Prin. of Accounting II - Exam 1

The cost of planting trees and shrubs, installing fences, and paving parking areas are normally charged to the land improvements account and are later depreciated over their expected useful lives.

True

Wasting assets

Assets whose physical substance consists of natural resources that are consumed in the operation of the business.

The amount of interest on a 10% note of $600 dated May 7 and due June 30 would be $9.00.

True

The correct entry to make when a note is paid at maturity depends on whether the note is interest bearing or non-interest bearing.

True

The allowance for bad debts account may have a credit balance prior to adjustment.

True

Interest-bearing note

A note with an explicit interest rate stated on the face of the note.

Credit advice

A notification to the payee that the bank has collected interest on a note and added the amount to the payee's account.

Long-term assets

Assets that are expected to provide benefits for a number of accounting periods.

Replacements

A component of a plant asset is replaced with a similar component. That is, a wooden floor is replaced with a new wooden floor. These replacements extend the lives of the assets beyond the original estimates, but do not improve their usefulness or efficiency.

Matching principle

A concept that requires expenses to be matched with the revenues they helped to produce.

Units-of-production method

A depreciation method in which depreciation is based on the extent to which the asset was used during the year.

Sum-of-the-years'-digits method

A depreciation method in which the annual depreciation is determined by multiplying the depreciable cost by a schedule of fractions.

Straight-line method

A depreciation method in which the depreciable cost of an asset is allocated equally over the years of the asset's useful life.

Notes payable register

A detailed auxiliary record of notes payable.

Notes receivable register

A detailed auxiliary record of notes receivable.

Copyright

A grant by the federal government of the exclusive right to the reproduction and sale of a literary, artistic, or musical composition.

Patent

A grant by the federal government to an inventor giving the exclusive right to produce, use, and sell an invention for a period of 20 years.

Direct write-off method

A method in which the bad debt expense is not recognized until it has been determined that an account is uncollectible.

Percentage of sales method

A method in which the current year's bad debt expense is estimated based on the relationship between the amount of credit sales and the amount of uncollectible accounts in prior years.

Percentage of receivable method

A method in which the current year's uncollectible accounts are estimated based on the relationship between the amount of accounts receivable and the amount of uncollectible accounts in prior years.

Modified Accelerated Cost Recovery System (MACRS)

A method of depreciation used for federal income tax purposes for plant assets acquired after 1986.

Non-interest-bearing note

A note on which no rate of interest is specified, although the note does include an interest component.

Dishonored

A note which the maker does not pay or renew at maturity.

Contingent liability

A potential liability that may become a real liability depending on future events. In the case of a note discounted at a bank, the business that discounted the note must pay the maturity value and any bank fees if the maker of the note does not pay it at maturity.

Trademark

A registered trade name or symbol that identifies a firm's merchandise.

Allowance method

A technique that attempts to recognize bad debt expense in the same period that the related credit sales are made.

Promissory note

A written promise to pay a specific sum at a definite future date.

Net receivables

Accounts receivable - Allowance for Doubtful Accounts

Declining-balance method

An accelerated depreciation method in which the book value is multiplied by a fixed rate. A common rate is double the straight-line rate (the double-declining-balance method).

Double-declining-balance method

An accelerated depreciation method in which the book value is multiplied by double the straight-line rate.

Contra-liability account

An account with a debit balance that is deducted from the related liability account.

Trade-in allowance

An allowance granted when one asset is traded in on the purchase of another similar asset.

Trade-in value

An allowance granted when one asset is traded in on the purchase of another similar asset.

Bad debt expense

An expense from failure to collect an account receivable.

Band discount (note receivable)

An interest fee that the bank charges for the time between the date of discounting and the due date of the note.

Accelerated depreciation methods

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years.

A 90-day note dated July 9 would be due on October 9.

False

If there is an improvement to a building that extends the life of the building, the total cost incurred should be debited to the long-term asset.

False

The account that is debited for accrued interest on notes receivable is Interest Revenue.

False

The credit portion of an adjusting entry to enter the estimate for uncollectible accounts can be made directly to a specific receivable account.

False

The depreciation method in which the depreciable cost of an asset is apportioned equally over its estimated useful life in terms of months or years is called the sum-of-the-years'-digits method.

False

The maker of the note is the one who is to receive the specified amount of money.

False

The payee of the note is the one who promises to pay a certain amount of money at a definite future time.

False

The percentage of sales method is often referred to as aging the receivables.

False

The write-off of the cost of a wasting asset is called amortization.

False

Under the percentage of receivables method, the adjusting entry at the end of the period for bad debt expense is not affected by the current balance in the allowance for bad debts account.

False

Useful life

The amount of service expected to be obtained from an asset.

Accrued interest on notes payable

Interest expense that has been incurred but not paid.

Accrued interest on notes receivable

Interest revenue that has been earned but not yet received.

Bank discount (note payable)

The amount that the bank deducts from the face of a note.

Intangible assets

Long-term assets that have no physical substance (patents, copyrights, and trademarks).

Tangible assets

Long-term assets that have physical substance.

Plant assets

Long-term tangible assets that are used in the operations of business.

Fixed assets

Long-term tangible assets that are used in the operations of the business.

Property, plant, and equipment

Long-term tangible assets that are used in the operations of the business. Also called plant assets or fixed assets.

Net realizable value

The amount a business expects to collect from its accounts receivable; calculated as accounts receivable less allowance for doubtful accounts. Also called net receivables.

Cash equivalent price

The amount of cash that could have been paid for the asset on the date of purchase.

Additions

The company has added a new asset. Examples include the addition of a wing to a building and the installation of shelving, sprinklers, and air conditioning.

Betterments

The company substitutes a better component of a plant asset for the existing one, such as a marble floor for a wooden floor.

Improvements

The company substitutes a better component of a plant asset for the existing one, such as a marble floor for a wooden floor. Also known as betterments.

Depletion

The consumption or exhaustion of natural resources.

Proceeds (note receivable)

The difference between the maturity value of the note and the bank discount. This is the amount of cash received by the business discounting the note.

Salvage value

The estimated market value of an asset on its expected disposal date.

Scrap value

The estimated market value of an asset on its expected disposal date.

Principal of the note

The face amount of the note that the maker promises to pay at maturity. The principal is the base on which the interest is calculated.

Effective rate

The interest amount paid divided by the proceeds received on a discounted note.

Physical depreciation

The loss of usefulness because of deterioration from age and wear.

Functional depreciation

The loss of usefulness because of inadequacy or obsolescence.

Term of the note

The months or days from the date of issue to the date of maturity.

Proceeds (note payable)

The net amount received from the bank.

Depreciable cost (base)

The original cost less salvage (or scrap) value.

Maker

The person or business agreeing to make the payment on a note.

Depreciation

The portion of a plant asset's cost that is recognized as expense.

Amortization

The portion of an intangible asset's cost that is recognized as expense.

Maturity value

The principal of the note plus interest equals the maturity value of the note.

Discounting (note payable)

The procedure, which banks often use, of deducting interest in advance when making a loan.

Aging the receivables

The process of estimating the uncollectible amount by analyzing account balances according to the length of time the accounts habe been outstanding.

Rate of interest

The rate at which interest is charged, usually expressed as an annual percentage, but in some cases a monthly rate is quoted.

Payee

The specific person or business to whom a note is payable.

Cost

The sum of all amounts spent to acquire an asset and prepare it for its intended use.

Time

The term of the note stated as a fraction of a year.

Discount period

The time between the date of discounting and the due date of the note.

Book value

The underpreciated cost of the asset (cost - accumulated depreciation).

Discounting a note receivable

Transferring a note receivable to a bank for cash.

A promissory note is usually referred to as a "note."

True

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods.

True

If the maker of a note refuses or is unable to pay or renew it at maturity, the note is said to be dishonored.

True

Maturity value is equal to face value plus interest.

True

Most people tend to buy more if they can "charge it" rather than pay cash.

True

One method for estimating the amount of uncollectibles involves taking a percentage of sales on account.

True

Properties whose physical substance consists of natural resources that are consumed in the operation of a business are called wasting assets.

True

Special tax assessments for streets, sewers, flood prevention, or parks are charged or added to the land account.

True

The allocation of the cost of a plant asset over the periods expected to benefit from its use is called depreciation.

True

The depreciation method using a fixed rate applied to the book value of the asset each year, resulting in successively smaller depreciation charges as the undepreciated cost diminishes year by year, is called the declining balance method.

True

The difference between the cost of an asset and its accumulated depreciation is its book value.

True

The direct write-off method has one advantage - it is very simple to apply.

True

The percentage of sales method emphasized proper estimating and reporting of bad debt expense on the income statement and the matching of expenses with revenues.

True

The term "net receivables" refers to the difference between accounts receivable and allowance for bad debts.

True

Under the accrual basis of accounting, the allowance method is generally required for financial reporting purposes.

True

When a bank collects a notes receivable, it notifies the payee that the net amount has been added to the payee's account by using a credit advice.

True