Secured versus Unsecured Bonds

Comparison between Secured and Unsecured Bonds Unsecured bonds, called debentures, are issued without any security to back them. Investors purchase them based on the creditworthiness of the company. Some bonds arc secured by the borrower’s collateral or specified assets. These secured bonds are often referred to as mortgage bonds.

Term versus Serial Bonds

Term Bonds Definition Term bonds are bonds whose entire principal amount is due at a single date. Most corporate bonds are term bonds. Serial Bonds Definition Serial bonds have principal payments that are required at specific intervals. Serial bonds are often issued by state or local municipalities. Example To illustrate, assume that the city of …

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Simple vs Compound Interest

Interest is payment for the use of money for a specified period of time, Interest can be calculated on either a simple or a compound basis. The distinction between the two is important because it affects the amount of interest earned or incurred. Simple Interest Simple interest means that the interest payment is computed on …

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Interperiod tax allocation

Introduction The liability, income taxes payable is based on taxable income. This is the amount a firm will have to pay the federal government as the result of its operations, as defined by the IRC. The question is, if the firm’s pretax accounting income is different from its taxable income because of timing differences, what …

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Differences between accounting and taxable income

As we know there are various differences between generally accepted accounting principles (GAAP) and the provisions of the Internal Revenue Code (IRC). These differences result from the varying objectives of GAAP and the IRC. The objectives of GAAP are aimed at providing investors and other users of financial statements with reliable and relevant financial information. …

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Accounting for natural resources

What are the natural resources? Natural resources are physical substances that when extracted from the ground are converted into inventory and when sold produce revenues for the firm. Natural resources include oil, natural gas, coal, iron, uranium, and timber. These assets are often referred to as wasting assets, because once they are removed from the …

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Disposal of Property, Plant or Equipment

Disposal of plant assets can occur through the retirement of discarded assets, sales, involuntary conversions, or trade-ins. No matter how the disposal is accomplished, the accounting procedures are quite similar. Depreciation must be recorded up to the date of disposal and, where appropriate, a gain or loss must be recorded on the disposal. These concepts …

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Accounting for Revenue and Capital Expenditures

Subsequent expenditures made on property, plant, and equipment can be in the form of either capital or revenue expenditures. As we noted, the distinction between the two is often hazy and depends on the accounting policies developed by management. However, the distinction is important because it affects the determination of current and future periods’ income. …

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How to measure the acquisition cost of property, plant and equipment?

According to the FASB, “the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use.” In terms of property, plant, and equipment, this means that all the reasonable and necessary costs required to get the asset to its location and ready …

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Capital vs Revenue Expenditures

What is the expenditure? Throughout accounting, we have used the term expenditure to refer to payment of an asset or the incurrence of liability in exchange for another asset or for a service rendered. Capital Expenditure The expenditure is made in cash or on credit and results in the firm’s receiving another asset, such as …

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Aging method of accounts receivable/Uncollectible accounts

What is the aging method? – Explanation The aging method is based on determining the desired balance in the account Allowance for Uncollectible Accounts. The accountant attempts to estimate what percentage of outstanding receivables at year-end will ultimately not be collected; ‘this amount becomes the desired ending balance in the Allowance for Uncollectible Accounts, and …

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Cash-Basis vs Accrual Accounting

Cash-Basis v/s Accrual Accounting – Essential Aspects To Consider Before Choosing Accounting is an essential aspect of any business. There are primarily three methods of accounting – Cash basis, accrual accounting and modified cash-basis, and each method has its pros and cons in application. The two accounting methods that have a major difference in their …

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Notes Receivable

Notes Receivable – Definition Notes receivable are a written, unconditional promise by an individual or business to pay a definite amount at a definite date or on demand. The individual or business that signs the note is referred to as the maker of the note, and the person to whom the payment is to be …

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Goods in transit

What is meant by goods in transit? Definition Goods in transit are goods that have been purchased but have not yet been received by the purchaser. These goods can be easily overlooked when counting the ending inventory because they are not physically located at either the seller’s or the purchaser’s warehouse. Accounting Treatment of goods …

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Periodic Inventory System

What is a Periodic Inventory System? Periodic inventory system does not keep continuous track of ending inventories and cost of goods sold. Instead, these items are determined only periodically, at the end of each quarter, each year, or other accounting period. Although this method may be easier to use for record-keeping purposes, it results in …

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Factory Overhead Practical Problems and Solutions

Factory Overhead Application Methods Problem No. 1 The IQIZ Company estimated its factory overhead of the next period at $160,000. It is estimated that 40,000 units will be produced at a materials cost of $200,000. Production will require 40,000 man-hours at an estimated wage cost of $80,000. The machines will run about 25,000 hours. Required: …

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Important techniques of labour costing

In this article, we are trying to explain some important techniques and formulas to calculate labour cost, payroll and incentive wages. 1. Measurement of Labour Turnover (a). Separation method: Labour Turnover = (No. of separations in a period / Average No. of Workers) x 100 LT = (NS / ANW) x 100 (b). Replacement Method …

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Labour Costing Practical questions with answers

Question No. 1 Calculate total monthly remuneration of three workers: A, B and C. (a). Standard production per month per worker 1,000 units. (b). Actual production during the month: A: 850 units B: 750 units C: 950 units (c). Piece work rate is 10 cents per unit (actual production) (d). Additional production bonus is $10 …

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General Ledger Practical Problems and Solutions

Problem No.1: (Opening a Factory Ledger) The following balance appeared in the books of Marry & Company on December 31, 2018.   Cash $39,000 Accounts Receivable 15,000 Stores 21,000 Work-in-process Materials 10,000 Work-in-process Labour 7,000 Work-in-process factory overhead 8,000 Finished Goods 14,000 Machinery & Equipment 1,36,000 Land & Building 2,40,000 Capital Stock $2,50,000 Retained Earnings …

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Early Extinguishment of Debt

What is meant by the Early Extinguishment of Debt? – Definition The retirement of debt before maturity is called the early extinguishment of debt. Early extinguishment of debt occurs whenever a firm’s long-term debt is retired before maturity. Management can accomplish this extinguishment by repurchasing the bonds in the market. Other bonds are callable and …

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Notes Payable

What is Notes Payable? – Definition Notes payable is a liability that results from purchases of goods and services or loans. Usually, a written instrument that includes interest. It is a form of Long-term Debt. Explanation A firm may issue along-term note payable for a variety of reasons. For example, notes may be issued to …

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Future value of an annuity

What is the Future Value of an Annuity? The amount of a series of payments or receipts taken to a future date at a specified interest rate is called the future value of an annuity. Explanation An annuity is a series of equal payments made at specified intervals. Interest is compounded on each of these …

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Lower of Cost or Market (LCM) Theory

What is meant by Lower of cost or market? Lower of cost or market is a method of inventory pricing by which the inventory is priced at cost or market, whichever is lower. It is an application of conservatism in accounting. Explanation Under generally accepted accounting principles (GAAP), the presumption is that inventories will be …

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Contingent Liabilities

What are Contingent Liabilities? – Definition Contingent liabilities are possible liabilities that may or may not occur, depending on some future events. or Contingent liabilities are potential future liabilities whose existence is contingent upon some future event. Explanation In effect, a contingent liability is the result of an existing condition or situation whose final resolution …

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Intangible Assets

What are intangible assets? – Definition Intangible assets are those assets which have no physical substance but have future economic benefits based on rights or benefits accruing to the asset’s owner. Explanation Intangible assets are noncurrent assets that have no physical properties. They generate revenues because they offer a firm value in future revenue production …

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Current Liabilities

Current Liabilities – Definition Current liabilities are those liabilities that will either be paid or require the use of current assets within a year (or within the operating cycle, if longer), or that result in the creation of new current liabilities. Current vs Long-term Liabilities In preparing a balance sheet, liabilities are classified as either …

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Conservatism Principle of Accounting

What is meant by the accounting term “Conservatism”? Conservatism is the prudence exercised in financial reporting as a result of the uncertainties surrounding business and economic activities. when faced with accounting alternatives accountants tend to choose those that are least likely to overstate assets or income. Conservatism Principle For historical reasons, an accountant is always …

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Subsidiary Ledger

What is a Subsidiary Ledger? Subsidiary Ledger is a ledger that contains backup or more detailed accounts than does the general ledger. The Need for Subsidiary Ledgers The need for timely and accurate information, as well as good internal control procedures, requires that certain backup accounts be maintained. To illustrate, management needs to know not …

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Financial Statement Analysis

What is Financial Statement Analysis? Financial statement analysis is one of the most fundamental financial research & analysis practices. To put it in layman’s terms, it’s the process of analyzing financial statements so that decision-makers have access to the right data. It’s also used as a method for taking the proverbial pulse of the business. …

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Horizontal Analysis of Financial Statements

What is Horizontal Analysis? Horizontal Analysis is one of the ways of analyzing financial statements. It compares historical data, which includes ratios and line items, over a series of accounting periods.  Accounting period can be a month, a quarter or a year. This method of analysis is also known as Trend analysis. The Horizontal method …

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Accrued Interest

Accrued interest – Definition Accrued interest is the payment for the use of money. Many loans or notes are interest-bearing and have the following characteristics: Principal or face amount—the amount lent or borrowed. Maturity date——the date the loan must repaid. Maturity value—the total of the principal and interest at the maturity date. Interest rate—the percentage …

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Prepaid Assets

What are prepaid assets? – Definition Prepaid assets are nonmonetary assets whose benefits affect more than one accounting period. They include items such as prepaid insurance and prepaid rent and essentially represent the right to receive future services. However, the rights to these future benefits or services rarely last more than two or three years. …

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