Accounting 3001 Final Exam Study Guide

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Understand what goes in the different sections of the income statement

Income statement

Operating section

Sales or revenue section
Cost of goods sold section
Selling expenses
Administrative or general expenses

Non operating section (revenues and expenses from non operating activities)

Other revenues and gains
Other expenses and losses

Income tax
Discontinued operations (Material gains or losses incurred in the disposition of a component of the business)
Extraordinary items
Noncontrolling interest
Earnings per share

Understand how the accounting equation works ( ie Assets = Liabilities + Stockholders Equity)
Understand how the allowance for doubtful accounts is calculated to include how to determine bad debt expense

Bad debt expense is an operating expense
Direct write off method

Debit bad debts expense
Credit accounts receivable

Allowance method

Record estimated uncollectables

Debit bad debt expense
Credit allowance for doubtful accounts

Recording the write off

Debit allowance for doubtful accounts
Credit accounts receivable

Recovery of an uncollectable account

First entry

Debit accounts receivable
Credit allowance for doubtful accounts

Second entry

Debit cash
Credit accounts receivable

Calculating allowance

Percent of sales

Management concludes that X% of sales will be uncollectable; either total credit sales or net credit sales

debit bad debt expense
credit allowance for doubtful accounts

percent of recievables

does not fit the concept for matching revenue and cost
bad debt expense/allowance = calculated percent of receivables

either

plus an existing debit balance
minus an existing credit balance

Understand how retained earnings are calculated?

Retained earnings

Beginning of year retained earning balance
Plus/minus net income/loss
Minus dividends

Common
Preferred

Equals end of year retained earnings

Understand the test for impairment and how to execute the calculation to estimate the impairment loss?

Impairment: write offs of long lived assets (property, plant, equipment)

If the future cash inflows are less than the assets carrying amount of the asset, the asset is impaired.

Carrying amount equals cost minus accumulated depreciation
If future cash inflows are greater than the carrying value, the asset is not impaired

Impairment loss: the amount that the carrying amount exceeds fair value

Fair value of an asset is the market price for the asset
If no market price exists, then the fair value is present value of expected future net cash flow

Know the types of cost that are capitalized versus expensed for assets

Capitalized

Assets under construction for the companies own use
Asset intended for sale
Capitalization period

Expenditures for the asset have been made
Activities to ready the asset for use have already started
Interest cost is being incurred

Understand the definition of depreciation, different types of deprecation methods (Straight line, declining balance and units of production) and how to calculate them

Depreciation: accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to the periods expected to benefit from the use of the asset
Methods

Straight line

Function of time rather than usage
(cost – salvage value) / estimated service life

declining balance

does not initially deduct salvage value
some percentage multiple is applied to the yearly % depreciated on the straight line method
double declining

5 years
20% (straight line) times two = 40% depreciation per period
continue to depreciate by 40% until salvage value is reached

units of production

depreciation charge for the year = [(cost less salvage value) X hours this year] / total hours

What type of account are the discount and premium accounts and How does amortization of the premium or discount affect interest expense?

Which obligations are considered current liabilities and which would be considered long-term

Current liabilities

Current liabilities: Obligations whose liquidation is reasonably expected to require use of existing resources classified as current assets.
Examples

Accounts payable
Notes payable
Current maturities of long term debt
Short term obligations expected to be refinanced
Dividends payable
Customer advances and deposits
Unearned revenue
Sales taxes payable
Income taxes payable
Employee related liabilities

Long term liabilities

Liabilities that cannot be settled within the accounting period

Bonds payable
Long term notes payable
Pension
Deferred income tax liabilities
Warranties, because you don't know if you will have to pay out a warranty until the warranty expires or you are required to settle an amount disclosed in the warranty agreement

What types of transactions could result in unearned revenue and how to calculate unearned revenue for coupons and subscriptions. Chapter 13***

Unearned revenue: collections received in advance to the service being performed

Warranties
Rent
Subscriptions
coupons

Entry

Initial sale
Debit cash
Credit unearned revenue

After service is provided

Debit unearned revenue
Credit revenue

Calculating unearned revenue for coupons

Understand what treasury stocks are and how to account for them?

Treasury stocks: shares a company has issues and holds on their own books

When a company buys back its own stock, its stockholders equity decreases and assets decrease
Essentially the same as unissued capital stock

Accounting for treasury stock

Purchase of treasury stock

Cost method (most used)

Debit treasury stock for the reacquisition cost and deducting it from total paid in capital and retained earnings

Par (stated) value method

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only

Calculation

Number of shares repurchased X purchase price per share

debit treasury stock
credit additional paid in capital

sale of treasury stock

sale above cost

debit cash for volume of shares sold X sale value
credit treasury stock for volume of shares sold X amount paid per share to reacquire treasury stock
credit paid in capital from treasury stock for the difference
** does not recognize gains because they are not selling an ASSET
** lists paid in capital separately on the balance sheet as part of paid in capital

sale below costs

debit cash for amount received for selling stock at new sales price
debit paid in capital difference between above and below
credit treasury stock for original reacquisition price per share times volume

retiring shares involves debiting volume of retired shares X

What dividends result in a reduction in stockholders equity? How dividends are calculated and journalized?

Dividends resulting in a reduction in stockholders equity

All dividends besides stock dividends

Cash dividends

Calculated

Amount per share X outstanding shares

Entries

Date of declaration

Debit retained earnings (declared cash dividend)
Credit dividends payable

Date of record

No entry

Date of payment

Debit dividends payable
Credit cash

Property dividends: dividends paid in the form of some asset other than cash

Entries

Date of declaration

First entry

Debit equity investment for fair value of asset minus cost
Credit unrealized holding gains/loss for same amount

Second entry

Debit retained earnings (property dividends declared) by fair value at date of declaration
Credit property dividends payable for same amount

Date of distribution

Debit Property dividends payable: fair value at date of declaration
Credit equity investment for same amount

Liquidating dividends: dividends based on something other than retained earnings. Reduces corporate paid in capital

Entries

Date of declaration

Debit retained earnings for its given value
Debit paid in capital excess of par – common stock for difference between declared dividends and stated retained earnings
Credit dividends for declared amount

Date of payment

Debit dividends payable for declared amount
Credit cash for the same amount

Understand the difference between stated rate, coupon rate, nominal rate and effective rate and know how to calculate the interest expense using straight line and effective interest rate method

Types of interest rates on bonds

Stated rate, coupon rate, nominal rate: the interest rate earned on bonds that is written on the bond
Effective rate

Rate actually earned on bonds

If the bond is sold at a discount, the effective rate is higher than the stated rate
If the bond is sold at a premium, the effective rate is lower than the stated rate

Calculate interest

Straight line method

Issued at par

Yearly Interest = bond price X interest rate

Issued at discount

period interest expense plus amortized discount on bonds (discount amount divided by number of periods that interest is paid)

Issued at premium

period interest expense minus amortized premium (premium amount divided by number of periods that interest is paid)

effective interest method (preferred method)

matches expenses with revenues better than straight line
companies:

compute interest expense by first, multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate
determine the bond discount or premium amortization next by comparing the bond interest expense with the interest (cash) to be paid

Amortization amount =

Bond interest expense

Carrying value of bonds at beginning of period X effective interest rate

MINUS bond interest paid

Face amount of bonds X stated interest rate

What is the depreciable base, book value of an asset, and a change in an estimate?

Depreciable base: the amount of an asset that is depreciated

Cost of a truck is 10,000, salvage value is 1,000. Depreciable base is 9,000

Book value of an asset

What was paid for the asset

Change in an estimate

When an asset is looked at again and is given an estimate of longer or shorter life and depreciation needs to be fixed
You have an asset worth 10,000 that has accumulated depreciation of 2,000

You think this asset has 10 more years left as opposed to the original number, you then take the 8,000 remaining and divide by 10

How to calculate and book the journal entry for bond and how to calculate the gain or loss on early retirement of a bond?

Journal entry for a bond

Issuance of a bond

Debit cash
Credit bonds payable

Recording interest expense payment

Debit interest expense
Credit cash

Recording accrued interest at years end

Debit interest expense
Credit interest payable

Calculate gain or loss on extinguishment

Reacquisition price
Minus net carrying amount of bonds redeemed

Face value
Plus: unamortized discount (times periods left divided by total original periods)
Plus unamortized issue cost (times periods left divided by total original periods)

Equals gain/loss on redemption

Recording gain or loss on extinguishment

Debit bonds payable by face value
Debit loss on redemption of bonds by calculated loss amount
Credit discount on bonds payable by calculated unamortized discount value
Credit unamortized bond issue cost
Credit cash by amount paid to call in the bond early

Understand the conditions for a contingency liability

Contingency: an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately resolved when the future even occurs or fails to occur
Conditions

Likelihood of loss

Probable: likely to occur
Reasonably probable: more than remote, but less than likely
Remote: chances of occurence are slight

Companies should accrue an estimated loss by a charge to expenses or liabilities is both of these conditions are present

If likelihood is probable that a liability has occured
the amount of the loss can be reasonably estimated

What are included in the employee versus the employer salaries and wages journal entry?

Employee salary and wage journal entry

Employee payroll

Debit salaries and wage expense by given payroll amount

Credit withholding taxes payable
Credit FICA taxes payable
Credit union dues payable
Credit cash for the difference

Employer payroll

Debit payroll tax expense by sum of the below

Credit FICA taxes by FICA% X payroll amount
Credit FUTA taxes by federal% X payroll amount
Credit SUTA taxes by state% X payroll amount

Requirements for federal unemployment tax

Paid 1,500 or more in wages in the current or subsequent year
Employed the same individual in at least one day per week for the last 20 weeks

Employees pay:

Income tax withholding
FICA taxes – employee share
Union dues

Employers pay:

FICA taxes – employer share
Federal unemployment (FUTA)
State unemployment (SUTA)

Compensated absences

Companies should accrue a liability for the cost of compensation for future absences if the following conditions are present:

Employees services are already rendered
Obligation relates to the rights that vest or accumulate
Payment of compensation is probable
The amount can be reasonably estimated

Difference between the loss method and the cost of goods sold method for writing down inventory

Loss method for writing down inventory

Debits a loss account for the write down of inventory to market
Credit inventory

Cost of goods sold method

Debit cost of goods sold for the write down of inventory to market
Credit inventory

Cost of goods sold account absorbs the loss

Understand how common stock and preferred stock are issued for cash versus property and how a lump sum issuance is handled

Understand how Stockholders Equity is calculated and how dividends affect retained earnings.

Retained earnings equals

Capital stock

Preferred stock
Common stock
Dividends

PLUS additional paid in capital

Excess over par – preferred
Excess over par – common

PLUS retained earnings

Total paid in capital and retained earnings (sum of capital stock and additional PIC)
Less cost of treasury stock
Less accumulated other comprehensive loss

Additional notes and points of study

Test 1

Chapter 2

What two fundamental qualities make accounting useful in decision making? (question 4)

Relevance: capable of making a difference in a situation

Capable of making a difference when it have predictive value or confirmatory value

Faithful representation: free from error, numbers match what actually exists or what actually occurred

Comprehensive income elements (Question 7)

Change in net assets resulting from transactions or other other events NOT INVOLVING OWNERS (investments by owners, distribution to owners)

Revenues
Losses
Expenses

Four assumptions in the financial accounting structure

Economic entity assumption

A company is its own entity, so it should report only factors within the entity.

Should not report owners finances or finances of other business units

Going concern

Accounting procedures should go on as though the company will last forever.

The only case when this assumption does not hold is when the company’s failure is imminent and accounting is approached under the liquidation approach

Monetary unit

The company’s accounting is denominated in a monetary unit because it is relevant, universally understood, and useful

Periodicity

A company can divide its economic activities into artificial time periods, usually monthly, quarterly, and annually

GAAP requires companies to value assets and liabilities at acquisition prices: Historical cost principle

Fair value: the present value that would be received for an asset. Newly accepted by GAAP because it is more relevant and useful.
Companies are now given the “fair value option” to either use

Revenue recognition principle (Question 8)

Revenue should be recognized during the accounting period when the service is performed.

Revenue is recognized when the service is performed, not when actual payment is received

Chapter 3

Different records (Question 10)

Account: T account that shows the effect of a transaction on another specific element such as assets or liabilities
Ledger: a book or print out containing all the accounts

General ledger: collection of all asset, liability, owner’s equity, revenue and expense accounts
Subsidiary ledger: contains details on a specific general ledger account

Journal: where a company initially records transactions or other events
Trial balance: list of all open accounts in the ledger

Adjusted trial balance: taken immediately after all adjustments have been made
Post-closing trial balance: taken after closing entries have been posted

When an item of expense is paid and recorded in advance, it is normally called a:

Cash expense
It is not a prepaid expense because…. ********

Accrued expense

Expenses that have accumulated (accrued) but have not yet been paid. They are matched with earnings

Adjusting entry for unearned revenue

When cash has been received

Debit cash
Credit unearned revenue

When service has been performed

Debit unearned revenue
Credit revenue

Estimated uncollectables

Estimated uncollectables are credited to the allowance for doubtful accounts

Chapter 4

Extraordinary items (question 15)

Transaction must be:

Unusual in nature
Infrequent
And material in amount

Reported as a separate element in the income statement
Does not include disposal of a business segment (question 17)

Calculating gross profit (question 16)

Gross profit = sales – cost of goods sold

Earnings per share (question 18)

Calculating earnings per share

(Net income – preferred dividends)/ weighted average common shares outstanding

Chapter 5

Current assets (question 19)

Cash and other assets that the company expects to convert to cash, sell, or use in one year/operating cycle. Whichever is longer
i.e. inventory

Reporting Capital stock (Question 20)

Calculating

Par value of all authorized, issued, and outstanding

Intangible assets (Question 21)

lack physical substance and are not financial instruments

patents, copyrights, franchises, goodwill, trademarks, trade names, customer lists

calculating stockholder’s equity (question 22)

Stock (preferred and common) plus retained earnings, plus other comprehensive income, minus treasury stock.

Chapter 6

Which compounding approach would return the lowest amount after one year? (question 23)

Daily
Monthly
Quarterly
Annually.

Annually would return the lowest amount because the more you compound interest, the more interest that builds upon itself

using the table for compounding interest

8 years, compounded quarterly at 8%

Table: 2% for 32 periods

Duration = 8 years X 4(quarterly) = 32
Interest rate = 8% divided by 4(quarterly) = 2%

Present value (question 25)

Someone will receive 1,000,000 after 20 years. Interest rate is 5% compounded annually.

table used: present value of one dollar
20 periods
5% interest

future value (question 26)

initial investment: 100,000, 10% interest compounded semi annually for 5 years

table used: future value of one dollar
interest: 5% (10%/2) because compounded semi annually
periods: 10 periods (5 years X 2) because it is compounded 2 times a year

present value (question 27)

what would the initial payment be for an investment that pays 20,000 at the end of each year for 10 years then returns a maturity value of 300,000 after 10 years. Interest rate is 8%

table used:
20,000 X pv of OA
300,000

present value of annuity (question 28)

Test 2

Chapter 7

journal entry for writing-off an account as uncollectible under the allowance method (question 1)

allowance method: involves estimating uncollectible accounts at the end of each period

this is to allow companies to value accounts receivable at net receivable value: the amount that the company actually expects to receive in cash

recording ESTIMATED

debit bad debt expense
credit allowance for doubtful accounts

recording the write-off of an uncollectible account

debit allowance for doubtful accounts
credit accounts receivable (because the given amount is no longer a receivable)

recording sales made on credit with cash discounts(question 2)

net method: initial entries are made to accounts receivable taking the discount into account. And if payment is not received within the discount period, the difference is added onto the accounts receivable

Gross method: initial accounts receivable/revenue is entered in the full sales amount. If payment is received within the discount period, sales discount is then deducted from accounts receivable in the next entry

Allowance for doubtful accounts with debit/credit balances (question 3)

Estimated allowance for doubtful accounts is credited to the allowance for doubtful accounts.

If a debit balance exists, it is subtracted from the new estimated uncollectible number
i.e. if estimated uncollectables is 64,000 and a debit balance of 3,000 exists in the allowance for doubtful accounts. The new credit balance for allowance for doubtful accounts is 61,000

bad debt expense after adjusting for estimated allowance and a credit balance in the allowance account (question 4)

bad debt expense will equal the estimated uncollectible minus the allowance that already exists as a credit

estimated uncollectibles equal 520,000. There is already an credit balance in the allowance account of 12,000, so bad debt expense for the year is 508,000 (520,000 – 8,000)

recording notes receivable in the case of a sale (question 5)

if you sell something in return for a note receivable

debit entry will be the full amount of the note receivable

Chapter 8

Perpetual inventory systems (continuously tracks the value of the inventory) (question 6)

Characteristics of a perpetual inventory system

Purchases of merchandise or raw materials for resale are debited to inventory, not purchases
Freight-in is debited to inventory, not purchases.

Returns and allowance are credited to inventory, not a separate account

Cost of goods sold is recorded with each sale, debited to COGS and credited to inventory
Subsidiary ledger records the quantity, cost, and type of inventory purchased

Periodic system:

Debits purchases
total cost of goods for resale will equal purchases, plus cost of inventory on hand at the beginning of the period
COGS = cost of goods available for sale minus ending inventory

Goods in transit (FOB) (question 7)

FOB destination: title passes when the goods reach the buyer
FOB shipping point: title passes when goods leave the supplier
i.e. goods in transit which are shipped FOB destination should be included in the inventory of the seller

Inventory methods (LIFO, FIFO characteristics) (question 8)

FIFO: first goods purchased are the first goods to be used or sold

Inventory and cost of goods sold will be the same whether the periodic or perpetual system is used.
Approximates the physical flow of goods
Inventory is closely related to cost, because the most recent purchases are still on hand at a cost recently paid
FIFO, average cost, or standard cost. Is used for internal reporting purposes

LIFO: the most recent items purchased are the first to be used or sold

Inventory costs and COGS will be different depending on whether the periodic or perpetual system is used
Does not approximate the physical flow of goods
Erosion of the LIFO inventory can easily occur, called LIFO liquidation. Which distorts net income and can result in substantial tax payment
Used for tax and external reporting purposes

In a period of rising prices, the FIFO method tends to give the highest reported net income

Sales discount entry
Value assigned to ending inventory under LIFO
Value assigned to cost of goods sold under FIFO

Chapter 9

Lower-of-cost-or market applied to inventory (question 12)

Lower of cost or market is used instead of historical (paid price) cost if the future utility of an asset drops below its original cost
Market: means the cost to replace
Under lower of cost or market, companies value an asset at cost, or cost to replace, whichever is lower

When inventory declines in value below historical cost, and the decline is not temporary, what is the maximum amount that the inventory can be valued at

Valued at or between the ceiling and floor

Ceiling: net realizable value: estimated selling price less cost of disposal

Prevents overstatement of the value of inventory

Floor: net realizable value less a normal profit margin:

Prevents understating the value of inventory

Inventory valuation

Historical cost is 64, NRV is 58, profit margin is 5, market value is 60.
What is the proper inventory price?
Since value has declined past the historical cost, lower of cost or market approach needs to be utilized

The valuation of inventory will be 50, NRV

Relative sales value method (question 15)

Lump sum purchase

Finding cost per item

Estimated cost of inventory with markup ******

Chapter 10

Characteristics of plant assets (Question 17)

Acquired for use in operations and not for resale
Long term in nature and usually depreciated
They posses physical substance

Qualifying for capitalization of interest cost during construction of assets (question 18)

A company capitalizes interest costs starting with the first expenditure related to the asset and continues until the company readies the asset for its intended use

Capitalization period

Expenditures for the asset have been made
Activities to ready the asset have begun
Interest costs are being incurred

Qualifying assets

Under construction for an enterprises own use
Intended for sale or lease that are produced as discrete projects

Ships, real estate development

Financed through the issuance of long-term debt

Assets that DO NOT qualify for capitalization

Assets in use or are ready to be used
Assets that a company does not use in its earnings

Accounting recognition for nonmonetary exchange of plant assets (question 19)

Commercial substance: an exchange where future cash flows change as a result of the transaction

Recognize all gains/losses immediately

When an exchange LACKS commercial substance

If no cash is received: defer gains, recognize loss immediately
If cash is received: recognize partial gain, recognize losses immediately

Purchased land and a building. What should be recorded as cost for both?

Purchased land for 250,000
Old building was demolished and construction began on a new building

Demolition of old building cost 20,000
Architect’s fees cost 35,000
Legal fees for title investigation and purchase contract cost 5,000
Construction costs are 1,290,000
Salvaged materials from demolition: 10,000

Cost of land: 265,000

initial price: 250,000 plus demolition of old building: 20,000 plus legal fees and purchase contract: 5,000 minus salvaged materials: 10,000

Cost of building: 1,325,000

Construction cost: 1,290,000 plus architect fees: 35,000

Cost of equipment (question 21)

Purchase price: 12,000
Sales tax: 800
Freight charges: 200
Repairs for damage during installation: 350
Installation costs: 225

Cost: 13,225

Purchase price: 12,000
Sales tax: 800
Freight charges: 200
Installation cost: 225

Ordinary repairs are added to an expense account, not the cost of equipment

Nonmonetary exchange, asset for asset (question 22 and 23)

Company A and Company B have an exchange with no commercial substance
Company A gives up an asset

Book value: 48,000
Fair value:60,000

Company B gives up an asset

Book value: 80,000
Fair value 76,000
Company A gives B a boot of 16,000

What amount should Company A record for the asset received? (question 22)

64,000

reasons

book value of B (80,000) minus the boot (16,000) = 64,000
OR, book value of A (48,000) plus the boot (16,000) = 64,000

What amount should Company B record for the asset received? (question 23)

60,000

reason

fair value of the asset is 60,000

recognizing a gain and value of an asset received

Company A gave up:

Computer with fair value of 240,000 and an undepreciated cost of 225,000 recorded on books

Company B gave up

60,000
used computer with a fair value of 180,000

no commercial substance

How much gain should Company A recognize? And what amount should the acquired computer be recorded?

Gain: 15,000 (cost of asset given up: 240,000 minus depreciation: 225,000
Computer received is valued at: 180,000 (180,000, the fair value)

Exam practice 2 (conceptual)

What amount do companies record and report long-term notes receivables? (question 1)

They record and report long term notes receivable at the present value of the cash they expect to collect

Where is “purchase discounts lost” reported?

In the “other expenses and losses” section of the income statement

The change in the LIFO reserve from one period to the next is recorded as:

An adjustment to cost of goods sold
LIFO reserve: the difference between the inventory method used for reporting purposes and LIFO
Change in the allowance balance from one period to the next is the LIFO effect

When should a company abandon the historical cost principle?

When the future utility of the inventory item falls below its original cost

The gross profit method can be used to approximate the dollar amount of inventory on hand

TRUE

In a basket purchase, how are the cost of the individual assets acquired determined?

Based on their relative sales value

Trade discounts (question 7)

Are not recorded in accounts because they are just a means of computing a price
Used to avoid frequent changes in catalogues
Used to quote different prices for different quantities purchased

Where should goods in transit that were recently purchased FOB destination be included on the balance sheet?

Should not be included on the balance sheet because the title passes when they receive the goods, which they have not.

What is the meaning of “market” in terms of lower of cost or market?

Current replacement cost

Which statement is not true about the gross profit method of inventory valuation?

“it may be used to estimate inventories for annual statements”
Gross profit method: substitute for verifying or determining the inventory amount.
Because this is an estimate, companies still need to do a physical count at the end of each year. This method is permitted by the GAAP for interim reports as long as it is disclosed but not allowed for annual statements

Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

Improved matching of bad debt expense with revenue

Which of the following methods of determining annual bad debt expense best achieves the matching concept?

Percentage of sales

Because it is directly related (matched) to sales

Which method (net method or gross method) may be used to record cash discounts a company receives for paying suppliers promptly?

Both involve recording cash discounts

Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

FIFO, because each unit can be linked to a cost for that period, whereas LIFO does approximate the physical flow of goods

In the context of dollar value LIFO, what is a LIFO layer?

The LIFO value of an increase in the inventory for a given year
Dollar value LIFO method: determines and measures any increase or decrease in a pool in terms of total dollar value, not the physical quantity of the goods in the inventory pool.

Which of the following is not an acceptable approach in applying the lower-of-cost-or market method to inventory?

Inventory location

This has no relevance the the method

Why might inventory be reported at sales prices (NRV or market price) rather than cost?

When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal

Net realizable value is:

Selling price less costs to complete and sell.

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices:

This fact must be disclosed

Final practice

An early extinguishment of bonds payable which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition:

Any costs of issuing the bonds must be amortized up to the purchase date
The premium must be amortized up to the purchase date
Interest must be accrued from the 1st interest date to the purchase date

During early extinguishment, all costs must be amortized

Double declining balance: depreciation

Find percent per year in given number of periods. Double this number and it is the depreciation percentage per year.

Can only go as low as the salvage value

Reporting impairment on equipment

Impairment loss: the amount by which the carrying amount exceeds fair value
The company will only recognize an impairment if the net future cash flows are less than the carrying amount.

An employees net (take-home) pay is determined by gross earnings minus amounts for income tax withholdings end the employee’s

Portion of FICA taxes and any voluntary deductions

Employee payroll deductions:

Gross pay minus:

Withholding tax
Portion of FICA taxes
Voluntary deductions (union dues)

Employer payroll taxes

Debit payroll tax expense

Credit FICA
FUTA
SUTA

ONLY EMPLOYER PAYROLL TAXES INCLUDE UNEMPLOYMENT

Vista sold 6,000 of annual subscriptions for 125 each on September 1. How much unearned revenue will exist as of December 31?

Total unearned revenue at point of sale: 750,000 (6,000 X 125)
After four months, 250,000 has actually been earned.
So on December 31: 500,000 is the remaining unearned revenue

Warranty cost

Warranty costs are estimated to be 2% of sales in the first year, 3% in the second year, 4% in the third year.
Total sales = 4,200,000
Total actual warranty expenditures for 3 years = 209,000

What amount should the company report as a liability at the end of the third year

169,000
(9% * 42,000,000) – 209,000

bond proceeds

3,000,000 bond. 6%, 5 year. Interest is paid semi annually
what are the proceeds

carrying value of the bonds
entry to record the redemption
stockholders equity is generally classified into two major categories

Earned capital

Retained earnings

Contributed capital

Paid-in capital given to the company by stockholders

Treasury shares are

Issued, but not outstanding

When selling treasury stock

If you sell treasury stock below cost, you debit additional paid in capital because the loss on the sale incurred is a deduction from the credit-balance additional paid in capital.
If you sell treasury stock above cost, you credit additional paid in capital because the gain you made adds onto the additional paid in capital portion of stockholder’s equity.

Cash dividends are paid on the basis of the number of shares:

Outstanding

Total additional paid in capital

Final exam practice (conceptual)

True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported
Property, plant, and equipment is usually presented in the balance sheet at:

Original cost less accumulated depreciation

What is accounting in general terms

An accounting process which allocated long-lived asset cost to accounting periods

Major difference between the service life of n asset and its physical life is that:

Service life refers to the time an asset will be used b a company and physical life refers to how long the asset will last

If an industrial firm uses the units of production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will:

Vary with production

Liabilities are:

Obligations arising from past transactions and payable in assets or service in the future

Of the following items, the only one which should not be classified as a current liability is:

Short-term obligations expected to be refinanced

Which of these is not included in an employers payroll tax expense?

Federal income taxes

Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation

The type of litigation involved

These are factors:

Time period in which the underlying cause of action occurred
The probability of an unfavorable outcome
The ability to make reasonable estimate of the amount of the loss

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be:

Greater than if the straight-line method were used

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is:

Par value of the shares issued

Appropriate basis could be:

Market value of the services provided
Market value of the shares issued

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

Can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

Gross profit method

Fire destroyed inventory, leaving 12,000 worth of inventory intact. What is the estimated ending inventory destroyed by fire

Beginning inventory: 200,000
Net purchases: 600,000
Net sales: 1,200,000
Percentage markup on cost: 66.67

(200,000 + 600,000) – (1,200,000 / 5/3) – 12,000

equals 68,000
the “5/3” comes from the fact that you add 1 to markup: 1 + 66.67 = 5/3

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