ACCT 211 Final Exam Review Guide PDF

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ACCT 211 Final Exam Review Guide * For the Final Exam, remember that this is not a topic guide of what is on the exam. This is a review guide that provides an overview of the material from the textbook. This guide provides examples of the harder math problems you may see on the exam, but you are still expected to know everything from the relevant chapters, even if it was not included in this guide. You are also still responsible for any material taught in lecture with Professor Kamlet, as well as any twitter articles, guest speakers, etc. Good luck studying!* Another disclaimer: The chapters in this guide refer to the OLD textbook. Please find the corresponding chapters in your new textbook Chapter 9: Fixed Assets and Intangible Assets Recording, Expensing, and Reporting Fixed Assets A fixed asset is any tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale. Examples of fixed assets include land, buildings, equipment, furniture, fixtures, etc.  Following the cost principle, fixed assets should be recorded at the cost of acquiring them, which includes all the costs incurred to get the asset delivered, installed, etc. The entry for purchasing a fixed asset is as follows: Date

Equipment (Could be Building, Land, etc.) Cash Expensing Fixed Assets

Amount Debited Amount Credited

A fixed asset converts to an expense as it is used or consumed. The expensing of fixed assets is accomplished through depreciation. Depreciation is the process of allocating the cost of a fixed asset over its useful life. It’s an application of the matching principle. The amount of expense recognized each period is known as depreciation expense. Suppose that Dozier calculates its truck’s depreciation as 10,000 for the first year. At year-end, Dozier would make the following entry: Year-end Date

Depreciation Expense Accumulated Depreciation

10,000 10,000

Fixed assets are reported at their net book value, which is the value of the fixed asset after depreciation is subtracted. Calculating Depreciation Expense When a company owns depreciable assets, it must calculate depreciation expense each period. Doing so requires the following information: cost, salvage value, useful life, and the depreciation method. Below are the three types of depreciation methods and their equations: Straight Line Depreciation: This method spreads depreciation expense evenly over each year of the asset’s useful life. Depreciation Expense = (Cost – Salvage Value) / Useful Life (in years) Double Declining Balance: The double-declining-balance method of depreciation is an accelerated method that results in more depreciation expense in the early years of an asset’s life and less depreciation expense in the later years of an assets life. Depreciation Expense = Depreciation Rate x Net Book Value = (Straight Line Rate x 2) x (Cost – Accumulated Dep.) Straight Line rate = 100% / x amount of years It’s important to note that over an asset’s life, an entity cannot record more total depreciation than the asset’s depreciable cost. Regardless of how much depreciation expense is calculated to be, an asset’s accumulated deprecation balance should never exceed the depreciable cost (This is explained nicely on page 189).

This will change depreciation expense for each year because the amount of accumulated depreciation over the years will increase, causing depreciation to be more at the beginning of the life, and then less at the end of the life. Units of Activity Method: This method calculates depreciation based on actual asset activity. Because it relies on an estimate of an asset’s lifetime activity, the method is limited to those assets whose units of activity can be determined with some degree of accuracy. Depreciation Expense per Unit = (Cost – Salvage Value) / Useful Life in Units When you find this expense per unit, you then multiply it by the amount of units produced for the year to get the annual depreciation expense. Depreciation Example (Exercise 17, Page 208): Phigam Steel purchases a machine on January 1 for $30,000. The machine has an estimated useful life of seven years, during which time it is expected to produce 114,800 units. Salvage value is 1,300. The machine produces 15,500 and 16,200 units in its first and second years of operation. Calculate depreciation expense for the machine’s first two years using the straight line, double-declining-balance, and units-of-activity methods of depreciation. Round values to the nearest dollar. a) Straight Line Depreciation: Depreciation Expense = (Cost – Salvage Value) / Useful Life (in years) Depreciation Expense = (30,000 – 1,300) / 7 Depreciation Expense = 4,100 for each year Date

Calculation

Year 0

Depreciation Expense

Accumulated Dep.

Net Book Value

-

0

30,000

Year 1

(30,000 – 1,300) / 7

4,100

4,100

25,900

Year 2

(30,000 – 1,300) / 7

4,100

8,200

21,800

b) Double-Declining-Balance Method: Depreciation Expense = Depreciation Rate x Net Book Value = (Straight Line Rate x 2) x (Cost – Accumulated Dep.) Straight Line rate = 100% / x amount of years Date

Calculation

Year 0

Depreciation Expense

Accumulated Dep.

Net Book Value

-

0

30,000

Year 1

((100%/7) x 2) x (30,000 – 0)

8,571

8,571

21,429

Year 2

((100%/7) x 2) x (30,000 – 8571)

6123

14,694

15,306

c) Units of Activity Method: Depreciation Expense per Unit = (Cost – Salvage Value) / Useful Life in Units Depreciation Expense per Unit = (30,000 – 1,300) / 114,800 = .25 Date

Calculation

Year 0 Year 1

.25 x 15,500

Depreciation Expense

Accumulated Dep.

Net Book Value

-

0

30,000

3,875

3,875

26,125

Year 2

.25 x 16,200

4,050

7,925

22,075

These charts are the best way to prepare a depreciation expense problem. It keeps the work neat, organized, and allows you to find your answer easily. Adjustments Made During a Fixed Asset’s Useful Life This portion of the book (Page 192) discusses how changes in depreciation estimates are accounted for in the journal. Be mindful of the journal entries shown. Capital Expenditures: Increases the expected useful life or productivity of an asset – an example would be a new engine for an automobile. Revenue Expenditures: Maintains the expected useful life or productivity of the asset – an example would be an oil change. Page 193 shows the journal entries and examples associated with expenditures – be mindful of them. --------------------------------------------------------------------------------------------------------------------------------------------------Asset Impairment Sometimes, a fixed asset’s market value will fall substantially due to changing market conditions, improvements in technology, or other factors. When a fixed asset’s market value falls materially below its net book value, and the decline in value is deemed to be permanent, the asset is considered impaired. Suppose a company has equipment that makes a unique toy that becomes extremely popular. It has a net book value of 140,000 and a higher market value. Suppose that the toy suddenly loses popularity. As a result, the market value of the machine plummets to 40,000. The company deems this decline to be permanent, and declares the asset impaired on March 23. The impairment would be recorded as follows: Mar. 23

Loss on Impairment Equipment

100,000 100,000

Disposing of Fixed Assets When a company decides that it no longer needs a fixed asset, it usually disposes of the asset. When disposing an asset, there are three steps to be followed:  Update depreciation on the asset  Calculate gain or loss on disposal o Gain on disposal = proceeds from sale > net book value o Loss on disposal = proceeds from sale < net book value  Record the disposal Suppose a company purchases a machine on 1/1/12 for 30,000. They estimate the useful life and salvage value to be four years and 2,000. They use the straight-line method of depreciation (7,000/year) and record depreciation annually on 12/31. Loss Example: Suppose further that the company sells the machine on June 30, 2014, for 12,000. First, you need to update the depreciation, as the machine was used for 6 th months since the last record of depreciation. Since the company uses straight-line, the expense would just be 7000/2, or 3,500. The following entry would be made: June 30, 2014

Depreciation Expense Accumulated Depreciation

3,500 3,500

As a result of this entry, the accumulated depreciation balance is updated to a balance of 17,500 (14,000 from 2012 and 2013, and then 3,500 from 2014). With this balance, gain/loss can be calculated: Proceeds from sale = 12,000 Cost of Machine = 30,000 Less: Acc. Dep = (17,500) Net Book Value = 12,500 Loss from Sale = (500) The following journal entry would be made to record the disposal: Cash Accumulated Depreciation Loss on Disposal Equipment

12,000 17,500 500 30,000

--------------------------------------------------------------------------------------------------------------------------------------------------Gain Example: Suppose that the company sells the machine on March 31, 2015 for 8,000. After updating depreciation, the Accumulated Depreciation account would have a balance of 22,750. Proceeds from sale = 8,000 Cost of Machine = 30,000 Less: Acc. Dep = (22,750) Net Book Value = 7,250 Gain from Sale = 750 Cash 8,000 Accumulated Depreciation 22,750 Gain on Disposal 750 Equipment 30,000 --------------------------------------------------------------------------------------------------------------------------------------------------Evaluating a Company’s Management of Fixed Assets This portion of the book discusses horizontal and vertical analysis again, along with the fixed asset turnover ratio, as well as the average useful life and the average age ratios for fixed assets. Be mindful of these equations and their meaning. Intangible Assets This final portion of the chapter discusses intangible assets, such as patents, trademarks, etc. Be mindful of their definitions as well as the journal entries associated with them. An important concept is the amortization of intangible assets. An example is shown below: Suppose a company possesses a 60,000 patent that has the maximum legal life of 20 years. The company believes that the paten will be useful for only 12 years and then be worthless. The Amortization expense at the end of each year would be 5,000 (60,000/12) and would be recorded as follows: End of year

Amortization Expense Patent

5,000 5,000

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Chapter 10: Liabilities

Taxes Payable  

When conducting business, corporations generate a variety of tax obligations to the federal, state, and local taxing authorities – income tax is an example Suppose a company computes its annual income tax expense to be $25,000 on December 31 but plans to pay it in the next period: The following entry would be made

Dec. 31  

Income Tax Expense Income Tax Payable



25,000

Another example is sales taxes – when a company makes a retail sale, it collects sales tax according to state and /or local regulations Suppose a company sells a $1,000 item on July 10 and collects an 8% sales tax: The following entry would be made

July 10



25,000

Cash

1,080 Sales 1,000 Sales Tax Payable 80 A third type of tax that generates a current liability is payroll taxes - when paying employee wages, employers must withhold income taxes and Social Security (FICA) taxes owed by the employee – the employer then remits those taxes to the taxing authority Suppose that an employee earns a May salary of $10,000 – based on the employee’s filing status, the company must withhold 15% of the salary for federal income taxes, 12% for state income taxes, and 7.65% for Social Security taxes

May 31

Salaries Expense Federal Tax W/H Payable State Tax W/H Payable FICA Taxes Payable Cash

10,000 1,500 1,200 765 6,535

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Notes Payable Suppose that on March 1 Brown Company borrows $30,000 by signing an 8%, 6-month note with Miller Street Bank – Interest is to be paid on August 31 Mar. 1

Cash

30,000 Note Payable

30,000

Interest = Principal x Annual Rate x Time Outstanding = $30,000 x .08 x 6/12 = $1,200 Aug. 31

Note Payable Interest Expense Cash

30,000 1,200 31,200

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Bonds 

A bond’s face value is the amount that the borrowing company wants to borrow

  

A bond’s stated interest rate is the contractual rate at which interest is paid to the creditor (also known as nominal rate, coupon rate, or contractual rate) A bond’s maturity date is the date on which the face value must be repaid to the creditor The market (or effective) rate of interest is the rate of return that investors in the bond markets demand on bonds of similar risk o Sometimes a bond will pay interest at a rate that is equal to what creditors demand in the market – in such cases, creditors will buy the bond at its face value o Sometimes a bond will pay interest at a rate that is lower than what creditors demand – in such cases, creditors will purchase the bond only if the price is discounted – by discounting the price, the borrower is effectively increasing the rate of interest that the creditor earns – DISCOUNT o Sometimes a bond will pay interest at a rate that is higher than what creditors demand – the borrower will sell the bond only if the price is raised – by raising the price, the borrower effectively lowers the rate of interest that the creditor earns – PREMIUM

*Please be mindful that the following example is of a discount – your exam may have either a discount or a premium. The procedure is still the same for both scenarios. The only thing that will be different on a premium example is that the interest paid would be greater than the interest expense On January 1, 2012, LED issues bonds with a face value of $300,000. These bonds have a stated interest rate of 4% and interest is paid annually on December 31. The bonds mature in four years. The market interest rate is 5% 

Determine the amount of discount on the bonds at issuance

Part 1) Use the Present Value of $1 table to determine the first part of the issuance price          

Face Value of the Bond x Value from PV of $1 table Remember to always use the MARKET RATE when using the tables Use 5% and 4 periods since it’s annual (if it were semi-annual, you would use 2.5% and 8 periods) = $300,000 x .823 = 246,900 Part 2) Use the Present Value of an Annuity table to determine the second part of the issuance price Face Value x Contract Rate x Time Outstanding x PV of an Annuity Rate Remember to always use the MARKET RATE when using the tables Use 5% and 4 periods since it’s annual (if it were semi-annual, you would use 2.5% and 8 periods) = $300,000 x .04 x 12/12 x 3.546 = 42,552 Add both of these values to get the issuance price! = 246,900 + 42,552 = 289,452 = issuance price

Part 2) Prepare an amortization schedule for all four years using the effective interest method Interest Expense

Interest Paid

Discount Amortized

Total Discount

Book Value

10,548

289,452

14,477.10

12,000

2,477.1

8,070.9

291,929.1

14,596.46

12,000

2,596.46

5,474.45

294,525.55

14,726.28

12,000

2,726.28

2,748.17

297,251.83

14,748.17

12,000

2,748.17

0

300,000

To calculate Interest Expense, multiply the Book Value from the year prior by the market rate

To calculate Interest Paid, multiply the Contract Value (or Face Value) by the contract rate and by time outstanding For the 4th year, adjust the amortized discount to make it so the total discount goes to 0 and the book value goes to 300,000 Entry For Bond Issuance: Jan. 1

Cash 289,452 Discount on B/P 10,548 Bonds Payable 300,000

Entry for Year 1 Discount Amortization Dec. 31

Interest Expense 14,477.1 Discount on B/P 2,477.1 Cash 12,000

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Chapter 11: Stockholder’s Equity A corporation is a separate legal entity, and is formed under state law by submitting articles of incorporation to a sate government and requesting the establishment of a corporate. Many sole proprietorships and partnerships have limited access to the capital needed to successfully operate or expand their businesses. Corporations can access capital through the sale of stock to investors, who then become stockholders.   

Authorized Shares: Refers to the number of shares of stock that a company can legally issue Issued Shares: Refers to the number of shares a company has distributed to owners to date Outstanding Shares: Refers to the number of shares that have been issued and are still held by someone other than the issuing company

Stockholders have the right to vote, the right to participate in dividends, the right to participate in residual assets, and the right of preemption Par Value is an arbitrary value that determines an entity’s legal capital – legal capital is the amount of capital that a state requires a corporation to maintain in order to protect creditor claims. Recording Common Stock 

Suppose that a company issues 100 shares of $1 par value stock for $5 per share on April 5. The company would record this issuance:

April 5

Cash

500 Common Stock Additional PIC

100 (Recorded at par value) 400 (Difference b/w par value and issuance price)

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Dividends A dividend is a distribution of profits to owner – the decision to distribute any dividend rests with the company’s board of directors 

Cash Dividends o A cash dividend is a distribution of cash to stockholders

o The date on which the board declares the dividend is called the date of declaration o The payment date is the date on which the dividend will be distributed o The date of record determines who will receive the dividend (NO ENTRY FOR THIS DATE) Suppose that a company with 1,000,000 outstanding shares of stock declares a $.05 per share dividend on Nov. 3 – the dividend is payable on November 30 to stockholders of record on November 21. Date of Declaration Entry Nov. 3

Retained Earnings

50,000 (1,000,000 * .05)