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Date Posted: 09:50:22 01/23/00 Sun
Author: Charles Hodges
Subject: Some Accounting Questions and Answers
In reply to: John 's message, "Some Accounting Questions" on 09:22:52 01/23/00 Sun


I've inserted my answers into your questions.

> I've been working on the quizzes and I have a couple
> of questions:
>
> 1. What is the difference between accrued taxes &
> Income tax.(prblm 2 - Spring 1998)

When you see the word "accrued" this is almost always a signal that we are discussing a liability (usually current). Income tax is from the income statement and is just above net income.

The Balance sheet account "accrued taxes" would exist anytime there is a a mis-match between the time that firm incurs a tax liability (usually due to profitable operations) and the time in which one mails the check to the IRS.

On one's personal balance sheet, here is an example. 1999 is over and your tax obligations (which would be recorded on your 1999 income statement) are now decided. In 2000 you will pay, or receive, the difference between what you paid and what you owe. If you have overpaid your taxes (perhaps generating the balance sheet account "pre-paid taxes" or "taxes receivable" if you are waiting for a refund) or under paid your taxes (in which case you list "accrued taxes" which will be the amount you send to the IRS sometime in 2000), either will produce a balance sheet account.

>
> 2. What is "Paid Capital" (#13 on one of the
> quizzes)

If a firm does not have preferred stock, then most firms have 2-4 accounts listed in owners equity area. These accounts are retained earnings, commons stock, (additional) paid-in capital, and treasury stock. The accounts listed are generally driven by the the laws of the state in which a company is incorporated and the corporations charter and bylaws.

Retaining earnings represents the history of the firms profits (causing an increase) and dividends (causing a decrease).

The accounts which represent investments by stock holders go into either one account, Common Stock account, or two separate accounts, the Common Stock and Additional Paid-in Capital account.

The common stock account is typically the number of share outstanding times the par value of the stock. Paid-in Capital is money received by the firm over and above the par value. Thus if a firm sell 1 share of $1 par value stock for $10, this would cause the common stock account increase by $1 and the paid-in capital account to increase by $9 ($10 selling price - $1 par value)

Treasury stock is an account with the primary purpose of accounting for stock repurchased by the company on the market. Companies can usually resell this stock to the public or issue this stock to employees without shareholder approval.


> 3. If equipment is leased is it still recorded as an
> asset (and does it get depreciated) and the lease
> payments go on the liability side of the balance
> sheet?

Leases are extremely complicated and beyound the scope of this course. Lease are occasions where a company has use of an asset but someone else actually owns the asset. There are two basic types of leases, operating and capital. Operating leases are "off-balance sheet" thus are neither listed as asset or liability. Information about operating leases is listed in the footnotes to financial statements.
Capital leases are treated very similar to secured financing (e.g., a bank makes a loan to buy a specific assets and the bank has the right to seize the asset if payments are not paid). The capital lease would be listed as a long term liability and would decrease as one made lease payments. The asset associated with the capital lease would be listed among the firm's long-term assets and would generally be depreciated by the firm.

Hope this helps.

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