Exam 3 Chp 7-9 Pearson

Equity financing

Investments from stockholders ( Stockholder Equity)

A(n) ________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)

Lease

Which of the following costs are capitalized as an asset for an internally developed patent? Legal fees Filing fees Research and development

Legal fees Filing fees

unsecured bonds

backed by specific asset. - most

f ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?

A debit to Cash of $110,000. A credit to Bonds payable of $100,000 A credit to Premium on Bonds Payable of $10,000

debit financing

Borrowing money from creditors(liability) - tax deuctable

• The cost of a major improvement that extends the useful life of an asset would be _____, whereas the cost of maintenance that does not increase the future benefits would be _____.

Capitalized Expensed

fringe benefits

Employee benefits paid by the employer. (e.g., FICA, Worker's Compensation, Withholding Tax, Insurance, etc.) Free flights when a flight attendant

current liability

payable within one year from the balance sheet -Notes payable, Account payable, Payroll liability

Secured bond

bonds are supported by a specific asset the issuer pledges as collateral. -Taking house if cant repay debt

A(n) _______ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright the life of the creator plus 70 years.

Bonds and leases are normally classified as ______ liabilities.

long-term

Payroll Liabilities

Employer withholds federal and state income taxes, Social Security and Medicare taxes (employee's portion), voluntary withholdings(retirement)

Identify the characteristics of an annuity.

Equal time periods between payment dates A series of amounts that are equal

If bonds are retired before the maturity date, this is considered a(n)

early extinguishment of debt.

Depreciation Expense

asset's cost - residual value / service life = Depreciate cost/ service life

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

current-year activity or production

depreciation rate per unit

depreciate cost/total units expected to be produced

Sales Tax Payable

when company collects sales tax Debits increase Cash & increases Credit Sales tax payable

Depreciation

Allocation of asset's cost to expense over time. Property, plant, and equipment

A series of equal amounts paid or received over equal time periods is called a(n) ______

Annuity

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

Serial bonds

Payment in installment over years. - easy meet obligation

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.

Which of the following are common characteristics or provisions of bonds?

secured or unsecured term or serial convertible callable

The depreciable cost is

the cost of the asset minus the residual value.

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

Cash; Bonds Payable

Journal Entry Interest

Debit Interest Expense Credit Interest Payable

Journal Entry Contingencies Loss Probable

Debit Loss Credit Contingent Liability

Which of the following may be classified as contingent liabilities?

Future litigation losses Product warranties Frequent flier program awards

Identify characteristics of notes payable that are not common to accounts payable.

Interest bearing Based on promissory note

Double declining rate

= 2/estimated service life

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles and back. How does ABC Airlines record the $300 collected in advance?

A debit Cash $300 credit Deferred Revenue $300.

Journal Entry Notes Payable + Interest when Note maturites

Debit Notes Payable Debit Interest Payable Debit Interest Expense Credit Cash

Capitalized

Purchase price plus costs necessary to get asset ready for use

he original cost of an asset minus accumulated depreciation is

book value.

Notes Payable

borrows from bank, bank requires signed not to pay back with interest Debit Cash Credit Notes Payable

Loans requiring periodic payments of interest and principle are referred to as _______ notes

installment

The original cost of the asset less the accumulated depreciation is the _______ ______ of the asset

Book Value

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium.

A new major component that is added to an existing asset is called

an addition.

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

(cost - residual value)/estimated total production.

Bonds that mature on one specific date are called ____ bonds, whereas bonds that mature in installments are referred to as _______ bonds.

Term & serial

Gains

asset sell for more than book value

Which of the following are current liabilities?

Accounts payable Note payable due in 3 months Wages payable Deferred revenues Taxes payable The current portion of long-term debt Sales tax payable

Which of the following are commonly used depreciation methods?

Activity-based Straight-line Declining-balance

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

Additions Improvements Repairs and maintenance

What is the accounting treatment for goodwill acquired in a business acquisition?

Capitalize the goodwill Test for impairment Do not amortize

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true? The maximum depreciation is the $10,000 residual value. Clem will depreciate the machine for $150,000 over its service life. Clem must change to straight-line method in year 3. Clem will depreciate the machine for $160,000 over its service life.

Clem will depreciate the machine for $150,000 over its service life.

Which of the following are typically shown in an amortization schedule related to an installment notes payable?

The carrying value of the note at the beginning of the period The cash paid each payment period The carrying value of the note at the end of the period

On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?

$100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to interest expense for $5,120. notes payable for $1,120. Notes payable for 5,120. interest expense for $4,000.

notes payable for $1,120. interest expense for $4,000.

_______ value is the amount the company expects to receive for the asset at the end of its service life.

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.

Jingle Company signs a 6-month, $20,000 note. Stated interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as

$20,000 * 0.08 * 6/12 The stated interest rate of 8% is an annual rate and the applicable interest is for 6 months.

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?

$4,5000 The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.

Susan, a recent college graduate, makes a base salary of $70,000 per year. Susan has federal income tax withholding of $12,000, and state tax withholding of $4,000. Employers are required to withhold a 6.2% Social Security tax and a 1.45% Medicare tax. What is Susan's take-home pay?

$48,645

On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?

$50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?

$70,000 $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8,600 10,000 - $(2,000 - (10,000 x .06) = $8,600

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?

($10,000 - 4,000)/4 years = $1,500 per year

Journal Entry Amortization Franchise

Debit Amortization Expense Credit Franchise

Journal Entry Amortization Patent

Debit Amortization Expense Credit Patent

Journal Entry Bonds Issued Premium

Debit Cash Credit Bonds Payable Credit Premium on Bond

Journal Entry Bonds Issued Face Amount

Debit Cash Credit Bonds Payble

Journal entry installment note/Notes payable

Debit Cash Credit Notes Payble

Journal entry to record depreciation

Debit depreciation expense Credit accumulated depreciation

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

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $10,000 cash. The journal entry to record the sale will include which of the following entries?

Debit to cash $10,000 Debit to accumulated depreciation $30,000 Debit to loss on sale of asset $10,000 Credit to equipment $50,000

Which of the following are correct regarding bonds?

They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds at a specific date.

The gain or loss on disposal of an asset is calculated as: mount received less the book value of asset sold the fair value of the asset less the accumulated depreciation the cost of the asset less the accumulated depreciation consideration received less the fair value of the asset sold

amount received less the book value of asset sold

A(n) _______ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time. (Enter one word per blank)

franchise

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000 $4,000 + $9,000

Journal Entry Deferred Revenue (Cash in advance)

Debit Cash Credit Deferred Revenue

Journal Entry Bonds Issued Discount

Debit Cash Debit Discount Bonds Payable Credit Bond Payable

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

Probable Reasonably possible Remote

Callable bonds

Repay before date @ specific $ call price - most bonds

Expensed

Research and development costs

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880. 50,000 - (5,120 - 4,000 interest)

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

The decrease in the carrying value of the note The cash paid each payment period The carrying value of the note at the end of the period Interest expense based on the beginning period carrying value and the effective rate of the loan

A company's capital structure refers to

The mixture of debt and equity used to finance the company.

On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. The entry ABC would record at maturity, assuming all year-end (December 31) adjusting entries were made correctly, would include a ______.

debit to Interest expense of $1,250 debit to Interest payable of $1,000 debit to Notes payable of $50,000 credit to Cash of $52,250 BC pays both principal and interest: $50,000+2,250=$52,250. 4 months of interest expense was already recorded in the previous year. $50,000 x 0.06 x (5/12)=$1,250. The 6% is an annual rate and thus only 5/12 of the annual rate is recorded as an expense.

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20, Medicare $8.70, federal income tax $58, and state income tax $10. Assuming that John gets paid in cash, ABC would record a journal entry that includes a ______.

debit to Wages Expense of $600 credit to Cash of $486.10 credit to State and Federal Income Tax Payable of $68 credit to FICA (Social Security and Medicare) Payable of $45.90

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

debit to accumulated depreciation debit to loss credit to equipment

long-term liability

debt that is not due for at least one year

Contingencies

events with uncertain outcomes that may represent potential liabilities ex. lawsuit, warrranties

Interest Equation

face value x annual interest rate x fraction of the year

An intangible asset that is measured as the purchase price less the fair value of the net identifiable assets is called

goodwill.

capitalize

recording expenditures as an asset

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

residual

Bonds that are backed by collateral are ______.

secured

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.

Convertible bonds

investor convert bond shares in common stock

Journal Entry Bonds Issued w interest rate

Debit Interest Expense ( ___x%x/) Credit Cash

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required March 1, 2019 at the maturity date includes which of the following entries?

Debit interest expense $2,000 Debit interest payable $4,000 Debit note payable $100,000 Credit cash $106,000 Interest would have been accrued at 12/31 so an additional 2 month of interest is recorded as expense. $100,000 x 12% x 4/12 = $4,000 interest payable accrued 12/31. $100,000 x 12% x 2/12 interest expense 3/1.

Amoritization

Intangible asset to expense

tangible assets

land, land improvements, buildings, equipment, and natural resources

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

term Bonds

payment full principle amount @ single maturity date -most bonds

Don't amortize....

Indefinite useful lives -goodwill -trademark w indefinite life

Journal Entry for Loss on Sale

Debit Cash Debit Accumulated Deprecation Debit Loss Credit Equipment

Journal Entry Gain

Debit Cash Debit Accumulated Deprecation Credit Equipment Credit Gain

Journal Entry Gain exchange

Debit Equipment (new) Debit Accumulated Deprecation Credit Cash Credit Equipment (old) Credit Gain

Journal entry signing of an installment notes payable plus interest later date

Debit Interest Expense Debit Notes Payable Credit Cash

Journal entry signing of an installment notes payable plus interest

Debit Interest Expense (___x%x_/_) Debit Notes Payable Credit Cash $ monthly

Journal Entry Recording Lease

Debit Lease Asset Credit Lease payable

Journal Entry Employer's FICA tax & Unemployment tax

Debit Payroll Tax Expense Credit FICA tax payable ( 0.0765xSalaryExpenses) Credit Unemployment tax payable (0.062xSalaryExpense)

Journal Entry Fringe Benefits

Debit Salaries Expenses Credit Account Payable (blue cross) Credit Account Payable ( Fidelity)

Journal Entry salary expense, withholding, salaries payable

Debit Salaries Expenses Credit Income Tax Payable Credit FICA Payble ( 0.0765xSalariesExpense) Salaries Payable

Journal entry Warranty Estimate

Debit Warranty Expense Credit Warranty Liability ex. 1.5 mill x 3%= 45,000 (warranty expense)

Journal Entry Warranty Claim Happens (damaged needs repair)

Debit Warranty Liability Credit Cash

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 accumulated depreciation $40,000 Debit equipment $50,000 Credit equipment $120,000 Debit equipment $32,000 Debit loss on exchange $30,000 Credit accumulated depreciation $40,000

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

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 equipment $100,000 Credit gain on exchange of asset $40,000

On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries? Credit accumulated depreciation $70,000 Debit equipment $100,000 Debit accumulated depreciation $70,000 Credit equipment $100,000 Debit gain on sale of equipment $50,000 Debit cash $80,000 Credit cash $80,000 Credit gain on sale of equipment $50,000

Debit accumulated depreciation $70,000 Debit cash $80,000 Credit gain on sale of equipment $50,000 Credit equipment $100,000

Krasel Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries? Credit equipment $70,000 Credit equipment $90,000 Credit accumulated depreciation $70,000 Debit equipment $50,000 Credit gain on exchange of asset $30,000 Debit equipment $45,000 Debit accumulated depreciation $70,000

Debit equipment $50,000 Debit accumulated depreciation $70,000 Credit gain on exchange of asset $30,000 Credit equipment $90,000

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?

Debit to cash $45,000 Debit to accumulated depreciation $30,000 Credit to equipment $50,000 Credit to gain on sale of asset $25,000

Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?

Disclose the contingency and state that an estimate cannot be made.

patent

Exclusive right to manufacture product or use of process U.S Patent and Trad 20yrs

private placement: bond

Single Investor

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required at December 31, 2018 would include which of the following?

The annual rate of interest is 12% so the total interest of $12,000 is multiplied by the faction of the year or 4/12 Debit interest expense $4,000

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:

credit to Notes Payable for $24,000

account payable

owes supplier of merchandise/service bought on credit

intangible assets

patents, trademarks, copyrights, franchises, and goodwill

A(n) ______ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark