of the delivery truck would be capitalized as assets (new transmission and engine overhaul are unlikely to recur each period)

Which of the following payroll-related taxes must the employer pay by law?

Federal Insurance Contributions Act amounts Unemployment taxes

Which of the following are employer payroll costs?

Federal and state unemployment taxes Employer portion of Medicare tax

Which of the following must employers by law withhold from their employees' pay?

Federal income taxes

Which of the following are not required to be deducted from an employee's paycheck?

Federal unemployment tax (FUTA) Charitable contributions State unemployment tax (SUTA)

We capitalize (record as an asset) expenditures that benefit future periods. We expense items that benefit only the current period.

How do we record current and future benefits?

Service life:

How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life.

How do we record purchased vs. internally generated intangibles?

We record purchased intangibles as long-term assets at their purchase price plus all costs necessary to get the asset ready for use. We expense internally generated intangibles, such as R&D and advertising costs, as we incur them.

Patents, copyrights, trademarks, franchises, and goodwill.

What are included as intangible assets?

1) We multiply the rate by book value (cost minus accumulated depreciation), rather than by the depreciable cost (cost minus residual value). 2) In year 5, we are not able to record depreciation expense for the entire $5,184 times 0.40, because doing so would cause the book value to fall below the expected residual value. Instead, depreciation expense in the final year is the amount that reduces book value to the estimated residual value (book value beginning of the year, $5,184, minus estimated residual value, $5,000, = $184)

What are the two unusual features of declining-balance depreciation?

A retirement

What is a long-term asset that can no longer be useful and cannot be sold?

An exchange

What is it called when two companies trade assets?

A gain

What is it when we sell an asset for more than its book value?

Straight-line amortization

What is the most common amortization amongst companies?

A sale

What is the most common method to dispose of an asset?

Only when a company acquires another company.

When is Goodwill recorded?

In the first year, you multiply the cost times the depreciation rate. In the final year, you subtract the amount necessary to bring the value to the residual value.

When using the declining-balance method, how do you calculate the first and last year?

Subject to amortization: Patents, copyrights, trademarks (with finite life), franchises. Not subject to amortization: Goodwill, trademarks (with indefinite life)

Which intangible assets are and aren't subject to amortization?

Working capital formula

Working Capital = Current Assets - Current Liabilities

Notes payable:

Written promises to repay amounts borrowed plus interest.

Goodwill

____________ equals the purchase price less the fair value of the net assets acquired.

A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)

accounts payable.

Units of production or units of output are alternative terms for the _______ _________ depreciation method

activity-based

The __________ portion of long-term debt is the amount that will be paid within the next year. (Enter only one word.)

current

Taxes collected for taxing authorities are recognized as

current liabilities.

The portion of a long-term liability that will be paid within the next year is referred to and reported as the:

current portion of long-term debt

Payroll withholdings ______. (Select all that apply.)

decrease the amount of cash an employee receives are amounts subtracted from employees' gross earnings to determine their net pay

Which of the following are examples of fringe benefits provided by employers to their employees?

reduced or no-cost company-provided services payment of insurance premiums on employees behalf contributions to retirement and other savings accounts

The types of expenditures that can occur subsequent to an asset's acquisition are

repairs and maintenance. improvements. additions.

The depreciable cost of an asset is the asset's cost minus its estimated ______ value

residual

The depreciable cost of an asset is the asset's cost minus its estimated _________ value

residual

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.

sales revenue of $1,000. sales taxes payable of $100.

Which depreciation methods allocate the cost of long-term assets based on time?

straight-line declining-balance

Payroll withholdings are

the items subtracted from an employee's gross pay to arrive at take-home pay.

A contingent liability is an existing __________ situation that might result in a loss depending on the outcome of a future event.

uncertain

Which of the following is a guarantee that protects a customer from product defects for a specified period of time?

warranty

Activity-based method:

Allocates an asset's cost based on its use.

Straight-line method:

Allocates an equal amount of depreciation to each year of the asset's service life.

Amortization

Allocation of the cost of an intangible asset over its service life.

Declining-balance method:

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

Debt covenant:

An agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt.

Book value:

An asset's original cost less accumulated depreciation.

Copyright

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

What 4 elements does your employer pay to have you as an employee?

1) Federal and state unemployment taxes; 2) The employer portion of social security and Medicare; 3) Employer contributions for health, dental, disability, and life insurance; 4) Employer contributions to retirement or savings plan

What are the two ways companies acquire intangible assets?

1) They purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other companies. 2) They develop intangible assets internally, for instance by developing a new product or process and obtaining a protective patent.

Three essential characteristics of liabilities

1. probable future sacrifices of economic benefits 2. arising from present obligations to other entities 3. resulting from past transactions or events

State Unemployment Tax Act (SUTA) requires?

A tax of 5.4% (at maximum), but most companies pay a lower rate based on past employment history.

Federal Unemployment Tax Act (FUTA) requires?

A tax of 6.2% on the first $7,000 earned by each employee. This amount is reduced by a 5.4% (maximum) credit for contributions to state unemployment programs, so the net federal rate often is 0.8%.

Unemployment taxes:

A tax to cover federal and state unemployment costs paid by the employer on behalf of its employees.

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service.

Current liabilities:

Debts that, in most cases, are due within one year from the balance sheet date. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.

Depreciation expense formula

Depreciable cost is divided by the number of years in the asset's life. Depreciable cost / number of years in asset's life

Double-declining depreciation rate formula

Double-declining depreciation rate = 2 / Estimated service life (Two times the straight line rate)

Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?

Employee contributions to retirement plans Health insurance paid by the employee Federal income taxes

Land improvements:

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation.

Quick assets:

Includes only cash, current investments, and accounts receivable.

Calculating Interest on Notes formula

Interest = Face value * annual interest rate * fraction of year

Compound interest:

Interest earned on the initial investment and on previous interest.

Simple interest Formula: Simple interest = Initial investment * interest rate * time

Interest earned on the initial investment only.

Should a cost be an added to the asset account or recorded as an expense in the current period?

Is it a cost to get the asset ready for use or is it a recurring cost that benefits the company in the current period?

Franchise

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area.

Intangible assets:

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

______ value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)

Residual

Sales tax payable:

Sales tax collected from customers by the seller, representing current liabilities payable to the government.

Improvement

The cost of replacing a major component of an asset. Ex. Replacing the refrigeration unit should be capitalized to the equipment account.

Common current liabilities include:

The current portion of long-term debt Sales tax payable Deferred revenues

Time value of money:

The value of money today is greater than the value of that same amount of money in the future.

Present value

The value today of receiving some amount in the future.

Declining-balance depreciation

This method is an accelerated method, meaning that more depreciation expense is taken in the earlier years than in the later years of an asset's life. Declining-balance methods are also used in calculating depreciation for tax purposes.

True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

True

Contingencies

Uncertain situations that can result in a gain or a loss for a company.