Week 8 Key Concepts

Question 1

Interest:

Answer 1

is the payment for the use of money. Interest expense is reported separately in the
income statement.

Question 2

Simple interest

Answer 2

charges occur when interest earned is withdrawn and only the principal remains
invested.
simple interest: I =PxRxT

Question 3

Compound interest:

Answer 3

interest is earned on reinvested principal and interest. The accumulated
sum grows rapidly since interest is earned on interest as well as on the principal.

Question 4

Future Value:

Answer 4

the single amount to which invested principal plus interest grows.

Question 5

Present value:

Answer 5

a single amount of money at the present time that is the economic equivalent of a
stream of future payments.

Question 6

Contracts involving delayed payments

Answer 6

are evaluated by finding the present value of the stream
of payments. The present value of a stream of payments is a single amount of money at the
present time that is the economic equivalent of the entire stream.

Question 7

Compounding period:

Answer 7

The time period for which interest is calculated.

Question 8

Annuity:

Answer 8

A series of equal cash flows made at the beginning or end of equal periods of time.

Question 9

Ordinary annuity or annuity in arrears:

Answer 9

is an annuity whose payments occur at the end of
each period. Normally used in this course.

Question 10

Annuity due or annuity in advance:

Answer 10

is an annuity whose payments occur at the beginning of
each period. Only used in this course when indicated, if nothing said, assume it is ordinary.

Question 11

Perpetuity:

Answer 11

is an annuity whose payments continue forever is called a perpetuity. Perpetuities
can be either ordinary annuities or annuities due.

Question 12

eBook End of Appendix B – Activities recommended
Problems 04, 05, 08, 10 and 19

Answer 12

eBook End of Appendix B – Activities recommended
Problems 04, 05, 08, 10 and 19

Question 13

Capital assets:

Answer 13

They are long-lived assets used by a company to help produce product and otherwise
contribute to the revenue- generating process.

Question 14

Major classes of capital assets:

Answer 14

Property, Plant and Equipment; Intangibles; long-lived assets held for sale

Question 15

Basket Purchases:

Answer 15

Several assets are bought together for one price but for accounting records the
acquisition cost of each must be identified. Allocation based on relative sales value method.

Question 16

Intangible assets:

Answer 16

An asset, other than a financial asset, that lacks physical substance, but contribute
significantly, for a long-time to the revenue generating process.

Question 17

Goodwill:

Answer 17

the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets
acquired and liabilities assumed. Goodwill as per GAAP is only recognized when it is purchased.

Question 18

Assets held for sale:

Answer 18

When management commits to a plan to sell a long-lived asset, is actively
marketing it, expects to complete the sale within a year (or longer if certain conditions are met), and sets a reasonable sales price, the long-lived asset is classified as ‘held for sale’.

Question 19

Betterment:

Answer 19

The costs incurred to enhance service potential is a “betterment” and may be added to the carrying amount. Service potential is enhanced when there is an increase in physical output, associated operating costs are lowered, useful life is extended, quality of output is improved.

Question 20

Repair & maintenance expenses

Answer 20

The costs to maintain service potential are expensed in the period incurred

Question 21

Amortization:

Answer 21

rational and systematic allocation of cost less residual over useful life. Also called depreciation for property, plant and equipment and depletion for natural resource properties. Journal entry to record depreciation/amortization/depletion expense:
Dr Depreciation Expense
Cr Accumulated Depreciation

Question 22

Depreciation methods for PPE assets:

Answer 22

straight-line, units of activity, and declining balance method.

Question 23

Amortization of intangible assets with definite life:

Answer 23

Similar to straight-line method for PPE assets.

Question 24

Depletion of natural resources:

Answer 24

Using units of production method

Question 25

Stub Period Depreciation:

Answer 25

partial month depreciation, important to determine when an asset starts to
depreciate and the accumulated depreciation at the moment of sale. The 15th day of the month is the cutoff

Question 26

Changing depreciation methods:

Answer 26

Changes in depreciation method are accounted for retroactively with
restatement: depreciation since the assets were acquired is recomputed and the comparative amounts in
financial statements are restated. The effect, and reason for the change, is disclosed in the notes to FS.

Question 27

Changes in estimates of useful life/residual value:

Answer 27

They are accounted for prospectively, in the current
and future periods.

Question 28

Impairment of assets:

Answer 28

Impairment is the condition that exists when the carrying amount (cost –
accumulated amortization) of a long-lived asset exceeds its fair value. If an impairment occurs, journal
entry to record it is:
Dr. Impairment Loss and
Cr. Accumulated amortization

Question 29

eBook End of Chapter 9 – Activities recommended
Problems 03, 06 and 07
Download the audited financial statements of a company from SEDAR or EDGAR, and read the
footnotes that are related to Capital Assets accounts, such as depreciation/amortization methods.

Answer 29

eBook End of Chapter 9 – Activities recommended
Problems 03, 06 and 07
Download the audited financial statements of a company from SEDAR or EDGAR, and read the
footnotes that are related to Capital Assets accounts, such as depreciation/amortization methods.