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2010-12-01 17:58:59

test review
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  1. Plant assets
    • physical substance (a definite size
    • and shape),

    • are used in the operations of a
    • business,

    • are not intended for sale to
    • customers,

    • are expected to provide service to
    • the company for a number of years, except for land.

    • Referred to as property, plant, and
    • equipment; plant and equipment; and fixed assets.
  2. Cost Principle
    • requires that companies record plant
    • assets at cost.

    • Cost consists of all expenditures
    • necessary to acquire an asset and make it ready for its intended use.
  3. Revenue expenditure
    • If a cost is not included in a plant
    • asset account, then it must be expensed immediately.
  4. Capital expenditures
    • costs that are not expensed
    • immediately but are instead included in a plant asset account.
  5. Cost
    • is measured by the cash paid in a
    • cash transaction or by the cash equivalent price paid
  6. The cash equivalent price
    is equal to
    the fair market value of the asset given up or

    • the fair market value of the asset received,
    • whichever is more clearly determinable.
  7. Land
    • All necessary costs incurred in
    • making land ready for its intended use increase (debit) the Land account
    • Costs
    • typically include:

    1)the cash purchase price,

    • 2)closing costs such as title and
    • attorney’s fees,

    3)real estate brokers’ commissions, and

    4). Accrued property taxes and other liens on the land assumed by the purchaser
  8. Land Improvements
    • Includes all expenditures necessary
    • to make the improvements ready for their intended use.

    • Examples are driveways, parking lots,
    • fences, landscaping, and underground sprinklers.

    Limited useful lives.

    • Expense (depreciate) the cost of land
    • improvements over their useful lives.
  9. Buildings
    • Includes all costs related directly
    • to purchase or construction.

    • Purchase costs:
    • Purchase price, closing costs
    • (attorney’s fees, title insurance, etc.) and real estate broker’s commission.

    • Remodeling and replacing or repairing
    • the roof, floors, electrical wiring, and plumbing.
    • Construction costs:
    • Contract price plus payments for
    • architects’ fees, building permits, and excavation costs.
  10. Equipment
    • Include all costs incurred in
    • acquiring the equipment and preparing it for use.
    • Costs typically include:
    • cash purchase price
    • sales taxes
    • freight charges
    • insurance during transit paid by the
    • purchaser
    • expenditures required in assembling,
    • installing, and testing the unit
  11. Lease
    • A lease is a contractual agreement in
    • which the owner of an asset (the lessor)
    • allows another party (the lessee) to use the asset for a period of time at an
    • agreed price.
  12. Advantages of Leasing
    1.Reduced risk of obsolescence ( falling into disuse or becoming out of date).

    1.Little or no down payment.

    2.Shared tax advantages.

    3.Assets and liabilities not reported.

    Capital lease - lessees show the asset and liability on the balance sheet.
  13. Depreciation
    • The process of allocating to expense
    • the cost of a plant asset over its useful (service) life in a rational and
    • systematic manner

    • Process of cost allocation, not asset
    • valuation.

    • Applies to land improvements,
    • buildings, and equipment, not land.

    • Depreciable, because the
    • revenue-producing ability of asset will decline over the asset’s useful life.
  14. Factors in Computing Depreciation
    Cost- all expenditures necessary to acquire and make it ready for intended use.

    Useful Life- estimate of expected life based on need for repair, service life, and obsolescence.

    Salvage Value- estimate of the assets value at the end of its useful life.
  15. Depreciation Methods
    • Management selects the method it
    • believes best measures an asset’s contribution to revenue over its useful life.
    • Examples include:

    (1)Straight-line method.

    (2)Declining-balance method.

    (3)Units-of-Activity method
  16. Declining-Balance
    Accelerated method.

    • Decreasing annual depreciation
    • expense over the asset’s useful life.

    • Double declining-balance rate is
    • double the straight-line rate.

    Rate applied to book value.
  17. Units-of-Activity
    • Companies estimate total units of
    • activity to calculate depreciation cost per unit.

    • Expense varies based on
    • units of activity.

    • Depreciable cost is cost
    • less salvage value.
  18. Ordinary Repairs
    • expenditures to maintain the operating
    • efficiency and productive life of the unit.

    Debit - Repair (or Maintenance) Expense.
  19. Additions and Improvements
    • costs incurred to increase the operating
    • efficiency, productive capacity, or useful life of a plant asset.

    Debit - the plant asset affected.

    Referred to as capital expenditures.
  20. Impairments
    • A permanent decline in the market value of
    • an asset.

    • So as not to overstate the asset on the
    • books, the company writes the asset down to its new market value during the year in
    • which the decline in value occurs.
  21. Plant Asset Disposals
    • Companies dispose of plant assets in
    • three ways —Retirement, Sale, or Exchange (appendix).

    Sales- equipment is sold to another party.

    Retirement- equipment is scrapped or discarded.

    Exchange- existing equipment is traded for new equipment
  22. Sale of Plant Assets
    • Compare
    • the book value of the asset with the proceeds received from the sale.

    • If proceeds exceed
    • the book value, a gain on disposal occurs.

    • If proceeds are
    • less than the book value, a loss
    • on disposal occurs.
  23. Retirement of Plant Assets
    ØNo cash is received.

    • ØDecrease (debit) Accumulated
    • Depreciation for the full amount of depreciation
    • taken over the life of the asset.

    • ØDecrease (credit) the asset
    • account for the original cost of the asset.
  24. Return on Asset Ratio
    indicates the amount of net income generated by each dollar of assets.

    Return on Asset Ratio= Net Income / Average Total Assets
  25. Asset Turnover Ratio
    indicates how efficiently a company uses its assets to generate sales.

    Net sales/ Average Total Assets
  26. Profit Margin Ratio Revisited
    • Tells how effective a company is in
    • turning its sales into income—that is, how much income each dollar of sales provides.
  27. Amortization of Intangibles
    Amortize to expense.

    Credit asset account or accumulated amortization
  28. Amortization of Intangibles
    • No foreseeable limit on time the
    • asset is expected to provide cash flows.

    No amortization.
  29. Patents
    • Exclusive right to manufacture, sell,
    • or otherwise control an invention for a period of 20 years from the date of the
    • grant.

    • Capitalize costs of purchasing a
    • patent and amortize over its 20-year life or its useful life, whichever is
    • shorter.

    • Expense any R&D costs (Research and Development Cost) in
    • developing a patent.

    • Legal fees incurred successfully
    • defending a patent are capitalized to Patent account.
  30. Research and Development Costs
    Expenditures that may lead to



    new processes, and

    new products.
  31. Copyrights
    • Give the owner the exclusive right to
    • reproduce and sell an artistic or published work.

    • Copyright is granted for the life of the
    • creator plus 70 years.

    • Capitalize costs of acquiring and
    • defending it.

    • Amortized to expense over useful
    • life.
  32. Trademarks and Trade Names
    • Word, phrase, jingle, or symbol that
    • identifies a particular enterprise or product.

    • ØWheaties,
    • Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep.

    • Trademark or trade name
    • has legal protection for indefinite number of 20 year renewal periods.

    Capitalize acquisition costs.

    No amortization
  33. Franchises and Licenses
    • Contractual arrangement between a
    • franchisor and a franchisee.

    • ØToyota,
    • Shell, Subway, and Marriott are franchises.

    • Franchise (or license)
    • with a limited life should be amortized to expense over the life of the
    • franchise.

    • Franchise with an indefinite life should be carried at cost
    • and not amortized
  34. Goodwill
    • Includes exceptional management,
    • desirable location, good customer relations, skilled employees, high-quality
    • products, etc.

    • Only recorded when an entire business
    • is purchased.
    • Goodwill
    • is recorded as the excess of ...

    • purchase price over the FMV of the
    • identifiable net assets acquired.

    • Internally created goodwill should
    • not be capitalized
  35. Amortization
    • The allocation to expense of the cost of an intangible asset over the asset’s
    • useful life.
  36. Intangible Assets
    • Rights, privileges, and competitive advantages that result from the ownership of
    • long-lived assets that do not possess physical substance.
  37. Copyrights
    • An exclusive right granted by the
    • federal government to reproduce and sell an artistic or published work.
  38. Franchise
    • A right to sell certain products or
    • services or to use certain trademarks or trade names within a designated
    • geographic area.
  39. Research and Development Costs
    • Costs incurred by a company that
    • often lead to patents or new products.
    • These costs must be expensed as incurred.
  40. Current liability is debt with two key
    1.Company expects to pay the debt from existing current assets or through the creation of other current liabilities.

    • 2.Company will pay the debt within one year or the
    • operating cycle, whichever is longer.

    • Current liabilities include notes payable, accounts payable, unearned revenues, and accrued
    • liabilities such as taxes, salaries and wages, and interest payable
  41. Notes Payable
    Written promissory note.

    Require the borrower to pay interest.

    • Those due within one year of the balance sheet date are
    • usually classified as current liabilities.
  42. Sales Tax Payable
    • Sales taxes are expressed as a stated percentage of the
    • sales price.

    Retailer collects tax from the customer.

    • Retailer remits the collections to the state’s
    • department of revenue.
  43. Unearned Revenue
    • Revenues that are received before the company delivers
    • goods or provides services.

    • 1.Company debits Cash,
    • and
    • credits a current liability
    • account (unearned revenue).

    • 2.When the company
    • earns
    • the revenue, it debits the
    • Unearned Revenue account,
    • and credits a revenue account.
  44. Current Maturities of Long-Term Debt
    • Portion of long-term debt that comes due in the current
    • year.

    No adjusting entry required.

    • Illustration: Wendy Construction issues a five-year,
    • interest-bearing $25,000 note on January 1, 2009. This note specifies that each
    • January 1, starting January 1, 2010, Wendy should pay $5,000 of the note. When
    • the company prepares financial statements on December 31, 2009,

    • 1.What amount should be
    • reported as a current liability? ___5000______

    • 2.What amount should be
    • reported as a long-term liability? __20000_____
  45. Payroll and Payroll Taxes Payable
    • Determining the payroll involves computing three
    • amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.
  46. Payroll tax expense results from three taxes that governmental agencies levy on employers.
    • These taxes are:
    • FICA Tax

    • Federal
    • unemployment tax

    • State
    • unemployment tax
  47. Bonds
    • are a form of interest-bearing notes payable issued by corporations, universities,
    • and governmental agencies.

    Sold in small denominations (usually $1,000 or multiples of $1,000).
  48. Types of Bonds
    Secured- bonds that have specific assets of the issuer pledged as collateral.

    Unsecured- bonds issued against the general credit of borrowers.

    Convertible- bonds that can be converted into common stock at the bondholders option

    Callable- bond that are the issuing company can retire at a stated dollar amount prior to maturity.
  49. Bond certificate
    ØIssued to the investor.

    ØProvides information such as the

    üname of the company issuing bonds,

    üface value,

    ümaturity date, and

    ücontractual interest rate (stated rate).
  50. Face value
    principal due at the maturity
  51. Maturity date
    date final payment is due
  52. Contractual interest rate
    rate to determine cash interest paid, generally semiannually.
  53. Market value is a function of the three factors that determine present value:
    1.the dollar amounts to be received,

    • 2.the length of time until the amounts
    • are received, and

    3.the market rate of interest.

    The process of finding the present value is referred to as discounting the future amounts.
  54. Redeeming Bonds before Maturity
    • When a company retires bonds before maturity, it is
    • necessary to:

    • 1.eliminate the
    • carrying value of the bonds at the redemption date;

    • 2.record the cash paid;
    • and

    • 3.recognize the gain or
    • loss on redemption.

    • The carrying value of the bonds is the face value of the
    • bonds less unamortized bond discount or plus unamortized bond premium at the
    • redemption date.
  55. Liquidity ratios
    measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
  56. Solvency ratios
    • measure the ability of a company to survive over a long
    • period of time.
  57. effective-interest method
    • the amortization of the discount or premium results in interest expense equal to a
    • constant percentage of the carrying value.

    1.Compute the bond interest expense.

    • 2.Compute the bond interest paid or
    • accrued.

    3.Compute the amortization amount.