ACCOUNTING 3

Operating assets

Fixed assets = property, plant, equipment = tangible

Intangible assets = patents, copyrights, trademarks, goodwill

Aquisition of Fixed Assets

Cost = cash + notes payable + charges required to aquire and prepare the asset

Debit full cost to equipment, building, etc

Credit to cash, notes, stock, everything else

Depreciation of Fixed Assets

Reduction in operating asset value over its useful life

Follows matching principle - expenses in same period as revenues

Keep track with accumulated depreciation on balance sheet

Debit depreciation expense and credit accumulated depreciation each year

Book value/net value = cost - accumulated depreciation

Residual value = trade-in value, if end value /= 0

Straight line depreciation

Equal amt per year

Depreciation Expense = (Depreciable base = cost - residual value) / useful life

Debit Depreciation Expense, credit A/D

Rate = 1/useful life

Highest income in year 1

Double declining depreciation

Less and less per year

Depreciation Expense = 1/useful life * 2 * book value

Declining balance rate = 1/useful life * 2

Book value = cost - accumulated depreciation

Debit Depreciation Expense, credit A/D

Cares ab residual at the end

Most depreciation/lowest income in year 1

Units of Production depreciation

Per units

Depreciation Expense = Depreciation per unit * actual usage

Depreciation per unit = (Depreciable base = cost - residual value)/ expected use

Debit Depreciation Expense, credit A/D

Sum of the Years Digits Depreciation

Denominator = Useful life(Useful life +1)/2

For each year:

= Years remaining/Denominator * (Cost - residual)

Debit Depreciation Expense, credit A/D

Expenditures of fixed assets

Revenue/ordinary repair expenditures — do not increase future income, small, income statement, includes R&D

Capital expenditures - impact future, big, depreciable expense

Manipulate by making small costs into capital expenditures to spread out/depreciate

Impairment/Disposition of an fixed asset

Disposition (voluntary or involuntary):

Debit to cash and A/D

Credit to Gain on Disposal if gains; debit to Loss on Disposal if losses

Impairment:

Debit to Loss from Impairment, credit to Equipment

Fixed Asset Ratios

Fixed Asset Turnover Ratio = Net Sales/Avg Net Fixed Assets

• greater than 1 is good

• Net fixed asset = cost - A/D

Average Age of Fixed Assets = A/D/Depreciation expense

• greater than 1 is good

Aquisition/Amortization of Intangible Assets

• NOT R&D

Amortization = depreciation of intangible assets

• goodwill and trademark are NOT ammortized

Debit to asset, credit to cash for aquisition

Amortization expense = cost - residual / useful life

Debit to amortization expense, credit to asset for amortzation

Depletion

Natural resources deplete

Rate = cost - residual/ recoverable (all) uints

Depletion = rate * units recovered (used)

Debit to inventory, credit to accumulated depletion

Current Liabilities - Accured Interest

Acct payable, accrued liabiities, notes payable - must recognize interest

Interest expense = principal *annual rate * months/12

Debit interest expense, credit interest payable

After payment:

Debit notes, interest payable (paid already), interest expense (remaining ), credit cash

Sales Tax

Debit to cash or A/R, credit to sales and sales tax payable

Recording Taxes

Employee makes salary less witholding:

• Salary - (medicare/SS + federal/state witholding - healthcare - IRA)

Employer pays payroll taxes:

• Salary + (medicare/SS + federal/state unemployment + healthcare + IRA match)

Gov makes:

• SS from both, federal/state witholding, unemployment

Contingent Liabilities

must be probable and estimatable!!

Probable + estimatable - journal entry

Probable + not estimatable - no journal entry, footnote

Reasonably probable - no journal entry, footnote

Remote - no journal entry, no footnote

Warranties

Must record in sales period

Warranty expense = unist sold * failure/# sold * cost per failure

Debit to warranty expense, credit to warranty liability

After warranty payments:

Debit to warranty liability, credit to cash

Current Ratio

current assets/current liabilities

<1 is bad

Quick ratio

current asset - inventory/ current liabilities

• no inventory

• abilitiy to sell assets

Cash ratio

current asset - inventory - A/R/ current liabilities

• no inventory or A/R

• recognizes if receivables can be collected

Operating Cah Flow Ratio

cash flow form operating actities/current liabilities

Bonds and Notes Payable

Notes payable - pay face value and set interest

Bonds payable - pay face/par value at maturity and periodic interest

Types of Bonds

Secured - ex: mortgage

Unseured - junk bonds, debenture bonds

Callable - can pay off early

Convertible - can make into stock

Bonds: Interest rate vs yield

Premium - yield < stated rate, selling above face value, interest expense < interest paid, pay more interest for more money upfront

Discount - yield > state rate, selling below face value, interest expense > interest paid, pay less interest for less up front

At par - yield = stated rate

Issuance of a Bond

Debit to cash = (cash * %), credit to bonds payable

Credit to Premium on Bonds payable OR Debit to Discount on Bonds Payable

Debt Ratios

***Assets (current + long) = Debt/Liabilities (current + long) + Equity

To = divide

Debt to Total asset

Debt to Equity

Times Interest Earned = income from ops/interest expense