In Class Quiz 2 Study guide
In Class Quiz 2 Study guide MGMT 200
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This 7 page Study Guide was uploaded by jin soo kim on Sunday March 27, 2016. The Study Guide belongs to MGMT 200 at Purdue University taught by Kimberly Fatten in Summer 2015. Since its upload, it has received 47 views. For similar materials see Introductory Accounting in Economcs at Purdue University.
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Date Created: 03/27/16
Chapter 7 Long-Term Assets Capitalize: recording an expenditure as an asset Cost of Asset + All Expenditures NECESSARY to get it ready for use “Oddball” Expenditures Land: Site preparation, back taxes, demolition of old buildings sale of salvaged materials (decreases!) Building: Expenses necessary to put the building to its intended Basket Purchases Purchase of more than one asset for one purchase price Allocate total purchase price based on individual fair values Example: Lohengrin Company purchased land, a building and two pieces of equipment having fair values of $200,000, $400,000, $50,000 and $25,000 respectively for $600,000 total. At what price should the building be recorded at the purchase date? • Step 1: Add up all fair values (or fair market values): • $200K + $400K + $50K + $25K = $675K • Step 2: Divide asset fair value by total fair value from Step 1: • $400K/$675K = 59.3% • Step 3: Multiply purchase price by %of asset fair value in Step 2: • $600K * .593 = $355,800 -> recorded for building in the journal entry Three Types of LT Assets 1. Property, Plant & Equipment - 2. Intangibles – Patents, Copyrights, Trademarks, Franchises, Goodwill 3. Natural Resources – Timber, Rocks, Minerals, Gems, Oil & Natural Gas Three types of cost recovery methods 1. Property Plant & Equipment – Depreciation (Straight line, Declining Balance, Activity Based) 2. Intangibles - Amortization 3. Natural Resources – Depletion Know definitions and recovery periods for the types of intangibles discussed in class 1. Patent - Exclusive right to manufacture a product or use a process for 20 years 2. Copyright - Exclusive right of protection given to the creator of a published work (song, film, book, etc) for the life of the author plus 75 years 3. Trademark - Word, slogan, or symbol that distinctively identifies a company, product or service, renewable for 10 year periods indefinitely 4. Franchise - Local outlets that pay for the exclusive right to use franchisor company’s name and sell its products within a specified geographical area 5. Goodwill - Value of a company as a whole, over and above the value of its identifiable net assets; only recorded when it is part of the acquisition of another company Amortization Example In early January, Little King Sandwiches acquires franchise rights from University Hero for $800,000. The franchise agreement is for a period of 20 years. In addition, Little King purchases a patent for a meat-slicing process for $72,000. The original legal life of the patent was 20 years, and there are 12 years remaining. However, due to expected technological obsolescence, the company estimates that the useful life of the patent is only 8 more years. Straight-Line Depreciation Depreciation Expense: (Purchase Price – Residual Value) / Useful Life Accumulated Depreciation for year N: Depreciation Expense * N Book Value: Purchase Price – Accumulated Depreciation Double-Declining Balance Depreciation Expense: Purchase Price * 2 * (1 / Useful Life) Accumulated Depreciation for year N: Sum of all depreciation expense up to year N Book Value: (most of the time for this it’s the salvage value) Activity Based Depreciation Expense: (Purchase Price – Residual Value) / Total Activity Accumulated Depreciation for year N: Sum of all depreciation expense up to year N Book Value: Purchase Price – Accumulated Depreciation Journal Entry for Depreciation Dec 31 Depreciation Expense Accumulated Depreciation Chapter 8: Current Liabilities What are the three entries for payroll? Employee Payroll – amounts paid to employees and on behalf of employees Employers payroll taxes Employers contribution to fringe benefits Current vs. Long Term Liabilities Current: Payable within one year or an operation cycle Long-Term: Payable more than one year or an operation cycle Notes Payable Interest = Face Value * Annual Interest Rate * Fraction of the year How to record Notes payable Accrual of Interest Expense at the end of the period Repayment of the Notes Payable Contingent Liabilities An existing uncertain situation that might result in a loss RECORD if loss is PROBABLE and REASONABLY ESTIMATED o If estimate is a range, record the low and disclose the high in notes DISCLOSE if loss is reasonably possible DO NOTHING if possibility is remote and cannot be estimated DO NOTHING with a gain contingency Warranty Current Ratio Ratio of 1 or higher often reflects an acceptable level of liquidity, Higher the current ratio, the greater the company’s liquidity Acid-Test Ratio/Quick Ratio Based on a more conservative measure. Quick assets are readily convertible into cash Appendix C: Time Value of Money • Recognize the amount • Is it a single amount? (lump sum tables! PV $1, FV $1) • Is it a series of equal payments over equal time? (ANNUITY! PVA, FVA!) • Recognize the time period • Do I know the amount now and need to figure out the FUTURE amount? • Use Future Value Table (FV, FVA) • Do I know what I need to have/will have later and need to figure out what I should have NOW (in the present? • Use the Present Value Table (PV, PVA) Examples! • Company Z invests $5,000 today to save for a new piece of equipment they want to buy in five years. If they invest at 8% compounded quarterly, how much will they have in five years • Lump Sum or Annuity? • Lump Sum • Present or Future? • What WILL it be - FUTURE • What numbers do we use for the table? • 5 years * 4 quarters = 20 periods • 8% / 4 quarters = 2% • $5000 * FV $1 (1.48595) = $7,429.75 in five years • Company Z contracts with Company A to perform maintenance on a machine for 10 years and will pay $2,500 per year for the service. If the discount rate is 4%, compounded annually, What is the total cost of the contract today for Company Z? • Lump Sum or Annuity? • $2500 per year, 10 years = stream of payments = ANNUITY • Present or Future? • What will it cost in terms of TODAYs dollars – PRESENT VALUE • What numbers do we use for the table? • 4%, 10 years PVA table • $2500 * (8.11090) = $20,277.25 Chapter 9: Long Term Liabilities Bond: a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date. Bond Information • Bond Principle: The face amount of the bond, the amount being borrowed, the amount that will be paid back at maturity • Bond Interest: The series of payments made to the bond holders over the life of the bond. Face value * STATED rate / number of annual payments • Stated Rate of Interest: The amount written on the face of the bond; used to calculate the INTEREST PAYMENT • Market Rate of Interest: The going rate of interest for similar companies with similar risks out in the world; used to calculate BOND ISSUE PRICE Two parts to pricing a bond • 1. Face Amount of the Bond • Paid back at maturity as a Lump Sum • 2. Semi-annual (or annual or quarterly) Interest Payments • Paid using the stated (or face) amount of interest on the bond every six months (if semiannual) until the bond is retired • Same payment every time, Same time period • ANNUITY! Issue Price of a Bond • Two components: • Face value of the bond • Amount printed on the “face” of the bond • A/K/A Maturity Value – what you get paid when the bond matures • Interest • Stated on the bond • Amount of interest earned annually • Might be paid monthly, quarterly, semi-annually • But stated ANNUALLY Market Interest Rate: The interest % that a normal market will sell a bond Stated Interest Rate: The interest % that the company will sell the bond Amortization Schedule for Discount Amortization Schedule for Premium Debt to Equity Ratio: Measure of financial leverage; How much risk are we taking? Times interest Earned Ratio: Measures a company’s ability to meet interest payments as they become due
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