accounting exam 3

Long term assets

having a service life for more than one year. used for two major types → property, plant and equipment

Interchangeable Assets

Lacks physcial substance → patents, copyright, and trademarks etc

Goodwill

one company purchases another company, the amount paid for these invisible assets can be recorded by the purchasing company

Straight line

equal amounts across years

Declining balance

greater amounts in earlier years

Activity based

proportionate amounts based on benefits received

Recording deprecation

Debit → deprecation expense

Credit → Accumulated deprecation

How is Deprecation expense recorded on the income statement?

As an expense

How is accumulated deprecation recorded in the balance sheet?

Contra Asset in balance sheet

How to calculate goodwill

1. Calculate total assets at fair value

2. calculate total liabilities at fair value

3. Calculate net identifiable assets

4. Goodwill = purchase price - fair value net identifiable assets

How to find accumulated deprecation on year two for a straight line deprecation?

add the first and second year annual deprecation

Accumulated depreciation

The TOTAL depreciation from all years so far.

what is deprecation?

is when an asset (like a car, building, or equipment) loses value over time because of use, age, or wear and tear.

do we debit or credit losses?

debit

do we debit or credit gains?

credit

what is book value

is how much an asset is worth on a company's accounting records after subtracting depreciation.

To capitalize an expenditure means to record the expenditure as a(n

asset

what does capitalize mean

means recording a cost as an asset instead of an expense because it will benefit the company for multiple years.

The book value of an asset is equal to the

Asset’s cost less accumulated depreciation.

Which of the following will result in higher depreciation expense in the first year of the asset’s life?

Short service life and low residual value.

Correct

current liabilites

are obligations that are payable within one year

contingent liabilty

present obligations exist

warranty liabilities

company offer a warranty on product sold

liquidity analysis

company is said to be liquid if they currently have cash to pay for mature debts

The amount of the gain on the sale of equipment equals:

The selling price minus the book value of the equipment.

If equipment is retired, which of the following accounts would be debited?

Accumulated depreciation.

what is impairment loss?

happens when an asset loses value and is no longer worth as much as the company has recorded in its accounting books.

Adjustin entry for interest

Debit: interest expense

credit: intrest payable

We record interest expense on a note payable in the period in which

We incur interest.

If a company fails to accrue interest on notes payable, which of the following will occur?

Liabilities are understated.

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

sales tax payable

if a company needs cash how can it get it?

1.generate profit

2.issue shares of stock

3. borrow money from creditors

advantages of debts

allows expansion w/o surrending ownershape control

disadvantages of debts

risk of bankruptcy increases with borrowing

lease

contractual agreement to use an asset for a specified period

advantages of leasing

reduces upfront cash needed to use an asset, lease payments are typically lower than installment payments

compound

interest - earning intrrest on interest

How to record a lease

debit: lease asset

credit: lease payable

Which of the following is not a primary source of long-term debt financing?

accounts payable

A company’s capital structure refers to:

Its mixture of liabilities and stockholders’ equity.

A bond is a formal debt instrument that promises to pay:

both a principal amount at the maturity date and periodic interest payments.

Serial bonds are:

bonds that mature in installments.

Depreciation of equipment each year has what effect on the income statement?

Increase expenses for the amount of depreciation for the current year only.

: At the end of the year, the adjusting entry to amortize a patent involves:

Debit Amortization Expense; credit Patent.

how to record a sale

debit: cash, accumulated deprecation, loss

credit: equipment, and gain

how to determine if an is an impaired loss

If the book value is greater than the estimated total future cash flows, the asset is impaired

how to calculate impairment loss

Impairment Loss = Book Value − Fair Value

An exclusive 20-year right to manufacture a product or to use a process is a:

patent

Which of the following correctly describes the nature of depreciation?

Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.