AFM123 Lecture Notes - Lecture 7: Capital Cost, Income Statement

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ceruleandog494

6 Oct 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

David Lin

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Document Summary

Resources owned by a business to produce goods or services sold to customer. Tangible assets (aka fixed assets or property, plant, and equipment) Intangible assets (aka goodwill, patents, copyrights, and trademarks) All costs needed to quire assets are included in cost (i. e. construction for building) To record cost as an asset, rather than an expense. Estimate of how much asset will be worth when it is used up. Portion of the assets cost that will be used in generating revenue. Straight line method (cost - residual value) x 1/ useful life = amortization expense. Accumulated amortization increases by constant amount each year. Book value decreases by constant amount each year. Units of production method (cost residual value) x actual production this period / estimated total production = Allocates cost based on periodic output to its total estimated output. Declining balance method (cost accumulated amortization) x 2/useful life = amortization expense.

Related Questions

Can someone please provide the solutions. No explanation needed,just the answers so I can double check my work.

2. Firms with tangiblelong-term assets and less predictable cash flows, such as automanufacturers and steel companies, whose sales vary with changes ineconomic conditions, tend to use

a.	a more nearly equal mix of long-term debt and shareholdersâequity financing.
b.	a greater amount of long-term debt [80%] than shareholdersâequity financing [20%].
c.	a smaller amount of long-term debt [20%] than shareholdersâequity financing [80%].
d.	a greater amount of long-term debt [80%] than assets [20%].
e.	a greater amount of shareholdersâ equity [80%] than assets[20%].

3. During Year 3,Carrington Company made the following expenditures relating toplant machinery and equipment:

Â·	Continuing, frequent, and low cost repairs	$46,000
Â·	Special long-term protection devices were attached to tenmachines	11,000
Â·	A broken gear on a machine was replaced	5,000

How much should be charged to repairs and maintenance in Year3?

a.	$46,000
b.	$51,000
c.	$57,000
d.	$41,000
e.	none of the above

4. Which of the followingis/are not capitalized as an intangible asset?

a.	costs of an internally developed patent
b.	legal costs to defend a patent successfully
c.	goodwill acquired when a company purchases another company
d.	costs to purchase a patent
e.	none of the above

5. Repairs and maintenancedo not include

a.	the costs of restoring an asset's service potential afterbreakdowns.
b.	expenditures that increase the asset's life.
c.	routine costs such as for cleaning and adjusting.
d.	major tune-ups including labor and parts.
e.	All of the above are not considered to be repairs ormaintenance.

12. Sigma Company suffers a loss to itsbuilding in a fire and spends $100,000 on repairs and improvements.It judges that $80,000 of the expenditure replaces long-livedassets lost in the fire, and $20,000 represents improvements to thebuilding. Which of the following is the single journal entry thatSigma Company will make?

a.	Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 100,000
b.	Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000
c.	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Building . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 20,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 80,000
d.	Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 20,000 Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 80,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000
e.	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 100,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 100,000

16. Firms treat expenditures as assetswhen they:

a.	have acquired rights to the future use of a resource as a resultof a past transaction or event.
b.	can reliably measure the cost of the expected benefits at thetime of initial recognition.
c.	can exercise the entityâs right to, or control of, thebenefit.
d.	can obtain the future service potential and control othersâaccess to it.
e.	all of the above

Clarion Realty

Clarion Realty has decided to construct its own office building.The construction will be partially financed through a constructionloan and any remainder will be financed from internally generatedfunds. The internal accountants have collected the followinginformation concerning the construction.

	Average Balance	Construction	Other
Year	Construction Account	Debt @ 6%	Debt @ 10%
1	$2,000,000	$1,000,000	$500,000
2	$4,000,000	$1,000,000	$250,000
3	$3,000,000	$800,000	$200,000

22. The amount, if any, of capitalizedinterest cost for Year 1 is

a.	$0
b.	$50,000
c.	$60,000
d.	$110,000
e.	$170,000

23. The amount, if any, of capitalizedinterest cost for Year 2 is

a.	$0
b.	$50,000
c.	$60,000
d.	$180,000
e.	$230,000

33. When a firm constructs its ownbuildings or equipment:

a.	it recognizes the labor, material, and overhead costs incurredas an asset.
b.	U.S. GAAP and IFRS require firms to include, or capitalize,interest costs during construction in the cost of aself-constructed asset.
c.	it recognizes the labor, material, and overhead costs incurredas a period expense.
d.	U.S. GAAP and IFRS require firms to expense interest costsincurred during construction of a self-constructed asset.
e.	both choices a and b are correct.

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

1 of 50

Investments in debt securities, such as bonds, may be classifiedas either current or long-term assets.

	True
	False

Question

2 of 50

Marketable securities that are held until the due date of thesecurities are

	trading and held-to-maturitysecurities.
	available-for sale securities.
	held-to-maturity securities.
	trading securities.

Question

3 of 50

Which of the following business types is most common as measuredby the amount of business transacted?

	Government entities
	Proprietorships
	Partnerships
	Corporations

Question

4 of 50

Depreciation is based upon cost, useful life, and salvagevalue.

	True
	False

Question

5 of 50

Because depreciation is not cash-based, it is NOT reported inthe direct method of the statement of cash flows.

	True
	False

Question

6 of 50

A company has a petty cash fund of $200. At the end of themonth, $6.41 remains in the fund along with $190.96 in variousreceipts. The journal entry to replenish the fund would show adebit(s) to

	various expenses for $190.96 andCash Short of $2.63.
	Cash for $190.96.
	Cash for $193.59.
	various expenses for $190.96 andCash Over of $2.63.

Question

7 of 50

A 12-month, 8% note dated August 1, 2013 for $5,000 would haveaccrued interest payable on December 31, 2013 of $166.67.

	True
	False

Question

8 of 50

Warranty expense must be estimated and matched to revenues.

	True
	False

Question

9 of 50

Upgrading the RAM on a computer would be an example of a(n)

	capital expense.
	betterment.
	ordinary repair.
	extraordinary repair.

Question

10 of 50

The formula for the quick ratio is quick assets divided bynoncurrent assets.

	True
	False

Question

11 of 50

Which of the following are considered to be legal entities thatexist separate and distinct from their owners?

	Sole proprietorships
	Organizations with more than 100partners
	Partnerships
	Corporations

Question

12 of 50

Patents and copyrights can be seen, held, or touched.

	True
	False

Question

13 of 50

Which of the following would be considered part of the cost ofmachinery and equipment?

	Repairs after start-up
	Insurance after purchase
	Maintenance
	Sales taxes

Question

14 of 50

The business or person that signs the note and promises to paythe required amount is called the payee.

	True
	False

Question

15 of 50

Conley Company has a petty cash fund of $300. At the end of themonth, $42.38 remains in the fund along with $260.75 in variousreceipts. The journal entry to replenish the fund would bedebit

	Petty Cash for $257.62 and creditCash for $257.62.
	various expenses, $260.75 andcredit Cash for $260.75.
	various expenses, $260.75, creditCash Over for $3.13, and credit Cash for $257.62.
	various expenses, $254.49, debitCash Short for $3.13, and credit Cash for $257.62.

Question

16 of 50

Neither land nor land improvements are depreciated.

	True
	False

Question

17 of 50

Using a 365-day year, the maturity value of a 180-day note for$2,700 at 9% annual interest is (rounded to the nearest cent)

	$2,819.84.
	$2,821.50.
	$2,943.00.
	$ 119.84.

Question

18 of 50

On January 1, Bestway, Inc. signed a $175,000, 8%, 30-yearmortgage that requires semiannual payments of $7,735 on June 30 andDecember 31 of each year. The journal entry to record the secondsemiannual payment would be (round interest calculation to thenearest dollar) to

	debit Interest expense, $764; debitMortgage payable, $6,971; credit Cash, $7,735.
	debit Mortgage payable, $7,735;credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage expense, $764; credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage payable, $764; credit Cash, $7,735.

Question

19 of 50

Allied Industries purchased a piece of equipment for $65,000with an estimated salvage value of $15,000 on January 1. Itsestimated life is five years. To the nearest dollar, what is theequipment's depreciation using double-declining-balance for yeartwo?

	$ 26,000
	$ 12,000
	$ 20,000
	$ 15,600

Question

20 of 50

Payroll is also called employee compensation and can consist ofmany parts.

	True
	False

Question

21 of 50

The number of shares of stock that a corporation is given theright to sell is called

	authorized stock.
	issued stock.
	outstanding stock.
	capital stock.

Question

22 of 50

Which of the following would NOT be considered part of the costof machinery and equipment?

	In-transit insurance costs
	Delivery charges
	Installation costs
	Repairs and maintenance afterstart-up

Question

23 of 50

Equipment costing $118,000 has accumulated depreciation of$92,000. The equipment is a trade-in for new equipment costing$187,000. If the trade-in value received for the old equipment is$30,000, the journal entry to record this transaction is to

	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, creditEquipment (Old) for $118,000, and credit Cash for $161,000.
	debit Equipment (New) for $187,000and credit Cash for $187,000.
	debit Accumulated Depreciation âTruck for $50,000, debit Loss on Disposal $6,000, and credit Truckfor $56,000.
	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, debit Losson Exchange of Assets for $26,000, credit Equipment (Old) for$118,000 and credit Cash for $187,000.

Question

24 of 50

Liberty Company has declared a $40,000 cash dividend toshareholders. The company has 5,000 shares of $20-par, 6% preferredstock and 10,000 shares of $15-par common stock. The preferredstock is cumulative. How much will be distributed to the preferredand common stockholders on the date of payment if the preferredstock is $12,000 in arrears?

	$18,000 preferred, $22,000common
	$20,000 preferred, $20,000common
	$6,000 preferred, $34,000common
	$40,000 preferred, $0 common

Question

25 of 50

In accounting, what is the meaning of capitalized?

	Capitalized means that a given cityhas been selected as a government center.
	Capitalized means that the cost ofan asset is recorded as a debit (increase) to expense.
	Capitalized means that a liabilityaccount is credited (increase
	Capitalized means that an assetaccount is debited (increased) for the cost of an asset.

Question

26 of 50

Interest is an expense to the debtor and income to thecreditor.

	True
	False

Question

27 of 50

Cash consists of anything that a bank will take as adeposit.

	True
	False

Question

28 of 50

The cost of long-term assets must be allocated to an expense asthe asset is used up.

	True
	False

Question

29 of 50

The process of acquiring merchandise from a supplier begins withthe

	purchase order.
	check for payment.
	receiving report.
	invoice.

Question

30 of 50

Appleway Corporation purchases a machine for $125,000. It has anestimated salvage value of $10,000 and is expected to produce50,000 units in its lifetime. During the first year of operation,it produced 14,500 units. To the nearest dollar, the depreciationfor the first year under the units of production method will be

	$35,500.
	$31,250.
	$36,250.
	$33,350.

Question

31 of 50

Book value is depreciable cost minus accumulateddepreciation.

	True
	False

Question

32 of 50

The records of Inland Equipment showed a net loss of $30,000,depreciation expense of $25,000, and an increase in supplies onhand of $5,000. The amount of net cash flow from operatingactivities using the indirect method is

	($10,000).
	$15,000.
	$20,000.
	($15,000).

Question

33 of 50

Retained earnings represent internally generated capital.

	True
	False

Question

34 of 50

A company issues 15,000 shares of its $25 par common stock for$29 per share. The amount to be debited to Cash is

	$435,000.
	$375,000.
	$405,000.
	$ 60,000.

Question

35 of 50

On September 1, 2012, Juno Corp. lent $2,400 to Bill Askins on asix-month 8% promissory note. The journal entry to record the notefor Juno Corp. would be to:

	debit Note Receivable/Tim, $2,400;credit Cash, $2,400.
	debit Note Receivable/Tim, $96;credit Interest Income, $96.
	debit Note Receivable/Tim, $2,496;credit Cash, $2,496.
	debit Cash, $2,400; credit NotePayable/Tim, $2,400.

Question

36 of 50

Separation of duties is essential for internal control over cashreceipts and cash payments.

	True
	False

Question

37 of 50

Which of the following would indicate poor internal control overaccounts receivable?

	The same person handling cashreceipts also records the accounts receivable transactions.
	The person handling cash receiptspasses the receipts to someone who enters them into accountsreceivable.
	The mailroom employees open themail and give the cash receipts to another employee.
	The person who handles accountsreceivable would not write off accounts as uncollectible.

Question

38 of 50

Limited liability means that the stockholders of a corporationshare a personal liability for all debts of the corporation.

	True
	False

Question

39 of 50

Accumulated depletion is a(n)

	contra-asset account.
	cash account.
	contra-liability account.
	expense account.

Question

40 of 50

Allied Industries reported net income of $52,000, depreciationexpenses of $13,000, a gain on a land sale of $3,000, and adecrease in accounts receivable of $1,500. Under the indirectmethod, net cash flows from operations is

	$63,500.
	$66,500.
	$69,500.
	$60,555.

Question

41 of 50

The portion of stockholders' equity that can be used fordividends is referred to as legal capital.

	True
	False

Question

42 of 50

Franklin Industries had total assets of $560,000; totalliabilities of $250,000; and total stockholders' equity of$310,000. Franklin Industries debt ratio is

	55.4%.
	28.7%.
	44.6%.
	80.6%.

Question

43 of 50

Financial analysis is used to predict the future of abusiness.

	True
	False

Question

44 of 50

Online banking should NOT be used to reconcile the bankaccount.

	True
	False

Question

45 of 50

Costs of testing machinery or equipment before they are usedwould be included in the price of the machinery or theequipment.

	True
	False

Question

46 of 50

There are two methods for accounting for uncollectiblereceivables.

	True
	False

Question

47 of 50

Assets that are NOT expected to provide benefits for a number ofaccounting periods are called

	current assets.
	property, plant, andequipment.
	long-term assets.
	natural resources.

Question

48 of 50

The allowance method of accounting for bad debts is required byGAAP because of the materiality principle.

	True
	False

Question

49 of 50

A stock dividend affects total stockholders' equity.

	True
	False

Question

50 of 50

Realized gains and losses only occur when the security is soldfor more or less than the original cost.

	True
	False

AFM123 Lecture Notes - Lecture 7: Capital Cost, Income Statement

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