Accounting Exam 3

capitalization

recording costs as an asset on the balance sheet rather than expensing the costs on the income statement

Capitalized acquisition cost

the sum of all the costs incurred to bring the asset to its intended use

Lump-Sum Purchases of Assets

Several assets purchased in a group for 1 price, the total cost is allocated based on market values, this technique is called relative-sales-value method

Ordinary Repairs

serve to maintain asset or restore it to good working order

capital expenditures

increase asset’s capacity or extend its useful life; cost is added to an asset account and later expensed as depreciation

Depreciation

a process that allocates a plant asset’s cost to expense over its useful life, matching the expense against the revenue the asset helps earn each period

3 must know things to record depreciation

cost, estimated useful life, estimated residual value

Estimated useful life

length of service expected from using the asset that can be expressed in years, units of output, miles, etc.

Estimated residual value

also known as scrap or salvage value, is the expected cash value of asset at the end of its useful life; NOT depreciated

Straight-Line Method

Equal amount of depreciation is assigned each period, depreciable cost is divided by useful life to determine annual depreciation expense

Units-of-production Method

Fixed amount of depreciation is assigned to each unit of output produced by the asset and depreciable cost is divided by useful life in units-of-production to determine fixed amount per unit. per unit amount is multiplied by # of units produced each period to compute the depreciation expense

Double-Declining Balance Method

Writes off a larger amount of cost near the start of asset’s useful life, most frequently used accelerated depreciation method, multiplies asset’s declining book value at the beginning of the year by a constant %, two times the straight line depreciation rate

Gain

if the cash received is greater than the book value

Loss

If the cash received is less than the book value

Intangible Assets

Legal right to use or own but have no physical form, include patents, copyrights, franchises, trademarks, and goodwill, recorded at cost which typically consists of legal fees and other court processing fees

Amortization Expense

straight-line method to allocate the intangible asset cost to expense, no contra-asset is used

Goodwill

a special type of intangible asset only recorded when business acquires another business and pays a price greater than the net assets of the acquired company

Research and Development Costs

costs incurred to develop and create new products, most valuable activity, does not get reported on Balance Sheet, GAAP requires it to be reported as an expense on the income statement as incurred.

Current Liability

obligation due within 1 year/within the operating cycle if longer than 1 year

2 kinds of current liabilities

known amounts and estimated amounts

Long Term Liabilities

obligations that extend beyond one year

Short-term notes payable

due within one year, used to borrow cash/purchase asset

Sales Tax Payable

levied on retail sales, collected from customers and remitted to state

Accrued Liabilities

result from expenses incurred but not yet paid

3 main ways to finance

retained earnings, issuing stock, bonds

Bonds

debts of issuing company, groups of notes payable issued to multiple lenders in order to borrow large amounts, investors buy and sell bonds through bond markets

Term Bond

all mature at same time

serial bond

mature in installments at regular intervals

secured bond

secured by specific assets

unsecured bond

backed only by good faith, therefore require a higher interest rate

Bonds issued at par

interest expense and cash payment is based on face value of bond and stated interest rate