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Midterm 2 Review.docx

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Arts and Business
David Lin

Assets Liabilities Shareholder’s Equity A +10,000,00 NE +10,000,000 B +300,000,000 +300,000,000 NE C -50,000,000 NE NE +50,000,000 D +75,000,000 +120,000,000 NE +45,000,000 E NE NE NE F -5,000,000 NE -5,000,000 G NE NE NE H +7,800,000 NE +1,900,000 -5,900,000 I NE NE NE J +40,000,000 -20,000,000 +60,000,000 K NE +10,500,000 -10,500,00 L I= P x R x T Consider a timeline Loan for 100million on July 1, interest for loan is due in a year In 6 months (Dec 1), we have to calculate the interest and include it in the sheets I = 100mill x 10% x 6/12 = 5 million We record Interest Expense – 5M, Interest Payable +5M In 12 months, we pay the interest Interest Payable +5M Cash -10M Interest Expense -5M ARBUS 102: MID-TERM 2 REVIEW 30 multiple choice questions 3 short answer questions (55 marks) = 85 marks - Ratio formula sheet is provided, amortization formula are not provided - Calculator is allowed Amortization of Tangible Assets - Be able to apply the three amortization methods to calculate the amortization of any long-lived tangible assets - Asset cost: includes the purchase cost, sales tax, legal fees, and other costs needed to acquire and prepare the asset for use - Residual (salvage) value: is an estimate of the amount the company will receive when it disposes of the asset - Useful life: is the expected service life of an asset to the present owner. Land is the only tangible asset that has an unlimited useful life - Amortizable cost: is the portion of the asset’s cost that will be used in generating revenue; calculated as asset cost minus residual value 1. Straight-Line Method: a systematic and rational allocation of the cost of the asset in equal periodic amounts over its useful life (cost – residual value) x = amortization expense o Amortization expense is constant each year o Accumulated amortization increases by an equal amount each year o Book value decreases by the same equal amount each year 2. Units of Production Method: allocates the cost of an asset based on the relationship of its periodic output to its total estimated output (cost – residual value) x = amortization expense o Amortization expense, accumulated amortization, and book value vary from period to period, depending on the number of units produced 3. Declining- Balance Method: assigns more amortization to early years of an asset’s life and less amortization to later years (cost – accumulated amortization) x = amortization expense o Amortization expense is higher in the early years of an asset’s life o Usually used for products that lose value quickly (eg. technology) o The calculated amortization expense would not be recorded if the book value would fall below the residual value. Application: Consider Example E9-7 (p397) Income Balance Sheet Statement Year Computation Amortization Cost Accumulated Book Value Expense Amortization Straight Line Method At acquisition - -
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