ACCT 200 Exam 3 (Ch. 9-12)

Blossom Company incurs these expenditures in purchasing a truck: cash price $26,470, accident insurance (during use) $2,080, sales taxes $1,660, motor vehicle license $570, and painting and lettering $2,190. What is the cost of the truck?

$30,320 (26,470 + 1,660 + 2,190)

If we have a beginning balance of $30,000 on 1/1/2017, perform $507,000 worth of sales on account for the year, & have an ending balance of $20,000 on 12/31/2017, what is the value of cash receipts from customers for the year? Perform the adjusting entries for (a) Sales on Account & (b) Cash receipts from customers.

$517,000 [ (507,000 + 30,000) - 20,000) ] (a) Debit: Accounts Receivables ($507,000) Credit: Sales Revenue ($507,000) (b) Debit: Cash ($517,000) Credit: Accounts Receivables ($517,000)

Ivanhoe Company has delivery equipment that cost $53,300 and has been depreciated $24,500. Record entries for the disposal under the following assumptions. (a) It was scrapped as having no value. (b) It was sold for $37,300. (c) It was sold for $19,600.

(a) Debit: Accumulate d Depreciation - Equipment (24,500), Loss on Disposal of Plant Assets (28,800) Credit: Equipment (53,300) (b) Debit: Cash (37,300), Accumulate d Depreciation - Equipment (24,500) Credit: Equipment (53,300), Gain on Disposal of Plant Assets (8,500) (c) Debit: Cash (19,600), Accumulate d Depreciation - Equipment (24,500), Loss on Disposal of Plant Assets (9,200) Credit: Equipment (53,300)

Cash-Basis Accounting

- revenues are ONLY recognized when cash is received - expenses are recognized ONLY when cash is paid- PROHIBITED under GAAP (Generally Accepted Accounting Principles)

Accrual-Basis Accounting

- transactions recorded in the periods in which the events occur - revenues are recognized when services are PERFORMED, even if cash was not received - expenses are recognized when INCURRED, even if cash was NOT paid

Types of Stocks

1. Authorized: shares allowed to sell 2. Issued: Shares actually sold or given (EVER/ in TOTAL) 3. Treasury Stock: Shares reacquired from SH's 4. Outstanding: Issued shares - Reacquired Treasury Shares

Types of Dividends

1. Cash Dividends - corporation must have retained earnings, adequate cash, & declaration by the board of directors (legal obligation to pay dividends after declaration) 2. Stock Dividends - satisfies stockholders' dividend expectations without spending cash, increases marketability of corporation's stock, & emphasizes that a portion of stockholders' equity has been permanently reinvested in the business 3. Stock Split - NO journal entry required, decreases the market value per share & the par value for share while increasing the number of shares outstanding (EX: if four stockholders each held 10 shares, after a stock split, 16 stockholders would each hold 10 shares)

Necessary costs to make Land ready for Intended Use (DEBIT the Land Account)

1. Cash Purchase Price 2. Closing costs such as title & attorney's fees 3. Real Estate brokers' commissions 4. Accrued Property & other liens on the land assumed by the purchaser - Recurring costs (such as annual insurance) are NOT included for equipment

2 Interest Rates

1. Contract (Stated or Coupon Rate) 2. Market Rate (Effective or Discount Rate)

Factors in Computing Depreciation

1. Cost (all expenditures necessary to acquire the asset & make it ready for use) 2. Useful Life (estimate the expected life based on need for repair, service life, & vulnerability to obsolescence) 3. Salvage value (estimate the asset's value at the end of its useful life)

Adjusting Entry for Sale of Merchandise

1. Debit: Accounts Receivable Credit: Sale 2. Debit: Cost of Goods Sold (COGS) Credit: Inventory

Adjusting Entry for Sales Returns & Allowances

1. Debit: Sales Returns & Allowances Credit: Accounts Receivable 2. Debit: Inventory Credit: Cost of Goods Sold (COGS)

Usefulness of Cash Flows

1. Entity's ability to generate future cash flows 2. Entity's ability to pay dividends & pay liabilities 3. Reasons for difference between net income & net cash provided (used) by operating activities 4. Cash investing and financing transactions during the period

Significant Non-Cash Activities

1. Issuing common stock to purchase assets 2. Issuance of debt to purchase assets 3. Exchanging of plant assets 4. Conversion of bonds into common stock - Companies report non-cash activities in either a separate schedule (bottom of the statement) or separate note (goes to the financial statements)

Classifications of Cash Flows

1. Operating Activities (affects the Income Statement) 2. Investing Activities (affects Investments & Long-term Assets such as PPE) 3. Financing Activities (affects Long-term Liabilities & S/E)

Elements in a Financial Transaction

1. Principal (p): amount borrowed or invested 2. Interest Rate (I): an annual percentage 3. Time (n): # of years or portion of a year that the principal is borrowed or invested

Preferred Stockholder Rights

1. Priority in relation to dividends (hold the right to receive dividends BEFORE common stockholders) 2. Priority of the assets in the event of liquidation 3. However, they do NOT hold voting rights ** Cumulative Dividend - holders of preferred stock must be paid their annual dividends + any dividends in arrears BEFORE common stockholders receive dividends

Contingencies must be recorded as a liability & loss if the outcome of the lawsuit is BOTH

1. Probable & 2. There is a reasonable estimate of the expected loss - if both of these conditions are NOT met, then the company discloses this contingency in notes to the financial statements

Major Characteristics of a Corporation

1. Purpose: Non-Profit or For Profit 2. Ownership: Publicly or Privately held 3. ADVANTAGES: Separate Legal Existence, Limited Liability of Stockholders, Transferable Ownership Rights, Ability to Acquire Capital 4. DISADVANTAGES: Additional Taxes 5. BOTH an advantage & disadvantage: Corporate Management & Government Regulations

Types of Bonds

1. Secured Bonds - specific assets pledged as collateral 2. Unsecured Bonds - issued against the general credit of the borrower 3. Convertible Bonds - can be converted into common stock at the option of the bond HOLDER 4. Callable Bonds - can be redeemed (bought back) prior to maturity at the option of the bond ISSUER

2 Types of Interest

1. Simple Interest (p x i x n) 2. Compound Interest

Common Stockholder Rights

1. Stockholders get to vote in election of the board of directors & actions that require stockholder approval 2. Share the corporate earnings through receipt of dividends 3. Preemptive Right - Stockholders keep the same percentage of ownership when new shares of stocks are issued (EX: if share of stock was 14% before new shares of stocks were issued at a different percentage, the share of their stock is still 14%) 4. Residual Claim - if the company goes out of business, the stockholders receive what is left of company after lenders & creditors are paid back

What do Corporations purchase their outstanding stock?

1. To reissue shares to officers & employees as compensation 2. To have additional shares available for use in acquiring other companies 3. To increase trading of the company's stock on the market 4. To increase earnings per share 5. To eliminate hostile shareholders

4 Journal Entries to Record Bond Transactions

1. When the bond is issued (sold) - Debit "Cash" & Credit "Bonds Payable" 2. When interest is accrued at the end of a period - Debit "Interest Expense" & Credit "Interest Payable" 3. When the interest is paid - Debit "Interest Payable" (debit the same account here as what was credited in #2) & Credit "Cash" 4. When the bond is retired (paid off)

If the problem states "at the end of EACH year for..." then you know its an

ANNUITY

Balance Sheet Equation

Assets = Liabilities + Stockholders' Equity

Overstating Ending Inventory causes

Assets to be overstated, no effect on Liabilities, & Stockholders' Equity to be overstated

Understating Ending Inventory causes

Assets to be understated, no effect on Liabilities, & Stockholders' Equity to be understated

Calculating Cost of Goods Sold

Beginning Inventory + Purchases (& Freight In charges) - Purchase Returns/Discounts - Ending Inventory

End R/E Statement

Beginning R/E + Net Income (or - Net Loss) - Dividends

Book Value of an Asset Equation

Cost of Asset - Accumulated Depreciation to Date

If "Accumulated Depreciation" & "Cash" (selling price of PPE) which are both debit accounts exceed the cost of the PPE account which is a credit account, then you adjust this entry by

Crediting the difference with "Gain on Disposal of Plant Assets" account

CLER:

Credits Increase:Liabilities, Equity, & Revenue

If the Market Interest Rate is 12% & a bond is issued @ 10%, then the bond will be issued at a

DISCOUNT

STUDY CLASSIFIED BALANCE SHEET, APPENDIX G PROBLEMS, & ISSUING BONDS PROBLEMS

DOOOOO IT

Adjusting Entry to Write Off a Bad Account

Debit: Allowance for Doubtful Accounts Credit: Accounts Receivable

Adjusting Entry for Intangible Assets

Debit: Amortization Expense Credit: the specific Intangible Asset (EX: Patent)

On July 1, 2014, Wright Company purchased a copyright for $156,000. The useful life of the copyright is 6 years, even though its legal life is much longer. Perform the adjusting entry.

Debit: Amortization Expense ($13,000 - 156,000 / 6 years x 6/12 months) Credit: Copyright ($13,000)

Adjusting Entry for Accrued Revenues

Debit: Assets Credit: Revenues (Revenues, Net Income, S/E, & Assets understated; Liabilities unaffected if failed to record)

Adjusting Entry for Bad Debt Expense & Increasing the ADA

Debit: Bad Debt Expense Credit: Allowance for Doubtful Accounts

Adjusting entry for redeeming a Bond @ Maturity

Debit: Bonds Payable Credit: Cash

Adjusting Entry for Sales Discounts

Debit: Cash Debit: Sales Discounts Credit: Accounts Receivable

Journal Entry for Depreciation

Debit: Depreciation Expense Credit: Accumulated Depreciation

Adjusting Entry for Prepaid Expenses

Debit: Expenses Credit: Assets or Contra Assets (Expenses understated; Net Income, S/E, & Assets overstated, Liabilities unaffected if failed to record)

Adjusting Entry for Accrued Expenses

Debit: Expenses Credit: Liabilities (Expenses & Liabilities understated; Net Income & S/E overstated, Assets unaffected if failed to record)

Adjusting Entry for Unearned Revenue

Debit: Liabilities Credit: Revenues (Revenues, Net Income, & S/E understated; Liabilities overstated, Assets unaffected if failed to record)

Adjusting Entry for the Purchase of Treasury Stock

Debit: Treasury Stock Credit: Cash - Treasury Stock is a CONTRA stockholders' equity account (normal DEBIT balance)

If "Accumulated Depreciation" & "Cash" (selling price of PPE) which are both debit accounts do NOT exceed the cost of the PPE account which is a credit account, then you adjust this entry by

Debiting the difference with "Loss on Disposal of Plant Assets" account (same if PPE is not sold/valued at nothing)

DEAD:

Debits Increase: Expenses, Assets, & Dividends

4 Types of Adjusting Entries

Deferrals (cash flow BEFORE the event, requires an ending adjusting entry): Prepaid Expenses, Unearned Revenues Accruals (cash flow AFTER the event, is the ending adjusted entry): Accrued Revenues, Accrued Expenses

Computing Interest Formula

Face Value of Note x Annual Interest Rate x Time in Terms of One Year (When counting in months , only count FULL months)

Bonds may be issued at

Face Value, Discount (below face value), or Premium (above face value)

Present Value (PV) Equation

Future Value (FV) / [ (1 + Interest Rate) ^ (number of periods) ]

Income from Operations Equation

Gross Profit - Operating Expenses

Gross Profit Rate

Gross Profit/Net Sales

Every time we perform an adjusting entry, we change the:

Income statement account which affects the income statement, the statement of retained earnings, & the balance sheet

Investing Activities Inflows/Outflows (affects Investments & Long-term Assets such as PPE)

Inflows: from sale of PPE, sale of investments in debt/equity, & collection of principal on loans to other entities Outflows: to purchase PPE, purchase investments in debt/equity, & make loans to other entities

Financing Activities (affects Long-term Liabilities & S/E)

Inflows: from sale of stock & issuance of debt (bonds/notes) Outflows: to stockholders as dividends, pay back/redeem long-term debt, & to reacquire capital stock (treasury stock)

Operating Activities Inflows/Outflows (affects the Income Statement)

Inflows: sale of goods/services, interest/dividends received Outflows: to suppliers for inventory, to employees for wages, to gov. for taxes, to lenders for interest, & to others for expenses

If a company purchases a trademark, then it is reported under "_" at the value you paid for it. If the trademark is internally created, meaning that company generated that trademark, then it is _ because it doesn't not hold any fair value.

Intangible Assets; NOT reported

Bonds have an ___ relationship with market interest rate

Inverse relationship; if market interest rate < contractual rate, then bond price is > face value

When a plant asset is retired, they are recognized on the Income Statement as a

Loss on Disposal of Plant Asset

Declaring/Distributing STOCK Dividends or Performing a STOCK Split will

NOT affect assets, liabilities, NOR S/E

Quality of Earnings Ratio

Net Cash provided from Operating Activities/Net Income

Profit Margin Ratio Equation

Net Income/Net Sales

Gross profit

Net Sales - Cost of Goods Sold (COGS); shown ONLY on a multiple-step income statement

Format of Cash Flows

Operating Activites FIRST (have BOTH Direct & Indirect Method), Investing Activites SECOND, & Financing Activites THIRD

If the Market Interest Rate is 8% & a bond is issued @ 10%, then the bond will be issued at a

PREMIUM

4 Value Concepts

Periodic INTEREST Payments: Future/Present Value of an Annuity PRINCIPAL Paid @ Maturity: Future/Present Value of a Single Sum

Net Sales Equation

Sales Revenue - (Sales Returns & Allowances + Sales Discounts)

Straight-Line Method of Depreciation

[ (Cost - Salvage Value) / Useful Life in Years ] x Fraction of Year - Most common method used (required by the IRS) because it is the most consistent with the same amount being depreciated every year

Franchise

a right to sell certain products or services to use certain trademarks or trade names within a designated geographic area

Land Improvements

all expenditures necessary to make improvements ready for their intended use (EX: driveways, parking lots, fences, etc.)

Depreciation

allocating to the expense of the USEFUL life of a plant asset (land improvements, buildings, equipment, but NOT land)

Copyright

an exclusive right granted by the federal government to reproduce and sell an artistic or published work

Since the Income Statement is prepared under the Accural Basis of Accounting, BOTH sales & expenses from CASH differ from the Statement of Cash Flows, so we must

analyze the related balance sheet accounts (A/R & A/P)

When equipment is purchased on credit,

assets & liabilities both increase, thus balancing out one another & ONLY affecting the BALANCE sheet

Unearned Revenues

cash received BEFORE services are performed (EX: unearned rent revenue)

Research & Development (R&D) costs

costs incurred by a company that often lead to patents or new products (expensed when INCURRED)

"Discounts on Bonds Payable" holds a ___, whereas "Premium on Bonds Payable holds a ___.

debit; credit.

Paying CASH Dividends will

decrease BOTH assets & liabilities, not affecting S/E

When bonds are PAYED, we adjust for this by

decreasing BOTH assets & liabilities

When a bond is issued SEMI-ANNUALLY,

divide the rate by 2 & multiple the payment periods by 2 (if it is quarterly, do the same except with a factor of 4)!

Contingencies

events with uncertain outcomes that may represent potential liabilities (EX: lawsuits!)

Accrued Expenses

expenses INCURRED but NOT yet paid in cash or recorded (EX: interest expense, utilities expense, salaries/wages expense)

Prepaid Expenses

expenses paid in CASH & recorded as assets BEFORE they are used/consumed (EX: prepaid insurance, supplies on hand, prepaid advertising, prepaid rent, plant & equipment)

Plants Assets

have physical substance, are used in the operations of the business, are NOT intended for sale to customers, & are expected to provide service for the company (EX: equipment)

Declaring a CASH Dividend will

increase liabilities & decreases S/E

When bonds are ISSUED, we adjust for this by

increasing BOTH assets & liabilities

To determine the future value of a single amount, you need to know the

interest rate, # of compounding periods, & the amount of the payment or receipt

Bonds are a form of

interest-bearing notes payable (long-term liability)

Goodwill is recorded as the excess of

purchase price OVER the FMV of the identifiable net assets acquired

Historical Cost Principle

record plant assets at cost, consists of all expenditures necessary to acquire an asset & make it ready for use

Accrued Revenues

revenues for services performed but NOT yet received in cash or recorded (EX: interest revenue & unbilled services rendered)

Intangible Assets

rights, privileges, & competitive advantages that results from their ownership of long-lived assets that do not posses physical substance, have a limited or indefinite life (EX: patents, copyrights, trademarks, etc.)

Future Value of an Annuity Equation

sum of a series of future amounts + the accumulated compound interest on them

Amortization

the allocation to expense the cost of an intangible asset of the asset's useful life

Effective-Interest Method

the amortization of the discount or premium results in interest expense = to a constant % of the carrying value