Accounting for Long-Term Assets
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Questions and Answers

What should be recorded if a contingent loss is both probable and estimable?

  • Record and disclose
  • Disclose only
  • Ignore the loss
  • Record the loss (correct)

    • Which of the following best describes the face value of a bond?

  • The interest rate determined at issuance
  • The amount repaid at maturity (correct)
  • The total cost of issuance including fees
  • The price at which a bond is sold in the market

    • Which of the following is a disadvantage of the corporate form of ownership?

  • Double taxation (correct)
  • Transferable ownership
  • Ability to raise capital
  • Limited liability

    • What is the primary purpose of the statement of stockholders' equity?

    <p>To track changes in equity accounts (A)</p> Signup and view all the answers

    What type of stock has rights to dividends and liquidation preference over common stock?

    <p>Preferred stock (B)</p> Signup and view all the answers

    How are cash dividends recorded on the balance sheet?

    <p>Decrease in retained earnings (C)</p> Signup and view all the answers

    Which cash flow activity involves borrowing and equity transactions?

    <p>Financing activities (C)</p> Signup and view all the answers

    What is the definition of issued shares in a corporation?

    <p>Shares that have been sold to investors (B)</p> Signup and view all the answers

    Which of the following is an example of a tangible asset?

    <p>Building (C)</p> Signup and view all the answers

    What accounting treatment is used for costs that benefit only the current period?

    <p>Expensed (B)</p> Signup and view all the answers

    How should you account for an asset when benefits are expected to extend to future periods?

    <p>Capitalize the costs (D)</p> Signup and view all the answers

    What is the correct journal entry for recording straight-line depreciation expense?

    <p>Dr.Depreciation Expense, Cr.Accumulated Depreciation (C)</p> Signup and view all the answers

    Which formula is used to calculate interest expense?

    <p>Interest = Principal × Rate × Time (D)</p> Signup and view all the answers

    What entry is made when recording warranty liabilities at the time of sale?

    <p>Dr.Warranty Expense, Cr.Warranty Payable (B)</p> Signup and view all the answers

    What should be the treatment of a cost if the benefits are expected to occur in the current period only?

    <p>Expense the cost (B)</p> Signup and view all the answers

    Which type of liability is settled after one year?

    <p>Long-Term Liability (D)</p> Signup and view all the answers

    Flashcards

    Tangible Asset

    A physical item, like a building or equipment, that has value.

    Intangible Asset

    A non-physical right, like a patent or trademark, with value.

    Capitalized Cost

    Cost of a long-term asset that benefits future periods.

    Depreciation Expense(Straight-Line)

    The systematic allocation of a long-term asset's cost over its useful life.

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    Current Liability

    An obligation that is due within one year.

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    Notes Payable

    A written promise to pay a specific amount of money at a specific time.

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    Interest Expense Formula

    Principal x Interest Rate x Time in years

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    Warranty Liability

    Estimated cost for future repairs associated with a product sale.

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    Contingent Losses

    Losses that are probable and estimable, or probable but not estimable. Recorded or disclosed depending on estimability. Contingent gains are never recorded.

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    Notes/Bonds Payable

    A way to borrow money with fixed repayment terms (principal and interest).

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    Bond Face Value

    The amount repaid at the bond's maturity date.

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    Authorized Shares

    The maximum number of shares a company is allowed to issue.

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    Issued Shares

    The number of shares actually sold and distributed to investors.

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    Retained Earnings

    Part of a company's equity, increased by net income and decreased by net loss and dividends.

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    Statement of Cash Flows

    Financial statement that tracks the movement of cash into and out of a company during a specific period.

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    Operating Activities (Cash Flows)

    Cash flows that result from the day-to-day operations of a business, including net income adjustments.

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    Study Notes

    Long-Term Assets (L-T Assets)

    • Types of Assets:

      • Tangible assets are physical items like buildings, equipment, and land.
      • Intangible assets are non-physical rights or privileges such as patents, trademarks, and goodwill.

    • Accounting Treatment at Acquisition:

      • Capitalized items benefit future periods (e.g., purchase price, installation).
      • Expensed items only benefit the current period (e.g., maintenance).

    • Accounting Treatment After Acquisition:

      • Capitalize if the benefit extends to current or future periods.
      • Expense if the benefit is solely for the current period.
      • Example: Equipment is capitalized, while maintenance is expensed.

    • Journal Entries:

      • Dr. (Debit) Asset account for increase; Cr. (Credit) Cash or Payable account (decrease) for payment.
      • Example: Dr. Equipment, Cr. Cash represents an equipment purchase.

    Allocation of Costs After Acquisition

    • Depreciation (Straight-Line Method):
      • Formula: (Cost - Residual Value)/Useful Life = Depreciation Expense.

    Asset Disposition

    • Methods:
      • Sale, Retirement, Exchange.
    • Process:
      • Record proceeds.
      • Remove asset's book value.
      • Calculate gain or loss.
      • Example: Dr. Cash, Dr. Acc. Depreciation, Cr. Asset, Cr. Gain (or Dr. Loss).

    Current Liabilities

    • Characteristics:

      • Obligations arising from past transactions.
      • Current liabilities are payable within one year.
      • Long-term liabilities have a payment period exceeding one year.

    • Notes Payable and Interest Expense:

      • Interest = Principal × Rate × Time.

    • Payroll Withholdings and Employer Liabilities:

      • Employee withholdings for taxes (e.g., income tax, social security).
      • Employer expenses: Employer's share of taxes and benefits (e.g., FICA, unemployment).

    • Contingencies:

      • Record if losses are probable and estimable.
      • Disclose if losses are probable but not estimable.
      • Never record contingent gains

    Long-Term Liabilities

    • Financing Alternatives:

      • Notes/Bonds at face value: fixed repayment terms.
      • Leases: lower upfront costs, tax benefits.

    • Bond Characteristics:

      • Face value: Amount repaid at maturity.
      • Interest payments: Regular cash payments.
      • Market rate vs. stated rate: Determines bond issuance (premium, discount, or face value).

    Stockholders' Equity

    • Corporate Form of Ownership:

      • Advantages: Limited liability, transferrable ownership, raise capital.
      • Disadvantages: Double taxation, regulatory requirements.

    • Shares:

      • Authorized: Maximum issuable shares.
      • Issued: Shares sold.
      • Outstanding: Shares currently held by investors.

    • Invested Capital:

      • Issuance of stock: Recorded as stock account and additional paid-in-capital.
      • Example entry: Dr. Cash, Cr. Common Stock, Cr. Additional Paid-In-Capital

    • Preferred Stock:

      • Priority over common stock in dividends and liquidation.

    • Retained Earnings:

      • Increased by net income, decreased by net loss and dividends.
      • Declaration and payment reduce retained earnings.

    • Financial Reporting:

      • Balance Sheet: Stockholder's equity section.
      • Statement of Stockholder's Equity: Changes in equity accounts (e.g., increased by net income, decreased by dividends).

    Statement of Cash Flows

    • Activities:

      • Operating: Day-to-day activities (e.g., net income adjustments).
      • Investing: Asset purchases or sales.
      • Financing: Borrowing and equity transactions.

    • Warranty Liabilities:

      • Estimate and record anticipated costs during sale.

    • Contingent Losses:Record if loss probable and estimable

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    Description

    This quiz covers key concepts related to long-term assets, including types of assets, accounting treatment at and after acquisition, and the journal entries involved in asset transactions. Test your understanding of tangible and intangible assets, as well as the process of depreciation.

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