Accounting test #4

Unearned Revenues (ch11,p4-5-)

-How do companies account for unearned revenues that are received before goods are delivered or services are performed. 1. When a company receives the advance payment, it debits Cash and credits a current liability account identifying the source of he unearned revenue. 2. When the company recognizes revenue, it debits an unearned revenue account and credits a revenue account.

Franchises (ch10,p20)

A franchise is a contractual arrangement between a franchisor and franchisee. The franchisor grants the franchisee the right to sell certain products, perform specific services, or use certain trademarks or trade names, usually within designated geographic area. -Another type of franchise is license. A license granted by a governmental body permits a company house public property in performing its services. -When a company can identify costs with the purchase of a franchise or license, it should recognize an intangible asset. -Annual payments made under a franchise agreement are recorded as operating expenses in the period in which they are incurred.

Patents (ch10,p19)

A patent is an exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. A patent is nonrenewable, but companies can extend the legal life of a patent by obtaining new patents for improvements or other changes in the basic design. The initial cost of a patent is cash or cash equivalent price paid to acquire the patent. -The owner (of the patent) adds those costs to Patents account and amortizes them over the remaining life of the patent. -The patent holder amortizes the cost of a patent over its 20-year legal life or its useful life, whichever is shorter.

Trademarks and Trade Names (ch10,p19)

A trademark or trade name is a word, phrase, jingle, or symbol that identifies a particular enterprise or product. They also generally enhance the sale of the product. The registration may be renewed indefinitely as long as the trademark or trade name is in use.

Capital expenditures (ch10,p5)

Additions and improvements increase the company's investment in productive facilities. Companies generally debit these amounts to the plant asset that is affected. They are often called capital expenditures.

Amortization (ch10,p18)

Amortization is the process of allocating the cost of intangibles. Amortization is to intangibles what depreciation is to a plant asset and depletion is to natural resources.

Loss on Sale (ch10,p16)

Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000. In this case, Wright computes a lost of $2,000 as shown in Illustration 10.20 Journal Entry = (July 1) debited Cash (9,000), debited Accumulated Depreciation--Equipment ($49,000), debited Loss on Disposal of Plant Assets ($2,000), and Equipment ($60,000). (To record sale of office furniture at a loss).

Employer FICA Taxes (ch11,p16)

Each employee must FICA taxes. In addition, employers must match each employee's FICA contribution. This means the employer must remit to the federal government 12.4% of each employee's first $127,200 of taxable earnings, plus 2.9% of each employees earnings regardless of amount. The matching contribution results in payroll tax expense to the employer. The employers tax is subject to the same rate and maximum earnings as the employees.

Depreciation Methods (ch10,p8-12) (method 1)

Each method is acceptable under generally accepted accounting (GAAP) principles. Depreciation affects the balance sheet through accumulated depreciation and the income statement through depreciation expense. 1. (Straight-Line Method) Under the straight-line method, companies expense the same amount of depreciation for each year of the assets useful life. It is measured solely by the passage of time. (cost-salvage value=depreciable cost) --> (depreciable cost) divided by (useful life (in years)) = annual depreciation expense. 2. Alternatively, we also can compute an annual rate of depreciation. In this case, the rate is 20% (100% divided by 5 years). Illustration 10.10 shows a depreciation schedule using an annual rate.

Additions and Improvements (ch10,p5)

In contrast, additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. They are usually material in amount and occur infrequently.

Interest Calculation (ch11,p3)

Interest calculation = (face value of note) x (annual interest rate) x (time in terms of year) = interest

Ordinary Repairs (ch10,p5)

Ordinary repairs are expenditures to maintain the operating efficiency and productive life of the unit. They usually are small amounts that occur frequently.

Employer Payroll Taxes (ch11,16)

Payroll tax expense for business results from three taxes that government agencies levy on employers. These taxes are (1) FICA, (2) federal unemployment tax, and (3) state unemployment tax. These taxes plus such items as paid vacations and pensions (discussed in the appendix to this chapter) are collectively referred to as fringe benefits.

Reporting a Contingent Liability (ch11,p7)

The accounting for warranty costs is based on the expense recognition principle. The estimated cost of honoring product warranty contracts should be recognized as an expense in the period i the which the sale occurs.

Amortization (ch10,p26)

The allocation of the cost of an intangible asset to expense her its useful life in a systematic and rational manner (p.10-18)

Working Capital (ch11,p8)

The excess of current liabilities is working capital. (current assets) - (current liabilities) = Working Capital

Copyrights (ch10,p19)

The federal government grants copyrights, which give the owner the exclusive right to reproduce and sell an artistic or published work. Copy rights extend over the life of the creator plus 70 years. The cost of a copyright is the cost acquiring and defending it.

Going Concern Assumption (ch10,p7)

The going concern assumption states that the company will continue in operation for the foreseeable future. If a company does not use a going concern assumption, then plant assets should be stated at their fair value. In that case, depreciation of these assets is not needed.

Income Taxes (ch11,p11-12)

Under the U.S.pay-as-you-go system of federal income taxes, employers are required to withhold income taxes from employees each pay period. Four variables determine the amount to be withheld: (1) the employee's gross earnings, (2) material status, (3) the number of allowance claimed by the employee, and (4) the length of the pay period. The number of allowances claimed typically includes the employee, his or her spouse, and other dependents.

Depreciation Method (ch10,p8-12)(method 3)

(Declining-Balance Method) The declining-balance method produces a decreasing annual depreciation expense over the assets useful life. The method is so named because the periodic depreciation is based on a declining book value (cost less accumulated depreciation) of the asset. -The depreciation rate remains constant form year to year, but the book value to which the rate is applied declines each year. -Unlike the other depreciation methods, the declining-balance method does not use depreciable cost in computing annual depreciation expense. That is, it ignores salvage value in determining the amount to which the declining-balance rate is applied. -Depreciation stops when the assets book value equals expected salvage value. -A common declining-balance rate is double the straight-line rate. the method is often called the double-declining-balance method. (book value at beginning of year) x (declining balance rate 40%(double) or 20%) = annual depreciation expense.

Depreciation Methods (ch10,p8-12) (method 2)

(Units-of-Activity Method) under the units-of-activity method, useful life is expressed in terms of the total units of production or use expected from the asset, rather than as a time period. The units-of-activity method is ideally suited to factory machinery. (depreciable - total units of activity) = depreciable cost per unit --> (depreciable cost per unit) x (units of activity during the year) = annual depreciation expense.

Current Liabilities (ch11,p2)

-A current liability is debt that a company expects to pay within one year or the operating cycle, whichever is longer. -Debts that do not meet this criterion are long-term liabilities. -The different types of current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.

Pension Plans (ch11,p22)

-A pension plan is an agreement whereby an employer provides benefits (payments) to employees after they retire. -Most pension plans are subject to the provisions of ERISA (Employee Retirement Income Security Act), a law enacted to cur abuses in the administration and funding of such plans. -the most popular type of pension plan used is 401(k) plan. A 401(k) plan works as follows. As an employee, you can contribute up to a certain percentage of your pay into a 401(k) plan, and your employer will match a percentage of your contribution. These contributions are then generally invested in stocks and bonds through mutual funds. -Generally, the pension expense is reported as an operating expense in the company's income statement. -A liability is recognized when the pension expense to date is more than the company's contributions to date. An asset is recognized when the pension expense to date is less than the company's contributions to date.

Limited Partnership (ch12,p5)

-Advantages = (1) Limited partners have limited personal liability for business debts as long as they do not participate in management. (2) General partners can raise cash without involving outside investors in management of business. -Disadvantages = (1) General partners personally liable for business debts. (2) More expensive to create that a regular partnership. (3) Suitable mainly for companies that invest in real estate.

Limited Liability Partnership (ch12,p5)

-Advantages = (1) Mostly of interest to partners in old-line professions such as law, medicine, and accounting. (2) Owners (partners) are not personally liable for the malpractice of the other partners. -Disadvantages = (1) Unlike a limited liability company, owners (partners) remain personally liable for many types of obligations owed to business creditors, lenders, and landlords. (2) Often limited to a short list of professions.

Limited Liability Company (ch12,p5)

-Advantages = Owners have limited personal liability for business debts even if they participate in management. -Disadvantage = More expensive to create than regular partnership.

Regular Partnership (ch12,p5)

-Advantages = Simple and inexpensive to create and operate -Disadvantages = Owners (partners) personally liable for business debts

State Unemployment Taxes (SUTA) (ch11,p17)

-All states have unemployment compensation programs under state unemployment tax acts (SUTA). Like federal unemployment taxes, state unemployment taxes provide benefits to employees who lose their jobs. These taxes are levied on employers. -Companies use the account State Unemployment Taxes Payable for this liability.

Characteristics pf Partnerships (ch12,p3)

-Association of Individuals = (1) A partnership is a legal entity. A partnership can own property (land, buildings, equipment) and can sue or be sued . A partnership also is an accounting entity. thus the personal assets, liabilities, and transactions of the partners are excluded from the accounting records of the partnership, just as they are in a proprietorship.(2) Each partner's share is taxable at personal tax rates. -Mutual Agency = Mutual Agency means that each partner acts on behalf of the partnership when engaging in partnership business. The act of any partner is binding on all other partners. -Limited Life = Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution does not necessarily mean that the business ends. If the continuing partners agree, operations can continue without interruption by forming a new partnership. -Unlimited Liability = (1) Each person is personally and individually liable for all partnership liabilities. (2) Because each partner is responsible for all the debts of the partnership, each partner is said to have unlimited liability. -Co-Owner of Property = Partnership net income (or net loss) is also co-owned. If the partnership contract does not specify to the contrary, all net income or net loss is shared equally by the partners.

Current Maturities of Long-Term Debt (ch11,p5)

-Companies often identify current maturities of long-term debt on the balance sheet as long-term debt due within one year. -It is not necessary to prepare an adjusting entry to recognize the current maturity of long-tern debt. At the balance sheet date, all obligations due within one year are classified as current, and all other obligations as long-term.

Notes Payable (ch11,p3-4)

-Companies record obligations in the form of written notes as notes payable. Notes payable are often used instead of accounts payable because they give the lender formal proof of the obligation in case legal remedies are needed to collect the debt. -Notes payable usually require the borrower to pay interest. -Notes are issued for varying periods of time. Those due for payment within one year of the balance sheet date are usually classified as current liabilities.

Goodwill (ch10,p20)

-Goodwill represents the value of all favorable attributes that relate to a company that are not attributable to any other specific asset. These include exceptional management, desirable location, good customer relations, skilled employees, high-quality products, and harmonious relations with labor unions. -Therefore, companies record goodwill only when an entire business is purchased. In that case, goodwill is the excess of cast over the fair value of the net assets (assets less liabilities) acquired. -In recording the purchase of a business, the company debits (increases) the identifiable acquired assets , credits liabilities at their fair values, credits cash for the purchase price, and records the difference as goodwill.

FICA Taxes (ch11,p11)

-In 1937, Congress enacted the Federal Insurance Contribution Act (FICA). FICA Taxes are deigned to provide workers with supplemental retirement, employment disability, and medical benefits. In 1965, Congress extended to include Medicare for individuals over 65 of age. The benefits are financed by a tax levied on employee's earnings. FICA taxes consist of a Social Security tax and Medicare tax. They are paid by both employee and employer. -The FICA tax rate 7.65%(6.2% Social Security tax up to $127,200 plus 1.45% Medicare tax)

Liquidation (ch12,p12-13)

-Liquidation of a business involves selling the assets of the firm, paying liabilities, and distributing any remaining assets. Liquidation may result form the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy. -Partnership liquidation ends both the legal and economic life of the entity.

Sales Taxes Payable (ch11,p4)

-Many of the products we purchase at retail stores are subject to sales taxes. Many states also are now collecting sales taxes on purchases made on the Internet as well. Sales taxes are expressed as a percentage of the sales price. -Under most state sales tax laws , the selling company must enter separately in the cash register the amount of the sale and the amount of the sales tax collected. -When the company remits the taxes to the taxing agency, it debits Sales Taxes Payable and credits cash. The company does not report sales taxes as an expense. It simply forwards to the government the amount paid by the customers. Thus, Cooley Grocery serves only as a collection agency for the taxing authority.

Payroll Deductions (ch11,p10-11)

-Payroll deductions may be mandatory or voluntary. Mandatory deductions are required b law and consist of FICA taxes and federal and state income taxes. -The employer is merely a collection agent, and subsequently transfers the deducted amounts to the government and disunited recipients.

Research and Development Costs (ch10,p21)

-Research and Development costs are expenditures that may lead to patents, copyrights, new processes, and new products. -For one thing, it is sometimes difficult to assign the costs to specific projects. Also, there are uncertainties in identifying the extent and timing of future benefits. As a result, companies usually record R&D costs as an expense when incurred, whether the research and development is successful or not.

Federal Unemployment Tax (FUTA) (ch11,p16)

-The Federal Unemployment Tax Act (FUTA) is another feature of the federal Social Security program. Federal unemployment taxes provide benefits for a limited period of time to employees who lose their jobs through no fault of their own. The FUTA tax rate is currently 6.2% of taxable wages. The taxable wage bas is the first $7,000 of wages paid to each employee in a calendar year. -The employer bears the entire federal employment tax. there is no deduction or withholding from employees. Companies use the account Federal Unemployment Taxes Payable to recognize this liability.

Depletion (ch10,p17-18)

-The allocation of the cost of natural resources in a rational and systematic manner over the resource's useful life is called depletion. (That is, depletion is to natural resources as depreciation is to plant assets). -The reason is that depletion generally is a function of the units extracted during the year. -Depletion cost per unit. To compute depletion, the cost per unit is then multiplied by the number of units extracted (Total Cost-Salvage value) divided by (Total estimated units available) = Depletion Cost per Unit

Factors of Depreciation (ch10,p8)

1. Cost. Earlier, we explained the issues affecting the cost of a depreciable asset. Recall that companies record plant assets at cost, in accordance with the historical cost principle. 2. Useful life. Useful life is an estimate of the expected productive life, also called service life, of the asset for its owner. Useful life may be expressed in terms of time, units of activity (such as machine hours), or units of output. Useful life is an estimate. 3. Salvage value. Salvage value is an estimate of the asset's value at the end of its useful life. This value may be based on the assets worth as scrap or on its expected trade-in value. Like useful life, salvage value is an estimate.

Revenue Expenditures (ch10,p5)

Companies record such repairs as debits to Maintenance and Repairs Expense as they are incurred. Because they are immediately charged as an expense against revenues, these costs are often referred to as revenue expenditures.

Retirement of Plant Assets (ch10,p15)(partially depreciated)

Example: 1. If the company retires a plant asset before it is fully depreciated and not cash is received for scrap salvage value, a loss on disposal occurs. For example, assume that Sunset Company discards delivery equipment that cost $18,000and has accumulated depreciation of $14,000. The entry is as follows: debited Accumulated Depreciation -- Equipment (14,000), debited Loss on Disposal of Plant Assets (4,000), and credited Equipment (18,000). (To record retirement of delivery equipment at a loss)

Retirement of Plant Assets (ch10,p15) (fully depreciated)

Examples: 1. Example for a fully depreciated plant assets = Hobart company retires its computer printers, which cost $32,000. The accumulated depreciated on these printers is $32,000. The equipment, therefore, is fully depreciated (zero book value). The entry to record this retirement is = debited Accumulated Depreciation--Equipment (32,000) and credited Equipment (32,000).(To record retirement of fully depreciated equipment)

Accounting for Intangible Assets (ch10,p18-19)

If an intangible has a limited life, the company allocates its cost over the asset's useful life using a similar process to depreciation. The process of allocating the cost of intangibles is referred to as amortization. The cost of intangible assets with indefinite lives should not be amortized. To record amortization of an intangible asset, a company increases (debits) Amortization Expense, and decreases (credits) the specific intangible asset.

Defined-Contribution Plan (ch11,p22-23)

In a defined-contribution plan, the plan defines the employers contribution but not the benefit that the employee will receive at retirement. That is, the employer agrees to contribute a certain sum each period based on a formula. A 401(k) plan is typically a defined-contribution plan. -It follows that the company reports the amount of the contribution required each period as pension expense. The employer reports a liability only if it has not made the contribution in full.

Steps of Liquidation (ch12,p12-13)

In liquidation, the sale of non cash assets for cash is called realization. Any difference between book value and the cash proceeds is called the gain or loss on realization. To liquidate a partnership, it is necessary to: 1. Sell non cash assets for cash and recognize a gain or loss on realization. 2. Allocate gain/loss on realization to the partners based on their income ratios. 3. Pay partnership liabilities in cash. 4. Distribute remaining cash to partners on the basis of their capital balance. -Each of the steps must be performed in sequence. The partnership must pay creditors before partners receive any cash distributions. -When a partnership is liquidated, all partners may have credit balances in their capital accounts. This situation is called no capital deficiency. Or, one or more partners may have a debit balance in the capital account. This situation is termed a capital deficiency.

Reporting Uncertainty (ch11,p6)

In other words, a contingent liability is a potential liability that may become an actual liability in the future. 1. If the contingency is probable (if it is likely to occur) and the amount can be reasonably estimated, the liability should be recorded in the accounts. 2. If the contingency is only reasonably possible (if it could happen), then it needs to be disclosed only in the notes that accompany the financial statements. 3. If the contingency is remote (if it is unlikely to occur), it need not be recorded or disclosed.

Intangible Assets (ch10,p18-19)

Intangible assets are rights, privileges, and competitive advantages that result form the ownership of longs-lived assets that do not possess physical substance. 1. Government grants, such as patents, copyrights, licenses, trademarks, and trade names. 2. Acquisition of another business, in which the purchase price includes a payment for goodwill. 3. Private monopolistic arrangements arising from contractual agreements, such as franchises and leases.

Organizations with Partnership Characteristics (ch12,p3-4)

These types of partnerships are often called regular partnerships -Limited Partnerships = In a limited partnership, one or more partners have unlimited liability and one or more partners have limited liability for the debts of the firm. Those with unlimited liability are general partners. Those with limited liability are limited partners. -Limited Liability Partnerships = Most states allow professionals such as lawyers, doctors, and accountants to form a limited liability partnership or "LLP". the LLP is designed to protect innocent partners from malpractice or negligence claims resulting forth acts of another partner. -Limited Liability Companies = A hybrid form of business organization with certain features like a corporation and others like a limited partnership is the limited liability company or "LLC". And LLC usually has a limited life. The owners, called members, have limited liability like owners of a corporation.

Gain on Sale (ch10,15-16)

To illustrate a gain on sole of plant assets, assume that on July 1, 2020 Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As January 1, 2020, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2020 is $8,000. Wright records depreciation expense and updates accumulated depreciation to July 1 with the following entry: (July 1) debited Depreciation expense (8,000), credited Accumulated Depreciation -- Equipment (8,000).(To record depreciation expense for the first 6 months of 2020). --The sale and gain on the disposal of the plant asset as follows : debited Cash ($16,000), debited Accumulated Depreciation--Equipment($49,000), credited Equipment ($60,000), and Gain on Disposal of Plant Assets (5,000). (To record sale of office furniture at a gain)

Asset Turnover (ch10,p22)

Using ratios, we can analyze how efficiently a company uses its assets to generate sales. The asset turnover analyzes the productivity of a company's assets. It tells us how many dollars of sales a company generates for each dollar invested in assets. - Calculation = (net Sales) divided by (average total assets) = asset turnover.

Postretirement Benefits as Long-Term Liabilities (ch11,p23)

While part of the liability associated with (1) postretirement healthcare and life insurance benefits and (2) pension plans is generally a current liability, the greater portion of these liabilities extends many years into the future. Therefore, many companies are required to report significant amounts as long-term liabilities for postretirement benefits.