ACCT 209 1nd Edition Exam 3 Study Guide Lectures 9 12 Note This study guide is organized by topic Long 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 rate Definitions needed Gain When a long term asset is sold for more than book value Similar to revenue Loss When a long term asset is sold for less than book value Similar to expense Depletion 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 asset Intangible 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 9 Note Good will only comes in when company buys an existing one Current 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 event Current 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 date Maker the person borrowing money also called issuer Payee The person lending money Principle The amount borrowed the amount that interest accrues upon Maturity date The due date of the loan Maturity Value The amount paid by the maker on the maturity date Interest The cost of borrowing What 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 9 Current Liabilities Part Two Lecture 10 October 29 Equations needed 1 Estimated warranty expense Sale warranty 2 Quick Ratio Acid test ratio Quick Assets Current Liabilities Definitions needed Commitments Unexecuted Contract is reported Contingent 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 equation Important 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 compounding PV 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 amount Discounting The process of determining present value Annuity A series of equal payments made at regular intervals What 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 10 Compound 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 parties Bond payable contract to borrow created by an entity then issued or sold to numerous lenders Bond 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 lender Term bonds all bonds in the bond issue mature at same time Serial 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 payment Secured bonds have specific assets of issuing company pledged as collateral Debentures unsecured bonds backed only by general credit worthiness of issuing company Convertible bonds bond holder lender may exchange bond for shares of issuing company s stock Callable bonds issuer may call repay bonds before maturity Stated rate or coupon contract or face rate interest rate that determines the cash interest payments that the bond issuer must pay Market rate or effective rate or yield interest rate that is