ACCTMIS 2200 Exam 3 Study Notes

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Questions and Answers

What are the 4 accountable events in the life cycle of Property, Plant, and Equipment (PPE)?

Account for the acquisition of PPE. 2. Account for any capital expenditures made during the life of the asset. 3. Account for the depreciation of buildings and equipment. 4. Account for the sale or disposal of PPE.

What is PPE?

Property, Plant, and Equipment (PPE) are long-term assets that have a physical substance.

At what value is PPE recorded?

PPE is recorded at cost, which includes the purchase price plus all costs incurred in getting the asset ready for its intended use.

What is capitalization in accounting?

Capitalization is when a cost is recorded as part of an asset on the balance sheet rather than as an expense on the income statement. Signup and view all the answers

What is a lump sum purchase?

A lump sum purchase occurs when a company purchases more than one asset for a single, combined amount. Signup and view all the answers

How is the cost allocated to individual assets in a lump sum purchase?

The cost allocated to each asset is based on the percentage of the total fair market value that each individual asset represents. Signup and view all the answers

What is the formula for the cost assigned to each asset in a lump sum purchase?

(Individual Asset Fair Market Value / Total Fair Market Value of All Assets) x Total Purchase Price Signup and view all the answers

What are Capital Expenditures?

Capital Expenditures are costs incurred to significantly improve an asset, such as increasing its expected life or productive capacity. Signup and view all the answers

Should Capital Expenditures and Revenue Expenditures be capitalized?

Capital Expenditures: Yes (added to asset cost). Revenue Expenditures: No (expensed immediately). Signup and view all the answers

What are Revenue Expenditures?

Revenue Expenditures are costs incurred to maintain an asset in good working order, such as ordinary repairs. Signup and view all the answers

On which financial statements are Capital and Revenue Expenditures primarily reflected?

Capital Expenditures are reflected on the Balance Sheet (as part of asset cost). Revenue Expenditures are reflected on the Income Statement (as expenses). Signup and view all the answers

What is depreciation?

Depreciation is the systematic allocation of the cost of a plant asset (specifically buildings and equipment) to expense over its useful life, reflecting its usage or 'using up'. Signup and view all the answers

What type of PPE is typically not depreciated?

Land is typically not depreciated. Signup and view all the answers

What is the standard journal entry to record depreciation expense?

Debit Depreciation Expense; Credit Accumulated Depreciation. Signup and view all the answers

Describe the characteristics of the Depreciation Expense account.

Depreciation Expense is an expense account found on the income statement. It reduces net income and represents the amount of building or equipment estimated to have been used up in the current accounting year. Signup and view all the answers

Describe the characteristics of the Accumulated Depreciation account.

Accumulated Depreciation is a contra-asset account shown on the balance sheet with a normal credit balance. It decreases total assets and represents the total amount of the building or equipment's cost that has been depreciated since it was acquired by the company. Signup and view all the answers

What is the formula for Book Value?

Book Value = Cost of Asset - Accumulated Depreciation Signup and view all the answers

How does the book value of a depreciable asset typically change over time?

The book value of a depreciable asset typically decreases each year as accumulated depreciation increases. Signup and view all the answers

What are the four common depreciation methods?

<ol> <li>Straight-line, 2. Sum-of-the-years'-digits, 3. Double-declining balance, 4. Units of production.</li> </ol> Signup and view all the answers

What does the 'Cost' factor include when calculating depreciation?

Cost includes all expenditures necessary to acquire the asset and make it ready for its intended use. Signup and view all the answers

What does 'Useful Life' mean in depreciation calculations?

Useful life is an estimate of the length of time, typically in years, that the asset will be used in the company's business operations. Signup and view all the answers

What is 'Residual Value' in depreciation calculations?

Residual value is an estimate of the amount the company expects to be able to sell the asset for at the end of its useful life. Signup and view all the answers

What are the three key factors used in calculating depreciation?

Cost, useful life, and residual value. Signup and view all the answers

What is another name for residual value?

Salvage value. Signup and view all the answers

What is the formula for the straight-line depreciation method?

Depreciation Expense = (Cost - Residual Value) / Useful Life (in years) Signup and view all the answers

What is a key characteristic of the straight-line depreciation method regarding the annual expense amount?

Depreciation expense is the same amount each year of the asset's life using the straight-line method, assuming an equal 'using-up' of the asset over time. Signup and view all the answers

When is an asset considered fully depreciated?

An asset is fully depreciated when its ending book value equals its estimated residual value. Signup and view all the answers

What are Accelerated Depreciation Methods?

Accelerated depreciation methods record more depreciation expense in the early years of an asset's life and less depreciation expense in the later years. They show a declining amount of depreciation each year. Signup and view all the answers

What is the formula for the Sum-of-the-Years'-Digits (SYD) depreciation method?

Depreciation Expense = (Cost - Residual Value) x (Remaining Useful Life / SYD) Signup and view all the answers

In the Sum-of-the-Years'-Digits (SYD) method, how does the fraction (Remaining Useful Life / SYD) change over time?

The numerator starts as the asset's total useful life and decreases by one each year. The denominator (SYD) remains constant throughout all years. Signup and view all the answers

What is the formula for the double-declining balance (DDB) depreciation method?

Depreciation Expense = Book Value at Beginning of Year x (2 / Useful Life) Signup and view all the answers

What is the basis for the Units of Production depreciation method, and which accounting concept does it closely follow?

The Units of Production method bases depreciation on the actual usage or output of the asset. It adheres closely to the matching concept. Signup and view all the answers

What is the formula to calculate the depreciation rate per unit for the Units of Production method?

Usage Rate (Depreciation per Unit) = (Cost - Residual Value) / Total Estimated Usage (in units, hours, miles, etc.) Signup and view all the answers

Under what condition is a gain on the sale of an asset recorded?

A gain on sale is recorded if the cash received from the sale of an asset exceeds the asset's book value at the time of sale. Signup and view all the answers

Under what condition is a loss on the sale of an asset recorded?

A loss on sale is recorded if the cash received from the sale is less than the asset's book value at the time of sale. Signup and view all the answers

Describe the characteristics of a Gain on Sale account.

A Gain on Sale is typically treated as a revenue account (or 'other income'). It appears on the income statement and increases net income and, subsequently, retained earnings. Signup and view all the answers

Describe the characteristics of a Loss on Sale account.

A Loss on Sale is an expense account (or 'other loss'). It appears on the income statement and decreases net income and, subsequently, retained earnings. Signup and view all the answers

What are the four key items to account for when recording the sale of a plant asset?

<ol> <li>Record the cash received from the sale. 2. Eliminate the asset sold from the balance sheet (at its original cost). 3. Eliminate the related accumulated depreciation from the balance sheet. 4. Record any resulting gain or loss on the sale.</li> </ol> Signup and view all the answers

How is a Gain on Sale calculated?

First, calculate the Book Value (Cost of Asset - Accumulated Depreciation). Then, Gain on Sale = Selling Price - Book Value (where Selling Price > Book Value). Signup and view all the answers

How is a Loss on Sale calculated?

First, calculate the Book Value (Cost of Asset - Accumulated Depreciation). Then, Loss on Sale = Book Value - Selling Price (where Book Value > Selling Price). Signup and view all the answers

The measurement and recording of liabilities are based on what fundamental financial concept?

The measurement and recording of liabilities are based on the concept of the Time Value of Money, specifically involving compound interest. Signup and view all the answers

What is Simple Interest?

Simple interest is interest earned only on the original principal amount invested. Signup and view all the answers

What is the formula for simple interest?

Simple Interest = Principal (P) x Interest Rate (R) x Time (T) Signup and view all the answers

What is Compound Interest?

Compound interest is interest earned on both the principal invested and on all previously earned interest that has been added to the principal. Signup and view all the answers

What are the four primary Time Value of Money (TVM) calculation cases?

<ol> <li>Future value of a lump sum. 2. Present value of a lump sum. 3. Future value of an annuity. 4. Present value of an annuity.</li> </ol> Signup and view all the answers

In time value of money tables or calculations, what do 'n' and 'i' typically represent?

'n' represents the number of periods (e.g., years, months), usually found in the left column of tables. 'i' represents the interest rate per period, usually found in the top row of tables. Signup and view all the answers

What question does the Future Value of a Lump Sum calculation answer?

It answers: If we know the value of an amount today (present value), what will its value be at a specific point in the future, given a certain interest rate and compounding? Signup and view all the answers

What is compounding frequency?

Compounding frequency refers to how often interest is calculated and added to the principal within a given period (e.g., annually, semi-annually, quarterly, monthly). Signup and view all the answers

When interest is compounded more frequently than annually, what adjustments must be made to the interest rate (i) and number of periods (n) in TVM calculations?

The periodic interest rate 'i' must be adjusted by dividing the annual rate by the number of compounding periods per year. The total number of periods 'n' must be adjusted by multiplying the number of years by the number of compounding periods per year. These adjustments are necessary for all TVM cases when compounding is not annual. Signup and view all the answers

What question does the Present Value of a Lump Sum calculation answer?

It answers: If we know the value of an amount to be received or paid in the future, what is its equivalent value today, given a certain discount rate? Signup and view all the answers

What is discounting?

Discounting is the process of determining the present value of a future amount of money. Signup and view all the answers

What is the relationship between the present value (PV) and future value (FV) of a lump sum?

Present value and future value of a lump sum are reciprocals or opposites. Calculating the PV involves discounting a future amount back to the present, while calculating the FV involves compounding a present amount forward to the future. Signup and view all the answers

What is an annuity?

An annuity is a series of equal payments (either amounts received or paid) made at regular, equal time intervals. Signup and view all the answers

What is an Ordinary Annuity?

An ordinary annuity is an annuity where the payments occur at the END of each period. Signup and view all the answers

What is an Annuity Due?

An annuity due is an annuity where the payments occur at the BEGINNING of each period. Signup and view all the answers

What is the formula for the Future Value of an Ordinary Annuity (FVOA)?

FVOA = Payment Amount x Future Value Annuity Factor (from table or formula, using i and n) Signup and view all the answers

What is the formula for the Future Value of an Annuity Due (FVAD)?

FVAD = Payment Amount x Future Value Annuity Factor (i, n) x (1 + i) Signup and view all the answers

What is the formula for the Present Value of an Ordinary Annuity (PVOA)?

PVOA = Payment Amount x Present Value Annuity Factor (from table or formula, using i and n). Note: 'Payment' represents the amount of each individual, equal payment; do NOT sum the payments first. Signup and view all the answers

What is the formula for the Present Value of an Annuity Due (PVAD)?

PVAD = Payment Amount x Present Value Annuity Factor (i, n) x (1 + i) Signup and view all the answers

What is a long-term note payable?

A long-term note payable typically represents money borrowed from a bank or other lender for a period longer than one year, requiring periodic payments of principal and interest. Signup and view all the answers

What is the major accounting objective when dealing with long-term liabilities involving periodic payments (like notes payable or mortgages)?

The major objective is to determine how much of each loan payment should be allocated to interest expense and how much should be considered a reduction of the outstanding principal loan balance. Signup and view all the answers

What is an Amortization Table (or Schedule)?

An amortization table is a schedule that details each periodic payment on a loan (like a mortgage or note payable), showing the allocation of each payment between interest expense and principal reduction, and the remaining loan balance after each payment. Signup and view all the answers

In a loan amortization table, how is the interest portion of a payment typically calculated?

Interest = Outstanding Loan Balance (at the beginning of the period) x Periodic Interest Rate x Time (usually 1 for the period, e.g., # months / 12 if monthly payments) Signup and view all the answers

In a loan amortization table, how is the reduction of principal calculated?

Reduction of Principal = Total Payment Amount - Interest Portion Signup and view all the answers

In a loan amortization table, how is the new loan balance calculated after a payment?

New Loan Balance = Previous Loan Balance - Reduction of Principal Signup and view all the answers

What is a mortgage?

A mortgage is a special type of long-term note payable (borrowing, usually from a bank) that is secured by the pledging of specific assets, typically real estate, as collateral for the loan. Signup and view all the answers

What is the journal entry to record the issuance (receipt of funds) of a mortgage?

Debit Cash (for the amount borrowed); Credit Mortgage Payable (for the same amount). The liability is initially recorded at the amount borrowed. Signup and view all the answers

What is the typical journal entry structure for making a mortgage payment?

Debit Interest Expense (for the interest portion), Debit Mortgage Payable (for the principal reduction portion); Credit Cash (for the total payment amount). Signup and view all the answers

What is a lease?

A lease is a contract specifying the terms under which the owner of an asset (the lessor) agrees to transfer the right to use the asset to another party (the lessee) for a specified period. Signup and view all the answers

Who is the Lessee?

The lessee is the party that is granted the right to use property under the terms of a lease. Signup and view all the answers

Who is the Lessor?

The lessor is the owner of the property that is leased (rented) to another party (the lessee). Signup and view all the answers

Summarize the key accounting steps for a lessee under current finance lease standards.

The lessee records a 'Right-of-Use Asset' (leased asset) and a corresponding 'Lease Liability' on their balance sheet, both initially measured at the present value of the future lease payments. The Right-of-Use Asset is typically depreciated (amortized), and the Lease Liability is amortized (reduced) as payments are made. Signup and view all the answers

How is the depreciation of a leased asset (Right-of-Use Asset) often referred to, and what depreciation method is commonly used?

The depreciation of a leased asset is often referred to as amortization. While any systematic method can be used, it's typically calculated on a straight-line basis. Signup and view all the answers

What is the journal entry to record the depreciation (amortization) of a leased asset?

Debit Amortization Expense; Credit Right-of-Use Asset (or Accumulated Amortization). Signup and view all the answers

How does a lessee determine the appropriate useful life for depreciating (amortizing) a leased asset?

If the asset is returned to the lessor at the end of the lease, the lessee typically uses the lease term as the asset's life. If ownership of the asset is expected to transfer to the lessee (e.g., through a bargain purchase option), the lessee generally uses the economic life of the asset. Signup and view all the answers

Explain the process of amortizing the lease liability.

Amortizing the lease liability involves reducing the liability balance each time a lease payment is made. At the end of the lease term, the liability balance must be zero. Each payment is separated into an interest expense component and a principal reduction component, often using an amortization table similar to that used for loans. Signup and view all the answers

What journal entry does a lessee typically make at the inception (beginning) of a finance lease?

Debit Right-of-Use Asset; Credit Lease Liability. Both accounts are recorded at the present value of the future lease payments. Signup and view all the answers

What is the journal entry for the annual amortization (depreciation) of a leased asset?

Debit Amortization Expense; Credit Right-of-Use Asset (or Accumulated Amortization). Signup and view all the answers

What is the typical journal entry structure for a lessee making a lease payment under a finance lease?

Debit Interest Expense (for the interest portion), Debit Lease Liability (for the principal reduction portion); Credit Cash (for the total payment amount). Signup and view all the answers

What is the formula for the Debt-to-Equity Ratio?

Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity Signup and view all the answers

What does the Debt-to-Equity ratio measure?

It measures the proportion of a company's financing that comes from creditors (debt) versus stockholders (equity). It serves as a measure of leverage and indicates the degree of creditors' protection against potential insolvency. Signup and view all the answers

How is the Debt-to-Equity ratio typically interpreted?

A ratio greater than 1 indicates that the company has more debt than equity (e.g., a ratio of 1.3 means liabilities are 1.3 times, or 30% larger than, equity). A ratio less than 1 indicates that equity is greater than debt. A higher ratio implies greater financial leverage and potentially higher risk for creditors and investors. Signup and view all the answers

What are the 4 accountable events in the life cycle of Property, Plant, and Equipment (PPE)?

<ol> <li>Account for the acquisition of PPE.</li> <li>Account for any capital expenditures made during the life of the asset.</li> <li>Account for the depreciation of buildings and equipment.</li> <li>Account for the sale or disposal of PPE.</li> </ol> Signup and view all the answers

What is Property, Plant, and Equipment (PPE)?

Long-term assets that have a physical substance. Signup and view all the answers

PPE is recorded at its _____, which includes the purchase price plus all costs incurred in getting the asset ready for its intended use.

cost Signup and view all the answers

What is capitalization in accounting?

Capitalization is when a cost is recorded as part of an asset on the balance sheet rather than as an expense on the income statement. Signup and view all the answers

What is a lump sum purchase?

When a company purchases more than one asset for a single, combined amount. Signup and view all the answers

How is the cost typically allocated to individual assets in a lump sum purchase?

The cost is allocated based on the relative fair market values of the individual assets acquired. Signup and view all the answers

What is the formula for assigning cost to an individual asset in a lump sum purchase based on relative market values?

(Individual Asset's Fair Market Value / Total Fair Market Value of All Assets Purchased) x Total Lump-Sum Purchase Cost Signup and view all the answers

What are Capital Expenditures?

Costs incurred to significantly improve an asset, such as increasing its expected useful life, efficiency, or productive capacity. Signup and view all the answers

Should capital expenditures be capitalized? Should revenue expenditures be capitalized?

Capital expenditures should be capitalized (Yes). Revenue expenditures should not be capitalized; they are expensed immediately (No). Signup and view all the answers

What are Revenue Expenditures?

Costs incurred to maintain an asset in its normal operating condition (e.g., ordinary repairs, maintenance). Signup and view all the answers

On which financial statement are capital expenditures primarily reflected? On which financial statement are revenue expenditures primarily reflected?

Capital expenditures are capitalized and added to asset accounts on the balance sheet. Revenue expenditures are expensed immediately on the income statement. Signup and view all the answers

What is depreciation?

The systematic and rational allocation of the cost of a tangible plant asset (excluding land) to expense over its estimated useful life. Signup and view all the answers

Which type of PPE asset is typically not depreciated?

Land Signup and view all the answers

What is the standard journal entry to record depreciation expense?

Debit Depreciation Expense, Credit Accumulated Depreciation. Signup and view all the answers

Describe the Depreciation Expense account.

It is an operating expense account reported on the income statement. It represents the portion of a plant asset's cost allocated to the current accounting period. Signup and view all the answers

Describe the Accumulated Depreciation account.

It is a contra-asset account with a normal credit balance reported on the balance sheet as a deduction from the related asset's cost. It represents the total depreciation recorded on the asset since its acquisition. Signup and view all the answers

What is the formula for calculating the book value (or carrying value) of an asset?

Book Value = Cost of Asset - Accumulated Depreciation Signup and view all the answers

The book value of a depreciable asset typically increases each year as accumulated depreciation gets larger.

False (B) Signup and view all the answers

Name four common methods for calculating depreciation expense.

<ol> <li>Straight-line</li> <li>Sum-of-the-years'-digits</li> <li>Double-declining balance</li> <li>Units of production (or Activity method)</li> </ol> Signup and view all the answers

In the context of calculating depreciation, what does 'Cost' refer to?

The initial acquisition cost of the asset, including the purchase price and all expenditures necessary to get it ready for its intended use. Signup and view all the answers

In the context of calculating depreciation, what does 'Useful Life' refer to?

An estimate of the length of time (in years, units produced, hours used, etc.) the asset is expected to be used in the company's operations. Signup and view all the answers

In the context of calculating depreciation, what does 'Residual Value' refer to?

An estimate of the asset's expected value at the end of its useful life. Signup and view all the answers

What three factors are essential inputs for calculating depreciation expense?

Cost, estimated useful life, and estimated residual value. Signup and view all the answers

What is another common name for residual value?

Salvage value. Signup and view all the answers

What is the formula for calculating annual depreciation expense using the straight-line method?

(Cost - Residual Value) / Useful Life (in years) Signup and view all the answers

What is a key characteristic of the straight-line depreciation method concerning the annual expense amount?

The depreciation expense recorded is the same amount in each full year of the asset's useful life. Signup and view all the answers

When a depreciable asset is fully depreciated, its ending book value must equal its estimated _ _.

residual value Signup and view all the answers

What is the characteristic feature of accelerated depreciation methods?

They record higher amounts of depreciation expense in the earlier years of an asset's life and lower amounts in the later years. Signup and view all the answers

What is the formula for calculating annual depreciation expense using the Sum-of-the-Years'-Digits (SYD) method?

Depreciable Base x (Remaining Useful Life / SYD), where Depreciable Base = (Cost - Residual Value) and SYD is the sum of the digits of the asset's useful life. Signup and view all the answers

In the SYD depreciation formula fraction (Remaining Useful Life / SYD), how does the numerator change over time?

The numerator (Remaining Useful Life) starts as the total useful life and decreases by one each subsequent year. Signup and view all the answers

What is the formula for calculating annual depreciation expense using the double-declining balance (DDB) method?

Book Value at the Beginning of the Year x DDB Rate, where DDB Rate = (2 / Useful Life in years). Signup and view all the answers

What is the basis for calculating depreciation using the Units of Production method?

It is based on the actual usage or activity level of the asset (e.g., units produced, miles driven, hours operated) rather than the passage of time. Signup and view all the answers

How is the depreciation rate per unit calculated for the Units of Production method, and how is annual expense determined?

Depreciation Rate per Unit = (Cost - Residual Value) / Total Estimated Usage (in units). Annual Depreciation Expense = Depreciation Rate per Unit x Actual Usage (in units) for the year. Signup and view all the answers

Under what condition is a gain on the sale of a plant asset recorded?

A gain is recorded if the cash proceeds (selling price) received from the sale exceed the asset's book value (Cost - Accumulated Depreciation) at the time of sale. Signup and view all the answers

Under what condition is a loss on the sale of a plant asset recorded?

A loss is recorded if the cash proceeds (selling price) received from the sale are less than the asset's book value (Cost - Accumulated Depreciation) at the time of sale. Signup and view all the answers

Describe the Gain on Sale of Asset account.

It is typically classified as non-operating income or 'Other Income/Gains' on the income statement. It increases net income and retained earnings. Signup and view all the answers

Describe the Loss on Sale of Asset account.

It is typically classified as a non-operating expense or 'Other Expenses/Losses' on the income statement. It decreases net income and retained earnings. Signup and view all the answers

What four components must be accounted for in the journal entry when selling or disposing of a plant asset?

<ol> <li>Record the cash (or other assets) received.</li> <li>Remove the original cost of the asset sold from the balance sheet (credit the asset account).</li> <li>Remove the related accumulated depreciation from the balance sheet (debit Accumulated Depreciation).</li> <li>Record the resulting gain (credit) or loss (debit).</li> </ol> Signup and view all the answers

How is a gain on the sale of a plant asset calculated?

Gain = Selling Price - Book Value at Date of Sale (where Book Value = Cost - Accumulated Depreciation) Signup and view all the answers

How is a loss on the sale of a plant asset calculated?

Loss = Book Value at Date of Sale - Selling Price (where Book Value = Cost - Accumulated Depreciation) Signup and view all the answers

What fundamental concept recognizes that money available today is worth more than the same amount in the future due to its potential earning capacity, impacting liability measurement?

The time value of money. Signup and view all the answers

What is simple interest?

Interest calculated only on the original principal amount, without earning interest on previously accrued interest. Signup and view all the answers

What is the formula for calculating simple interest?

Interest = Principal (P) x Annual Interest Rate (R) x Time Period (T, in years) Signup and view all the answers

What is compound interest?

Interest calculated on the initial principal and also on the accumulated interest from previous periods ("interest on interest"). Signup and view all the answers

Name the four basic time value of money (TVM) calculation cases involving single sums and annuities.

<ol> <li>Future value of a lump sum (single amount)</li> <li>Present value of a lump sum (single amount)</li> <li>Future value of an annuity (series of equal payments)</li> <li>Present value of an annuity (series of equal payments)</li> </ol> Signup and view all the answers

In standard time value of money tables or formulas, what do 'n' and 'i' represent?

'n' represents the number of compounding periods (e.g., years, months), and 'i' represents the interest rate per compounding period. Signup and view all the answers

What does the 'Future Value of a Lump Sum' calculation determine?

It determines the value of a single amount of money invested today at a specific date in the future, considering compound interest earned over the period. Signup and view all the answers

What does 'compounding frequency' refer to?

The number of times per year that interest is calculated and added to the principal (e.g., annually, semi-annually, quarterly, monthly). Signup and view all the answers

When interest is compounded more frequently than annually, what adjustments must be made to the annual interest rate ('i') and the number of years ('n') in TVM calculations?

Divide the annual interest rate by the number of compounding periods per year to get the periodic rate 'i'. Multiply the number of years by the number of compounding periods per year to get the total number of periods 'n'. Signup and view all the answers

What does the 'Present Value of a Lump Sum' calculation determine?

It determines the current value (value today) of a single amount of money to be received at a specific date in the future, discounted back at a given interest rate. Signup and view all the answers

What is 'discounting' in finance?

The process of calculating the present value of future cash flows. Signup and view all the answers

The present value (PV) factor for a lump sum is the mathematical reciprocal of the future value (FV) factor for a lump sum, given the same interest rate (i) and number of periods (n).

True (A) Signup and view all the answers

What is an annuity?

A series of equal cash payments or receipts occurring at regular, equal time intervals. Signup and view all the answers

What distinguishes an ordinary annuity from other types?

In an ordinary annuity, the equal payments occur at the end of each period. Signup and view all the answers

What distinguishes an annuity due from other types?

In an annuity due, the equal payments occur at the beginning of each period. Signup and view all the answers

How do you calculate the Future Value of an Ordinary Annuity (FVOA)?

FVOA = Periodic Payment Amount x Future Value of an Ordinary Annuity Factor (FVOA Factor i,n) Signup and view all the answers

How do you calculate the Future Value of an Annuity Due (FVAD)?

FVAD = Periodic Payment Amount x Future Value of an Ordinary Annuity Factor (FVOA Factor i,n) x (1 + i) Signup and view all the answers

How do you calculate the Present Value of an Ordinary Annuity (PVOA)?

PVOA = Periodic Payment Amount x Present Value of an Ordinary Annuity Factor (PVOA Factor i,n) Signup and view all the answers

How do you calculate the Present Value of an Annuity Due (PVAD)?

PVAD = Periodic Payment Amount x Present Value of an Ordinary Annuity Factor (PVOA Factor i,n) x (1 + i) Signup and view all the answers

What is a long-term note payable?

A formal written promise (promissory note) to repay a borrowed sum plus interest over a period exceeding one year. Signup and view all the answers

When accounting for installment payments on long-term notes payable, what is the primary objective regarding each payment?

To accurately allocate each payment between the interest expense incurred during the period and the reduction of the outstanding principal loan balance. Signup and view all the answers

What schedule is commonly prepared to systematically show the allocation of each loan payment between interest and principal reduction over the loan's term?

An amortization table (or loan amortization schedule). Signup and view all the answers

In a loan amortization schedule, how is the interest portion of a specific payment typically calculated?

Interest = Outstanding Loan Balance at the Beginning of the Period x Periodic Interest Rate Signup and view all the answers

In a loan amortization schedule, how is the principal reduction portion of a specific payment calculated?

Reduction of Principal = Total Periodic Payment Amount - Interest Portion for the Period. Signup and view all the answers

In a loan amortization schedule, how is the new outstanding loan balance calculated after a payment?

New Loan Balance = Previous Loan Balance - Reduction of Principal for the current payment. Signup and view all the answers

What is a mortgage payable?

A specific type of long-term note payable where the borrower pledges certain assets, usually real estate, as collateral (security) for the loan. Signup and view all the answers

What is the journal entry to record the initial borrowing (issuance) through a mortgage payable?

Debit Cash (for the amount received), Credit Mortgage Payable (for the principal amount borrowed). Signup and view all the answers

What is the typical journal entry to record a periodic mortgage payment?

Debit Interest Expense (for interest portion), Debit Mortgage Payable (for principal reduction portion), Credit Cash (for the total payment amount). Signup and view all the answers

Define a lease.

A contractual agreement where the owner of an asset (the lessor) grants another party (the lessee) the right to use the asset for a specified period in exchange for periodic payments. Signup and view all the answers

Who is the lessee in a lease agreement?

The party obtaining the right to use the asset under the lease terms. Signup and view all the answers

Who is the lessor in a lease agreement?

The owner of the asset who grants the right to use it to the lessee. Signup and view all the answers

Under current accounting standards for finance leases, what does the lessee initially record on their balance sheet? How are these items accounted for over the lease term?

The lessee records a 'Right-of-Use' (ROU) asset and a corresponding Lease Liability, both measured at the present value of future lease payments. Over the lease term, the ROU asset is amortized (depreciated), and the Lease Liability is reduced (amortized) as payments are made, with interest expense being recognized. Signup and view all the answers

What is the periodic expense related to a Right-of-Use asset commonly called? What depreciation methods can be used?

The expense is typically called Amortization Expense. Generally, the straight-line method is used over the lease term or the asset's useful life, depending on lease criteria. Signup and view all the answers

Assuming amortization is recorded by reducing the asset account directly, what is the journal entry to record the periodic amortization of a Right-of-Use (ROU) asset?

Debit Amortization Expense, Credit Right-of-Use Asset. Signup and view all the answers

How does a lessee determine the amortization period (useful life) for a Right-of-Use asset acquired under a finance lease?

If the lease transfers ownership to the lessee by the end of the term or includes a bargain purchase option likely to be exercised, the lessee amortizes the asset over its economic life. Otherwise (if the asset is returned to the lessor), the lessee generally amortizes it over the shorter of the lease term or the asset's economic life (often simply the lease term). Signup and view all the answers

Describe the process of amortizing the lease liability.

Similar to loan amortization, each lease payment is allocated between reducing the lease liability (principal reduction) and recognizing interest expense based on the outstanding liability balance and the interest rate implicit in the lease (or the lessee's incremental borrowing rate). The liability balance must reach zero by the end of the lease term. An amortization table is used. Signup and view all the answers

What is the journal entry for the lessee at the inception (commencement date) of a finance lease?

Debit Right-of-Use Asset, Credit Lease Liability. Both accounts are recorded at the present value of the minimum lease payments. Signup and view all the answers

What is the journal entry to record the annual amortization expense for a leased asset (Right-of-Use Asset)?

Debit Amortization Expense, Credit Right-of-Use Asset (or Accumulated Amortization - ROU Asset). Signup and view all the answers

What is the journal entry for the lessee when making a periodic lease payment (assuming an ordinary annuity structure)?

Debit Interest Expense (calculated on the outstanding liability), Debit Lease Liability (for the principal reduction portion), Credit Cash (for the total payment amount). Signup and view all the answers

What is the formula for the Debt-to-Equity ratio?

Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity Signup and view all the answers

What does the Debt-to-Equity ratio measure?

It measures the relative proportion of financing provided by creditors (debt/liabilities) versus owners (equity). It indicates the extent to which a company relies on debt to finance its assets and operations, providing insight into financial risk and creditor protection. Signup and view all the answers

What generally does a Debt-to-Equity ratio greater than 1.0 signify compared to a ratio less than 1.0?

A ratio greater than 1.0 means the company has more debt financing than equity financing (e.g., a ratio of 1.5 indicates liabilities are 50% greater than equity). A ratio less than 1.0 means equity financing exceeds debt financing. Signup and view all the answers

What are the 4 main accountable events in the life cycle of Property, Plant, and Equipment (PPE)?

<ol> <li>Account for the acquisition of PPE. 2. Account for any capital expenditures made during the life of the asset. 3. Account for the depreciation of buildings and equipment. 4. Account for the sale or disposal of PPE.</li> </ol> Signup and view all the answers

What is Property, Plant, and Equipment (PPE)?

Long-term assets that have a physical substance. Signup and view all the answers

PPE is recorded at _____. This includes the purchase price plus all costs incurred in getting the asset ready for use.

cost Signup and view all the answers

What is capitalization in accounting?

When a cost is recorded as part of an asset on the balance sheet rather than as an expense on the income statement. Signup and view all the answers

What is a lump sum purchase?

When a company purchases more than one asset for a single, combined amount. Signup and view all the answers

How is the cost allocated to individual assets in a lump sum purchase?

Based on the percentage of the total market value represented by each individual asset. Signup and view all the answers

What is the formula for assigning cost to each asset in a lump sum purchase based on market values?

Assigned Cost = (Individual Asset Market Value / Total Market Value of all Assets) x Total Purchase Price Signup and view all the answers

What are Capital Expenditures?

Costs incurred to significantly improve an asset, such as increasing its expected life or productive capacity. Signup and view all the answers

Revenue expenditures should be capitalized.

False (B) Signup and view all the answers

What are Revenue Expenditures?

Costs incurred to keep an asset in good working order, such as ordinary repairs and maintenance. Signup and view all the answers

On which financial statement are capital expenditures primarily reflected? On which statement are revenue expenditures reflected?

Capital expenditures are reflected on the Balance Sheet (as part of assets). Revenue expenditures are reflected on the Income Statement (as expenses). Signup and view all the answers

What is depreciation?

The systematic allocation of the cost of a plant asset (buildings and equipment) to expense over its useful life. Signup and view all the answers

Which type of PPE asset is typically not depreciated?

Land Signup and view all the answers

What is the standard journal entry to record depreciation expense?

Debit Depreciation Expense, Credit Accumulated Depreciation. Signup and view all the answers

Describe the Depreciation Expense account.

It is an expense account reported on the Income Statement. It reduces net income and represents the amount of building or equipment cost allocated to the current accounting period. Signup and view all the answers

Describe the Accumulated Depreciation account.

It is a contra-asset account shown on the Balance Sheet with a normal credit balance. It decreases total assets and represents the total amount of depreciation recorded on an asset since its acquisition. Signup and view all the answers

What is the formula for Book Value?

Book Value = Cost of Asset - Accumulated Depreciation Signup and view all the answers

How does the book value of a depreciable asset typically change over time?

It decreases each year as accumulated depreciation increases. Signup and view all the answers

List the four common depreciation methods mentioned.

<ol> <li>Straight-line, 2. Sum-of-the-years'-digits, 3. Double-declining balance, 4. Units of production.</li> </ol> Signup and view all the answers

Define 'Cost' as a factor in calculating depreciation.

All expenditures necessary to acquire the asset and make it ready for its intended use. Signup and view all the answers

Define 'Useful Life' as a factor in calculating depreciation.

An estimate of the length of time (usually in years) the asset will be used in business operations. Signup and view all the answers

Define 'Residual Value' as a factor in calculating depreciation.

An estimate of the amount the company expects to receive from selling the asset at the end of its useful life. Signup and view all the answers

What three factors are needed to calculate depreciation?

Cost, Useful Life, and Residual Value. Signup and view all the answers

What is another common name for residual value?

Salvage value Signup and view all the answers

What is the formula for the straight-line depreciation method?

Annual Depreciation Expense = $(Cost - Residual Value) / Useful Life (in years)$ Signup and view all the answers

What is a key characteristic of the straight-line depreciation method regarding the annual expense?

The depreciation expense recorded is the same amount in each year of the asset's useful life. Signup and view all the answers

When is an asset considered fully depreciated?

When its accumulated depreciation equals its depreciable base (Cost - Residual Value), meaning its ending book value equals its residual value. Signup and view all the answers

What are Accelerated Depreciation Methods?

Methods that record more depreciation expense in the early years of an asset's life and less depreciation expense in the later years. Signup and view all the answers

What is the formula for the Sum-of-the-Years'-Digits (SYD) depreciation method?

Annual Depreciation Expense = $(Cost - Residual Value) \times \frac{Remaining Useful Life}{SYD}$ where SYD is the sum of the digits of the useful life (e.g., for 5 years, SYD = 5+4+3+2+1 = 15). Signup and view all the answers

In the Sum-of-the-Years'-Digits formula fraction $\frac{Remaining Useful Life}{SYD}$, how do the numerator and denominator behave?

The numerator (Remaining Useful Life) starts at the asset's total useful life and decreases by one each year. The denominator (SYD) remains constant throughout all years. Signup and view all the answers

What is the formula for the double-declining balance (DDB) method?

Annual Depreciation Expense = Book Value at Beginning of Year $\times \frac{2}{Useful Life (in years)}$ Signup and view all the answers

What principle does the Units of Production depreciation method adhere to?

It is based on the actual usage of the asset, which adheres well to the matching principle (matching expense with revenue generated by the asset's use). Signup and view all the answers

What is the two-step calculation for the Units of Production depreciation method?

Step 1: Calculate Depreciation Rate per Unit = $(Cost - Residual Value) / Total Estimated Usage (in units)$. Step 2: Annual Depreciation Expense = Depreciation Rate per Unit x Actual Usage (in units) for the year. Signup and view all the answers

Under what condition is a gain on the sale of an asset recorded?

If the cash received (selling price) from the sale of an asset exceeds its book value (Cost - Accumulated Depreciation) at the time of sale. Signup and view all the answers

Under what condition is a loss on the sale of an asset recorded?

If the cash received (selling price) from the sale of an asset is less than its book value (Cost - Accumulated Depreciation) at the time of sale. Signup and view all the answers

Describe the 'Gain on Sale' account.

It is typically classified as a non-operating revenue account on the Income Statement. It increases net income and retained earnings. Signup and view all the answers

Describe the 'Loss on Sale' account.

It is typically classified as a non-operating expense account on the Income Statement. It decreases net income and retained earnings. Signup and view all the answers

What four items must generally be recorded or accounted for when selling a plant asset?

<ol> <li>Record the cash received from the sale. 2. Remove the asset sold from the balance sheet (at its original cost). 3. Remove the related accumulated depreciation from the balance sheet. 4. Record the resulting gain or loss on the sale.</li> </ol> Signup and view all the answers

How is a Gain on Sale calculated?

Selling Price - Book Value (where Book Value = Cost - Accumulated Depreciation). If the result is positive, it's a gain. Signup and view all the answers

How is a Loss on Sale calculated?

Selling Price - Book Value (where Book Value = Cost - Accumulated Depreciation). If the result is negative, it's a loss. Signup and view all the answers

The measurement and recording of liabilities are often based on what financial concept?

The time value of money (compound interest). Signup and view all the answers

What is Simple Interest?

Interest earned only on the principal amount invested. Signup and view all the answers

What is the formula for Simple Interest?

Simple Interest = P x R x T (Principal x Rate x Time) Signup and view all the answers

What is Compound Interest?

Interest earned on both the principal invested and on all previously earned interest. Signup and view all the answers

List the four primary Time Value of Money (TVM) calculation cases.

<ol> <li>Future value of a lump sum. 2. Present value of a lump sum. 3. Future value of an annuity. 4. Present value of an annuity.</li> </ol> Signup and view all the answers

In time value of money tables or calculations, what do 'n' and 'i' typically represent?

'n' represents the number of periods (e.g., years, months). 'i' represents the interest rate per period. Signup and view all the answers

What does the 'Future Value of a Lump Sum' calculation determine?

It determines the value of a single amount invested today at some specific point in the future, considering compound interest. Signup and view all the answers

What does 'Compounding' refer to in finance?

The frequency with which interest is calculated and added to the principal (e.g., annually, semi-annually, quarterly, monthly). Signup and view all the answers

When interest is compounded more frequently than annually (e.g., semi-annually or quarterly), what adjustments must be made to the interest rate (i) and number of periods (n) in TVM calculations?

The periodic interest rate 'i' must be divided by the number of compounding periods per year. The number of periods 'n' must be multiplied by the number of compounding periods per year. Signup and view all the answers

What does the 'Present Value of a Lump Sum' calculation determine?

It determines the value today of a single amount that will be received at some point in the future. Signup and view all the answers

What is 'Discounting' in the context of time value of money?

The process of calculating the present value of a future amount. Signup and view all the answers

What is the relationship between the present value (PV) and future value (FV) of a lump sum?

They are reciprocals or opposites; PV calculations discount a future amount back to the present, while FV calculations compound a present amount forward to the future. Signup and view all the answers

What is an Annuity?

A series of equal payments made or received at regular intervals over a specified period. Signup and view all the answers

What is an Ordinary Annuity?

An annuity where the payments occur at the end of each period. Signup and view all the answers

What is an Annuity Due?

An annuity where the payments occur at the beginning of each period. Signup and view all the answers

What is the general formula or approach to calculate the Future Value of an Ordinary Annuity?

$FV_{Ordinary Annuity} = Payment Amount \times FV Annuity Factor_{i,n}$ (where the factor comes from a table or formula). Signup and view all the answers

How is the calculation for the Future Value of an Annuity Due adjusted compared to an Ordinary Annuity?

The Future Value of an Annuity Due is calculated as: $Payment Amount \times FV Annuity Factor_{i,n} \times (1 + i)$. Signup and view all the answers

What is the general formula or approach to calculate the Present Value of an Ordinary Annuity?

$PV_{Ordinary Annuity} = Payment Amount \times PV Annuity Factor_{i,n}$ (where the factor comes from a table or formula). 'Payment' refers to the single, recurring payment amount. Signup and view all the answers

How is the calculation for the Present Value of an Annuity Due adjusted compared to an Ordinary Annuity?

The Present Value of an Annuity Due is calculated as: $Payment Amount \times PV Annuity Factor_{i,n} \times (1 + i)$. Signup and view all the answers

What defines a long-term note payable?

A formal written promise to repay a borrowed amount, typically from a bank, over a period longer than one year. Signup and view all the answers

What is a major accounting objective when dealing with payments on long-term liabilities like notes payable?

To determine how much of each loan payment represents interest expense and how much represents a reduction of the principal loan balance. Signup and view all the answers

What tool is commonly used to track the allocation of loan payments between interest and principal reduction?

An Amortization Table (or schedule). Signup and view all the answers

In a loan amortization table, how is the interest portion of a payment typically calculated?

Interest = Outstanding Loan Balance (at beginning of period) x Interest Rate per Period x Time (usually expressed as fraction of a year, e.g., 1/12 for monthly). Signup and view all the answers

In a loan amortization table, how is the principal reduction portion of a payment calculated?

Reduction of Principal = Total Payment Amount - Interest Portion. Signup and view all the answers

In a loan amortization table, how is the new loan balance calculated after a payment?

New Loan Balance = Old Loan Balance - Reduction of Principal. Signup and view all the answers

What is a Mortgage?

A special type of long-term note payable that is secured by the pledging of specific assets, usually real estate, as collateral. Signup and view all the answers

What is the journal entry to record the issuance (borrowing) of a mortgage?

Debit Cash, Credit Mortgage Payable for the amount borrowed. Signup and view all the answers

What is the journal entry to record the first mortgage payment (assuming standard amortization)?

Debit Interest Expense (for the calculated interest portion), Debit Mortgage Payable (for the principal reduction portion), Credit Cash (for the total payment amount). Signup and view all the answers

What is a Lease?

A contract specifying the terms under which the owner of an asset (lessor) agrees to transfer the right to use the asset to another party (lessee). Signup and view all the answers

Who is the Lessee?

The party that is granted the right to use property under the terms of a lease (the user/renter). Signup and view all the answers

Who is the Lessor?

The owner of the property that is leased to another party. Signup and view all the answers

Under current accounting standards (like ASC 842), what is the initial accounting treatment for most leases by the lessee?

The lessee records a 'Right-of-Use Asset' (leased asset) and a corresponding 'Lease Liability' on their balance sheet, both typically measured at the present value of the future lease payments. Signup and view all the answers

What term is often used for the depreciation of a right-of-use (leased) asset?

Amortization. While depreciation and amortization are similar concepts, amortization is commonly used when referring to intangible or right-of-use assets. Signup and view all the answers

What is the typical journal entry to record the annual amortization (depreciation) of a leased asset?

Debit Amortization Expense, Credit Right-of-Use Asset (or Accumulated Amortization). Signup and view all the answers

How does a lessee determine the amortization period (useful life) for a leased asset?

If ownership transfers to the lessee or there's a purchase option the lessee is reasonably certain to exercise, use the asset's economic life. Otherwise (e.g., asset is returned to lessor), use the shorter of the lease term or the asset's economic life. Signup and view all the answers

Describe the process of amortizing the lease liability from the lessee's perspective.

The lease liability is reduced over the lease term using the effective interest method. Each lease payment is allocated between interest expense (calculated on the outstanding liability balance) and principal reduction (reducing the liability). An amortization table is often used. Signup and view all the answers

What is the journal entry at the inception (beginning) of a lease for the lessee?

Debit Right-of-Use Asset, Credit Lease Liability. Both are recorded at the present value of the future lease payments. Signup and view all the answers

What is the journal entry to record the first lease payment, assuming it's made at the beginning of the period (annuity due) and after the initial lease recognition?

Debit Lease Liability, Credit Cash. (If it's an ordinary annuity, paid at end of period, the entry would include Interest Expense). Signup and view all the answers

What is the journal entry to record a subsequent lease payment under the effective interest method (assuming it's not the very first payment)?

Debit Interest Expense (calculated on liability balance), Debit Lease Liability (payment amount minus interest), Credit Cash (total payment amount). Signup and view all the answers

What is the formula for the Debt-to-Equity Ratio?

Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity Signup and view all the answers

What does the Debt-to-Equity ratio measure?

It measures the proportion of a company's financing that comes from debt (creditors) versus equity (stockholders). It indicates the level of financial leverage and provides insight into creditors' protection against insolvency. Signup and view all the answers

What does a Debt-to-Equity ratio greater than 1 generally signify?

It signifies that the company has more debt than equity financing; creditors are providing more financing than stockholders. Signup and view all the answers

Flashcards

Accountable Events in PPE Life Cycle

Account for the acquisition of PPE. 2. Account for any capital expenditures. 3. Account for the depreciation. 4. Account for the sale or disposal of PPE.

PPE

Long-term assets that have a physical substance.

PPE Recording

Recorded at cost; purchase price plus all costs incurred in getting the asset ready for use.

Capitalization

When a cost is recorded as part of an asset on the balance sheet rather than as an expense on the income statement.