accouting test

FINAL REVIEW SESSION PCC

Chapter 9 Reporting and Analyzing Long-Lived Assets

COST TO ACQUIRE FIXED ASSETS

Advanced Technology, a computer manufacturer, purchased a machine that applies computer chips to circuit boards, using a process known as Surface Mount Technology (SMT). The costs associated with acquiring the SMT machine are listed below. Where should each cost be recorded in the accounting records? What account? (5 min)

Purchase price $150,000

Transportation 1,200

Engineer's fee to set up and

adjust the machine to

required specifications 2,000

Electrician's fee to install a new

power outlet required by

the SMT machine 800

Repairs made to wall as a result

of damage during installation

of the new power outlet 500

Cost of chips and circuit board

used to test the new machine

before it is used in production 300

Transparency Master 10-2

COST TO ACQUIRE FIXED ASSETS

Solution

Advanced Technology, a computer manufacturer, purchased a machine that applies computer chips to circuit boards, using a process known as Surface Mount Technology (SMT). The costs associated with acquiring the SMT machine are listed below. Where should each cost be recorded in the accounting records?

Recorded in

Purchase price $150,000 Equipment

Transportation 1,200 Equipment

Engineer's fee to set up and

adjust the machine to

required specifications 2,000 Equipment

Electrician's fee to install a

new power outlet required

by the SMT machine 800 Equipment

Repairs made to wall as a

result of damage during

installation of the new

power outlet 500 Repair Expense

Cost of chips and circuit

boards used to test the

new machine before it is

used in production 300 Equipment

DEPRECIATION CALCULATIONS 20 min

STRAIGHT-LINE AND UNITS-OF-ACTIVITY METHODS

Lucianno's Pizza purchased a car to be used in delivering pizzas. The car cost $14,000. It will be used for 5 years, after which its salvage value will be about $2,000. In those 5 years, Lucianno's estimates that the car will be driven 80,000 miles.

1. Calculate depreciation for all 5 years, using the straight-line method.

2. Assume that the car was driven 10,000 miles in year 1, 15,000 in year 2, 18,000 in year 3, 20,000 in year 4, and 17,000 in year 5. Calculate depreciation, using the units-of-activity method for all 5 years.

Transparency Master 10-7

DEPRECIATION CALCULATIONS

STRAIGHT-LINE AND UNITS-OF-PRODUCTION METHODS

Solution

1. ($14,000 $2,000)/5 years = $2,400 per year

2. ($14,000 $2,000)/80,000 miles = $0.15 per mile

Year 1: 10,000 miles $0.15 per mile = $ 1,500

Year 2: 15,000 miles $0.15 per mile = 2,250

Year 3: 18,000 miles $0.15 per mile = 2,700

Year 4: 20,000 miles $0.15 per mile = 3,000

Year 5: 17,000 miles $0.15 per mile = 2,550

$12,000

30 minutes to here

The question here was calculate depreciation for 5 years so you showed the entire table.

Wiley Plus questions are very specific – Read them carefully. The questions may give you all the data you see in these questions. Yet a multiple choice question may ask you to calculate book value at the end of a particular year.

Lets review different questions you can draw from the exam pools. Using the Units of Activity example above.

1. What is book value in this Units Exercise after the second year.

2. What is accumulated depreciation after the second year? What is the depreciation expense for the 4th year.

3. What is the depreciable cost.

4. What is the depreciation expense for the 4th year.

Answer each of these questions for practice. Practice “reading the actual question” which is often given after presenting information. On the quiz, many students answered the “what is depreciable cost” question by giving the amount of depreciation expense. Same for the question “What is accumulated depreciation” at a point in time.

Accumulated depreciation is not the same as depreciation expense, nor is it the same as depreciable costs.

Take care in reading the question.

Book value above 14,000 – 3750 = 10,250

Accumulated depreciation after the second year. 1500 + 2250 = 3,750

Depreciable Cost = 12,000 Cost – Salvage Value

Depreciation expense for 4th year = $3000

Transparency Master 10-8

DEPRECIATION CALCULATIONS

DECLINING-BALANCE METHOD

ABC Marketing recently purchased a machine that cost $80,000. The machine is expected to last 4 years and have a residual value (salvage value) of $6,000.

Calculate the depreciation expense to be recorded each year under the declining-balance method. (15 min)

Transparency Master 10-9

DEPRECIATION CALCULATIONS

DECLINING-BALANCE METHOD

Solution

Year 1: ($80,000 – $0) 50% = $40,000

Year 2: ($80,000 – $ 40,000) 50% = 20,000

Year 3: ($80,000 – $ 60,000) 50% = 10,000

Year 4: ($74,000 – $ 70,000) = 4,000

$74,000

REMEMBER WE DON’T DEPRECIATE BELOW SALVAGE VALUE.

COST – SALVAGE VALUE = DEPRECIABLE COST (IN THIS CASE 74,000).

THIS SOLUTION DIDN’T KEEP TRACK OF BOOK VALUE AS WE DID IN EXERCISES.

ALSO – REMEMBER TO MULTIPLY BY BOOK VALUE, NOT THE DEPRECIATION AMOUNT PER YEAR. HERE IT’S THE SAME – ONLY BECAUSE OF 50%. MULTIPLY BY THE CHANGING BOOK VALUE, NOT BY THE DEPRECIATION AMOUNT PER YEAR. 50 min to here

Again be ready for different questions like what it is the accumulated depreciation, book value or depreciation at a point in time or for a period.

Disposal of Assets Problem 20 minutes

Hortenz bought equipment on January 10, 2004 that cost $ 120,000 and had a $ 10,000 residual (salvage) value. It had an estimated life of 10 years. Hortenz sells the equipment on March 13, 2009 for: 1) 47,000 cash (2) 75,000 cash

Record the necessary entries for March 13, 2009. Wiley Plus doesn’t put dates in bold. Watch out for questions with a date. You may need to compute partial depreciation. Part of a year.

Don’t forget step 1. – What is Step 1?? We sold the equipment in early March. How many months passed since the last entry for depreciation? ( assume an annual period).

Depreciate up to date.

5 years of depreciation (120,000-10,000)/10 = 11,000 per year

55,000 for 5 years.

Round to the nearest dollar. 11,000 full year X 2/12 =

March 13 Depreciation Expense-Equip 1833

Accumulated Deprec-Equipment 1833

After this entry accumulated depreciation = ? 55,000 + amount in entry= $56,833

Disposal Entry – Remove the Equipment account, remove Acc Depreciation account and record the cash of $47,000. Can you see if you have a gain or loss? What was book value?

Step 2 The Disposal Entry

Mar 13 Cash 47,000

Acc Deprec-Equip 56,833

Loss on Sale of Plant asset 16,167

Equipment 120,000

= (120000-56833)=63,167 Cost – Acc Deprec = Book Value

Book Value = 63,167

Cash rec’d versus Book Value = Loss or gain on sale of fixed asset.

47000 - 63167 = (16,167) Loss on Sale of Plant Asset

2) sold for 75000 cash

75,000 – 63,167 = 11,833 Gain – now cash received exceeds book value.

Cash 75000

Acc Deprec-Eq 56833

Equipment 120000

Gain on sale of fixed asset 11833

70 min to here

Payroll Entries for Salaries Expense and the Employers payroll taxes 15 min

PCC student problem, lets say the problem tells you that gross salaries for the period is $5154.50. FICA withholding is $279.27 for Social Security and $77.32 for Medicare. Both can be combined and entered as FICA ___ _______. Federal Income tax withholding is $1055.69. State Income tax withholding is $10.80. Federal Unemployment Tax is $1.60.

State Unemployment tax is $10.80

Prepare the journal entry for the employees’ salary and withholding. Then prepare the employer’s payroll tax journal entry. 15 min

PAYROLL REGISTER AND JOURNAL ENTRIES

Solution

To record employee pay and withholding:

Salaries and Wage Expense 5,154.50

Fica Taxes Payable 356.59

Federal Income Taxes Payable 1,055.69

State Income Tax Payable 10.80

Salaries Payable 3,731.42

To record employer's payroll taxes:

Payroll Tax Expense 368.99

Fica Taxes Payable 356.59

State Unemployment Tax Payable 10.80

Federal Unemployment Tax Payable 1.60

Important – Use account names in your entry. Expenses need the word expenses. Liabilities in this one all have the word “payable”. Otherwise, we don’t really know what the accounts are. 85 min to here

Issuance of Bonds – BE10-8 and BE 10-9. Prepare journal entries for each. 15 min

BRIEF EXERCISE 10-8

Cash ($300,000 X .98) 294,000

Discount on Bonds Payable 6,000

Bonds Payable 300,000

(Cash received = Face value of bond X. 98)

BRIEF EXERCISE 10-9

Cash ($400,000 X 1.01) 404,000

Bonds Payable 400,000

Premium on Bonds Payable 4,000

(Cash received = Face value of bond X 1.01)

Redeeming bonds at maturity is simple. Use the principal of the bond. Example BE 10-9 above. Interest payments would be separate from redemption. Annually or semi-annually.

Bonds Payable 400,000

Cash 400,000 100 min to here

Ch 11 Stockholders Equity - We should know the entries for issuing stock, declaring and paying a dividend. Buying Treasury stock. Know the stockholders’ equity section of the balance sheet. How to compute Total Stockholders’ equity.

Let’s do E 11-5 on page 575 - fix the entries – work on board in groups and discuss how this should be done. Online – maybe split into breakout rooms and discuss. 15 min 115 min to here.

EXERCISE 11-5 This shows calculations to help you on account line. Don’t do that in the entry. Example: The first account is just Cash.

May 2 Cash (8,000 X $13) 104,000

Common Stock (8,000 X $10) 80,000

Paid-in Capital in Excess of Par

Value—Common Stock

(8,000 X $3) 24,000

10 Cash (10,000 X $53) 530,000

Preferred Stock (10,000 X $20) 200,000

Paid-in Capital in Excess of Par

Value—Preferred Stock

(10,000 X $33) 330,000

15 Treasury Stock (600 X $12) 7,200

Cash 7,200

LO 2 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

130 minutes to here.

BE11-5 Prepare entries for a cash dividend. 5 min

BRIEF EXERCISE 11-5

Nov. 1 Cash Dividends (7,000 X $1) 7,000

Dividends Payable 7,000

Dec. 31 Dividends Payable 7,000

Cash 7,000

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

They give you the cash dividend per share in this one. What if they don’t. For Preferred Stock, companies often state the per share dividend as a % of the par value of the stock. Example: Scientific Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding. How much is the dividend per share?

Dividend per share is $7. .07 x 100 par value.

I remember students having questions about this in chapter 11. Often the examples give you the dividend as a per share amount. For Preferred, they might not.

BE11-8 Prepare a stockholders’ Equity section - again on board in groups. P. 548 has a good model. 15 min

BRIEF EXERCISE 11-8

Stockholders’ equity

Paid-in capital

Capital stock

Common stock, $10 par value, 5,000 shares

issued and 4,500 shares outstanding $ 50,000

Additional paid-in capital

Paid-in capital in excess of par value—

common stock 22,000

Total paid-in capital 72,000

Retained earnings 42,000

Total paid-in capital and retained earnings 114,000

Less: Treasury stock (500 shares) (11,000)

Total stockholders’ equity $103,000

LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Let’s discuss. What is paid in capital? Is retained earnings in paid-in capital?. What about common stock or preferred stock?

Is Treasury Stock paid-in capital. Understand the terminology above and how Total Stockholders Equity is computed.

.

Ch 12 Exercise 12-4 E12-4 on page 632 Operating Activities of the Statement of Cash Flow – Indirect method. 15 min 135 min to here

EXERCISE 12-4

SUNN INC.

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

Cash flows from operating activities

Net income $153,000

Adjustments to reconcile net income to net

  cash provided by operating activities:

Depreciation expense $27,000 )

Decrease in accounts receivable 9,000

Decrease in inventory  4,000

Increase in prepaid expenses   (5,000)

Increase in accrued expenses payable  10,000 )

Decrease in accounts payable   (7,000 )   38,000

Net cash provided by operating

  activities $191,000

(See Illustration 12-13)

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Note: The questions in WileyPlus may not be in this format. It may ask for how some of these items are used to determine Net Cash provided by operating activities. What effect does a Decrease in Inventory have? A Decrease in Accounts Payable? A question may make you calculate net income rather than simply state it.

If you know your statement of Cash Flows very well (all three activities) and the Indirect Method for the Operating Activities, you shouldn’t have a problem with the various question formats.

You can practice with E12-3 on page 632 also on this Indirect Method for the Operating Activities. Solution below.

EXERCISE 12-3

SOSA COMPANY

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

Cash flows from operating activities

Net income $190,000

Adjustments to reconcile net income to net

  cash provided by operating activities:

Depreciation expense $35,000

Loss on disposal of plant assets   5,000

Increase in accounts receivable  (15,000)

Increase in prepaid expenses   (4,000)

Increase in accounts payable  17,000   38,000

Net cash provided by operating

  activities $228,000

(See Illustration 12-13)

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Ratios

There may be a few ratio problems to solve on the exam, but only from chapters 9 to 12. There may be a few conceptual questions on ratios from chapter 13 regarding the concepts of liquidity, solvency and profitability. Do you understand these terms and which ratios measure liquidity, solvency or profitability? You had the chapter 13 homework to do in Wiley Plus, but Wiley Plus didn’t ask the last question in Problem 13-5A in the book version of your online problem. It asks you to compare liquidity, solvency and profitability from the ratios you did in that problem. In other words, do you know what the ratios are telling you. The software in Wiley Plus didn’t have a space for this, but we should understand what the ratios tell us.

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