ACC 201 Exam 5 Review

1. What is the description for plant assets?

Resources that have physical substance that are used in business operations and are not intended for sale to
customers, property, plant and equipment. Except for land, plant assets decline in service value over useful lives.

2. What costs go into the cost of plant assets?
Plant assets must be recorded at cost which consists of all expenditures necessary to acquire and make it ready for
its intended use (includes cost of equipment, freight and installation)

3. What is the difference between capital and operating leases?
Capital Lease-both asset and liability are recorded on balance sheet-appears as an asset
Operating Lease-no asset or liability recorded on balance sheet-expensed on income statement

4. What is the definition of depreciation?
Allocating cost of plant asset to expense account over useful life of the asset using a rational, systematic method of
allocation

5. How do you calculate depreciation using:
a. Straight-line: Depreciable cost (cost of asset-salvage value)/useful life to expense equal amount of depreciation every
year
b. Double declining balance: (1/estimated life)x2 to get ddb rate, book value x ddb rate=depreciation expense, subtract
dep. expense from book value, answer x ddb etc., method used when assets will become obsolete quickly
c. Units of Activity: useful life expressed in total units of production, machine hours or miles driven. Depreciable cost/units
of activity=dep. cost per unit, dep. cost per unit x units of activity during year

6. Are we allowed to change prior periods depreciation expense?
No because it would adversely affect the users confidence in financial statements

7. What are the journal entries for disposal/sale of assets?
a. Sale:
-if proceeds exceed book value results in Gain on Disposal
Dep. Expense 8000
Accu. Dep.-Furniture 8000
(to record depreciation expense for first 6 months of year)
Cash 16000
Accu. Dep.-Furniture 49000
Furniture 60000
Gain on Disposal 5000
(to record sale of office furniture at gain)
-if proceeds are less than book value results in Loss on Disposal
Cash 9000
Accu. Dep.-Furniture 49000
Loss on Disposal 2000
Furniture 60000
(to record sale of office furniture at a loss)

b. Retirement
Accu. Dep.-Furniture 49000
Loss on Disposal 11000
Furniture 60000
c. Exchange

8. Ch. 9 RatiosProfit Margin x Asset Turnover = Return on Assets
a. Return on Assets Ratio-measures amount of net income generated by each dollar invested in plant assets, higher ratio-
more profitability
Net Income/Average Total Assets
b. Asset Turnover Ratio-measures how efficiently a company uses its assets, how many dollars in sales generated for each
dollar invested in plant assets
higher ratio-company operates more efficiently
Net Sales/Average Total Assets
c. Profit Margin Ratio-Net Income/Net Sales

9. What are intangible assets?
Rights, privileges and competitive advantages that result from ownership of long-lived assets that do not possess
physical substance
a. Which ones are amortized? Ones with definite lives
b. Which ones are not amortized? Ones with indefinite lives
c. What are the different types of intangible assets? Patents, research and development costs, copyrights, trademarks and
trade names, franchises, licenses, leases, goodwill
Amortization Expense 7500
Patent 7500
(to record patent amortization)

10. What are the different types of current liabilities?
Notes payable, sales tax payable, payroll and payroll taxes payable, unearned revenues, current maturities of long-
term debt

11. What is the definition of a current liability?
Debt that a company reasonably expects to pay (1) from existing current assets or thru creation of other current
assets, (2) within one year or the operating cycle

12. What are types of bonds?
Secured bonds-company uses assets as collateral
Unsecured Bonds-general credit of company acts as guarantee to pay
Convertible Bonds-bondholder may turn bonds in for common stock if choose
Callable Bonds-company may retire (buy back) bonds at stated dollar amount prior to maturity date

13. What are the journal entries to account for notes payable?
Cash 100000
Notes Payable 100000
(to record issuance)

Interest Expense 4000
Interest Payable 4000
(to accrue interest)
Notes Payable 100000
Interest Payable 4000
Cash 104000

14. What are the journal entries to account for sales tax payable?
Cash 10600
Sales 10000
Sales Tax Payable 600
(to record daily sales and sales tax)

15. How do you calculate sales and sales tax?
10600 / 1.06 = 10000
16. What kind of account is unearned revenue?
Current liability
17. What are the features of bonds?
Bond certificate-issued to buyer, evidence of claim against company which issued (sold) the bond
Face value-amount due to be paid to investor at maturity
Maturity date-final payment is due to investor from company
Contractual interest rate-stated interest rate usually paid semiannually

18. What is the difference between contractual interest rates and market interest rates?
Contractual interest rate-rate applied to the face value to arrive at the interest paid in a year
Market interest rate-rate investors demand for loaning funds to corporation
-when contractual and market the same, bonds sell at face value
-when contractual lower than market, bonds sell at a discount
-when market lower than contractual, bonds sell at a premium

19. How do you calculate amortization for bond discount using straight-line?

$200,000 x .96=$192,000
$200,000-192,000=$8,000 Discount on Bonds Payable
$8000 / 5 years= $1,600 annual amortization
$1,600 / 12 = $133.33 monthly amortization

20. If a $1,000 bond sells at 98.25, how much will the issuing company receive?
$1,000 x .9825= $982.50

21. Ratios from Chapter 10, what do they measure?
Debt to Total Assets Ratio (extent to which companys assets are financed with debt)
Total Liabilities / Total Assets
Times Interest Earned Ratio (gives indication of a companys ability to meet interest payments as due)
(Net Income + Interest Expense + Tax Expense) / Interest Expense
22. When do we record a Contingency (probable and have reasonable estimate of the amount to be recorded)?
Events with uncertain outcomes aka lawsuits