ACCT 209 1nd EditionExam # 3 Study Guide Lectures: 9 -12Note: This study guide is organized by topicLong Term Assets Continued (Lecture 9 – October 22)Equations needed: (1) Book Value = Cost – Accumulated depreciation (2) Straight line method of depreciation expense:Expense each year = (Cost – Salvage value)/ Useful life(3) Units of activity method of depreciation expense: Expense = (Cost – salvage value) / useful life in units * Units produced in current period(4) Depletion rate(Natural Resources)= Cost of resource / Estimated units of resource(5) Depletion expense (Natural Resources) = # of unit expected * Depletion rateDefinitions needed:Gain: When a long term asset is sold for more than book value; Similar to revenueLoss: When a long term asset is sold for less than book value; Similar to expenseDepletion: Use of a natural resource (Expense over time)Depreciation: Use of a Property, Plant, & Equipment (Expense over time)Amortization: process of transferring cost to expense over useful life of an intangible assetIntangible Asset: Long lived assets that are used in the operation of a business but have no physical existence; Ex: Copy Rights, Patents, Trademarks, Franchise, and Goodwill;What kind of problems are from this section?- Disposal Problems; Determining whether there was a gain or loss on the disposal of long term assets. To see an example look at “National Express Delivery” Example on lecture note 9- Natural Resources problems; Calculating repletion rate and expense. To see an example look at “Aggie Sand and Gravel” example on lecture note 9Note:- Good will only comes in when company buys an existing oneCurrent Liabilities Part one (Lecture 9 – October 22)Equations needed:(1) Maturity Value = Principle + Total Interest(2) Short term interest bearing notes and simple interest:Interest (I) = Principle (P) * annual rate (R) * Time (T) Definitions needed:Liability: Probable future sacrifice of assets that arise from a present obligation based on a past eventCurrent Liability- Will be satisfied using current Assets; Ex: Accounts payable, Unearned revenue, short term notes payable, payroll liabilities, and current portion of long-term debt.Promissory note: unconditional written promise to pay a specified amount on demand or at a specified dateMaker: the person borrowing money; also called issuer Payee: The person lending moneyPrinciple: The amount borrowed; the amount that interest accrues uponMaturity date: The due date of the loanMaturity Value: The amount paid by the maker on the maturity date.Interest: The cost of borrowingWhat kind of problems are from this section?- Simple interest problems; Be able to calculate the maturity date, maturity value, and the interest expense. To see an example look at “Aggie Company” example in lecture note 9- Discounted Note Problems; Be able to calculate the interest expense, how much the maker will have to pay back and how much the maker received. To see an example look at the second “Aggie Company” example in lecture note 9Current Liabilities Part Two (Lecture 10 - October 29)Equations needed:(1) Estimated warranty expense = Sale * warranty %(2) Quick Ratio (Acid test ratio): Quick Assets / Current LiabilitiesDefinitions needed:Commitments: Unexecuted Contract; is reportedContingent liabilities: Based on a past event; Outcome is uncertain; Ex: Lawsuits, warranties, and guarantees of debts of others;What kind of problems are from this section?-Warranty expense; Estimate the warranty expense-Quick Ratio problems; Be able to use the quick ratio equationImportant things to note:- Quick ratio is like current ratio in that it is a liquidity measurement; It is stricter than current ratio though- Contingent Liabilities should be recorded if it is probable (More than 50% Likely to occur)and amount can be estimated. There should be a foot note if it is reasonable possible (But not probable) and or/ amount can’t be reasonably estimated. If it is not probably then there is no disclosure required.Compound interest and Long-term Liabilities Part one (Lecture 10 - October 29)Equations needed:(1) Present Value (Long way) = Amount to be paid/received in future * 1/ (1 + Interest rate)^Number of period of compoundingPV = FV * 1/ (1+ i) ^n(2) Present Value (Using Table) = Amount to be paid/received in future (FV) * Present Value Factor (PV on present Value table)(3) Present Value of Annuity (Long way) = Present value of each individual payment summed up (4) Present Value of Annuity (Using table) = PVOA = Payment * PVOA Factor (Found on Present value of ordinary annuity table)Definitions needed:Compound Interest: Interest is computed on both the principal and on previously earned interest Present Value: The amount needed today to achieve some unknown future value or the value of some known future amountDiscounting: The process of determining present valueAnnuity: A series of equal payments made at regular intervalsWhat kind of problems are from this section?- Calculating Present value using both the equation and the table; To see examples look at Example number 1 and 2 in lecture note 10- Calculating Present Value of an Annuity using both the equation and the table; To see examples look at Example number 3 and 4 in lecture note 10Compound interest and Long-term Liabilities Part two (Lecture 11 – November 5)Note that a small part of this topic was covered in lecture 12. It is included in this section. Equations needed:(1) Selling Price of bond = Present value of the interest payments (Annuity) and present value of the amount to be paid at maturity (Face amount)Definitions needed:Note payable : negotiated contract between two partiesBond payable : contract to borrow created by an entity then issued or sold to numerous lendersBond indenture: contract that sets out details, such as interest rate, interest payment dates) of bond issue (Some bond indentures include bond covenants)Bond covenant: promise; special provision in bond contract, usually included as protection to the lenderTerm bonds: all bonds in the bond issue mature at same timeSerial bonds: bonds in the bond issue have staggered maturity dates; since not all bonds mature at same time, allows issuing company to spread out re-paymentSecured bonds: have specific assets of issuing company pledged as collateralDebentures (unsecured bonds) – backed only by general credit-worthiness of issuing companyConvertible bonds: bond holder