Accounting 3001 Final Exam Study Guide

1. Understand what goes in the different sections of the income statement

1. Income statement

1. Operating section

1. Sales or revenue section
2. Cost of goods sold section
3. Selling expenses
4. Administrative or general expenses

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

1. Other revenues and gains
2. Other expenses and losses

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

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

1. Bad debt expense is an operating expense
2. Direct write off method

1. Debit bad debts expense
2. Credit accounts receivable

1. Allowance method

1. Record estimated uncollectables

1. Debit bad debt expense
2. Credit allowance for doubtful accounts

1. Recording the write off

1. Debit allowance for doubtful accounts
2. Credit accounts receivable

1. Recovery of an uncollectable account

1. First entry

1. Debit accounts receivable
2. Credit allowance for doubtful accounts

1. Second entry

1. Debit cash
2. Credit accounts receivable

1. Calculating allowance

1. Percent of sales

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

1. debit bad debt expense
2. credit allowance for doubtful accounts

1. percent of recievables

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

1. either

1. plus an existing debit balance
2. minus an existing credit balance

1. Understand how retained earnings are calculated?

1. Retained earnings

1. Beginning of year retained earning balance
2. Plus/minus net income/loss
3. Minus dividends

1. Common
2. Preferred

1. Equals end of year retained earnings

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

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

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

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

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

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

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

1. Capitalized

1. Assets under construction for the companies own use
2. Asset intended for sale
3. Capitalization period

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

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

1. 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
2. Methods

1. Straight line

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

1. declining balance

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

1. 5 years
2. 20% (straight line) times two = 40% depreciation per period
3. continue to depreciate by 40% until salvage value is reached

1. units of production

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

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

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

1. Current liabilities

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

1. Accounts payable
2. Notes payable
3. Current maturities of long term debt
4. Short term obligations expected to be refinanced
5. Dividends payable
6. Customer advances and deposits
7. Unearned revenue
8. Sales taxes payable
9. Income taxes payable
10. Employee related liabilities

1. Long term liabilities

1. Liabilities that cannot be settled within the accounting period

1. Bonds payable
2. Long term notes payable
3. Pension
4. Deferred income tax liabilities
5. 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

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

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

1. Warranties
2. Rent
3. Subscriptions
4. coupons

1. Entry

1. Initial sale
2. Debit cash
3. Credit unearned revenue

1. After service is provided

1. Debit unearned revenue
2. Credit revenue

1. Calculating unearned revenue for coupons

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

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

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

1. Accounting for treasury stock

1. Purchase of treasury stock

1. Cost method (most used)

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

1. Par (stated) value method

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

1. Calculation

1. Number of shares repurchased X purchase price per share

1. debit treasury stock
2. credit additional paid in capital

1. sale of treasury stock

1. sale above cost

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

1. sale below costs

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

1. retiring shares involves debiting volume of retired shares X

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

1. Dividends resulting in a reduction in stockholders equity

1. All dividends besides stock dividends

1. Cash dividends

1. Calculated

1. Amount per share X outstanding shares

1. Entries

1. Date of declaration

1. Debit retained earnings (declared cash dividend)
2. Credit dividends payable

1. Date of record

1. No entry

1. Date of payment

1. Debit dividends payable
2. Credit cash

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

1. Entries

1. Date of declaration

1. First entry

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

1. Second entry

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

1. Date of distribution

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

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

1. Entries

1. Date of declaration

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

1. Date of payment

1. Debit dividends payable for declared amount
2. Credit cash for the same amount

1. 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

1. Types of interest rates on bonds

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

1. Rate actually earned on bonds

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

1. Calculate interest

1. Straight line method

1. Issued at par

1. Yearly Interest = bond price X interest rate

1. Issued at discount

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

1. Issued at premium

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

1. effective interest method (preferred method)

1. matches expenses with revenues better than straight line
2. companies:

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

1. Amortization amount =

1. Bond interest expense

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

1. MINUS bond interest paid

1. Face amount of bonds X stated interest rate

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

1. Depreciable base: the amount of an asset that is depreciated

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

1. Book value of an asset

1. What was paid for the asset

1. Change in an estimate

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

1. 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

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

1. Journal entry for a bond

1. Issuance of a bond

1. Debit cash
2. Credit bonds payable

1. Recording interest expense payment

1. Debit interest expense
2. Credit cash

1. Recording accrued interest at years end

1. Debit interest expense
2. Credit interest payable

1. Calculate gain or loss on extinguishment

1. Reacquisition price
2. Minus net carrying amount of bonds redeemed

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

1. Equals gain/loss on redemption

1. Recording gain or loss on extinguishment

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

1. Understand the conditions for a contingency liability

1. 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
2. Conditions

1. Likelihood of loss

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

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

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

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

1. Employee salary and wage journal entry

1. Employee payroll

1. Debit salaries and wage expense by given payroll amount

1. Credit withholding taxes payable
2. Credit FICA taxes payable
3. Credit union dues payable
4. Credit cash for the difference

1. Employer payroll

1. Debit payroll tax expense by sum of the below

1. Credit FICA taxes by FICA% X payroll amount
2. Credit FUTA taxes by federal% X payroll amount
3. Credit SUTA taxes by state% X payroll amount

1. Requirements for federal unemployment tax

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

1. Employees pay:

1. Income tax withholding
2. FICA taxes – employee share
3. Union dues

1. Employers pay:

1. FICA taxes – employer share
2. Federal unemployment (FUTA)
3. State unemployment (SUTA)

1. Compensated absences

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

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

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

1. Loss method for writing down inventory

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

1. Cost of goods sold method

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

1. Cost of goods sold account absorbs the loss

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

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

1. Retained earnings equals

1. Capital stock

1. Preferred stock
2. Common stock
3. Dividends

1. PLUS additional paid in capital

1. Excess over par – preferred
2. Excess over par – common

1. PLUS retained earnings

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

1. Additional notes and points of study

1. Test 1

1. Chapter 2

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

1. Relevance: capable of making a difference in a situation

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

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

1. Comprehensive income elements (Question 7)

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

1. Revenues
2. Losses
3. Expenses

1. Four assumptions in the financial accounting structure

1. Economic entity assumption

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

1. Should not report owners finances or finances of other business units

1. Going concern

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

1. 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

1. Monetary unit

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

1. Periodicity

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

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

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

1. Revenue recognition principle (Question 8)

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

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

1. Chapter 3

1. Different records (Question 10)

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

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

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

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

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

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

1. Accrued expense

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

1. Adjusting entry for unearned revenue

1. When cash has been received

1. Debit cash
2. Credit unearned revenue

1. When service has been performed

1. Debit unearned revenue
2. Credit revenue

1. Estimated uncollectables

1. Estimated uncollectables are credited to the allowance for doubtful accounts

1. Chapter 4

1. Extraordinary items (question 15)

1. Transaction must be:

1. Unusual in nature
2. Infrequent
3. And material in amount

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

1. Calculating gross profit (question 16)

1. Gross profit = sales – cost of goods sold

1. Earnings per share (question 18)

1. Calculating earnings per share

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

1. Chapter 5

1. Current assets (question 19)

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

1. Reporting Capital stock (Question 20)

1. Calculating

1. Par value of all authorized, issued, and outstanding

1. Intangible assets (Question 21)

1. lack physical substance and are not financial instruments

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

1. calculating stockholder’s equity (question 22)

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

1. Chapter 6

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

1. Daily
2. Monthly
3. Quarterly
4. Annually.

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

1. using the table for compounding interest

1. 8 years, compounded quarterly at 8%

1. Table: 2% for 32 periods

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

1. Present value (question 25)

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

1. table used: present value of one dollar
2. 20 periods
3. 5% interest

1. future value (question 26)

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

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

1. present value (question 27)

1. 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%

1. table used:
2. 20,000 X pv of OA
3. 300,000

1. present value of annuity (question 28)

1. Test 2

1. Chapter 7

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

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

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

1. recording ESTIMATED

1. debit bad debt expense
2. credit allowance for doubtful accounts

1. recording the write-off of an uncollectible account

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

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

1. 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

1. 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

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

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

1. If a debit balance exists, it is subtracted from the new estimated uncollectible number
2. 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

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

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

1. 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)

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

1. if you sell something in return for a note receivable

1. debit entry will be the full amount of the note receivable

1. Chapter 8

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

1. Characteristics of a perpetual inventory system

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

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

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

1. Periodic system:

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

1. Goods in transit (FOB) (question 7)

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

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

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

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

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

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

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

1. Sales discount entry
2. Value assigned to ending inventory under LIFO
3. Value assigned to cost of goods sold under FIFO

1. Chapter 9

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

1. 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
2. Market: means the cost to replace
3. Under lower of cost or market, companies value an asset at cost, or cost to replace, whichever is lower

1. 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

1. Valued at or between the ceiling and floor

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

1. Prevents overstatement of the value of inventory

1. Floor: net realizable value less a normal profit margin:

1. Prevents understating the value of inventory

1. Inventory valuation

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

1. The valuation of inventory will be 50, NRV

1. Relative sales value method (question 15)

1. Lump sum purchase

1. Finding cost per item

1. Estimated cost of inventory with markup ******

1. Chapter 10

1. Characteristics of plant assets (Question 17)

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

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

1. 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

1. Capitalization period

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

1. Qualifying assets

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

1. Ships, real estate development

1. Financed through the issuance of long-term debt

1. Assets that DO NOT qualify for capitalization

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

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

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

1. Recognize all gains/losses immediately

1. When an exchange LACKS commercial substance

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

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

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

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

1. Cost of land: 265,000

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

1. Cost of building: 1,325,000

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

1. Cost of equipment (question 21)

1. Purchase price: 12,000
2. Sales tax: 800
3. Freight charges: 200
4. Repairs for damage during installation: 350
5. Installation costs: 225

1. Cost: 13,225

1. Purchase price: 12,000
2. Sales tax: 800
3. Freight charges: 200
4. Installation cost: 225

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

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

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

1. Book value: 48,000
2. Fair value:60,000

1. Company B gives up an asset

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

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

1. 64,000

1. reasons

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

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

1. 60,000

1. reason

1. fair value of the asset is 60,000

1. recognizing a gain and value of an asset received

1. Company A gave up:

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

1. Company B gave up

1. 60,000
2. used computer with a fair value of 180,000

1. no commercial substance

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

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

1. Exam practice 2 (conceptual)

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

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

1. Where is “purchase discounts lost” reported?

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

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

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

1. When should a company abandon the historical cost principle?

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

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

1. TRUE

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

1. Based on their relative sales value

1. Trade discounts (question 7)

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

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

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

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

1. Current replacement cost

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

1. “it may be used to estimate inventories for annual statements”
2. Gross profit method: substitute for verifying or determining the inventory amount.
3. 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

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

1. Improved matching of bad debt expense with revenue

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

1. Percentage of sales

1. Because it is directly related (matched) to sales

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

1. Both involve recording cash discounts

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

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

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

1. The LIFO value of an increase in the inventory for a given year
2. 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.

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

1. Inventory location

1. This has no relevance the the method

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

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

1. Net realizable value is:

1. Selling price less costs to complete and sell.

1. 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:

1. This fact must be disclosed

1. Final practice

1. 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:

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

1. During early extinguishment, all costs must be amortized

1. Double declining balance: depreciation

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

1. Can only go as low as the salvage value

1. Reporting impairment on equipment

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

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

1. Portion of FICA taxes and any voluntary deductions

1. Employee payroll deductions:

1. Gross pay minus:

1. Withholding tax
2. Portion of FICA taxes
3. Voluntary deductions (union dues)

1. Employer payroll taxes

1. Debit payroll tax expense

1. Credit FICA
2. FUTA
3. SUTA

1. ONLY EMPLOYER PAYROLL TAXES INCLUDE UNEMPLOYMENT

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

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

1. Warranty cost

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

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

1. 169,000
2.  (9% * 42,000,000) – 209,000

1. bond proceeds

1. 3,000,000 bond. 6%, 5 year. Interest is paid semi annually
2. what are the proceeds

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

1. Earned capital

1. Retained earnings

1. Contributed capital

1. Paid-in capital given to the company by stockholders

1. Treasury shares are

1. Issued, but not outstanding

1. When selling treasury stock

1. 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.
2. 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.

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

1. Outstanding

1. Total additional paid in capital

1. Final exam practice (conceptual)

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

1. Original cost less accumulated depreciation

1. What is accounting in general terms

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

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

1. 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

1. 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:

1. Vary with production

1. Liabilities are:

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

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

1. Short-term obligations expected to be refinanced

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

1. Federal income taxes

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

1. The type of litigation involved

1. These are factors:

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

1. 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:

1. Greater than if the straight-line method were used

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

1. Par value of the shares issued

1. Appropriate basis could be:

1. Market value of the services provided
2. Market value of the shares issued

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

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

1. Gross profit method

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

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

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

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

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