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UMass Amherst ACCOUNTG 221 - Final Exam Study Guide

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ACCT 221 1st EditionFinal Exam Study Guide Lectures: 14-22Lecture 14- March 24 thInventory turnover ratePerpetual method Tangible long-term asset1. Property plant and equipment- sometimes called plant assets or fixed assets. We depreciate these assets over their useful lifea. Fixed assets = depreciation expense2. Natural Resources- mineral deposits, oil and gas reserves, timber stands, coal mines, andtradea. Natural resource3. Land- has an infinite life and is not subject to depreciationIntangible Assets1. Intangible Assets with an identifiable useful life- these intangibles include patents and copyrights. We amortize the cost of each over its useful life.2. Intangible Assets with Indefinite Useful Lives- The intangibles include renewable franchises, trademarks, and goodwill. The cost of these assets is not expenses unless it can be shown that there has been impairment in value. Capitalize vs ExpenseCapitalize it = Extends its life, adds value -maintenance and repairs are not capitalized; they are expenses Lecture 15 – March 31 st Depreciation 1. Straight-line method Same amount of depreciation is taken each accounting period - Ex. Acquire $25,00 cash from the sale of common stock to purchase the truck Debit Cash Credit Common stock- Purchase a truck on Jan. 1st, 2009, for a net cost of $24,000 Credit Cash Debit Truck - Use the truck to generate 10,000 of revenue for the period. Depreciation expense calculated under straight-line is determined as follows: Asset Cost-Salvage value / Life in years  24-4 / 4yrs = $5,000 per year  Accumulated Deprecation – contra account for assets Record: credit 5,0000 to accumulated depreciation- truck  Debit depreciation expense for 5,000- Sell truck for $4,500 Debit cash 4,500 Credit truck 24,000 Debit accumulated depreciation 20,000 Credit gain on sale of truck 500 2. Double-Declining –Balance Produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years  3. Units of Production Produces varying amounts of depreciation in different accounting periods dependingupon the number of units produced Cost to be capitalized: Whatever it takes to get the asset up and running Salvage value = value on books if you sold equipment at the end of its lifeLecture 16 – April 2 nd Depreciation Methods Double-Declining (1/(# of years expected for useful life)) = % x 2 = xx% - xx% is the amount you multiply by the book value of the asset each year to find the depreciation expense Units of Production Method (Cost – Salvage Value) / Total estimated units of production = Depreciation charge per unit of production Depreciation charge per unit of production x units of production n current accounting period = depreciation expense - Ex. $24,000-$4,000/100,000 miles = $0.20 per mile - .2 * 30,000 miles = $6,000 = depreciation expense for the year  Natural Resources  Ex. Martin Minining Company paid $10,000 cash to purchase land that is expected to yield 5,000,000 tons of coal. After all coal is extracted the land is not expected to have any salvage value. During 2014, the company extracted and sold 500,000 tons of coal. $10,000,000 - $0 (Salvage Value) / 5,000,000 tons = $2.00 per ton extracted and sold  Credit cash 10,000,000 Debit coal mine 10,000,000 Cash flow = investing When expensed: credit coal mine for 1,000,000- Debit expense (equity) for 1,000,000 Expensing Intangible Assets An asset with an indefinite useful life is amortized using the straight-line method over the intangibles legal life or its useful life  Ex. Assume we purchase a patent that has 20-year legal and useful life for 20,000 cash.- Credit cash 20,000- Debit patent 20,000- Expense: Credit patent 1,000 Debit expense 1,000 Current versus Noncurrent  Current liabilities are due within 1 year or an operating cycle, whichever is longer Current liabilities include: Accounts payable Short-term notes payable Wages payable Taxes payable Interest payable Lecture 17- April 7 th Contingent Liabilities  Potential obligation arising from a past event The amount or existence of the obligation depends on some future event Ex. = lawsuits  Accounting standards require companies to classify contingent liabilities into one of three categories: Probable and estimable- Recognize in the financial statements  Reasonably possible (probable but not estimable)- Disclose in the footnotes to financial statements  Remote- No need to recognize or disclose  Warranty Obligations Generally within the warranty period, the seller promises to replace or repair defective products without charge to the customer Ex. Matric, Inc. sells $100,000 of merchandise for cash. The merch. Has a cost to Matrix of $60,000.- Debits cash 100,000- Credit revenue 100,000- Then: Credit inventory Debits Cost of Goods Sold Expense  Ex. 2 Matrix Inc. estimates that warranty expense associated with the current sale will be $5,000- Credit Warranty Payable- Debit Warranty Expense  Ex. 3 Matrix Inc. pays $1,000 cash to repair defective merchandise returned by several customers- Credit cash for 1,000- Debit warranty payable for 1,000- ***Do not debit warranty expense*** - we already estimated our expense, and put it into our warranty payables account – now as we actually pay, we decrease our warranty payables (hence the debit to warranty payable) Current Ratio Current asset/current liabilities Ex. 288,600/193,800 = 1.49 Anything greater than 1 is good!  Investments in Securities A company may use some of its extra cash to invest in the debt or equity securities of another company  These investments must be classified as one of three types: Securities held to maturity- Debt securities - Intent and ability to hold maturity- Not current  Trading securities - Debt and equity securities- Readily determinable fair values - Bought and held to sell in the near term- Actively and frequently traded (trying to make a profit – buy low, sell high)- Measured at fair market value and classified as a current asset- Unrealized gains and losses, included in determination of net income- Current  Securities available for Sale- Debt and equity securities- Readily determinable fair values- Not classified as either securities held to maturity or trading securities- Measured at


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