Study Guide for Accounting I Final Exam

Which of these is NOT a major advantage of a corporation?

Government Regulations

Which one of the following is a major DISADVANTAGE of a corporation?

Additional Taxes

Which of the following is NOT a stockholder's right?

The right to participate in management decisions.

Which of the following represents the maximum number of shares a corporation can issue?

Authorized shares

Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance?

Credit to Common Stock for $2,000

Which one of the following is not a right of preferred stockholders?

Priority voting rights

For what reason might a company acquire treasury stock?

To reissue the shares to officers and employees under bonus and stock compensation plans

On which date are entries for cash dividends required?

Declaration date and the payment date

Which one of the following decreases when a corporation purchases treasury stock?

Outstanding shares

What method is normally used to account for treasury stock?

Cost method

Corporate Form of Business:

Classified by Purpose:
*Not-for-Profit
*Profit
Classified by Ownership:
*Publicly Held
*Privately Held

Advantage of Corporations:

1.) Separate Legal Existence
�An entity separate and distinct from its owners and management
� The corporation acts under its own name
o May buy, own, and sell property; May borrow money
o May enter into legally binding contracts in the name of the corpor

Disadvantage of a Corporation:

1.) Corporation Management
� Separation of ownership and management
2.) Government Regulations
�Subject to numerous state and federal regulation
o Requirement for issuing stock
o Distributions of earnings, acceptable methods for buying back and retiring s

Forming a Corporation

1. File application with Secretary of State
2. State grants a charter.
a. Charter indicates amount of stock that a corporation is authorized to sell
3. Corporation develops by-laws.
4. Usually incorporate in a state whose laws are favorable to the corpora

Stockholder Rights

1.) Vote in election of board of directors and on actions that require stockholder approval.
2.) Share the corporate earnings through receipt of dividends.
3.) Keep the same percentage ownership when new shares of stock are issued (preemptive right).
4.)

A corporation is an entity separate and distinct from its owners.

True

As a legal entity, a corporation has most of the rights and privileges of a person

True

Most of the largest U.S. corporations are privately held corporations

False

Corporations may buy, own, and sell property; borrow money; enter into legally binding contracts; and sue and be sued

True

The net income of a corporation is not taxed as a separate entity

False

Creditors have a legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts

False

The transfer of stock from one owner to another requires the approval of either the corporation or other stockholders

False

The board of directors of a corporation legally owns the corporation

False

The chief accounting officer of a corporation is the controller

True

Corporations are subject to fewer state and federal regulations than partnerships or proprietorships

False

Stock Issue Considerations

Authorized Stock
Issuance of Stock
Par and No-Par Value Stocks
Paid-in Capital
Retained Earnings

Authorized Stock

The Charter indicates amount of stock that a corporation is authorized to sell

Issuance of Stock

� Could sell (issue) directly to investors or
� Indirectly through an investment banking firm

Par and No-Par Value Stocks

How a company sets a price for the new issue of stock

Par Value Stock

� Par value stock has been assigned a value per share
� Historically, par value determined legal capital per share that a company must retain in business for protection of corporate creditors

No-Par Value Stock

Is fairly common now since states have eliminated the "par value" concept

No-par value stock - stated Value:

In many states, the board of directors assigns a stated value to their no-par shares

Paid-in Capital

Is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock
� Common Stock and Preferred Stock
� Paid-in Capital in Excess of Par - Common
Paid-in Capital in Excess of Par - Preferred

Retained Earnings

Is net income that a corporation retains for future use.

At the end of the year:

� Revenue accounts (increases Retained Earnings)
� Expense accounts (decreases Retained Earnings) are closed to the Retained Earnings account.
� Dividends (decreases Retained Earnings) are also closed to the Retained Earnings account.

Accounting for Preferred Stock

� Typically, preferred stockholders have a priority as to:
� Distributions of earnings as dividends
� Assets in event of liquidation.
� Generally do not have voting rights.
� Accounting for preferred stock at issuance is similar to that for common stock

Treasury Stock

Is a corporation's own stock that it has been reacquired from shareholders but not retired. It has been purchased from the stock market.
� Corporations acquire treasury stock for various reasons:
� To reissue the shares to officers and employees under bon

Accounting for Dividends

� Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis.
� Types of Dividends:
� Cash
� Property
� Stock
�Scrip (A promissory note)

Accounting for CASH Dividends

For a corporation to pay a cash dividend, it must have:
� Retained earnings
� Payment of cash dividends from retained earnings is legal in all states.
� Adequate cash
� A declaration of dividends by Board of Directors.
� Three dates are important in conne

Accounting for Preferred Dividend Preferences

� Right to receive dividends before common stockholders.
� Per share dividend amount is stated as a percentage of preferred stock's par value or as a specified amount.
� Example: $100 par value, 8%; would mean that the dividend when declared would be $8.0

Accounting for Retained Earnings

� Retained earnings is
� Net income that a company retains in the business.
� Net income increases Retained Earnings and a net loss decreases Retained Earnings.
� Part of the stockholders' claim on the total assets of the corporation
� Debit balance in Re

Authorized -

The total amount of shares authorized by the state issued.

Issued -

The total amount sold to the public through the stock exchange (Outstanding + treasury stock = issued)

Outstanding -

Shares still held by the public

Treasury Stock -

Shares purchased by the corporation and used for later use (Issued - Outstanding = Treasury Stock).

To be classified as a current liability, how or when must a debt be expected to be paid?

Either out of existing current assets or by crediting other current liabilities

Which one of the following is not a typical current liability?

Bonds payable

Which of the following is a criterion for the classification of a liability as current?
I. It is a debt that can be paid from existing current assets.
II. It is a debt that can be paid through the creation of other current liabilities.
III. It must be pai

I and II

A corporation issued a $50,000, 9%, 4-month note on July 1. The corporation's year-end is September 30. Which one of the following is the adjusting entry for interest on September 30?

Interest Expense 1,125
Interest Payable 1,125

Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue?

$4,300

When recording payroll,

payroll deductions are recorded as liabilities.

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Revenue at December 31?

$4,500

The cash register tape indicates cash sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information?

Cash 2,155
Sales 2,000
Sales Taxes Payable 155

On December 30, 2017, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet?

$10,000 current liability; $40,000 long-term liability

A corporation issues $1,000,000 of 8%, 5-year bonds. The 8% rate of interest is called the __________ rate.

contractual

In what denomination are bonds typically issued?

$1,000

What term is used for bonds that have specific assets pledged as collateral?

Secured bonds

Which statement describes the market interest rate?

It is the rate investors demand for loaning funds.

Cuso Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate?

The contractual interest rate exceeds the market interest rate.

In a recent year, Day Corporation had net income of $150,000, interest expense of $30,000, and tax expense of $20,000. What was Day Corporation's times interest earned for the year?

6.67

Which is the most common way to present current liabilities on the balance sheet?

Notes payable are listed first.

Corristan Company purchased equipment and incurred these costs:
Cash price $24,000
Sales taxes $1,200
Insurance during transit 200
Annual maintenance costs ____400
Total costs $25,800
What amount should be recorded as the cost of the equipment?

$25,400

Which of the following is not a depreciable asset?

Land

Coronado Company purchased land for $80,000. The company also paid $12,000 in accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in t

$95,000

Which of the following costs should not be included in the cost of a building?

Broker's commission

Which of the following is not a way to express the useful life of a depreciable asset?

Cost of acquisition

What is depreciation?

A cost allocation method

When using the straight-line depreciation method, which of the following is not a factor affecting the computation of depreciation?

Book value

A purchase of equipment for $18,000 also involves freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and 4 years, respectively. Under the straight-line method, how much is annual depreciation e

$4,750

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2017. The machine was purchased for $80,000 on January 1, 2013, and was depreciated on a straight-line basis over a 10-year life assuming no salvage value. If the m

$18,000 loss

A company sold for $3,000 a plant asset that had a cost of $10,000 and accumulated depreciation of $7,500. What gain or loss did the company experience?

Gain of $500

A company has the following asset account balances:
Buildings and equipment $9,200,000
Accumulated depreciation 1,200,000
Patents 750,000
Land Improvements 1,000,000
Land 5,000,000
How much will be reported on the balance sheet under property, plant, & eq

$14,000,000

A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net sales total $250,000. What is the asset turnover?

1.25 times

Oahu Industries' average total assets for the year are $4,000,000, its net income is $800,000, and its net sales are $10,000,000. What is the return on assets?

20%

Which of the following measures provides an indication of how efficient a company is in employing its assets?

Asset turnover ratio

Plant Assets:

- Have Physical Substance
- Used in the operations of the business
- NOT intended to be sold
- Provides services to the business over a number of years
- Accounting Theory ~ That the asset's "revenue producing" ability declines over its useful life - This

Historical Cost Principle

- Requires that companies record plant assets at cost
- Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
- Revenue Expenditure - Costs incurred to maintain a plant asset are expended immediately.
- Cap

Four Areas of Property, Plant and Equipment

- Land
- Land Improvement
- Buildings
- Equipment

All necessary costs incurred in making land ready for its intended use ______.

Increase (debit) the Land account.

Land Costs typically include:

1) cash purchase price,
2) closing costs such as title and attorney's fees,
3) real estate brokers' commissions, and
accrued property taxes and other liens on the land assumed by the purchaser.

Land Improvement

Includes all expenditures necessary to make the improvements ready for their intended use.
- Examples: driveways, parking lots, fences, landscaping, and underground sprinklers.
- Limited useful lives.

Buildings

Includes all costs related directly to purchase or construction of the building.
Purchase costs:
- Purchase price, closing costs (attorney's fees, title insurance, etc.) and real estate broker's commission.
- Remodeling and replacing or repairing the roof

Equipment

- Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
- Cash purchase price.
- Sales taxes.
- Freight charges.
- Insurance during transit paid by the purchaser.
- Expenditures required in assembling, in

Depreciation

Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.
- Process of cost allocation, not asset valuation.
- Applies to land improvements, buildings, and equipment, not land.
- Depreciable, beca

Cost

All expenditures necessary to acquire the asset and make it ready for intended use

Useful Life

Estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence.

Salvage Value

Estimate of the asset's value at the end of its useful life

Where is Depreciation reported?

Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets

Depreciation Methods:

Management selects the method it believes best measures an asset's contribution to revenue over its useful life:
- Straight-line method.
- Declining-balance method.
- Units-of-activity method.

Under the Straight Line Method:

- Expense is same amount for each year under the straight line method.
- Depreciable cost = Cost less salvage value.
- Salvage Value is an estimate of the asset's value at the end of its useful life for the owner.
- Useful life is an estimate of the expec

Declining Balance Method:

-Accelerated method.
- Decreasing annual depreciation expense over the asset's useful life.
- Double declining-balance rate is double the straight-line rate.
-Rate applied to book value.

Units of Production Method:

Cost
Expected Salvage Value
Estimated useful life (in years)
Estimated useful life (in miles)
-Companies estimate total units of activity to calculate depreciation cost per unit.
- Expense varies based on units of activity.
- Depreciable cost is cost less

Retirement of Plant Assets:

- No cash is received.
- Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset.
-Decrease(credit) the asset account for the original cost of the asset.

Asset Turnover

Indicates how efficiently a company uses its assets to generate sales. A profitability ratio; desire a higher than last year's or competitors'
Net Sales/ Average Total Assets

Return on Assets

Indicates the amount of net income generated by each dollar of assets. A profitability ratio; desire a higher number than last year'/ competitors'
Net Income / Average Total Assets

What is a Current Liability?

A debt that a company expects to pay:
1. from existing current assets or through the creation of other current liabilities, and
2. within one year from the balance sheet date or the operating cycle, whichever is longer.
3. Debts that do not meet both crit

Notes Payable:

o Written promissory note.
o Usually require the borrower to pay interest.
o Frequently issued to meet short-term financing needs.
o Issued for varying periods of time.
o Those due for payment within one year of the balance sheet date are usually classifi

Sales Taxes Payable

- Sales taxes are expressed as a stated percentage of the sales price.
- Selling company
? collects tax from the customer.
? remits the collections to the state's department of revenue.

Unearned Revenues

Revenues that are received before goods are delivered or services are performed.

Current Maturities of Long-Term Debt

o Portion of long-term debt that comes due in the current year.
o No adjusting entry required.

Payroll and Payroll Taxes Payable

The term "payroll" pertains to both:
Salaries - managerial, administrative, and sales personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and manual laborers (rate per hour).
Determining the payroll involves computing three amount

Payroll tax expense results from three taxes that governmental agencies levy on employers.

These taxes are:
- FICA tax
- Federal unemployment tax
- State unemployment tax

Long-Term Liabilities

Definition: Long-Term Liabilities are obligations that a company expects to pay more than one year in the future.
1. Notes Payable - principal and interest are paid to the creditor over a long period of time
2. Bonds Payable - a form of interest-bearing n

BONDS PAYABLE: A LONG-TERM LIABILITY

1. Bonds are sold in small denominations usually $1,000 or multiples of $1,000.
2. When a corporation issues bonds, it is borrowing money from the investor (the bondholder). The corporation will pay back the principal with interest to the bondholder.
3. T

Secured Bonds

Have specific assets of the issuer pledged as collateral for the bonds.

Unsecured Bonds

Are issued against the general credit of the borrower.

Convertible Bonds

Can be converted into common stock at the bondholder's option

Callable Bonds

Can be redeemed (bought back), by the issuing company, at a stated dollar amount prior to maturity

Bond Certificate

A contract from the corporation (the issuer) to the bondholder.

Issuing Procedures

- Bond certificate
? Issued to the investor (bondholder).
? Provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest rate.
- Face value - principal due at the maturity.
- Maturity date - date final payment i

Issuing Bonds At Face Value

A corporation records bond transactions when it:
- issues (sells) or redeems (buys back) bonds and
- when bondholders convert bonds into common stock.
Bonds may be issued at
- face value,
- below face value (discount), or
above face value (premium).
Five

Issuing Corporations must pay

o Contractual interest rate over the term of the bonds (10%) not the market interest rate
-Face value at maturity ($100,000), not the issuance price of $98,000

� Bond premium is considered to be a reduction in the cost of borrowing

The borrower (Candlestick Inc.) is not required to pay the bond premium amount ($102,000) at the maturity date of the bonds, only the face value of $100,000

Redeeming Bonds at Maturity

Redemption on bonds at maturity is to pay the bondholder the face value of the bond not the discount or premium amount paid by the bondholder.

Current Liabilities:

Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
Current ratio: current assets = current ratio
Current liabilities
"For every one dollar of current liabilities the company

Long-Term Liabilities:

Solvency ratios measure the ability of a company to survive over a long period of time.
1. Debt to Assets Ratio - taught in chapter 2 this ratio indicates the extent to which a company's assets are financed with debt.
Debt to Assets Ratio:
Total Liabiliti

Contingencies

Events with uncertain outcomes that may represent potential liabilities that have not yet been realized. A common type of contingency is lawsuits, product warranties and environmental cleanup obligations that are pending.
a. Tobacco Companies cancer causi

Off-Balance Sheet Financing

- is an intentional effort by a company to structure its financing arrangements so as to avoid showing all liabilities on its balance sheet.
� Enron Corporation - hid its liabilities by creating partnerships. When a company engages in a partnership, even