ACCT 2810 Exam 3- Miller

Fixed Assets

Long-term assets that are relatively permanent such as land, buildings, or equipment. Tangible resources. Not for sale to customers.

Land

Does not depreciate

Fixed asset examples

ALL have sales taxes. Building (Arch. or engr. fee, construction, sales tax), Machinery and equipment (freight, installation, testing), Land and Development (paved parking area, outdoor lighting, fences)

Purchased equipment / cash. Purchase price + Freight cost (FOB Shipping) + Installation costs + repairs

ALL: cash down, inventory down/ Repairs: cash down, stockholders equity down

Depreciation

the process of allocating the cost of an asset to expense over its useful life. NOT asset valuation.

"aging" of depreciation

usage and passage of time. Assets down (accumulated deposits up), stockholders equity down (deposits expense up)

Net Book Value (NBV)

cost - accumulated depreciation. NOT represented on market value

depreciable assets

"useful life". Land development, buildings, equipment, machinery, automobiles. NOT land.

Depreciated Cost

Initial- residual

depreciation expense

(cost-residual value)/useful life

straight line depreciation

initial cost-(annual depreciation)(# of useful years). depreciation expense stays constant. Accumulated depreciation=(dep expense)(# of useful years) Depreciation. rate= (1/useful life)

Calculating Depreciation

KNOW cost, useful life, and residual value

calculating DDB depreciation

All years except last: (SL rate x2)(cost-previous year dep.) Last year: End NBV= residual value, end dep of year= prev year NBV- last year NBV.

DBB Depreciation equation effects

assets down (accumulated dep up), stockholders equity down (dep expense up). Recording dep. doesn't affect statements.

DBB depreciation

used for quickly deprecating assets (truck, technology, etc.). Depreciation expense declining

tax considerations

IRS allows depreciation expense deduction from income. required straight-line or MACRS

Partial Year depreciation

pro-rate for months owned. (can use SL or DBB) If date is not and beginning/end of month-> round to nearest month

Calculating Partial Year depreciation: SL method

remember: dep annual dep is CONSTANT. year 1- constant, year 2- constant/ (# of months/12), year 3- constant

Calculating Partial Year depreciation: DBB method

remember: annual dep is DECLINING. Partial year: take previous year depreciation x(# of months/12). The next year= (previous year- partial found)x DBB rate

additional costs

incurred after a fixed asset has been purchased and placed into service. I.E capital expenditures (extraordinary repair OR improvements) and revenue expenditures (ordinary maintenance)

examples of capital expenditures

repaired transmission, installed new hydraulic lift

examples of revenue expenditures

tune-up engine, oil change

equation with expenditures

effects assets (cash, delivery, and contra asset accumulated dep.) and stockholders equity. Note: all assets are added/subtracted together and the result is reflected in SE. Income statement effected too

Disposal of Assets- calculations

1. record dep expense 2. find NBV 3. compare NBV to cash proceeds to determine loss or gain. (> gain,< loss,= no gain or loss) 4. remove asset (down) and contra asset (asset up) on balance sheet. Discarding asset "retired asset"

Disposal of Fully depreciated Assets- equation

asset down, accumulated dep down (asset up). NO EFFECT. No effect on statements.

"fully depreciated"

NBV=0

Disposal of partially depreciated Assets- equation

Asset down (equip down, accumulated dep down (asset up)), stockholder equity down. Income and SE statement effected as a loss.

Selling fixed assets

similar to entry for discarding fixed assets. 1. update depreciation 2. record sale 3. IF sell is (<,>) of NBV differs

Selling fixed assets < NBV

asset down(cash down, accumulated dep. down so asset raises but not enough), stockholder equity down. Statements: income at loss, cash flow inflow by investing, SE down

Selling fixed assets > NBV

asset up (cash up, equip. down, accumulated dep. down), stockholder equity up. Statements: income at gain, cash flow outflow by investing, SE up

natural resources

NOT depreciated. depletion: "used up" process of transferring the cost of natural resources to an expense account. ex. metal, timber, coal

calculating depletion

1. total initial cost 2. quantity extracted each year 3. depreciation rate= cost of resource/ estimated total units of resource. 4. depletion expense (AKA CGS)= depletion rate x quantity extracted

depletion- equation

asset down (accumulated dep up), stockholder down (dep expense up). statements: income and SE down. CF no proceeds

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value. limited life "amortization" or indefinite life (land)

patents

exclusive rights to make or sell goods. includes "amortization" and expiration

patent- equation

no contra asset-> decrease patent asset. Asset down (at ammortization expense), stockholder equity down. Statements: no CF, SE and income down

calculating patents

given: cost, remaining life, and useful life. 1. amortization expense= cost/useful life. 2. patent worth= cost- amortization expense

Copyright

An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work. "amortized"

Trademark

a symbol, word, or words legally registered or established by use as representing a company or product. NOT "amortized"

Goodwill

company purchases another whole company and pays an amount greater than net assets of the company (buy out competition or see growth opportunity) GAAP. NOT 'amortized"-> reviewed for impairment

Business providing capital

*retained earnings 1. debt financing (includes liabilities owed by business) 2. equity financing (investments from owners of business, stock issued ownership)

debt financing

debt owed to others. current liabilities (due within year) and long-term liabilities (beyond 1 year). Contingent liabilities- contingent on future events

Current liabilities

any debt paid by existing current assets or other current liabilities within an operating cycle (or 1 year). ex. Acct. payable, taxes payable, unearned revenue, payroll liabilities, other accrued liabilities

account payable

The liability created by a purchase on account. I.E merchandise or supplies

Accrued Liabilities

expenses (current assets) that have been incurred but have not been paid at the end of the accounting period

notes payable

A written promise made by the business to pay a debt, usually involving interest, in the future. borrower- issuer of note, lender- receiving note. can be Current or Long-term

issuing a note- equation

no effect. Liabilities: notes payable up, account payable down

paying off note w/ maturity- equation

assets down(cash down), liabilities down (notes payable down), SE down (interest expense). statements: CF operating down (cash account), income down (interest expense)

paying off note w/ maturity- calculations

interest expense: cost x note % x (# of months/ 12)

payroll accounting

amount paid to employees for the services they provide during a period. salary: managerial, admin, etc. wages: manual labor (skilled and unskilled).

payroll taxes- employer taxes

FICA, Federal and state, Unemployment taxes

payroll taxes- employee taxes

FICA, Federal and state

payroll taxes

become liability when payroll is paid to employee. Liability relieved when taxes are paid.

Employee Payroll Deductions

federal and local income taxes. FICA, FUTA, and SUTA taxes. Medical insurances, pensions, etc. for individuals

recording payroll for company- equation

assets down (cash down)= liabilities up (FICA, Federal, state), SE down. Statements: CF operating down (cash acct.), Income down (gross payroll)

recording payroll for company- calculations

SE (-gross payroll), Liabilities (given # or given %), Assets= gross payroll- all liaibilties

recording employer payroll- equation

no effect. Liabilities (FICA, FUTA, SUTA) up, SE down. Statements: no CF, Income down (SE).

recording employer payroll- calculations

FICA, FUTA, SUTA given. SE is liabilities added together.

Contingent Liabilities

1. Liabilities that may arise from past transactions if certain events occur in the future. Classified: probable, reasonably possible, or remote. 2. Ability to measure potential liability. classified: estimable or not estimable.

Bonds

A form of interest-bearing notes payable. includes interest must be paid on regular basis. common face value $1000 per.

Bonds payable "Market=state"- equation

"Market interest=state interest". bonds sell at face value. Assets up, liability up. Statements: CF up financing

Bonds payable "Semi-Annual" interest payments- equation

State < market. Sell below face value (discount). Assets down (cash down by interest expense), SE down. Statements: CF operating down, Income down (interest expense)

Bonds payable "Semi-Annual" interest payments- calculations

cost x state % x 1/2= interest

Bond payable: Payoff w/ maturity- equation

"at face value" asset down, liabilities down (bonds payable down)

face value (par value)

amount of money that the bond buyer (lender) lent the issuer and that the lender will receive on repayment. No interest

bond issue price

based on price buyer is willing to pay factors: 1) face amount of bonds due at maturity date 2) interest stated in contract/ coupon rate 3) market rate of interest

Bonds NOT issued at face value- discount on Bonds Payable

1) market > contract stated rate 2) buyer not pay at face value 3) bond interest expense is MORE than paid out for interest payments

Bonds NOT issued at face value- Premium on Bond Payable

1) market < contract stated rate 2) buyers pay MORE than face value 3) Bond interest expense < paid out interest payments

equity financing

funds provided by the owners of a company. long-term: dividends. short-term: buy and sell. Capital stock and Retained earnings

Types of capital stock

"contributing capital" 1) common and preferred 2) treasured stock (*contra asset) 3) dividends

Types of retained earnings

1) profits retained in business 2) accumulated net income less dividends

shares of stock

minimum amount of shares to sell stock that can be issued with or with our monetary amount. legal capital- minimum stockholder contribution required by some states (company is "separate legal entity" cannot own stock)

types of shares of stock

1) par- monetary value stated on stock certificate 2) no-par- some state may require a stated value

Stock Spread

1) authorized: total number allowed to issue (cap amount) 2) issued: shares issued to shareholders (share-able) 3) outstanding- shares currently in the hands of stockholders (not share-able, entitled to dividends)

treasure stock equation

issued common stock- outstanding common stock. NOT entitled to dividends

Stock Rights

1) right to vote 2) right to share earnings 3) right to share assets upon liquidation

common stock

1. one class of stock issued 2. each share has equal rights

preferred stock

1. has preference rights over common stock 2. dividend rights are stated as dollars per share or as a percent of par

issuance of stock

price that a stock sells depends on the 1) financial conditions of corp. 2) investment expectations of corp. 3) general business and economic conditions. Stock issued at premium and in exchange for cash

issuance of stock- equation

assets up (cash of total), SE up (common stock and Paid-In capital in excess of par). CF effected. Income not.

treasury stock

stock issued by corporate and then reaquired. reported as reduction of SE. regained beaus: 1) shares for resale to employees 2) reissued as bonus to employees 3) support market price of stock

treasury stock-equation

assets down (ash outstanding common st.), SE down (treasury stock)

dividends

declaring ... decrease RE of corp. Types of ... are: cash and stock

declaration of cash dividends- equation

Liabilities up (dividends payable) SE down (RE)

payment of cash dividends-equation

assets down (cash) liabilities down (dividends payable)

stock dividends

(instead of cash) 1) distribution of shares to stockholders 2) transfer of RE to paid-in capital 2) does NOT change the assets, liability, or total SE of corp.

stock dividends- equation

Is % above 25%? If so, everything above par. No, paid-in capital goes up. Both go RE down, common stock up.

stock split

process of corp. reducing par or stated value of common stock and issuing proportionate number of additional shares. NOT an exchange of money. Does NOT effect financial statements

stock split- equation

no effect

debt ratio

measures solvency. measures percent of company assets financed by debt. ability to pay debt on time.

Debt Ratio Formula

%(total liabilities/total assets). (no higher than 50%)

earnings per share

major priority measure reported in financial statements

earnings per share-equation

(net income-preferred dividends)/number of common shares