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
