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?

To track changes in equity accounts Signup and view all the answers

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

Preferred stock Signup and view all the answers

How are cash dividends recorded on the balance sheet?

Decrease in retained earnings Signup and view all the answers

Which cash flow activity involves borrowing and equity transactions?

Financing activities Signup and view all the answers

What is the definition of issued shares in a corporation?

Shares that have been sold to investors Signup and view all the answers

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

Building Signup and view all the answers

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

Expensed Signup and view all the answers

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

Capitalize the costs Signup and view all the answers

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

Dr.Depreciation Expense, Cr.Accumulated Depreciation Signup and view all the answers

Which formula is used to calculate interest expense?

Interest = Principal × Rate × Time Signup and view all the answers

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

Dr.Warranty Expense, Cr.Warranty Payable 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?

Expense the cost Signup and view all the answers

Which type of liability is settled after one year?

Long-Term Liability Signup and view all the answers

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.