Accounting 101 final
Treasury Stock
a corporation's own stock, which has been reacquired and held for future use
Par Value
a descriptive term for legal capital
Market interest rate > Stated interest rate =
a discount
Reviewing company ratings
Determines to whom to extend credit
On January 10,2017 Pharaoh company sold merchandise on account to Tompkins for $8,030, terms n/30
Jan 10 Accounts receivable 8,030 Sales Revenue 8,030
Note terms are expressed in
months, days
Authorized stock
the amount of stock that may be issued according to the corporation's charter
Book value
the difference between the cost of the plant asset and the accumulated depreciation to date
Sale of bonds above face value
will cause the total cost of borrowing to be less than the bond interest paid
Current liability is paid
within one year, or the operating cycle, whichever is longer
A stockholder who receives a stock dividend
would own more shares of stock
Depreciation formula under straight-line method
(Cost - Salvage value) / useful life
Determining the maturity date of a promissory note
- On Demand - On a stated date - At the end of a stated period of time
Dividend preferences
- Preferred stockholders have the right to receive dividends before common stockholders - Preference on corporate assets if the corporation fails - Preference may be for the par value of the shares of for a specified liquidating value
Stock splits
- Reduces the market value of shares - No entry recorded for stock split - Decrease par value and increase number of shares
Advantages of the corporate form of business
- Separate legal existence - Limited liability of stockholders - Transferable ownership rights - Ability to acquire capital life - Continuous life - Corporation management
Other comprehensive income
- certain adjustments to pension plan assets - types of foreign currency gains and losses - some gains and losses on investments
Authorized stock
- charter indicates the amount of stock that a corporation is authorized to sell - Number of authorized shares is often reported in the stockholder's equity section
Current market price of a bond is a function of three factors:
- dollar amounts received - length of time until the amounts are received - market rate of interest The process is referred to as discounting future amounts
Disadvantages of the corporate form of business is
- government regulations - Corporation management - Additional taxes
Profit Margin ratio
- indicates how effective a company is in turning its sales into income
Asset turnover ratio
- indicates how efficiently a company uses its assets - Net sales / Average Total Assets
Return on asset ratio
- is an overall measure of profitability - Net income / Average Total Assets
When promissory notes may be used
- when individuals and companies lend or borrow money - when amount of transactions and credit period exceeds normal limits - in settlement of accounts receivable
Dishonor of notes receivable
A dishonor note is not paid n full at maturity. Dishonored note receivable is no longer negotiable
Honor of notes receivable
A note is honored when its maker pays it in full at its maturity date
Selling receivables to a factor
Accelerates cash receipts from receivable when necessary
Declining balance rate
Book value at Declining Fraction of beginning of x balance rate x year the year
Collecting information on competitor's payment period policies
Establishing a payment period
Calculating the accounts receivable turnover and average collection period
Evaluating the liquidity of receivables
Computing interest
Face value x Annual x Time in terms of note interest rate of one year Example: $730, 12%, 120 days -> 730 x 12% x 120/360 = $29.20
On February 9, Tompkins gave Pharaoh company a 7% promissory note in settlement of this account
Feb 9 Notes receivable 8,030 Accounts Receivable 8,030
Promissory note
a written promise to pay a specified amount of money on demand at a definite time
Corporations issuing bonds
borrowing money. The person who buys the bonds is investing in bonds
A company purchased land for $94,000 cash. Real estate broker's commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Proceeds from the salvage of the demolished building was $1,200. Under the historical cost principle, the cost would be recorded at:
answer: $104,800 Solution: $94,000 land purchased + $5,000 real estate broker commission + ($7,000 demolishing - $1,200 proceeds from salvage)
Bonds
are a form of interest-bearing notes payable issued by corporations, universities, and government agencies.
Unsecured bonds
are issued against the general credit of the borrower
Issuance of stock
corporation can issue stock - directly to investors - indirectly through an investment banking firm
Mid-year disposal
depreciation for the fraction of the year to the date of the disposal must be recorded
Retained earnings
net income that a corporation retains for future use in the business
Contractual interest rate
rate to determine cash interest paid, stated as annual rate
Residual Claim
refers to stockholder's right to share in assets upon liquidation
Paid-in capital
the total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership
Logan Corporation issues 40,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders' equity section, the effects of the transaction above will be reported
under both capital stock and additional paid-in capital sections
Two classifications of paid-in capital
- Capital Stock - Preferred stock - Common stock - Additional paid-in capital - Paid-in capital in excess of par value - common stock - Paid-in capital in excess of par value - Preferred stock
Equipment account
- Installation cost - Freight cost - Cost of trial runs
Cost of constructing a building
- Interest incurred during construction
Retained earnings restrictions
- Legal restrictions - Contractual restrictions - Voluntary restrictions
Company purchased a new machine on Oct. 1 2014, at cost of $85,150. The company estimated that the machine has salvage value of $8,810. The machine is expected to be used for 62,960 working hours during its 8-year life
1/8 -year life = .25 2014 = 85,150 book value x .25 declining balance x 3/12 fraction of year= 5,322 2015 = (85,150 - 5322) new book value x .25 = 13957
Ervay Company has $3,500,000 of bonds outstanding. The un-amortized premium is $50,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
Answer: $15,400 gain Solution: 3,500,000 x 1.01 = 3,535,000 3,535,000 - 3,500,000 = 35,000 50,400 - 35,000 = 15,400
Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life.
Answer: $29,400 Solution: (150,000 equipment purchased + 7,000 freight charged + 20,000 installment) = 177,000 total cost (177,000 cost - 30,000 Salvage value) / 5 year useful life
On July 1, 2017, Linden Company purchased the copyright to Norman Computer Tutorials for $210,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2017 would be
Answer: 21,000 Solution: 210,000 copyright / 5 year useful life = 42,000 July - December = 6 months -> 1/2 year 42,000 x 1/2 = 21,000
Bonds with a face value of $600,000 and a quoted price of 104¼ have a selling price of
Answer: 625,500 Solution: 104 1/4 = 1.0425 600,000 x 1.0425 = 625,500
If Lantz Company issues 10,000 shares of $5 par value common stock for $210,000, the account
Answer: Common stock will be credited for $50,000 Solution: 10,000 shares x $5 par value = $50,000
Molina Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 103. The journal entry to record the issuance will show a
Answer: Credit to bonds payable for $5,000,000 Solution: Cash (5m x 1.03) 5,150,000 Bonds payable (5,000 x 1,000) 5,000,000 (5m x 8%) Premium on bonds payable 400,000
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record ACCRUAL OF EMPLOYER'S PAYROLL taxes would include a
Answer: debit to payroll expense for $11,660 Solution: Federal taxes + state taxes + FICA = accrual of employer's payroll Payroll tax expense 11,600 FICA taxes payable 9,180 Federal unemployment taxes 320 State unemployment taxes 2,160
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record the payment of NET PAYROLL would include a
Answer: debit to salaries and wages payable for $81,320 Solution: salaries - (FICA + Income + Medical) = salaries and wages payable 120,000 - (9,180 + 25,000 + 4,500) = 81,320 April 30 Salaries and wages payable 81320 Cash 81320
A truck costing $75,000 and on which $65,000 of accumulated depreciation has been re-corded was discarded as having no value. The entry to record this event would include a
Answer: loss of $10,000 Solution: Debit cash - 65,000 (equipment sold) Debit depreciation - 0 (no value) Debit Loss - 10,000 (equipment - (equipment sold + depreciation) (75,000 - (65,000 + 0) Credit equipment - 75,000
A company sells a plant asset that originally cost $375,000 for $125,000 on December 31, 2017. The accumulated depreciation account had a balance of $150,000 after the current year's depreciation of $37,500 had been recorded. The company should recognize a
Answer: loss of $100,000 Solution: Debit cash - 125,000 furniture sold Debit Accumulated depreciation - 150,000 Debit Loss on disposal- 100,000 (office furniture - (furniture sold and acc.depr) (375,000 - (125,000 + 150,000) Credit office furniture - 375,000
Determine the total estimated in-collectible:
Balance on each current year's accounts receivable x each estimated percentage in-collectible = estimated in-collectible (add the totals)
On March 3, Indigo Corporation sells $654,300 of its receivables to National Factors Inc. The company assesses a service charge of its receivable to Western Factors Inc. Western Factors Inc assesses a service charge of 4% of the amount of receivables sold. Prepare the entry on Indigo corporations' books to record the sale of receivables:
Mar. 3 (3) Cash (654,300 - 26172) 628,128 (2)(4% x 654,300) Service Charge 26,172 (1)Accounts Receivable 654,300
Recognizing Notes Receivable: Brent Company wrote a $1,000, two-month, 8% promissory note dated May 1, to settle on an open account. Prepare the entry Wilma company makes for this receipt.
May 1 Notes receivable 1,000 Accounts receivable - Brent Company 1,000
2016 May 1 Received a $6,800, 12-month, 6% note in exchange for an outstanding account receivable from R.Stoney Dec 31 Accrued interest revenue on the R.Stoney note 2017 May 1 Received principal plus interest on the R.Stoney note (no interest has been accrued since Dec.31,2016) Record the transactions in the general journal. The company does not make entries to accrue interest except at Dec. 31
May 1, 2016 Notes Receivable 6,800 Accounts receivable 6,800 Dec 31, 2016 Interest receivable 272 (6,800 x 6% x 8/12) Interest Revenue 272 May 1, 2017 Cash 7,208 (6,800 x 6% x 4/12) Interest Revenue 136 Interest receivable 272 Notes receivable 6,800
Sky-song, inc. has the following transactions related to notes receivable during the last 2 months of the year. The company does not make entries to accrue interest except at Dec 31 Nov 1 Loaned $55,200 to C.Bohr on 12-month, 6% note Dec 11 Sold goods to K.R Pine inc. receiving a $3,600, 90- day 6% note Dec 16 Received a $16,800, 180-day, 11% note to settle an open account from A. Murdock Dec 31 Accrued interest revenue on all notes receivable Journalize the transactions for sky-song, inc
Nov 1 Notes receivable 55,200 Cash 55,200 Dec 11 Notes receivable 3,600 sales revenue 3,600 Dec 16 Notes receivable 16,800 accounts receivable 16,800 Dec 31 Interest receivable 641 Interest revenue 641 (Bohr's note : $55,200 x 6% x 2/12 = 552 Pine's note : 3,600 x 6% x 20/12 = 12 Murdock's note : 16,800 x 11% x 15/360 = 77 Total accrued interest = 641)
Monitor Collections
Preparing monthly accounts receivable aging schedule and investigating problem accounts
Expense recognition principle
Recording depreciation each period
Dividends require what information
Three dates - Declaration date: Board authorizes dividends - Record date: Registered shareholders are eligible for dividend - Payment date: The company issues dividend checks
Convertible bonds
can be converted into common stock at the bondholder's option
Callable bonds
can be redeemed by the issuing company at a stated dollar amount
Age of accounts 2017 2016 % current 61,800 72,930 2% 1-30 days past due 13,900 7,310 5% 31-90 days past due 10,700 2,590 29% over 90 days past due 6,800 1,210 45% 93,200 84,040
current 61,800 x 2 = $1,236 1-30 days past due 13900 x 5 = 695 31-90 days past due 10,700 x 29 = 3,103 Over 90 days past due 6,800 x 45 = 3,060 $8,094
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The journal entry to record the MONTHLY PAYROLL on April 30 would include a
debit to salaries and wages expense for $120,000
Which of the following is the appropriate general journal entry to record the declaration of cash dividends?
debit: cash dividends credit: dividends payable
The net effects on the corporation of the declaration and payment of a cash dividend are to
decrease assets and decrease stockholder's equity
Secured bonds
have specific assets of the issuer pledged as collateral for the bonds
Cumulative dividend
holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends
Par Value stock
is capital stock that has been assigned a value per share
Per share dividend amount
is stated as a percentage of the preferred stock's par value or as a specified amount
Goodwill can be recorded
only when there is an exchange transaction involving the purchase of an entire business
Disposal gain
when debit is greater than original price; credit disposal
Disposal loss
when debit is less than original price; debit disposal
