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Accounting exam 3 chapter 7-8
Terms in this set (24)
How do you calculate gross profit?
Sales - COGS = GP
What is the primary characteristic of any method called straight line
equal amounts per period
. Multiple Choice: Which of the following is true about residual value:
a. It is deducted from asset cost in calculating annual depreciation expense under the straight-line method
b. It represents the estimate of the cost that can be recovered at the end of an asset's life
c. You initially ignore residual value when applying the DDB method, but don't let book value fall below it.
d. All are true about residual value.
If you buy a restaurant and pay an amount designated as goodwill, what does that goodwill represent?
Location, good reputation, good staff, good client base.
When can companies report goodwill on their balance sheet?
When they acquire it in a business transaction
How is a gain or loss on the sale of a plant asset determined?
PROCEEDS - BV = Gain (Loss)
Sell for 40,000 proceeds an asset that cost $150,000 and has $90,000 in Accum Depr: BV 60,000 (150,000-90,000)
40,000 proceeds - 60000 BV = loss 20,000
How are land and land improvements different? How is the cost of a plant asset determined at acquisition? What plant asset doesn't depreciate?
Land has no limited life, land improvements like landscaping, parking lots, fencing does have a limited life; land does not depreciate; land improvements do depreciate. Cost = price plus all expenditures necessary for acquisition and placement for use.
Calculate the depreciation for the first year on an asset that cost 60,000 with a 5-year life (100,000 miles) and a $5,000 residual value using straight line, DDB, and activity-based method. The asset was used for 12,000 miles in year 1. Round your answers to whole dollars, unit costs to 4 decimal places.
SL 60,000 - 5000 / 5 = $11,000 annual depreciation expense
A patent with a cost of $240,000 is amortized over 5 years. What is the annual amortization? What is the patent's book value at the end of year 2?
240000/5 = 48,000 amort per year; 240000 cost - 48000 (year 1 amortization) - 48000 (year 2 amort.) = 144,000.
What taxes are withheld from employee's paychecks?
FIT, SIT, LIT, Social Security (OASDI & HI)
What liabilities does this create? What is net pay?
FIT withholding payable, SIT withholding payable, employee SS tax Payable
What taxes are paid by the employer for payroll? To what account are these amounts debited?
FUTA, SUTA, Social Security (FICA) ; Employer Payroll Tax Expense
When is the liability for product warranties recorded?
In the same period as the sales of the related products. In other words, When the related items are sold.
In determining how to record a potential contingent liability, what are the 3 classes of probability? What is the accounting treatment for each class?
Probable - record the liab
Reasonably possible - disclose in a note
Remote - do nothing
. DDB is an accelerated depreciation method. How does an accelerated methods differ from other methods? Why are accelerated methods often used for tax purposes?
An accelerated method takes more depreciation in the early years, less as life goes on. Accelerated depreciation allows for faster recovery of asset cost, which gives an advantage for tax purposes, use MACRS for taxes.
What burden is carried by self-employed individuals in regards to FICA tax?
Self employed people pay both the employee and employer share of social security tax (15.3% instead of 7.65%)
What is the inference when it is said that a business can "write-off" an expenditure?
That it can be deducted as an expense or loss and so used to reduce taxable income, resulting in a tax savings.
What are the 3 characteristics of a liability? What are two characteristics of a liability that can be classified as a current liability?
LIAB: probable future sacrifices of economic benefits, arising from present obligations to other entities, resulting from past transactions or events.
Curr Liab: due within 1 year and paid from current assets
How do you calculate the current ratio and how do you interpret the current ratio?
Current assets / current liabilities = current ratio shows how much you have in current assets to cover each $1 of current liability, it is measure of liquidity
How do you calculate net working capital and how do you interpret net working capital?
NWC = current assets - current liability; it is a liquidity measure
How does selling gift cards create a liability? What benefit does selling gift cards offer a company? What are some other types of deferred revenue?
The company that sells gift cards creates a liability for the goods and services that can be redeemed with the gift card; the company selling gift cards gets the cash from the sale of the gift card; subscriptions, season tickets, deposits in advance of sales all result in deferred revenue
What is the difference between a capital expenditure and a revenue expenditure?
Capital expenditures benefit more than 1 period and are recorded as assets; revenue expenditures benefit only the current period and are recorded as expenses
How do intangible assets differ from PP&E?
intangible assets have no physical characteristics, they often represent legal rights; PP&E are real, permanent, fixed assets.
Briefly describe these bond characteristics: secured, debenture, callable, redeemable, convertible, serial
Secured - have specific property as collateral, debenture - issued on the general credit of the company, callable - issuing company can make the holders surrender the bonds for payment, redeemable - holders can turn in the bonds for cash at bond holders' request, convertible - holders can change the bonds for common stock, serial - mature in installments
Recommended textbook explanations
Glencoe Accounting: First Year Course
Don Herrmann, J. David Spiceland, Wayne Thomas
Charles T. Horngren, Srikant M. Datar
Horngren's Cost Accounting
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