1. © 2014 Cengage Learning. All Rights Reserved. How to Read a Textbook © 2014 Cengage Learning. All Rights Reserved. Chapter 15 Vocab Test Review Chapter 15 Vocab Test Review If you know how to read a textbook, you will understand and remember what you have read. There are three simple tools that you can do to read more effectively: SCAN: Scan the chapter in the book. Look at the boldface terms, charts, graphs, headings & subtitles, maps, photos & illustrations, summary, and review questions. Scanning provides you with information in a short amount time. You get a quick view of the information and it prepares you for what you are about to read. It makes it easier and more understandable when you actually do read. READ: When you read, have a purpose. This helps you to stay focused and understand what you have read. Ask yourself questions as you read. “What does this word mean?, Why is this important?, etc.” You are a detective while you read. Looking for answers to your questions while you read. When you finished reading you should have answered all of your question and the review questions. REVIEW: Once you have finished reading, take the time to go one step further. Go through the scanning process again and look at the bold words, italicized words, charts, pictures, headings, etc. Make sure you understand what you have read. You can even make flash cards of the different headings or events that took place in your reading. You will be amazed how much you remember when it is time to review for the test. Source: http://www.coedu.usf.edu/zalaquett/Help_Screens/study_skillsMHS.htm

2. © 2014 Cengage Learning. All Rights Reserved. Adjusting Account Balances ●Some general ledger accounts need to be brought up to date before financial statements are prepared. ●Adjusting entries are used to bring a general ledger account up to date. ●A business can use any 12-month period for reporting its financial performance. ●It is best to end in a period of low business activity so inventory is easier to count and you have the time to do it. SLIDE 2 Lesson 15-1 LO1

3. © 2014 Cengage Learning. All Rights Reserved. Preparing aTrial Balance ●The first step in preparing adjusting entries is to prepare a trial balance. ●A trial balance prepared before adjusting entries are posted is called an unadjusted trial balance. SLIDE 3 LO1 Lesson 15-1

4. © 2014 Cengage Learning. All Rights Reserved. Preparing an Unadjusted Trial Balance LO1 Lesson 15-1 All accounts are listed, even if the account does not have a balance.

5. © 2014 Cengage Learning. All Rights Reserved. Recording Adjusting Entries for Supplies SLIDE 5 LO2 Lesson 15-1 Debit Supplies Expense—Office 1 1 Credit Supplies—Office 2 2 Debit Supplies Expense—Store 3 3 Credit Supplies—Store 4 4

6. © 2014 Cengage Learning. All Rights Reserved. Recording an Adjusting Entry for Prepaid Insurance SLIDE 6 LO2 Lesson 15-1 The amount of insurance used is recorded as a debit to Insurance Expense. The unadjusted balance of Prepaid Insurance does not reflect the value of insurance premiums that expired during the fiscal period. It is no longer correct and needs to be adjusted.

7. © 2014 Cengage Learning. All Rights Reserved. Recording an Adjusting Entry for Merchandise Inventory ●The amount of inventory on hand at the beginning of a fiscal period is called beginning inventory. ●During the period, merchandise is purchased and merchandise is sold. ●Physical inventory: Done to determine how much merchandise remains in inventory at the end of the period. ●Businesses that use a periodic inventory system (instead of the perpetual method) debit Purchases when merchandise is bought. ●The actual count of merchandise at the end of a fiscal period is called ending inventory. SLIDE 7 LO3 Lesson 15-2

8. © 2014 Cengage Learning. All Rights Reserved. Recording an Adjusting Entry for Merchandise Inventory SLIDE 8 LO3 Lesson 15-2 Adj.5,648.44 Dec. 31 Bal. 108,486.44 (New Bal.102,838.00) Merchandise Inventory Income Summary Adj.5,648.44 Debit Income Summary 1 1 Credit Merchandise Inventory 2 2 Adjust this amount to reduce and correct the inventory balance.

9. © 2014 Cengage Learning. All Rights Reserved. Journalizing the Adjusting Entry for Interest Receivable -- Although not received daily, interest is earned daily ●Revenue earned in one fiscal period but not received until a later fiscal period is called accrued revenue. ●Interest earned but not yet received is called accrued interest income. SLIDE 9 LO3 Lesson 15-2

10. © 2014 Cengage Learning. All Rights Reserved. Journalizing the Adjusting Entry for Interest Receivable SLIDE 10 LO3 Lesson 15-2 Debit Interest Receivable 1 1 Credit Interest Income 2 2 Interest Income Dec. 31 Bal. 464.00 New Bal.93.00 (New Bal.557.00)

11. © 2014 Cengage Learning. All Rights Reserved. Understand: 1.What types of accounts are increased by recording an adjusting entry for accrued revenue? SLIDE 11 ANSWER The adjusting entry for accrued revenue increases a revenue account (a credit) and increases an (asset) receivable account (a debit). Lesson 15-2

12. © 2014 Cengage Learning. All Rights Reserved. Categories of Assets ●Most businesses use several broad categories of assets in their operations. ●Cash and other assets expected to be exchanged for cash or consumed within a year are called current assets. ●Physical assets that will be used for a number of years in the operation of a business are called plant assets. SLIDE 12 LO5 Lesson 15-3

13. © 2014 Cengage Learning. All Rights Reserved. Plant Assets ●A loss in the usefulness of a plant asset as a result of wear or obsolescence is called depreciation. ●To match revenue with the expenses used to earn the revenue, the cost of a plant asset must be expensed over the asset’s useful life. ●Depreciation expense is not recorded on all plant assets. Land is a plant asset that is not depreciated. ●The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during that asset’s useful life is called depreciation expense. SLIDE 13 LO5 Lesson 15-3

14. © 2014 Cengage Learning. All Rights Reserved. Depreciating Plant Assets ●Three factors are considered in calculating the annual amount of depreciation expense for a plant asset: ●Original cost ●Salvage value ●Useful life ●Straight Line Depreciation Formula: Subtract the salvage value from the original cost, and then divide by the number of estimated years of useful life. SLIDE 14 LO5 Lesson 15-3

15. © 2014 Cengage Learning. All Rights Reserved. Depreciating Plant Assets— What is included in the Original Cost? ●The original cost of a plant asset includes all costs paid to make the asset usable to a business. ●These costs include the price of the asset plus delivery and any necessary installation costs. SLIDE 15 LO5 Lesson 15-3

16. © 2014 Cengage Learning. All Rights Reserved. Depreciating Plant Assets ●An estimate of the amount that will be received for an asset at the time of its disposal is called its salvage value. ●Salvage value may also be referred to as residual value or scrap value. ●Since salvage value cannot be known when the asset is bought, it must be estimated. SLIDE 16 Lesson 15-3 LO5

17. © 2014 Cengage Learning. All Rights Reserved. Depreciating Plant Assets— Useful Life ●The period of time over which an asset contributes to the earnings of a business is called its useful life. ●The total amount of depreciation expense is distributed over the estimated useful life of a plant asset. ●Two factors affect the useful life of a plant asset: ●Physical depreciation ●Functional depreciation ●Functional depreciation should be considered in estimating the useful life of computer equipment. SLIDE 17 Lesson 15-3 LO5

18. © 2014 Cengage Learning. All Rights Reserved. Depreciation ●Recording an equal amount of depreciation expense for a plant asset in each year of its useful life is called the straight-line method of depreciation. SLIDE 18 LO5 Lesson 15-3 Original Cost− Estimated Salvage Value= Estimated Total Depreciation Expense $2,500.00−$500.00=$2,000.00 Estimated Total Depreciation Expense÷ Years of Estimated Useful Life= Annual Depreciation Expense $2,000.00÷5=$400.00

19. © 2014 Cengage Learning. All Rights Reserved. Depreciation ●The total amount of depreciation expense that has been recorded since the purchase of a plant asset is called accumulated depreciation. SLIDE 19 LO6 Lesson 15-3 20X2 Accumulated Depreciation+ 20X3 Depreciation Expense= 20X3 Accumulated Depreciation $800.00+$400.00=$1,200.00

20. © 2014 Cengage Learning. All Rights Reserved. Book Value ●The original cost of a plant asset minus accumulated depreciation is called the book value of a plant asset. SLIDE 20 LO6 Lesson 15-3 Original Cost− 20X3 Accumulated Depreciation= Ending 20X3 Book Value $2,500.00−$1,200.00=$1,300.00 The difference between an asset’s account balance and its related contra account is called book value. Another example: There is the Book Value of Accounts Receivable after its contra account—Allowance for Uncollectible Accounts—is subtracted. The difference between an asset’s account balance and its related contra account is called book value. Another example: There is the Book Value of Accounts Receivable after its contra account—Allowance for Uncollectible Accounts—is subtracted.

21. © 2014 Cengage Learning. All Rights Reserved. Journalizing the Adjusting Entry for Accumulated Depreciation SLIDE 21 LO6 Lesson 15-3 The total amount of depreciation expense that has been recorded since the purchase of a plant asset is called accumulated depreciation.

22. © 2014 Cengage Learning. All Rights Reserved. Adjusting Entries SLIDE 22 LO7 Lesson 15-4

23. © 2014 Cengage Learning. All Rights Reserved. Calculating Income Before Federal Income Taxes ●A trial balance prepared after adjusting entries are posted is called an adjusted trial balance. ●The adjusting entry for Federal Income Tax Expense is an adjusting entry that is unique to a corporation. SLIDE 23 LO8 Lesson 15-4

24. © 2014 Cengage Learning. All Rights Reserved. Calculating Income Before Federal Income Taxes SLIDE 24 LO8 Lesson 15-4 1 1 2 2 −=$103,518.97 5 5 4. 4.Calculate the total account balances of income statement debit accounts, excluding the balance of Federal Income Tax Expense. Include the account balance of Income Summary if the account has a debit balance. 2. 2.Enter the account balances of all accounts except Federal Income Tax Expense. 1. 1.Enter the account titles of all general ledger accounts. 5. 5.Subtract the total of debits from the total of credits to calculate net income before federal income taxes. 3. 3.Calculate the total account balances of income statement credit accounts. Include the account balance of Income Summary if the account has a credit balance. $635,345.90 3 3 $531,826.93 4 4

25. © 2014 Cengage Learning. All Rights Reserved. Calculating Federal Income Tax ●Different tax rates are applied to different levels of net income. ●Each tax rate and taxable income amount on one line of a tax table is called a tax bracket. ●The tax rate associated with a tax bracket is called a marginal tax rate. ●The marginal tax rate increases as the net income before federal income tax increases. SLIDE 25 LO8 Lesson 15-4

26. © 2014 Cengage Learning. All Rights Reserved. Calculating Federal Income Tax SLIDE 26 LO8 Lesson 15-4 Net Income before Federal Income Taxes− Of the Amount Over= Net Income Subject to Marginal Tax Rate× Marginal Tax Rate= Marginal Income Tax $103,518.97−$100,000.00=$3,518.97×39%=$1,372.40 Bracket Minimum Income Tax+ Marginal Income Tax= Federal Income Tax $22,250.00+$1,372.40=$22,622.40 Congress (not the IRS) sets the amounts and rates of the tax brackets used to calculate federal income tax expense. Bracket Minimum Inc. Tax

27. © 2014 Cengage Learning. All Rights Reserved. Journalizing the Adjusting Entry for Federal Income Tax Payable SLIDE 27 LO8 Lesson 15-4 1 1 Debit Federal Income Tax Expense 2 2 Credit Federal Income Tax Payable

28. © 2014 Cengage Learning. All Rights Reserved. 3 3 Total, prove, and rule the trial balance 2 2 Update balance of Federal Income Tax Expense Completing an Adjusted Trial Balance SLIDE 28 LO9 Lesson 15-4 1 1 Enter the adjusted balance of Federal Income Tax Payable

29. © 2014 Cengage Learning. All Rights Reserved. 10-1 29 The End (Thanks for studying!)