Accounting ch 7, 8, 9

current liabilites

accounts payable ( inventory and expense), subject to state sales taxes and federal taxes, unearned revenue, notes payable, current portion of long term debt.

Amortization

allocating the cost of intangible assets to expense ( use straight line method)

Depletion

allocation of the cost of a natural resource over its service life

convertible bond

allows the investor to transfer each bond into shares of common stock

callable bond

allows the issuer to pay off the bonds early at a fixed price

residual value

amount the company expects to receive from selling the asset at the end of its useful life

accounts payable

amount the company owe to suppliers

interest

annual percentage rate to be applied to the face value of the loan

riskiness of a businesses obligations

classifying liabilities as either current or long term helps investors and creditors assess this

Asset disposal

depreciate to date of disposal 1. sell asset 2.retire 3. trade in

how do you record depreciation?

depreciation .................... $ accumulated depreciation .......... $

profit margin

earnings per dollar of sales = net income / net sales

installment payment

includes $ for interest and amount that represents a reduction of outstanding balance

bond issue costs

includes underwriting, legal, accounting, registration and printing fees

interest expese

incurred on notes payable

accrual accounting

interest expense is recorded in the period interest is incurred rather than the period it is paid

Depreciation

on property, plant and equipment- allocation of the costs of a tangible asset over its service life

book value

original cost of asset minus current balance in accumulated depreciaiton

amortization schedule

summary of cash paid, interest expense, changes in carrying value for each semi annual interest period

secured bond

supported by specific assets pledged as collateral by the issuer

FICA

taxes based on federal insurance contributions act, taken out of employees paychecks and matched by the employer for social security ( 6.2 %) and medicare (1.45% )= 7.65% * employer must double the tax on each employees salary (15.3 %)

The problem with borrowing from one lender?

their is a limited amount of $ they can lend

market interest rate

true interest rates used by investors to value the bond issue

commercial paper

unsecured notes sold in minimum denominations of $25,000 with maturities up to 270 days

serial bond

matures in installents

term bond

matures on a single date

debentures bond

maturity date is when you pay full price

sinking fund

money set aside to pay debts as they come due

warrenties

most common contingent liability, need to record expense in the same period it sells product

retire bonds @ maturity / before

*@- face value bonds payable........# cash ........ # * before- record gain or loss bonds payable ......... # loss/gain.....................# cash..................................#

Double declining balance

*book value x doubled depreciation rate *record the same

straight line method

*cost- residual (depreciable cost) / service life = # * take depreciable cost and multiply by depreciation rate to get expense * To find rate= 100/ # of years * continue every year until you reach depreciation cost Record as: asset.......... # cash ........... # Depreciation expense........# accumulated depreciation ....... #

activity based

*depreciation cost / total units expected to produce = rate * rate x miles driven/time used = expense * record as the same

Intangible assets

-not subject to amortization= unlimited life, goodwill & trademarks ( test for impairments and loss) -subject to amortization = limited life, franchise, patent,copyrights

Tangible assets

-property, plant and equipment -buildings + equipment = subject to depreciation -natural resources= not subject to depletion (land) -timber forest, oil,mines = subject to depletion

bonds issued at discount, premium, face amount

1. discount- issue price is below face amount, stated interest rate < market interest rate 2. premium= issue price above face amount , stated interest rate > market interest rate 3. face amount- equal, stated = market rates

what are the 3 characteristics of liabilities?

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

how do corporations get money?

1. sell stock ( preferred or common stock) 2. borrow from lender ( notes, secured and unsecured) 3. borrow from many lenders (bonds)

3 types of depreciation methods

1. straight line- takes equal amount each year, most common 2. double declining balance- accelerated method, more is taken in earlier years than in later years 3. activity based- based on the use of the assets life, common for natural resources.

Long term assests

1. used in operations : tangible and intangible 2. not used in operations: investments/ notes recievable

carrying value

balance in bonds payable, = face value of bonds payable

3 primary sources of long term debt

bonds, notes and leases

Why would a company choose a bond over borrowing from the bank?

by borrowing by issuing bonds effectively bypasses the bank and borrows directly from investing public= lower interest rate.

interest expense for discount and premium

carrying value x market rate

annuity

cash payments of equal amounts of equal periods of time

Copyright

exclusive right of protection for the creator of a published work.

Patent

exclusive right to manufacture a product or use it, usually lasts around 20 years.

principal

face value of a bond, amount that is being lent or borrowed

bond

formal debt instrument that obligates the borrower to repay a stated amount and called face amount or principal at specific maturity date

matching

getting expenses into the same period as revenue

net pay

gross pay - deductions

liquity

having some sufficient cash to pay currently maturing debts

service life

how long the company expects to receive benefit from the asset

early extinguishment of debt

issuer retires debt before its maturity date, record loss or gain

what is the problem with operations?

it makes it tough for businesses to grow

goodwill

largest intangible asset, represents the value of a company as a whole * purchase price- fair value of all its net assets

unearned revenue

liability account that records cash received in advanced for a future sale or service

notes payable

liability that creates interest expense, written promise to repay amounts borrow plus interest

franchise

local outlet that pays for the right to use the companies name and sell their products

current portion of long term debt

long term debt maturing within one year.

recording a contingent liability

payment is probable and can be estimated

disclosure of a contingent liability

payment is reasonably possible and can be estimated

liability

present responsibility to sacrifice assets in the future due to a transaction that happened in the past

issue price

present value of face amount plus present value of periodic interest payments

Basket purchase

purchasing more than one asset at the time for one purchase price ( record all separately)

stated interest rate

rate quoted in the bond used to calculate the cash payments for interest

big bath

recording all losses in one year to make a bad year look even worse and to make future years look good

Captitalize

recording an expenditure as an asset or future benefit

materiality

relates to the size of an item that is likely to influence a decision

cash paid for discount & premium

remains the same = face amount x stated rate

asset

represents any future benefit

sales tax payable

sales tax collected from customers by the seller, current liabilities payable to government

unsecured bond

secured only by the full faith credit of the issuing corporation

when do you record a gain or loss?

when you sell for more the original price or less for less then the original cost.

trademark

word, slogan or symbol that identifies a company or service.