D104 Intermediate Accounting II Units 4-6

Straight Line Depreciation

(Cost - Salvage Value) / Useful Life

Service Hours Depreciation

[(Cost - Salvage Value) / Total Service Hours] x hours used

Units of Output Depreciation

[(Cost - Salvage Value) / Total Units] x Units Produced

Activity Method Depreciation

[(Cost - Salvage Value) x hours this year) / total estimated hours

Sum of the Years Digits Depreciation

[Number of years remaining x (Cost - Salvage Value)] / Sum of the Years

Double Declining Balance Depreciation

(Straight-Line Rate x 2) x Net Book Value (DO NOT subtract salvage value)

What is the major difference between the service life of an asset and its physical life?

Service life refers to the time an asset will be used by a company, and physical life refers to how long the asset will last.

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation.

What is the depreciation expense for the second year on this asset?

$8,000

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to which of the following?

The total amount to be charged to expense over an asset's useful life

Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset. This capital expenditure improved the overall efficiency of the asset during its remaining useful life.

What is depreciation expense for 2017? (Assume that salvage value remains unchanged.)

$17,333

For 2015 & 2016 Chattanooga depreciations $12,000 per year [($80,000 - $20,000)/5]. The depreciable basis, before the addition, on January 1, 2017 is $36,000 ($80,000 - $20,000 - $12,000 - $12,000). The addition increases the depreciable basis to $52,000 ($36,000 + $16,000). The new annual depreciation for the remaining three years is calculated as $52,000/ 3 years = $17,333.

Unless otherwise stipulated, what is depreciation normally computed on the basis of?

The nearest full month

Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation.

What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold?

$70,000

When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded?

Recorded in the Accumulated Depreciation account

How can the composite or group depreciation system be described?

A straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000.

To record the impairment loss, what should be included in the journal entry?

An increase in the asset's Accumulated Depreciation account by $285,000

Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000.

Which amount should Florence recognize as a loss on impairment?

$105,000

When is the restoration of an impairment loss permitted?

On assets being held for disposal

An asset impairment occurs when the asset's carrying amount exceeds what amount?

Expected future net cash flows

Usually, companies compute depletion for accounting purposes using which method?

Usually, companies compute depletion for accounting purposes using which method?

Porter Resources Company acquired a tract of land containing an extractable natural resource. Porter is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information includes: Land at $7,500,000 and Estimated restoration costs of $1,500,000.

If Porter maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

$3.2

In 2020, Bargain Shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $75 billion.

What is Bargain shop's asset turnover?

2.33 times

For 2020, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,000,000, and net income of $200,000.

What is Hammer's return on assets for 2020?

20.0%

In its 2017 annual report, Crane Manufacturing Company reports beginning-of-the-year total assets of $2,682,000, end-of-the-year total assets of $2,883,000, total sales of $4,726,000, and net income of $785,000.

What is Crane's Profit Margin on Sales?

16.61%

What is true regarding a general description of the depreciation methods applicable to major classes of depreciable assets?

It is necessary to include depreciation in corporate financial statements or notes thereto.

How do you calculate the asset turnover ratio?

Net sales/average total assets

What is the book value of a plant asset equal to?

The asset's acquisition cost less the total related depreciation recorded to date

How do you calculate the profit margin on sales?

net income / net sales

How do you calculate return on assets?

Net income / average total assets OR profit margin on sales x asset turnover

Lundy Company purchased a depreciable asset for $99,000 on January 1. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation.

What is the depreciation expense for the second year on this asset? (Please round the double-declining balance rate to 2 decimal places, e.g. 0.35 or 35% in your intermediate calculations.)

$16,988

For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000.

What is Lassiter's 2017 asset turnover ratio?

125 times

Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2017 of $150,000. It is estimated that the machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000.

Which of the following should be recognized as a a loss on impairment?

$0

McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value.

How should this change be accounted for by McDonald?

By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020

How do you compute the return on total assets?

Divide net income by average total assets

A pizza delivery chain buys several assets with varying useful lives at the start of the year and is trying to determine which special depreciation method to use. The following assets were purchased:

12 delivery trucks

4 pizza ovens

6 point-of-sale systems

20 sets of tables and chairs

Which depreciation method allows the pizza delivery chain to use one rate to depreciate all the assets?

Composite

A company wants to calculate a loss on impairment on an asset.How is the loss calculated?

Carrying value less the fair value

The asset turnover for a company in the most recent accounting year is 1.50.

Which statement accurately describes the meaning of this ratio?

The company generated net sales of $1.50 per dollar of assets in the most recent year.

A company purchased and placed into service a piece of machinery with an original cost of $100,000. It estimates a 10-year useful life with no salvage value. At the beginning of Year 8, when accumulated depreciation was $70,000 and the asset's book value was $30,000, the company estimates that it will use the machine for a total of 12 years.

Which statement describes the proper accounting treatment beginning with Year 8?

The company will depreciate the $30,000 book value over the next five years.

A company purchased a plot of land for $500,000 for the purposes of harvesting timber for resale. The company paid $10,000 to have the property boundaries marked by a land surveyor. The company also acquired a bulldozer for $100,000. The bulldozer will be used at this plot of land in addition to other locations where the company harvests trees.

What will be the company's depletion base for the land?

$510,000

A company believes a property contains natural resources and pays $80,000 for the property. The company spends $50,000 on a bulldozer to be used in multiple projects, $10,000 to dig the land to find the natural resources, and $3,000 on intangible development costs.

How much is the depletion base for the natural resources?

$93,000

An asset costs $200,000 with an expected useful life of five years. At the end of five years, the salvage value is expected to be $20,000.

What is the depreciation base?

$180,000

What defines liabilities?

Obligations arising from past transactions and payable in assets or services in the future

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period.

How should these notes be classified on the balance sheet of Larsen Company?

Current liabilities

For what purpose is the current liability section of the balance sheet of primary importance to bankers?

To assist in understanding the entity's liquidity

What, if any, is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within one year of the company's balance sheet date or the company's operating cycle, whichever is greater.

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350.

What is the amount of sales tax (to the nearest dollar) for May?

$49,350

The total $754,350 includes sales tax. Posner collects 7% sales tax. Therefore: [Sales + (.07 x Sales)] = $754,350. ($754,350 / 1.07) = $705,000. $754,350 - $705,000 = $49,350 sales tax

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350.

What is the amount of sales tax payable (to the nearest dollar) for May?

$49,350

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated

What is the proper way to report some gain contingencies?

As a disclosure only

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated.

Based on the above facts, how should the company report the estimated loss contingency?

Accrued and disclosed

Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorney estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $800,000.

How should this contingent liability be recorded?

No journal entry is needed, only a disclosure

How are accrued liabilities disclosed in the financial statements?

By appropriately classifying them as regular liabilities in the balance sheet

The acid-test ratio relates total current liabilities to cash and what other account(s)?

Short-term investments and receivables

What does the current ratio inform you about a company?

The company's liquidity

Presented below is information available for Marley Company.

Current Assets

Cash: $4,000

Short-term investments: $55,000

Accounts receivable: $61,000

Inventory: $110,000

Prepaid expenses: $30,000

Total current assets $260,000

Total current liabilities are $100,000.

What is the acid-test ratio for Marley?

1.20 to 1

What is the Current Ratio?

Current Assets / Current Liabilities

What is the Acid-Test Ratio?

(Cash + Short-Term Investments + AR) / Current Liabilities

Bargain Surplus made cash sales during the month of October of $375,000. The sales are subject to a 6% sales tax that was also collected.

What would be included in the summary journal entry to reflect the sale transactions?

Credit Sales Taxes Payable for $22,500

Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000.

As a result of the above facts, what is the correct treatment of Wooten's contingent obligation?

As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year.

If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?

$16,400,000

What is the interest rate written in the terms of the bond indenture known as?

Stated rate

For which type of bond does the issuer have the right to call and retire the bonds prior to maturity?

Callable bond

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization.

What is the total interest expense reported on the 2017 income statement?

$1,568,498

Which is the rate of interest actually earned by bondholders?

Effective rate

On October 1, 2020, Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

What is the credit side of the journal entry to record the issuance of the bonds?

$6,000,000 Bond Payable and $240,000 to Premium on Bonds Payable

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them.

What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

$5,790,000

What is the generally accepted method of accounting for gains or losses from the early extinguishment of debt?

A difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250.

What does the entry to record the redemption include?

Credit of $18,750 to Discount on Bonds Payable

At December 31, 2020 the following balances existed on the books of Rentro Corporation:

Bonds Payable: $7,000,000

Discount on Bonds Payable: $980,000

Interest Payable: $168,000

If the bonds are retired on January 1, 2021, at 102, what will Rentro report as a loss on redemption?

$1,120,000

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%.

What is included in the adjusting journal entry made by Litton on December 31, 2017 with regard to the note?

A credit to Discount on Notes Payable for $90,156

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable.

When such a transaction takes place, what is true?

The present value of the debt instrument must be approximated using an imputed interest rate.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan.

What relationship can you expect to apply to the situation?

The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.

On January 1, 2020, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825.

What amount of interest income should Ms. Price recognize in 2020?

$18,783

How should long-term debt that matures within one year and is to be converted into stock be reported?

As noncurrent and accompanied with a note explaining the method to be used in its liquidation

How is the debt to assets ratio computed?

Total liabilities / total assets

How is the times interest earned ratio computed?

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Putnam Company's 2021 financial statements contain the following selected data: Income taxes $40,000 Interest expense $25,000 Net income $60,000

What is Putnam's times interest earned ratio?

5.0 times

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount.

What value would Kimbrough report for the unamortized bond discount on December 31, 2017?

$285,500

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them.

What amount of gain or loss would Prouty record on this early extinguishment of debt?

$250,000 loss

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180.

Using effective-interest amortization, how much interest expense will be recognized in 2020?

$1,960,622

On January 1, 2021, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Danis gave Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments of $1,400,000 with the first payment due December 31, 2021. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of interest is $3,481,800.

What is the amount of interest income that should be recognized by Jacobs in 2021, using the effective-interest method?

$348,180

In every corporation, what is the one class of stock that represents the basic ownership interest called?

Common stock

Who does the residual interest in a corporation belong to?

The common stockholders

Which type of preferred stock generates a dividend in arrears?

Cumulative preferred stock

Duszynski Company issues 20,000 shares of its $.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000.

What is the amount of the proceeds allocated to the common stock?

$468,750

On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock.

What is the debit side of the journal entry to record the reacquisition of the stock?

Treasury Stock for $480,000

An analysis of stockholders' equity of Hahn Corporation as of January 1, 2021, is as follows:

Common stock, par value $20; authorized 100,000 shares; issued and outstanding 90,000 shares: $1,800,000

Paid-in capital in excess of par: $900,000

Retained earnings: $760,000

Total: $3,460,000

Hahn uses the cost method of accounting for treasury stock and during 2021 entered into the following transactions:

Acquired 2,500 shares of its stock for $75,000.

Sold 2,000 treasury shares at $35 per share.

Sold the remaining treasury shares at $20 per share.

Assuming no other equity transactions occurred during 2021, what should Hahn report on December 31, 2021, as total additional paid-in capital?

$905,000

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?

Treasury stock for the purchase price

"Gains" on sales of treasury stock (using the cost method) should be credited to which account?

Paid-in capital from treasury stock

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017.

As a result of this stock dividend, what happened to the company's total stockholders' equity?

It did not change.

On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017.

What was the impact of the 10% stock dividend on the balance of the retained earnings account?

$88,000 decrease

Cash dividends are paid on the basis of which number of shares?

Outstanding

Where should the balance in Common Stock Dividend Distributable be reported on the Balance Sheet?

Addition to capital stock

How is the rate of return on common stock equity computed?

Net income less preferred dividends/average common stockholders' equity

How is the payout ratio calculated?

Cash dividends/net income less preferred dividends

Layne Corporation had the following information in its financial statements for the years ended 2020 and 2021:

Cash dividends for the year 2021: $10,000

Net income for the year ended 2021: $93,000

Market price of stock, 12/31/20: $10

Market price of stock, 12/31/21 $12

Common stockholders' equity, 12/31/20: $1,600,000

Common stockholders' equity, 12/31/21: $1,980,000

Outstanding shares, 12/31/21: 160,000

Preferred dividends for the year ended 2021: $15,000

What is the payout ratio for Layne Corporation for the year ended 2021?

0

Layne Corporation had the following information in its financial statements for the years ended 2020 and 2021:

Cash dividends for the year 2021: $10,000

Net income for the year ended 2021: $93,000

Market price of stock, 12/31/20: $10

Market price of stock, 12/31/21 $12

Common stockholders' equity, 12/31/20: $1,600,000

Common stockholders' equity, 12/31/21: $1,980,000

Outstanding shares, 12/31/21: 160,000

Preferred dividends for the year ended 2021: $15,000

What is the book value per share for Layne Corporation for the year ended 2021?

$12.38

What are convertible bonds usually converted into?

Common stock

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, how is the sweetener accounted for?

Expense

During the conversion of preferred stock into common, how should any excess of the par value of the common shares issued over the carrying amount of the preferred being converted be treated?

It should be treated as a direct reduction of retained earnings

In 2016, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2017, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $42 per share.

What total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock?

$1,500,000