HBX- Accounting 4 Flashcards

Question

What are the benefits of putting accumulated depreciation into a separate account?

Answer 1

1. It allows you to **easily see the original cost of the asset** so you can compare it to the current or replacement cost at any point in time. 2. It can also provide the reader of the financial statements with **a quick feel for how old the assets of the business are**, by looking at the relationship between the gross value or original cost of the assets, and the value of the accumulated depreciation account. While we are talking about long-lived physical assets and depreciation, keep in mind that **_land is an exception to this rule_**. **_We do not depreciate land_** because it is not “used up” by the business, and its value is typically not reduced or consumed.

Answer 2

We do not depreciate land because it is not “used up” by the business, and its value is typically not reduced or consumed. **HOWEVER The Exception to the Exception** What about a mining company? Isn’t its land “used up” as it extracts resources from the land? Indeed this is an exception to the exception, and a mining company would need to recognize the decrease in value as it extracts resources. It would record this expense using an account called depletion, which acts very much like depreciation.

Answer 3

An account for which the typical balance is contrary to other accounts in its category. Used to adjust the net value of the account to which it relates. An example is Accumulated Depreciation, which is a contra-asset account used to arrive at the net book value of fixed assets. * a contra asset account has a credit balance since a normal asset account has a debit balance. * A contra revenue account has a debit balance since a normal revenue account has a credit balance. COMMON CONTRA ACCOUNTS * Accounts Receivable Less: **Allowance for Doubtful Accounts** Net Accounts Receivable * Inventory Less: **Reserve for Obsolete Inventory** Net Inventory * Fixed Assets Less: **Accumulated Depreciation** Net Fixed Assets * Sales Revenue Less**: Sales Discounts, Returns, and Allowances** Net Sales * Common Stock Less: **Treasury Stock** Net Shares Outstanding

Answer 4

The amount to be depreciated is the total cost to put the asset in service ($300,000) minus the assumed salvage value after 5 years ($60,000). This leaves $240,000 to be depreciated over 5 years (60 months) or $4,000 per month.

Answer 5

By July 1, 2014, the equipment would have been in use for 6 months. The amount to be depreciated is the total cost to put the asset in service ($300,000) minus the assumed salvage value after 5 years ($60,000). This leaves $240,000 to be depreciated over 5 years (60 months) or $4,000 per month. Therefore, the accumulated depreciation at that point would be **$24,000** ($4,000 per month times 6 months).

Answer 6

A common accelerated depreciation method of calculating and recording depreciation expense. It recognizes more depreciation expense in the early years and less in the later years compared to straight-line depreciation. There's a calculation tool for this- Depreciation calculator. (The module doesn't get in to the exact calculations)

Answer 7

units of measure depreciation is used on assets that have a more fixed output potential. For example, a piece of equipment that is expected to produce 100,000 products over its lifetime, could be depreciated each period based on the proportionate number of products that it produced.

Answer 8

**PEER ANSWER:** Accelerated depreciation may make sense when the actual fair market value of the object declines quickly at first and more slowly later. For instance, cars typically exhibit this property, losing a significant portion of their value the first time they are driven out of the lot, but retaining a reasonable amount of salvage value in the long term. Alternatively, a company could perform accounting shenanigans by using double declining balance depreciation to mask profits, which is one reason why the accounting principle of consistency is so important.

Answer 9

If Pepsi MAKES $$$ off of this! 1. **Remove it from the books**. CREDIT - P, P, & E 2. **Remove the accumulated depreciation** ($20,000) - DEBIT Accumulated Depreciation \*Remember- accumulated depreciation is a (contra-asset) Contra-asset accounts increase with credits and decrease with debits. 3. **Record Cash from** **sale****:** DEBIT - Cash AT THIS POINT THE EQUATION IS NOT EQUAL (Cause they made more $$ than they thought) Because of this…. 4. **To Include profits:** CREDIT Gain on Sale of Equipment (similar to revenue- but not cause it’s not the main sales of the business. Pepsi sells drinks not trucks)

Answer 10

What if Pepsi LOST $$$ off of the sale! 1. **Remove it from the books.** CREDIT - P, P, & E 2. **Remove the accumulated depreciation** ($20,000) - DEBIT Accumulated Depreciation \*Remember- accumulated depreciation is a (contra-asset) Contra-asset accounts increase with credits and decrease with debits. 3. **Record Cash** from sale: DEBIT - Cash AT THIS POINT THE EQUATION IS NOT EQUAL (Cause they lost $$) Because of this…. 4. **To include loss:** DEBIT to Loss on sale of equipment (Similar to an expense)

Answer 11

1. Straight Line 2. Double Declining Balance Depreciation 3. Units of measure depreciation

Answer 12

Impairment ## Footnote A permanent reduction in the value of an asset due to technological or market factors that cause the asset to have less value than it currently has in the accounts of the business. Impairment typically applies to intangible assets such as goodwill or patents. But it can happen to fixed assets as well. For example, think of what would happen if PepsiCo became aware that the value of the truck had declined to $30,000 because the truck manufacturer has stopped supporting this line of trucks and stopped making spare parts (remember the truck was originally purchased for $70,000). Assume further, that PepsiCo plans to continue using the truck for three more years. In this case, PepsiCo would need to record an impairment charge to reduce the value of the asset.

Answer 13

The journal entry to record the impairment would recognize the actual impairment loss by debiting the Loss on Impairment account for $40,000. The other half of the journal entry would be a credit to Accumulated Depreciation for $40,000 to decrease the carrying value of the asset. Note that the journal entry does not directly reduce the value of the truck recorded on the books, but instead uses the Accumulated Depreciation account to reduce the net book value. The journal entry would look like this:

Answer 14

(((US GAAP vs. IFRS Note that it is possible for an asset’s value to increase after a loss on impairment has been recognized if the factors leading to impairment no longer exist. US GAAP and IFRS differ in how these subsequent value increases are treated. Generally, US GAAP does not allow the value to be written back up once it has been impaired. There is no upward revaluation under US GAAP. In contrast, IFRS standards generally will allow the revaluation of certain assets, up to the asset’s original cost adjusted for depreciation.)))

Answer 15

Non-physical long-lived assets such as patents, trademarks, copyrights, brands, and goodwill. When an intangible asset is acquired, it is recorded on the balance sheet as an **asset.** _It will then be converted into an expense over time using **amortization (**_**a contra-asset account that acts similarly to accumulated depreciation).** The result is that the expense is recognized in the period in which it provided benefit to the business. While the expense for long-lived physical assets is called depreciation, the expense for long-lived non-physical assets is called amortization. Also similar to long-lived physical assets, intangible assets may significantly decrease in value. If a company becomes aware that this has happened, the company will need to record an **impairment loss** to reduce the value of the asset. intangible assets that are determined to have indefinite useful lives do not follow the ordinary amortization rules. The most common of these that you will encounter is goodwill. Under the most recent standards for both US GAAP and IFRS, goodwill is not amortized, but rather is tested for impairment at least annually. **If it is determined that goodwill has been impaired, a company will reflect this on the books by debiting impairment loss and crediting goodwill.** Under both US GAAP and IFRS, once an impairment loss has been recognized on goodwill, the loss cannot be reversed. \*\*\*Note that some companies choose not to use the accumulated amortization account, and instead will directly credit the asset to reduce the value of the asset. This is in contrast to depreciation, where companies will always use an accumulated depreciation account.

Answer 16

Goodwill is the excess of the amount paid to acquire a business over the fair market value of the business' net assets. It is called Goodwill because this excess is often associated with the assumed value of the otherwise undefined intangible aspects of the business. Although a company may feel that it has value in its brands and name, goodwill is only recorded as the result of an acquisition. Self-generated brand value is not recorded as goodwill. **goodwill is not** **amortized,** **but rather is tested for impairment at least annually.**

Answer 17

1. **Perpetual Inventory System-** The expense for Inventory is reported at the time of the sale. (Used by Pepsi & Becoming more common) When products are sold- Pespi increases costs of goods sold to debit 2. **Periodic Inventory System** (Used by other businesses)- the business only periodically records costs of good sold by physically counting the inventory on hand.

Answer 18

The correct answer is Perpetual. Under a perpetual inventory system, a company continuously tracks the sales of inventory and records Cost of Goods Sold for each sale. Even companies with a perpetual inventory system may perform inventory counts periodically.

Answer 19

Since there were 30 boxes in inventory at the beginning of the month and 20 more boxes were purchased, there were 50 boxes available for sale. Since there were 25 boxes remaining in inventory at the end of the month, it means that 25 boxes were sold during the month. At a cost of $5 per box, that means the Cost of Goods Sold was **_$125._**

Answer 20

1. **FIFO-** FIRST IN, FIRST OUT. Used by Pepsi Whatever they sell first is recorded as the FIRST IN price (even if they physically sell the later items) 2. **LIFO-** LAST IN, FIRST OUT- Which recognizes the cost of the newest items first and weight average, which takes the average cost of all items in inventory. 3. Businesses that have expensive inventory, such as a car dealer, will use specific identification and track the cost of each item individually. \*US allows all methods and International system allows all except LIFO **Take note that LIFO and FIFO are accounting conventions for the purpose of inventory valuation, but do not necessarily represent the actual flow of goods.**

Answer 21

Under FIFO, the 250 hats sold would be expensed using the earliest inventory costs first. 250 \*5 = $1,250.

Answer 22

Under FIFO, the 250 hats sold would be expensed using the earliest inventory costs first. So the ending Inventory balance is (150 \* 5) + (200 \* 6) = $1,950.

Answer 23

Under LIFO, the 250 sold would be expensed using the most recent inventory costs first. So the ending Inventory balance is 350 \* 5 = $1,750.

Answer 24

Product Costs- products that a business needs to buy, manufacture, or deliver a good/service. They are recorded as **assets** on the balance sheet and **expense** at the time of sales. example for a retail industry being: * Stage 1- Raw Materials * Stage 2- Work in Progress * Stage 3- Finished Goods Other Examples.... * Raw Materials * Direct Labor * Overhead * Packing

Answer 25

Period Costs- all the other costs the business incurs, such as office salaries, or office rent. Period costs are expensed in the period that they are incurred. **These costs are only listed on the income statement**- not the balance sheet

Answer 26

Product costs * Manufacturing & Utilities * Direct Materials * Equipment Maintenance * Manufacturing Equipment Depreciation Period Costs * Advertising expense * Admin Office Supplies * Sales Commisions * **Head of Office Utilities** * **R & D Cost (Research and Development)**

Answer 27

1. **_Raw materials_** are the components and supplies that a business purchases to be used in production. For PepsiCo, it would be sugar, concentrates, water, and plastic, among others. A home construction business could have wood or cement as raw materials. A business will usually have a supply of these items on hand. 2. Once an item has been taken from raw materials into the production process it is considered **_work in process inventory or WIP_.** These are items that are no longer raw materials but haven’t been fully made into completed products. Additional costs that are added to work in process inventory are labor and overhead costs. Labor cost is the wages paid to the factory workers. * \*Overhead includes additional cost items in the manufacturing process where it isn’t practical to track those costs directly to a specific product. Think of manufacturing equipment depreciation or rent for the factory building. These costs are allocated on some reasonable basis to the items they help produce.* 3. **_Finished goods inventory._** These are items that are completed and ready to be sold to customers. This is similar to inventory on the shelf found in a retail business. The cost of finished goods inventory includes raw materials, labor, and factory overhead costs. ## Footnote **When goods are sold, the total cost of producing the chips is Cost of Goods Sold on the income statement. If they aren’t sold… they remain as inventory on the balance sheet.**

Answer 28

Inventory for a manufacturer includes Raw Materials, Work in Process, and Finished Goods. The ending balance of Raw Materials + The ending balance of WIP + The ending balance of Finished Goods = Total Inventory $700,000 + $900,000 + $860,000 = **$2,460,000.**

Answer 29

Inventory for a manufacturer includes Raw Materials, Work in Process, and Finished Goods. The ending balance of Raw Materials + The ending balance of WIP + The ending balance of Finished Goods = Total Inventory $800,000 + $1,200,000 + $0 = **$2,000,000.**

Answer 30

Deferred Taxes arise from a temporary difference in the timing between recognizing the tax expense for a given period on the financial records compared to actually filing and paying the taxes per the tax records. There are many valid reasons that the two amounts may differ. Some examples include differences in depreciation methods, differences in bad debt estimates and actual write offs, tax-loss carry-forwards, and some pension payments and expenses. Deferred taxes can be either **_an asset**_ or _**a liability,_** and can be either current or non-current, depending on when the temporary timing difference is expected to reverse. * In cases where the timing difference leads to a: * *higher taxable income** *(on income tax return)* _than the_ **pretax income** *(income statement)* the excess tax paid increases the deferred tax asset account. * a deferred tax liability account reflects an obligation to pay taxes in the future related to the income already considered as income for financial reporting purposes. At a given point in time, a balance sheet may show both a deferred tax asset and a deferred tax liability. Deferred taxes exist because of the **matching principle.** In this case, the matching principle requires that we match the tax expense for a given period with the revenue and other expenses for that period, as they are shown on the financial statements. If we simply said that the taxes calculated on the tax return were the tax expense for the period, then the tax expense would be based on a different amount than the amount shown as Income Before Taxes on the financial statements and the tax expense would not relate to the reported results for the business. Deferred taxes are recorded so that the financial statements accurately reflect what amount of taxes relates to the current accounting period income, and what amount of taxes relates to income in other periods.

Answer 31

**depreciation.** Maybe things are depreciated in different ways! One for financial statements- the other for Tax Books

Answer 32

a Deferred Income Tax Liability- you will owe later! **Anytime you see Deferred income- it means there will be taxes owed in the future**

Answer 33

Yes- in the form of **deferred income taxes. Such as:** 1. Current assets OR Long-Term Assets 2. Current Liabilities OR Long-Term Liabilities Ex: Bikram Yoga Natick, it shows up as a short-term asset and a long-term liability because the owner recognizes revenue and depreciation at different times for financial reporting than she does for tax filing. Because most companies have 2 books 1- finance books 2- tax books

Answer 34

* **Income before taxes** is the amount listed on the _income statement_ after subtracting all losses and expenses except taxes from revenues and gains. * **Taxable income** is the amount listed on a _tax return_ after subtracting all of the deductions from the gross income.

Answer 35

1. **_Tax Expense_** for a given period is calculated by multiplying the Income Before Tax (_on the balance sheet_) from the financial accounts by the tax rate. * *Tax Expense = Income Before Taxes x Tax Rate** 2. **_Taxes Payable_** are calculated by multiplying the Taxable Income from the tax return by the tax rate. * *Taxes Payable = Taxable Income x Tax Rate** \*\*Whenever the Income Before Taxes on the Income Statement is different than the Taxable Income on the tax return, if that difference is caused by a temporary timing difference, then the difference between Tax Expense and Taxes Payable will be a **Deferred Tax amount.** The nature of the timing difference determines whether the Deferred Tax entry will be a liability, as in this example, or an asset, as we will see next. **Deferred Taxes =** difference between Tax Expense and Taxes Payable due to a temporary timing difference

Answer 36

Tax Expense is the amount of tax that relates to activity that occurred during the current accounting period. As an expense account, it is closed out like all other expense accounts during the year-end close so the account balance at the start of the next year is zero. Be aware that the year-end closing process can take some weeks, or even months, to complete, but the closing entries are all made as of the last day in the fiscal year. The fiscal year can be different from the tax year and, in some ways this can be easier to handle but it is outside the scope of this course and we will not get into further detail.

Answer 37

Taxes Payable is the amount of taxes you actually owe based on what the government says you owe. This liability is typically due and payable within a few months from the close of the tax year. Thus, a balance due at the end of one year related to the tax return for that year will normally be paid in the first half of the following year. For example, at December 31, 2013 an adjusting journal entry would be made to record the accrual for taxes payable based on activities in 2013, but the taxes would actually likely be paid by April 15, 2014.

Answer 38

* Taxes Payable Taxes Payable is the tax liability due in the current period.

Answer 39

Deferred Tax Liability This is the amount that arises when Taxable Income is less than Income Before Taxes due to a temporary timing difference.

Answer 40

The company needs to record the income taxes related to 2013. Because there is a temporary timing difference related to depreciation expense, the company will need to record deferred taxes related to the difference, in addition to recording income tax expense and taxes payable. The correct answer is to: * debit Income Tax Expense for $33,000 ($110,000 \* 30%) * credit Taxes Payable for $30,000 ($100,000 \* 30%) * credit Deferred Income Tax Liability for $3,000 (the difference between Income Tax Expense and Taxes Payable).

Answer 41

``` Bikram Yoga Natick. You have seen that the yoga studio often receives payments in advance for yoga class memberships that customers can use over the next 12 months. Because Maria files her taxes on a cash basis, these advances from customers are taxable income right away. However, for financial accounting purposes, these advances are deferred and the revenue is recognized proportionately over the course of the next 12 months. ``` This timing difference could cause taxable income to be higher than income before taxes, and the difference would give rise to the recording of a **deferred tax asset.**

Answer 42

Deferred Tax Asset ## Footnote In cases where a temporary timing difference leads to a higher taxable income in the current period than the financial income reported, then the excess tax paid is recorded and shown in the financial statements as a Deferred Tax Asset. A Deferred Tax Asset reflects a prepayment of taxes that will be due in the future related to activity already reported in the financial statements.

Answer 43

The company needs to record the income taxes related to 2013. Because there is a temporary timing difference, the company will need to record deferred taxes related to the difference, in addition to recording the tax expense and taxes payable. The correct answer is to: * debit Income Tax Expense for $20,000 ($100,000 \* 20%), * credit Taxes Payable for $22,000 ($110,000 \* 20%), and * debit Deferred Income Tax Asset for $2,000 (the difference between Income Tax Expense and Taxes Payable).

Answer 44

**Debit the Deferred Tax Asset account** When a temporary timing difference causes Taxable Income to be higher than Income Before Taxes, the required entry is a debit. In this case, the debit is an increase to the Deferred Tax Asset account.

Answer 45

Credit the Deferred Tax Liability account The fact that the tax deduction for depreciation is higher than the Depreciation Expense causes Taxable Income to be less than Income Before Taxes. Since Tax Expense is based on Income Before Taxes, this means that the amount of Tax Payable for 2013 will be less than the Tax Expense for the year. This is a temporary timing difference which will reverse in future years so it means that there will be taxes payable in some future year when the Depreciation Deduction is less than the Depreciation Expense. This difference in taxes paid versus tax expense for 2013 is recorded as a Deferred Tax Liability.

Answer 46

The correct answer is to debit the Deferred Tax Liability account. The fact that the tax deduction for depreciation is lower than the Depreciation Expense causes Taxable Income to be more than Income Before Taxes. Since Tax Expense is based on Income Before Taxes, this means that the amount of Tax Payable for 2013 will be more than the Tax Expense for the year. This is a timing difference which was set up as a liability in the year that the asset was purchased, and it is now reversing so it means that the amount deferred as liability in previous years is now being paid down. Thus the liability is being reduced and debits reduce liabilities.

Answer 47

**Credit the Deferred Tax Asset account** When a temporary timing difference causes Taxable Income to be lower than Income Before Taxes, the required entry is a credit. In this case, the credit is a decrease to the Deferred Tax Asset account, because in previous years, when the Deferred Revenue was first recorded, a Deferred Tax Asset would have been created.

Answer 48

The correct answer is to debit the Deferred Tax Asset account. The fact that the Provision for Bad Debts could not be deducted for tax purposes means that Taxable Income will be greater than Income Before Taxes. Since this difference will reverse over time it means that the higher taxes paid this year will be recovered in future years so the amount of the increase in taxes paid is recorded as a Deferred Tax Asset.

Answer 49

Current Liabilities The Deferred Tax Liability would have been classified as a Non-Current Liability initially, but as soon as it becomes evident that liability is expected to be resolved in a year or less, it should be reclassified as a Current Liability.

Answer 50

**The business recognizes $500,000 of Tax Expense but pays $550,000.** This is the correct answer! The Tax Expense for the year would be increased by $500,000 by this entry. However, due to timing differences the business had to pay $550,000 and the difference is set up as a Deferred Tax Asset.

Answer 51

**The business recognizes $500,000 of Tax Expense but will pay more as a temporary timing difference reverses.** This is the correct answer! The Tax Expense for the year would be increased by $500,000 by this entry. However, due to reversal of previously recorded temporary timing differences the business had to pay $525,000 and the difference is a reduction of a Deferred Tax Liability.

Answer 52

**The business incurs $500,000 for income tax expense for the year 2014.** This is the correct answer! The Tax Expense for the year would be increased by $500,000 by this entry. Since $50,000 would not be payable until a future year, it is set up as a Deferred Tax Liability.

Answer 53

The business recognizes $500,000 of Tax Expense but will pay more as a temporary timing difference reverses. This is the correct answer! Since the Deferred Tax Liability is being debited, it means that it is being reduced and an amount set up in a prior period when a temporary timing difference made Taxable Income less than Income Before Taxes is now reversing as the timing difference now makes Taxable Income higher than Income Before Taxes.

Answer 54

**Asset or Liability Account** Deferred Taxes can be either an asset or a liability account. In fact, some companies have both Deferred Tax Asset and Deferred Tax Liability accounts in their Chart of Accounts and in their financial statements. The nature of a Deferred Tax account depends on whether the difference between methods of recording activity for financial purposes and for tax purposes results in Taxable Income on the tax return being temporarily higher or lower than Income Before Taxes on the income statement. Differences that cause Taxable Income to be higher than Income Before Taxes generate Deferred Tax Assets while differences that cause Taxable Income to be lower than Income Before Taxes generate Deferred Tax Liabilities. There are various ways that these temporary differences can occur and some of them generate Deferred Tax Assets and others generate Deferred Tax Liabilities so it is possible, and even common, for a company's balance sheet to have both.

Answer 55

**No Entry is required** Since this is a permanent difference the correct answer is that there is no Deferred Tax entry required. The difference (reduction in this case) in Tax Expense is simply reported in the year that it occurs. Only temporary timing differences result in Deferred Taxes.

Answer 56

The closing process is really just an opportunity for a company to evaluate its trial balance and ensure that the proper accruals and other adjusting entries have been made so that the financial statements will accurately reflect the results of all transactions that occurred during the period. The closing process brings together many of the accounting concepts and principles discussed in Module 1 (revenue recognition and matching concept as well as conservatism, consistency, materiality, historical cost, relevance, reliability, going concern, money measurement, and entity concept). Management looks at all of the accounts and transactions through the lens of the accounting principles and tries to make sure that they are applied.

Answer 57

For the first transaction, Hipzone should * debit Accounts Receivable for $450 and * credit Sales for $450. At the same time, HIPZONE should * debit Cost of Goods Sold for $220 and * credit Accumulated Project Costs for $220. For the second transaction, Hipzone should * debit Depreciation Expense for $180 and * credit Accumulated Depreciation for $180.

Answer 58

This transaction results in * a reduction of the Land and Building account of the initial, gross value of the land and building (credit of $1,500,000) offset by * receipt of cash (debit of $1,100,000), * reduction of accumulated depreciation (debit of $100,000), and * recognition of the loss on the disposal of the asset (debit of $300,000). Remember that accumulated depreciation is a contra-asset account associated with the related asset account. Whenever a company disposes of an asset, the value of that asset account, as well as the related contra-asset account, must both be removed from the books. The difference between the asset account and the contra-asset account is known as the net book value. Whenever the net book value is greater than the amount of cash received from the sale of the asset, a loss is recognized. When the net book value is less than the amount of cash received from the sale of the asset, a gain is recognized.