11/4 buad 280 exam 2

land

tangible

land improvements

tangible

buildings

tangible

equipment

tangible

natural resources

tangible 

patents

intangible

trademarks

intangible

copyrights

intangible

franchises

intangible

goodwill - intangible or tangible

intangible

appraisal fee

cost to provide opinion on market value of property

fair value

estimated stand alone selling price

as natural resources are used, cost is allocated to an expense through a process called

depletion

land capitalized costs

purchase price + closing costs - sale of salvaged materials

closing costs

attorney fees, agent commissions, title, title search, recording fees, back taxes, other obligations, clearing, filling, leveling, removing old buildings

how to record amount for fair values for basket goods

1. estimated fair value / allocation % out of total fair values

2. multiply by amount of basket purchase (price when sold together) 

3. record amount

purchase of intangible assets

purchase cost + legal fees

how are internally developed intangible assets recorded?

expensed on income statement as incurred

when is goodwill recorded

1. when part of the acquisition of another business 

2. when the purchase price exceeds the fair value of net identifiable assets

how to calculate goodwill

1. fair value of assets acquired - fair value of liabilities assumed = fair value of identifiable net assets

2. purchase price - fair value of identifiable net assets = goodwill

when to capitalize

expenditures are capitalized if it benefits future periods

when to expense

expenditures are expensed if it benefits only the current period

repairs and maintenance - capitalize or expense?

• when maintaining a given level of of benefits → minor → current → expense

• making major repairs that increase future benefits → capitalize 

addition - capitalize or expense?

adding a new major component → capitalize

improvement - capitalize or expense?

replacing a major component → capitalize

legal defense of intangible assets - capitalize or expense?

• incurring litigation costs to defend the legal right to the asset → capitalize 

• if defense is unsuccessful → expense

depreciation

the process of allocating the cost of an asset to an expense over its service life

accumulated depreciation

contra asset account that represents total depreciation since the equipment was purchased

entry to record annual depreciation for equipment

debit depreciation expense, credit accumulated depreciation

book value

cost of asset - current balance in accumulated depreciation 

depreciable cost

asset’s cost - residual value

straight line method when reestimating

1. depreciation expense = (cost - residual value) / initial service life

2. depreciation after x years = depreciation expense * x

3. book value after x years = cost - depreciation after x years

4. depreciation expense in the reestimate year = (book value after x years - residual value) / number of more years

double-declining balance method (depreciation rate) 

1. calculate straight-line rate: 100 / useful life = x

2. 2x = double-declining

depreciation rate per unit

(asset’s cost - residual value) / total units expected to be produced

when does impairment occur

book value > future cash flows or benefits

impairment loss

book value - fair value

what does the impairment loss entry look like

entry reduces net income and total assets by amount of impairment loss

net realizable value

market price - any additional costs necessary to sell it

estimating value of lost inventory

1. gross profit = gross profit ratio % * net sales

2. cogs = net sales - gross profit

3. ending inventory = beginning inventory + purchases - cogs

depreciation expense

total capitalized costs / useful life

adjusting net income from lifo to fifo

1. cogs under lifo - lifo reserve = cogs under fifo 

2. income tax expense under lifo + (lifo reserve * tax rate) = income tax expense under fifo

3. net income under fifo = revenue - cogs - income tax expense 

writing off uncollectible balance

debit allowance for doubtful accounts, credit accounts receivable

when costs are increasing, fifo results in

lower cogs, higher ending inventory values, higher net income

times interest earned (tie)

measures a company’s ability to meet its interest obligations with operating income

how to record an increase in the allowance for doubtful accounts

debit bad debt expense, credit allowance for doubtful accounts

ending allowance balance =

beginning balance + bad debt expense - write offs

activity based depreciation

1. depreciable base = cost - salvage value

2. depreciable rate per mile = depreciable base / total estimated miles

3. depreciation expense = miles driven * depreciable rate per mile

ammortization expense

1. depreciation rate * cost = expense

2. cost - expense = book value end of year one

3. book value end of year 1 * depreciation rate = book value end of year 2

4. repeat as necessary

under accrual accounting, revenue is recognized…

when earned 

big bath accounting

taking large write offs in one period

when does depreciation stop?

when book value reaches salvage value

vertical analysis

1. income statement items as a percentage of net sales

2. balance sheet items as a percentage of total assets

horizontal analysis

percent change = (second year amount - base year amount) / base year amount

liquidity ratios

short-term

• current ratio

• quick ratio

• operating cash flow to current liabilities

solvency ratios

long-term

• debt-to-equity

• times interest earned

profitability ratios

measures earnings or operating effectiveness of a company

accounts receivable turnover

how many times receivables have been collected during the period

inventory turnover

shows how quickly a company sells its products and restocks them over a period of time

ppet

how effectively a company uses its property, plant, and equipment to generate sales

sales allowance

contra revenue account - reduces revenue and current assets

2/10, net 30

1. customer will receive a 2% discount if amount owed is paid within 10 days

2. if customer does not take the discount, full payment is due within 30 days

nonrecurring items 

• employee layoffs

• consolidating production facilities 

• reorganizing sales operations 

• outsourcing some activities 

• terminating or relocating employees

• write-down of long-term assets

benefits of credit sales

1. increased sales

2. customer loyalty

3. competitor advantage

disadvantages of credit sales

1. loss of time value of money

2. risk of non-collection

allowance method

1. establish an allowance 

   1. estimate amount of future uncollectible accounts at the end of initial year 

   2. record estimate as an allowance for doubtful accounts 

   3. make adjusting entry that debits bad debt expense and credits allowance for doubtful accounts 

2. write off actual bed debts

   1. write of specific accounts deemed uncollectible by reducing accounts receivable and allowance for doubtful accounts

   2. reinstate previously written off receivables that are recovered from customers

3. re-estimate ending allowance balance and making adjusting journal entry

   1. estimate future uncollectible balance

   2. adjust allowance for doubtful accounts so ending balance of allowance is accurate

   3. debit bad debt expense, credit allowance for doubtful accounts

percentage of receivables method

amount in accounts receivable * percentage uncollectible

aging of accounts receivable method

based on estimated uncollectible per aging bucket 

more accurate than using a single percentage

accounts receivable write off

debit allowance for uncollectible accounts, credit accounts receivable

record collection of accounts receivable previously written off

debit accounts receivable, credit allowance for uncollectible accounts

debit cash, credit accounts receivable 

inventory cost

sum of all the direct costs to bring the inventory to salable condition

inventory cost includes

1. purchase price

2. shipping costs

3. insurance while in transit 

4. fees or taxes paid to get the inventory ready to sell

5. less returns, allowances, and discounts 

inventory cost does not include

1. most administrative costs (liability insurance, utilities, salaries) 

2. most marketing costs

3. research and development costs

balance sheet approach

fifo - amount it reports for ending inventory (which appears in the balance sheet) better approximates the current cost of inventory

when costs are increasing, lifo results in

higher cogs, lower ending inventory, lower net income, lower income taxes 

income statement approach

lifo - the amount it reports for cogs (which appears in the income statement) more realistically matches the current cost of the inventory needed to produce current revenues

lifo conformity rule

requires a company that uses lifo for tax reporting to also use lifo for financing reporting

fob shipping point

ownership of goods transfers to the buyer when it is placed on the truck/carrier

fob destination

ownership of the goods transfers to the buyer when it is delivered at its destination

consignment inventory

supplier (consigner) physically provides inventory to a retailer (cosignee) for sale, but the supplier retains ownership of the inventory until the goods are sold to the end customer

tangible and not subject to depreciation 

those with indefinite useful lives - land

intangible and subject to ammortization

those with finite useful lives

1. patents

2. copyrights

3. trademarks (with finite life)

4. franchises

intangible and not subject to amortization

those with indefinite useful lives

1. goodwill 

2. trademarks (with indefinite life) 

service life, useful life

estimated use the company expects to receive from the asset before disposing of it 

residual value, salvage value

the amount the company expects to receive from selling the asset at the end of its service life

straight-line depreciation method

1. Depreciation base: cost - residual value

2. Depreciation rate: 1/estimated useful life

3. Depreciation base * depreciation rate = depreciation expense

double-declining balance method

depreciation expense = (cost * 2) / useful life

activity-based depreciation

1. Depreciation base: cost - residual value

2. Depreciation expense: depreciation base / total life in units

most companies use for depreciation

1. straight line for financial reporting 

2. accelerated for tax reporting 

Hot Stone Creamery sold ice cream equipment for $12,400. Hot Stone originally purchased the equipment for $81,000, and depreciation through the date of sale totaled $66,500.

Record the gain or loss on the sale of the equipment.

cash = sale amount

accumulated depreciation = amount depreciated

loss: purchase price - accumulated depreciation = book value → book value - sale amount = loss

On January 1, Masterson Supply purchased a small storage building for $21,500 to be used over a five-year period. The building has no residual value. Early in the fourth year, the storage building burned down.

Record the retirement of the remaining book value of the storage building.

loss = (purchase price / useful life) * years unused

accumulated depreciation = (purchase price / useful life) * years used

building = purchase price 

On February 3, a company provides services on account for $31,500, terms 3/10, n/30. On February 9, the company receives payment from the customer for those services on February 3.

Record the service on account on February 3 and the collection of cash on February 9.

A company has the following account balances at the end of the year:

• Credit Sales = $400,000

• Accounts receivable = $80,000

• Allowance for Uncollectible Accounts = $400 credit

The company estimates future uncollectible accounts to be 4% of accounts receivable. At what amount would Bad Debt Expense be reported in the current year’s income statement?

2800

At the end of the year, an adjusting entry is recorded to reduce ending inventory from its recorded cost to net realizable value (NRV). The adjusting entry involves

Debit Cost of Goods Sold; credit Inventory

cogs =

beginning inventory + purchases - ending inventory

lower of cost/net realizable value method

multiply quantity by whichever is lower (unit cost or unit nrv) 
add for each item 

When a company determines that the net realizable value of its ending inventory is lower than its cost, what would be the effect(s) of the adjusting entry to write down inventory to net realizable value?

decrease total assets, decrease net income, decrease retained earnings