Accounting Final Exam
Chapter 9
Plant Asset
Plant asset → A resource that has physical substance, is used in the operations of a business, and is not intended for sale to customers
Can also be called property, plant, and equipment, property and equipment, and fixed assets
All plant assets EXCEPT LAND decline in service potential over their life
Land
The cost of land includes:
The cash purchase price
Closing costs and real estate brokers’ commissions
Accrued property taxes and other liens on the land assumed by the purchase
Anything needed to get the land ready for its use
Buildings
Facilities used in operations, such as stores, offices, warehouses, factories
Building costs include:
Purchase price/contract price
Closing costs
Real estate broker’s commissions
Costs to make the building usable (paint, remodeling, etc)
Excavation costs
Equipment
Equipment costs include:
Purchase price + sales taxes
Freight
Assembly and installation
Expenditures During Useful Life
Ordinary repairs → fairly small amounts that occur frequently like oil changes, tune ups, etc
Expense XX
Cash XX
Additions and improvements → increase the efficiency, capacity or useful life of an asset, larger amounts the occur infrequently
Plant Asset XX
Cash XX
Deprecraciation
Depreciation → process of allocating the cost of a plant asset to an expense over its useful life in a rational and systematic process
Depreciation expense = Expense
Accumulated depreciation = Contra Asset Account
BOOK VALUE = Original cost - accumulated depreciation
Factors in computing depreciation:
Cost → what is needed to have the asset ready for its intended use
Useful life → ESTIMATE shown in terms of time
Salvage Value → ESTIMATE of the asset’s value at the end of the useful life
Straight-line Method
Journal entry:
Depreciation expense XX
Accumulated depreciation XX
Disposal of Plant Assets
Three ways this could happen:
Sale → Equipment is sold to another party
Retirement → Equipment is scrapped or discarded
Exchange → Existing equipment is traded for new equipment
If disposal occurs in the middle of the year, the depreciation needs to be brought up to date…THEN a journal entry to eliminate the asset:
Accumulated depreciation - Asset XX
Assets XX
Retire a plant asset, journal entry:
Accumulated Depreciation XX
Asset XX
Selling a plant asset, journal entry:
Gain:
Cash XX
Accumulated depreciation - Asset XX
Asset XX
Gain XX
Loss:
Cash XX
Accumulated depreciation - Asset XX
Loss XX
Asset XX
Intangible Assets
Intangible assets → Do not have a physical substance, represent rights, privileges, or competitive advantages
Examples - patents, trademarks, copyrights, trade names, franchises/licenses, goodwill
Patents
Patent → exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years
Journal entry:
Amortization Expense XX
Patents XX
AMO/Do not AMO
AMO
Copyrights
Do not AMO
Franchises
Trademarks + trade names
Goodwill
Ratios
Asset turnover = Net sales/Average total assets
Shows how efficiently a company uses assets to generate sales
How many dollars of SALES are generated by each dollar of assets
Return on assets = Net income/Average total assets
Overall measure of profitability
Shows the amount of net income generated by each dollar
Chapter 10
Current Liabilities
A debt expected to be paid: 1) From existing current assets, AND 2) Within ONE year
Examples: Accounts payable, current portion of long term debt, unearned revenue, accrued payroll
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due within ONE year
No adjusting entry required when recording it, but it changes balances sheet presentation
Unearned Revenue
You were paid for something before goods were provided or services were performed (the company now has a liability)
Journal entry:
When receiving cash:
Cash XX
Unearned revenue XX
When providing a service:
Unearned revenue XX
Revenue XX
Sales Taxes
Example entry:
Best Clothing Ever sales show $5,400 in sales. The sales tax rate is 8%. So, $5,400/1.08 = $5,000 in sales.
To record the sale:
Cash $5,400
Sale $5,000
Sales Tax Payable $400
To remit taxes to the taxing authority:
Sales Tax Payable $400
Cash $400
Payroll Deductions
Payroll Journal Entries
Record payroll accrual:
Salaries and Wage Expense XX
FICA Taxes Payable XX
Federal Income Taxes Payable XX
State Income Taxes Payable XX
Salaries and Wages Payable XX
Record Payment of NET wages:
Salaries and Wages Payable XX
Cash XX
Bonds
Bond → a form of interest-bearing notes payable issued by corporations, universities, and government agencies
Giving the bond = bond payable
Taking the bond = bond receivable
Terminology:
Maturity date - date the final payment is due
Face value - principal due at maturity
Contractual interest rate - annual rate used to determine cash interest paid
Types of bonds:
Secured - have a specific assets the issuer pledges as collateral for bonds
Unsecured - issues against general credit of borrower (no collateral)
Collateral → is an asset or property that a borrower offers to a lender as security for a loan
Convertible - can be converted into common stock at bondholder’s option
Callable – can be redeemed (bought back) by the issuer prior to maturity, at a stated dollar amount
Accounting for Transactions
Market rate → drives what a bond is sold/traded for
Redeeming Bonds
Redeeming bonds at maturity, journal entry:
Bonds Payable XX
Cash XX
Ratios
Liquidity ratio
Current ratio = current assets/current liabilities
Measures short term ability to pay obligations and meet unexpected cash needs
Solvency ratios
Debt to total assets = total liabilities/total assets
Measure ability to survive over a long period of time
Chapter 11
Corporation
Corporation → a legal entity that has rights and privileges, corporations can be classified by purpose and ownership
Two types of stock:
Preferred
Common
When a corporation has only one class of stock
Stock Issue Consideration
Authorized stock
The amount of stock that a corporation may sell
Does NOT result in a journal entry
Par and No-par Value
Par value - capital stock that has been assigned a value per share in the corporate charter
No-par value - capital stock that has not been assigned a value in the corporate charter
The board of directors may assign a stated value to the no-par shares (or it can be truly no par)
Market value → what the stock sells for
Issue Common Stock
Assume Ziggy issues 1,000 shares of $1 par value common stock at par for cash. Journal entry:
Cash $1,000
Common stock $1,000
If Ziggy issues an additional 1,000 shares of the $1 par value common stock at $5 per share, what is the journal entry?
Cash (1,000 x 5) $5,000
Common stock ($1,000 x 1) $1,000
Paid-in Capital in excess of par $4,000
If there is no par value - If there is no stated value or par value on the Ziggy transaction for 1,000 shares at $5 each, the journal entry is:
Cash $5,000
Common Stock $5,000
Treasury Stock
Treasury stock → stock that the company has bought back from shareholders and is holding onto for future use, no journal entry needed
Dividend
Dividend → a distribution by a corporation to its stockholders on a pro rata basis
Types of divided:
Cash
Stock
Dates and Journal Entries for Cash Dividends
Declaration date → BOD authorizes cash dividend and announces it to stockholder
Cash Dividends XX
Dividends Payable XX
↓
Record date → Ownership of the outstanding shares is determined, no entry required
↓
Payment date → Dividend checks are mailed to stockholders of record
Dividends Payable XX
Cash XX
Ratios
Payout ratio = cash dividends declared on common stock / net income
Measures a company’s dividend record
Shows the earning a company distributes as a cash dividend to common stockholders
Return on Stockholders’ equity = (Net income - preferred dividends) / AVERAGE common stockholders’ equity
Measures profitability from common stockholder’s viewpoint
Shows corporate performance through profitability