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MU ACC 221 - Exam 3 Study Guide

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ACC 221 1st EditionExam # 3 Study Guide Lectures: 21 - 31Lecture 21 (March 18) – Fixed AssetsWhat are fixed assets? Long-term assets that the company intends to use up and are never resold. This can include equipment, land, buildings, company cars and trucks. They create up to five asset accounts. We show wear on them through depreciation. What is the purchase price?This is the total amount of money paid to place the item into service. This may include purchase price, tax, and any fees.Dr. Truck, Cr. Cash Lecture 22 (March 20) – Operating Costs and ExpensesWhat are operating costs and expenses? Appear on income statement, expenses once capital asset is put into service (matinence). This is basically the difference between maintaining the life (expenses) v. extending the lifeof the asset (capital cost). If unsure of where something goes, should consider it an operating expense and decrease the assets. Lecture 23 (March 30) – Asset DepreciationWhat are the main depreciation accounts?Accumulated depreciation Permanent account, shows the total value of depreciation over time; rolls over tonext accounting period and builds upon itselfDepreciation expenseTemporary account, emptied into retained earnings as an expense at the end of the accounting cycleBook valueBook value is a calculated cost found based on the balance sheetOriginal cost of asset – accumulated depreciationStop depreciation when book value = residual valueYou may use different types of depreciation for financial reporting and tax returns; government does not regulate this. What is straight-line depreciation? Depreciates evenly over time (Full cost – residual value) / estimated lifeAdjusting entry: Dr. depreciation expense, Cr. Accumulated depreciationWhat is double-declining depreciation?Front-loaded expenses make payments larger in the beginning years to gain a tax advantage(1/ life of loan) x 2; 1/5  2/5 x money left to depreciateAdjusting: dr. depreciation expense, Cr. Accumulated depreciationMust know when to stop depreciating: adjust final year to get the exact depreciation amount to equal residual value; cannot be above or below residual value at the end.What is activity-based depreciation? Depreciation is based on usage of the assetFully depreciated when reaching 100,000 miles(cost – residual value) / life  ($110,000 - $5,000) / 100,000 = $1.05/ mileHow do you remove assets?No gain or lossDr. Cash (amount equipment worth, $66,000)Dr. accumulated depreciation (amount depreciated, $44,000)Cr. Equipment (total $110,000)Gain on saleDr. Cash ($76,000)Dr. Accumulated depreciation ($44,000)Cr. Equipment ($110,000)Cr. Gain on disposal on fixed assets ($10,000)Loss on saleDr. Cash ($56,000)Dr. Accumulated depreciation ($44,000)Dr. Loss on disposal of fixed assets (-$10,000)Cr. Equipment ($110,000)Lecture 24 (April 1) – GoodwillWhat is goodwill?Intangible asset, help to make a company more valuable by adding a variety of aspects, including: brand recognition, logo, reputation, customer loyalty, trained employees and location. Goodwill will be zero when the amount you pay equals the amount of hard assets you receive. You cannot have negative goodwill. Total value paid – physical assets received = goodwillPut on the asset sheet through acquisitions; if the company has never been purchased, there is no goodwill to show. How do you put goodwill into the accounting system?Dr. cash, accounts receivable, inventory, property & equipment, and goodwillCr. Accounts payable, notes payable, and cashLecture 26 (April 6) – PayrollWhat are the types of payroll liabilities?Payroll taxes; until payday, place salary payable into liabilities section. On payday, pay offliabilities with cash. Take our taxes prior to payday. Total salary expense without withholding any: Dr. salaries expense, Cr. Salaries payable FICA TaxSocial security and Medicare (15.3%, employee ½ and employer ½). Calculated as percentage (wages earned). Dr. tax expense, Cr. FICA tax payable. To payoff, Dr. FICA taxes payable, Cr. Cash. Add expense columns = total assets of payrollFederal/ state income tax Individual to each person, Dr. salaries payable, Cr. Federal/ state income tax payable Unemployment tax% you pay depends on how often you lay off employees. Pay state unemployment tax payable and a small federal amount. Sales tax: $100, 7% sales tax, pay $107  Dr. Cash $107, Cr. Sales Revenue $100, Cr. Sales tax payable $7. May also compute: $107/1.07 = original priceLecture 27 (April 8) - BondsWhat are bonds?Long-term liabilities, method of borrowing using more than one lenderWhat is compounding interest? Borrow $10,000, 6% annual interest, outstanding 3 years. Dr. interest expense, Cr. Interest payable for each yearYear 1: $10,000 (6%) = 600  $10,600 owedYear 2: $10,600 (6%) = 636  $11,236 owedYear 3: $11,236 (6%) = 674.16  $11,910.16 owedWhat are table factors? Determine amount owed to bank. Look up in table using the interest rate and number of periods. What is pay demand? When selling a bond to market, if interest rate is lower, the cost of borrowing is lowered, making the total value larger than the face value, letting you borrow more (borrowing on premium). If interest rate increases, you will borrow less (borrowing on discount). If interest rate is the same on initial and day of sale, you will borrow the expected amount (borrowing on par). What are the journal entries when market is buying bonds?Dr. cash, Cr. Bonds payable (use calculated selling price) Lecture 29 (April 13) – Bonds Cont. What are discount bonds?Sold $290,000, 6% annual rate, less than face value. Face value (interest rate) = $17,400. Payment promised in bond agreement = $15,000. Actual – promised = $2,400  Add difference to bond liability. End of terms, liability = face valuePay $15,000 now, save extra $2,400 for last payment: Dr. interest expense $17,400, Cr. Cash $15,000, Cr Bond payable $2,400What are premium bonds?Bond liability $310,000; above face value, 4% annual interest rate. $310,000 (4%) = $12,400. Payment promised in bond agreement = $15,000. Actual – promised = $2,600. Add difference to bond liability. Pay $15,000 now, reduce bond payable by $2,600. By end of term, liability = face value of $300,000Dr. interest expense $12,400, Dr. Bond payable $2,600, Cr. Cash $15,000What are par bonds?Sold $300,000, liability = face value. $300,000 (interest rate) = amount originally promised in bond agreement. All payments will be exactly $15,000,


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