ACC 200 Exam 2
On September 1 of Year 1, Ashlyn Company sold a plasma TV screen and TWO-year warranty to a customer for a joint price of $2,000. Ashlyn collected all of the cash up front on September 1, the contract-signing date. The two-year warranty period begins on the date that Ashyln Company delivers the plasma TV screen to the customer. Ashlyn Company has generated the following information regarding sales of this type. -Cost of plasma TV screen, $1,200 -Sales price of plasma TV screen if sold separately, $1,800 -Sales price of TWO-year warranty if sold separately, $600 Ashlyn Company delivered the plasma TV screen to the customer on October 1 of Year 1 which starts the two-year warranty period. Which ONE of the following is included in the ADJUSTING ENTRY that Ashlyn Company should make with respect to the warranty as of December 31 of Year 1? Assume that no adjustments are made before December 31.
$500 warranty for 48 months = 20.83/month 3 months went by --> 20.83 * 3 = 62.50 Contract Liability - Warranty 62.50 Warranty Revenue 62.50
During Year 1, Kylie Department Store had total sales of $3,000,000, of which 60% were on credit. During the year, $1,000,000 cash was collected on credit sales. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Management does NOT use the percentage of sales method, so ignore the data in Question 23 and Question 24; just refer back to the original data found before Question 23. -- Management has performed an aging analysis on its Accounts Receivable. The end result of this aging analysis is that the balance in the Allowance for Bad Debts as of the end of Year 1 should be $50,000. Which ONE of the following is included in the journal entry necessary at the end of the year to record bad debt expense for the year?
% receivables / aging analysis The ending allowance account should be $50,000 (paired up with accounts receivable) 20,000 (beginning balance in allowance for bad debts) - 27,000 (writeoffs for uncollectible) + ________bad debt expense_______ = 50 bad debt expense = 57,000! Bad Debt Expense 57,000 Allowance for Bad Debts 57,000
On January 1 of Year 1, Amber Company purchased a silver mine for $100,000. The mine will have a salvage value of $15,000 when all of the silver is removed. As of January 1 of Year 1, it was expected that the mine contained 20,000 ounces of silver. During Year 1, Amber Company removed 1,000 ounces of silver from the mine. On January 1 of Year 2, Amber Company spent $20,000 to make some mine improvements. The salvage value is still expected to be $15,000 at the end of the life of the mine. It is also estimated that the total amount of silver left in the mine is not impacted by the improvements, so with 1,000 ounces of silver removed during Year 1 there are 19,000 ounces remaining as of the beginning of Year 2. -- During Year 2, Amber Company removed 2,000 ounces of silver from the mine. What is the amount of DEPLETION EXPENSE for Year 2?
( 100,000 - 15,000 ) / 20,000 ounces = 4.25/oz 4.25 * 1000 = 4,250 100,000 - 4250 = 95,750 for year 1 year 2 95,750 + 20,000 for renevations 115,750 - 15,000 = 100,750 100,750 / 19,000 remaining ounces = 5.30 per ounce 5.30 per ounce * 2000 ounces = 10,600
During Year 1, Kylie Department Store had total sales of $3,000,000, of which 60% were on credit. During the year, $1,000,000 cash was collected on credit sales. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Management uses the percentage of sales method and estimates that 4% of credit sales will ultimately be uncollectible. Which ONE of the following is included in the summary journal entry necessary during the year to record the write off of the $27,000 in verified uncollectible accounts?
*Bad debt expense is an ESTIMATE!* These accounts written off as uncollectible are verified! We know who they are! STEP 1: Throw away their accounts (Accounts Receivable asset goes DOWN) STEP 2: Allowance for bad debts GOES DOWN Allowance for Bad Debts 27,000 Accounts Receivable 27,000
Which would appear in the closing entires for the year?
*close revenues, expenses, and dividends* CREDIT to Costs of Goods Sold for $1,250 CREDIT to Dividends for $60 CREDIT to Insurance Expense for $220 DEBIT to Rent Revenue for $100 DEBIT to Sales Revenue for $1,000 All of these have retained earnings as their opposite
Barry and His Carpet-Cleaning company
-Barry's reported sales have been increasing by over 200% each year -Barry reports that one of his large current jobs is located in a distant town named Arroyo Grande. the contract is for a $2.3 million restoration job on an eight-story building -Barry reports he is working on a $7 million job in Sacramento -Barry says he has an $8.2 million job in San Diego What audit work should you do before certifying that Barry's sales are being reported appropriately? -ask to see the actual contracts -talk with the companies -look at his financial records to see whether these companies have paid any cash -choose a contract and go to the job site for an inspection -Barry created the illusion of sales growth by creating fictitious revenues and receivables -lots of his jobs didn't even exist
Nominal (Temporary) Accounts:
-Revenues -Expenses -Dividends -costs of goods sold is an expense -Does not include -unearned sales revenue (liability) -prepaid rent expense (asset)
During Year 1, Kylie Department Store had total sales of $3,000,000, of which 60% were on credit. During the year, $1,000,000 cash was collected on credit sales. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Management uses the percentage of sales method and estimates that 4% of credit sales will ultimately be uncollectible. Which ONE of the following is included in the journal entry necessary at the end of the year to record bad debt expense for the year?
-Year 1 total sales: $3,000,000 -60% on credit: $1,800,000 -$1,000,000 credit sales collected -Beginning Accounts Receivable: $165,000 -Beginning allowance for bad debts: $20,000 -Written off as uncollectible: $27,000 -estimates 4% credit sales will be uncollectible. (1,800,000 * 0.04 = 72,000) -Percentage of sales method: estimate the percentage of sales that will be uncollectible Journal Entry: Bad Debt Expense 72,000 Allowance for Bad Debts 72,000 the debit is always bad debt expense Allowance account (negative asset) (credit)
factors that can reduce comparability among financial statements:
-company is composed of a variety of different lines of business -companies use different accounting methods -companies classify items differently
On January 1 of Year 1, Coley Company established a stock option plan for its senior employees. A total of 1,500,000 options were granted that permit employees to purchase 1,500,000 shares of stock at $50 per share. Each option had a fair value of $6 on the grant date. The market price for Coley stock on January 1 of Year 1 was $50. The employees are required to remain with Coley for three years (Years 1 through 3) to exercise these options. Coley's net income for Year 1, before including any consideration of compensation expense, is $2,000,000. Compute Coley Company's NET INCOME for Year 1. Ignore income taxes
1,500,000 options * $6 fair value = $9,000,000 for 3 years --> 3,000,000 per year 2,000,000 net income 3,000,000 compensation expense Net loss of 1,000,000
Steps to adjusting entries
1. Fix the balance sheet (assets and liabilities) 2. Fix the income statement (revenues and expenses) 3. Make sure your entry DOES NOT INCLUDE CASH
What are the four factors that might motivate a manager to attempt to manage earnings?
1. Meet internal targets 2. Meet external expectations 3. Income smoothing 4. Window dressing for an IPO or a loan
On January 1 of Year 1, Kylie Ramona borrowed $400,000 under a mortgage note payable contract. The annual interest rate on this mortgage is 12% compounded monthly. This is a 15-year, fully-amortizing monthly mortgage. The monthly payments are $4,800.67 and are due at the end of each month, starting on January 31 of Year 1. Which ONE of the following is included in the journal entry made by Kylie Ramona on February 28 of Year 1 to record the payment in cash of $4,800.67? Note: The February 28 payment is the SECOND monthly payment.
12% compounded monthly means 1% per month 1st payment: 4,800.67 which is made up of 4,000 (1% of 400,000) 800.67 (principal) take the principal away to see balance for next month next month it will be 399,199.33. Interest will be 3,991,99 Principal will be 808.68 Interest expense 3991.99 Mortgage note payable 808.68 Cash 4800.67
On September 1 of Year 1, Ashlyn Company sold a plasma TV screen and TWO-year warranty to a customer for a joint price of $2,000. Ashlyn collected all of the cash up front on September 1, the contract-signing date. The two-year warranty period begins on the date that Ashyln Company delivers the plasma TV screen to the customer. Ashlyn Company has generated the following information regarding sales of this type. -Cost of plasma TV screen, $1,200 -Sales price of plasma TV screen if sold separately, $1,800 -Sales price of TWO-year warranty if sold separately, $600 Ashlyn Company delivered the plasma TV screen to the customer on October 1 of Year 1 which starts the two-year warranty period. What is the TOTAL amount of revenue, both TV screen sales revenue and warranty revenue, that Ashlyn Company should recognize from this transaction during year 1?
3 months 62.50 for warranty TV Screen - 1500 revenue 1500 + 62.50 = 1,562.50
Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll. How much CASH is paid to EMPLOYEES for one week?
329,400 GROSS PAY - Social security - medicare - income tax
During Year 1, Ramona Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Aging of Accounts Receivable at the end of Year 1 Overall: 492,000 Less than 30 days: 366,000 31 to 60 days: 72,000 61 to 90 days: 24,000 Over 90 days: 30,000 Age of account: percent ultimately uncollectible Less than 30 days : 2% 31 to 60 days : 12% 61 to 90 days: 35% Over 90 days : 90% Ramona Company uses the aging method to determine its ending allowance for bad debts balance. What is the appropriate allowance for bad debts balance as of the end of Year 1?
366,000 * 0.02 = 7,320 72,000 * 0.12 = 8,640 24,000 * 0.35 = 8,400 30,000 * 0.90 = 27,000 7320 + 8640 + 8400 + 27000 = 51,360 Ending Allowance for Bad Debts = $51,360
Julian Company sold goods for a total selling price of $5,000. The sale was made on account. The terms of the sale are 4/10, n/30. - Assume that Julian collects the cash 15 days after the sale. What amount will be reported as "net sales" from this transaction?
4/10, n/30 means that if you pay within 10 days, you get 4% off. Otherwise, the n means you have to pay in 30 days no matter what. They paid after 10 days, so they do not get 4% off. sales discount = 0 Net sales = Gross sales - sales discount Net sales: $5,000 *if they paid in 7 days, the net sales would be $4,800
Purchased on January 1 -- 100 units, $10 cost per unit Purchased on January 16 -- 300 units, $10 cost per unit Purchased on January 25 -- 400 units, $10 cost per unit Sold on January 31 -- 500 units, $15 selling price per unit A physical inventory count has revealed that only 220 units are in ending inventory on January 31. Which ONE of the following is included in the journal entry necessary to record the fact that some inventory is missing?
80 are missing the cost is $10 $800 of inventory lost debit inventory shrinkage $800
Pecos Yo Company purchased a machine for $100,000 in cash on August 1 of Year 1. The machine has an estimated useful life of 10 years and an estimated salvage value of $10,000. Pecos Yo Company uses the straight-line method for computing depreciation expense. What is the BOOK VALUE of the machine as of the END of Year 3?
9000 per year 750 per month year 1: 750 * 5 = 3750 year 2: 9000 year 3: 9000 total acc. depreciation = 21,750 100,000 - 21,750 = 78,250
How does financial reporting impact a company's cost of capital?
A company produces financial statements to better inform lenders and investors about the performance of the company. Good financial statements reduce the uncertainty of lenders and investors. With lower uncertainty, there is lower information risk for the company, and the company's cost of capital is lower.
Characteristics of adjusting entries
ALWAYS have at least one balance sheet account AND at least one income statement account NEVER include the cash account
Purchased goods costing $1,000. The purchase was made on account with terms of 4/10, n/30. The original purchase was recorded with a DEBIT to Inventory and a CREDIT to Accounts Payable for $1,000. - The account was paid in cash after 23 days. Which ONE of the following is included in the journal entry to record the payment of cash on account after 23 days?
Accounts Payable 1000 Cash 1000
What are the advantages and disadvantages of an earnings-based bonus system?
Advantages: -Employees are unified and directly interested in the overall performance of the company Disadvantages: -Makes the financial statement numbers less reliable bc it increases the incentive of employees to manage earnings -focus on periodic income may cause them to adopt a short-term focus
During Year 1, Ramona Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Aging of Accounts Receivable at the end of Year 1 Overall: 492,000 Less than 30 days: 366,000 31 to 60 days: 72,000 61 to 90 days: 24,000 Over 90 days: 30,000 Age of account: percent ultimately uncollectible Less than 30 days : 2% 31 to 60 days : 12% 61 to 90 days: 35% Over 90 days : 90% Ramona Company uses the aging method to determine its ending Allowance for Bad Debts balance. Which ONE of the following is included in the journal entry necessary at the end of the year to record bad debt expense for the year?
Allowance for Bad Debts Beginning Balance ↑ Bad Debt Expense ↑ Write-offs ↓ ↑Beginning Balance 20,000 ↑Bad Debt Expense ????? ↓Write-offs 27,000 Ending Balance 51,360 (from last question) 20,000 + ??? - 27,000 = 51,360 Bad Debt Expense = 58,360 Bad Debt Expense 58,360 Allowance for Bad Debts 58,360 Percentage of sales method: estimate bad debt expense directly aging method: given an estimate of ending balance and work backwards to find bad debt expense
How do accounting standards impact the cost of capital?
By increasing the quality of financial reporting, good accounting standards are to reduce information risk. Thus, the overall cost of capital is lower when accounting standards are of higher quality
Ratios and equations
CURRENT RATIO current assets / current liabilities DEBT RATIO total liabilities / total assets NUMBER OF DAYS' SALES IN INVENTORY 365 / (COGS/Avg Inventory) AVERAGE COLLECTION PERIOD (NUM DAYS' SALES IN ACC REC) 365 / (AR Turnover) PRICE EARNINGS RATIO Market value of shares / net income FIXED ASSET TURNOVER sales / ppe DEBT-TO-EQUITY RATIO total liabilities / total stockholders' equity TIMES INTEREST EARNED RATIO Earnings before interest & taxes / interest expense
On September 1 of Year 1, Ashlyn Company sold a plasma TV screen and TWO-year warranty to a customer for a joint price of $2,000. Ashlyn collected all of the cash up front on September 1, the contract-signing date. The two-year warranty period begins on the date that Ashyln Company delivers the plasma TV screen to the customer. Ashlyn Company has generated the following information regarding sales of this type. -Cost of plasma TV screen, $1,200 -Sales price of plasma TV screen if sold separately, $1,800 -Sales price of TWO-year warranty if sold separately, $600 Ashlyn Company delivered the plasma TV screen to the customer on October 1 of Year 1. Which ONE of the following is included in the journal entry Ashlyn Company makes to record the delivery of the plasma TV screen?
Contract Liability - TV Screen. 1500 Sales Revenue - TV Screen. 1500
Vaststrom Company had the following data for the year. Accounts receivable, beginning of year..................$150,000 Allowance for bad debts, beginning of year...........30,000 Cash collected from credit customers............... ......830,000 Credit sales for the year .................................................868,000 Accounts receivable, end of year.................................180,000 Allowance for bad debts, end of year ........................53,000 Given these data, which ONE of the following statements is true with respect to the creditworthiness of the credit customers of Vaststrom Company?
Creditworthiness = allowance / acc. rec. Beginning 30/150 = 20% (Better) End 53/180 = 29.4% (Worse) The average creditworthiness of credit customers declined during the year
Which accounts typically have debit and credit balances?
DEBITS: Assets, Expenses, Dividends CREDITS: Liabilities, Equities, Revenues R.E.D. - Revenues (Credit), Expenses (Debit), Dividends (Debit)
The company earns interest on various investment accounts. As of December 31 of Year 1, the company has earned interest revenue of $5,000 for which it has not yet received the cash; the company will not receive the cash until February of next year. The correct adjusting entry was made. - On February 28 of Year 2, the company received a total of $7,000 in cash as interest on its various investment accounts. As mentioned above, some of that interest was actually earned last year. -- Which ONE of the following is included in the journal entry necessary on February 28 of Year 2 to record the receipt of $7,000 in cash?
December 31 Interest Receivable 5,000 Interest Revenue 5,000 February 28 (ADJUSTING ENTRY) Cash 7,000 Interest Revenue 2,000 Interest Receivable 5,000
The company pays its workers every two weeks. As of December 31 of Year 1, the company's workers have earned wages of $7,000 for which they have not yet been paid; they will not be paid these wages until January of next year. The correct adjusting entry was made. - On January 5 of Year 2, the company paid total wages to the employees of $10,000, of which $7,000 related to work performed last year. Which ONE of the following is included in the journal entry necessary on January 5 of Year 2 to record the payment of $10,000 in cash?
December 31 Wages Expense 7,000 Wages Payable 7,000 January 5 of Year 2 (ADJUSTING ENTRY) Debit Wages Expense 3,000 Debit Wages Payable 7,000 Credit Cash 10,000
Defined benefit plans Defined contribution pension plans
Defined contribution plan -money set aside to pay for benefits is fixed, and the benefits that will be paid are uncertain. Benefits depend on the earnings of the contributions, the age at retirement, and so forth -you put in a certain amount each month and what you get out depends on how it does -depends on how your 401k does Defined benefit plan -the pension benefits that will be paid are fixed, meaning retired workers will get a pension benefit that is based on factors such as the number of years worked and so forth -fixed monthly amount
Inventory purchase and sales data are as follows. [Note: There was no inventory before the purchase made on January 1.] Purchased on January 1 -- 100 units, $9 cost per unit Purchased on January 16 -- 300 units, $8 cost per unit Purchased on January 25 -- 400 units, $7 cost per unit Sold on January 31 -- 500 units, $10 selling price per unit Assume that the company uses FIFO. Compute GROSS MARGIN for January
FIFO (sell the old, keep the new) LIFO (sell the new, keep the old) Average (sell/keep at average cost) $900 + $2400 + $700 = 4,000 5,000 - 4,000 = 1,000 to calculate average cost: add up total COGS add up total units total COGS / total units = avg cost
Queeg Company uses the percentage of sales method of computing bad debt expense. The following data are from Year 1. -Beginning Allowance for Bad Debts = $400,000 -Write-offs during the year = $480,000 -Bad debt expense for the year = $520,000 Maryk & Greenwald, the auditors of Queeg's financial statements, compiled an aged accounts receivable analysis of Queeg's accounts at the end of Year 1. This analysis has led Maryk & Greenwald to estimate that, of the accounts receivable Queeg has as of the end of Year 1, $270,000 will ultimately prove to be uncollectible. Given their analysis, Maryk & Greenwald, the auditors, think that Queeg should make an adjustment to its Year 1 financial statements. -- - Which ONE of the following should be included in the adjusting journal entry that Maryk & Greenwald should suggest?
Fill out allowance chart to find out that ending allowance is 440,000 but the auditors think it should be 270,000 we need to adjust that. It needs to go down 170,000 (440,000-270,000) We need to make bad debt expense go down bc that is what we can change in the allowance chart Allowance for Bad Debts. 170,000 Bad Debt Expense 170,000
What are the five labels in the earnings management continuum, and what general types of actions are associated with each of the labels?
Five labels in the earning management continuum: 1. Savvy Transaction Timing - Strategic matching (actually doing things differently) 2. Aggressive Accounting - Change in methods or estimates with full disclosure 3. Deceptive Accounting - Change in methods or estimates with little or no disclosure 4. Fraudulent Reporting - Non-GAAP accounting 5. Fraud - Fictitious transactions
During Year 1, Ramona Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Aging of Accounts Receivable at the end of Year 1 Overall: 492,000 Less than 30 days: 366,000 31 to 60 days: 72,000 61 to 90 days: 24,000 Over 90 days: 30,000 Age of account: percent ultimately uncollectible Less than 30 days : 2% 31 to 60 days : 12% 61 to 90 days: 35% Over 90 days : 90% How much cash was collected from CREDIT CUSTOMERS during the year?
For aging method focus on ending allowance. Bad debt expense is NOT computed directly Accounts Receivable ↑Beginning ↑Credit Sales ↓Collect Cash ↓Write-offs Begin. balance 165,000↑ New Credit Sales 2,400,000↑ Cash collections ??? ↓ Write-offs 27,000↓ Ending Balance 492,000 ➟ must mean that cash collections are $2,046,000
Large Company purchased Small Company for $90,000 cash. At the time of the purchase, Small Company had assets with a fair value of $50,000. Small Company also had liabilities with a fair value of $70,000; Large Company assumed responsibility for the liabilities of Small Company on the date of the purchase. Note that the fair value of Small Company's reported liabilities exceeded the fair value of the company's reported assets. How much GOODWILL should be recorded by Large Company in connection with this acquisition of Small Company for $90,000 cash?
GOODWILL fills in the gap from their assets and liabilities to how much they were bought for 110,000
How should financial statement users view the financial statements?
In a skeptical light
What is meant by the term "income smoothing"?
Income smoothing is the practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next.
Which ONE of the following is a danger of basing a manager's bonus on reported net income?
Increases the incentive for managers to manipulate reported earnings
Inflation and LIFO/FIFO
Inflation - FIFO results in HIGHEST income taxes, LIFO results in LOWEST income taxes average cost is in between
Explain the significance of a company's meeting or beating analysts' earnings forecasts for many quarters in a row.
It is evidence that companies manage both their own reported earnings as well as managing the forecasts by providing guidance to analysts.
On June 1, the company paid $1,200 in advance for 12 months of rent, with the rental period beginning on June 1. This $1,200 was recorded as Rent Expense. [Yes, they did it wrong, but we have to work with what they did]. As of the end of the year, no entry has yet been made to adjust the amount initially (incorrectly) recorded. -- Which ONE of the following will be included in the ADJUSTED ENTRY necessary on December 31?
June 1 (Balance Sheet *assets & liabilities*) Rent Expense 1200 Cash 1200 Dec 31 of Year 1 (ADJUSTING ENTRY) (Income Statement *revenues & expenses*) Prepaid Rent 500 Rent Expense 500 By Dec 31, the rent expense should be 700, so to take rent expense down from 1200 to 700, you need to make rent expense go down by 500 (credit rent expense 500) WHEN SOMETHING IS DONE WRONG, YOU CAN CREDIT EXPENSE!!
Rocky Company borrowed $10,000 on April 1, 20X1. The loan has an annual interest rate of 14%. Rocky Company repaid the loan in full (both principal and interest) on January 31, 20X2; no payments were made on the loan between April 1, 20X1 and January 31, 20X2. [Note: The correct adjusting entry with respect to this loan was recorded on December 31, 20X1.] The single journal entry to record the repayment of the loan (both principal and interest) on January 31, 20X2 includes a
Loan Payable 10,000 Interest Payable 1050 Interest Expense 117 Cash 11,167
What is one way of distinguishing between earnings management that is ethically right and earnings management that is ethically wrong?
Management intent.
In what sense is financial reporting part of a company's general public relations effort?
Managers use financial statements to communicate information about the company to the public.
On May 1 of Year 1, the company paid $2,400 in advance for 2 years (24 months) of insurance, with the insurance period beginning on May 1 of Year 1. This was recorded as Prepaid Insurance -- Which one of the following will be included in the ADJUSTING ENTRY necessary on December 31 of Year 1?
May 1 (Balance Sheet *assets & liabilities*) Prepaid Insurance 2400 Cash 2400 Dec 31 (ADJUSTING ENTRY) (Income Statement *revenues & expenses*) Insurance Expense 800 Prepaid Insurance 800 Expense: ($2,400 / 24 months) * 8 months = $800 The prepaid insurance asset is going down every month
On May 1 of Year 1, the company paid $2,400 in advance for 2 years (24 months) of insurance, with the insurance period beginning on May 1 of Year 1. This was recorded as Prepaid Insurance -- Which ONE of the following will be included in the ADJUSTING ENTRY necessary on December 31 of Year 2? Note: Assume that the correct adjusting entry was made on December 31 of Year 1
May 1 (Balance Sheet *assets & liabilities*) Prepaid Insurance 2400 Cash 2400 Dec 31 of Year 2 (ADJUSTING ENTRY) (Income Statement *revenues & expenses*) Insurance Expense 1200 Prepaid Insurance 1200 Expense: ($2,400 / 24 months) * 8 months = $100/month May 1 - Dec 31 was already done This is for Jan 1 - Dec 31 (12 months) The prepaid insurance asset is going down every month
During Year 1, Kylie Department Store had total sales of $3,000,000, of which 60% were on credit. During the year, $1,000,000 cash was collected on credit sales. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Management has performed an aging analysis on its Accounts Receivable. The end result of this aging analysis is that the balance in the Allowance for Bad Debts as of the end of Year 1 should be $50,000. - What is Kylie's NET Accounts Receivable balance as of the end of the year, after recording the Allowance for Bad Debts?
Net Accounts Receivable = Accounts Receivable - Allowance at end Allowance at end = 50,000 Accounts Receivable Begin. balance 165,000 (positive) New credit sales 1,800,000 (positive) Cash Collections 1,000,000 (negative) Write-offs 27,000 (negative) ^^^^^^These 4 affect accounts receivable^^^^^^^^^^^^^ End. Balance = 938,000 ----------------------------------------------- Allowance for Bad Debts Beginning allowance 20,000 Estimated Bad Debt Expense 57,000 Write-offs 27,000 Ending balance 50,000 Net Accounts Receivable = 938,000 - 50,000 = 888,000
During Year 1, Ramona Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Bad Debts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000. Aging of Accounts Receivable at the end of Year 1 Overall: 492,000 Less than 30 days: 366,000 31 to 60 days: 72,000 61 to 90 days: 24,000 Over 90 days: 30,000 Age of account: percent ultimately uncollectible Less than 30 days : 2% 31 to 60 days : 12% 61 to 90 days: 35% Over 90 days : 90% Ramona Company uses the aging method to determine its ending Allowance for Bad Debts balance. - What is Ramona's NET Accounts Receivable balance as of the end of the year, after recording the Allowance for Bad Debts?
Net Accounts Receivable = Accounts Receivable - Allowance for Bad Debts 492,000 - 51,360 = 440,640 = Net Accounts Receivable
On October 1, the company received $2,400 in advance for 12 months of service to be provided, with the service period beginning on October 1. This $2,400 was recorded as Unearned Service Revenue. The service is provided evenly throughout the year. As of the end of the year, no entry has yet been made to adjust the amount initially recorded. -- Which ONE of the following will be included in the ADJUSTING ENTRY necessary on December 31?
October 1 (Balance Sheet *assets & liabilities*) Cash 2,400 Unearned Service Revenue 2,400 (Unearned Service Revenue is a liability) December 31 of Year 1 (ADJUSTING ENTRY) (Income Statement *revenues & expenses*) Unearned Service Revenue 600 Service Revenue 600 (service revenue is credited because it increases equity) (unearned service revenue is a liability that is going down because the service has been partially completed, so it is debited)
Sold goods costing $1,200 for $300 cash with the remaining $1,700 on account. After two weeks the customer returned the goods. There is nothing wrong with the goods; the customer just changed his mind, and you have a return policy that allows customers to return their purchases at any time for any reason. - Which ONE of the following is included in the journal entries necessary to record this return? Note: You are recording the RETURN; assume that the initial sale was recorded correctly. Also, note that the initial sale was partially a cash sale and partially a credit sale.
Original Sale Cash 300 A/R 1700 Sales Revenue 2000 Cost of Goods Sold 1200 Inventory. 1200 --------------------------------------------- Sales Returns 2000 Cash 300 A/R 1700 Inventory 1200 Cost of Goods Sold. 1200 -flip everything Sales Revenue ⇒ Sales Returns
Sold goods costing $1,200 for $2,000 cash. After two weeks the customer returned the goods. The goods are defective; you estimate that you will be able to resale them for about $350. This $350 amount is the amount at which the inventory should be recorded in your books once it is returned by the customer. - Which ONE of the following is included in the journal entries necessary to record this return? Note: You are recording the RETURN; assume that the initial sale was recorded correctly. Also, note that the initial sale was a cash sale
Original Sale Cash 2000 Sales Revenue. 2000 COGS. 1200 Inventory. 1200 Return Sales Return 2000 Cash 2000 Inventory 350 COGS 350 850 is the loss
Internal controls
Policies and procedures implemented by a business that are designed to 1) safeguard assets and 2) ensure accurate accounting records 3) make sure only authorized transactions take place
On September 1 of Year 1, Ashlyn Company sold a plasma TV screen and TWO-year warranty to a customer for a joint price of $2,000. Ashlyn collected all of the cash up front on September 1, the contract-signing date. The two-year warranty period begins on the date that Ashyln Company delivers the plasma TV screen to the customer. Ashlyn Company has generated the following information regarding sales of this type. -Cost of plasma TV screen, $1,200 -Sales price of plasma TV screen if sold separately, $1,800 -Sales price of TWO-year warranty if sold separately, $600 Which ONE of the following is included in the journal entry Ashlyn Company makes to record the receipt of the $2,000 cash on September 1 of Year 1?
Price of just TV: 1800 Price of just warranty: 600 Combo Price: 2000 1800 / 2400 = 0.75 2000 * 0.75 = 1500 600 / 2400 = 0.25 2000 * 0.25 = 500 Cash 2000 Contract Liability - TV Screen 1500 Contract Liability - Warranty 500
Matching Principle
Recognize expenses in the same period as the revenues they help to generate (does not have to do with cash flow) falls under accrual accounting
Accrual Accounting
Records revenues and expenses when they are incurred, regardless of when cash is exchanged. Accrual = an entry recording revenue or expense in the absence of a cash transaction
How do accounting standards impact the cost of capital?
Reduce information risk
Revenue Recognition Principle
Revenues are recognized in the period in which they are earned (does not have to do with cash flow) Falls under accrual accounting
Borrower Company borrowed $100,000 from Bank B on May 1 of Year 1. The annual interest rate on the loan is 12%. Borrower Company will repay the entire loan, both principal and accrued interest, after two years on April 30 of Year 3. So, Borrower Company will pay NO CASH to Bank B between May 1 of Year 1 and April 30 of Year 3. [Note: There is no interest compounding with this loan. So, Borrower Company never owes any interest on the accrued interest. Instead, Borrower Company only owes interest on the original $100,000 borrowed amount.] What is Borrower Company's INTEREST EXPENSE with respect to this loan in Year 3?
SPLIT IT UP PER MONTH AND SEE HOW MUCH THERE IS IN YEAR 3
Vaststrom Company had the following data for the year. Accounts receivable, beginning of year..................$150,000 Allowance for bad debts, beginning of year...........30,000 Cash collected from credit customers............... ......830,000 Credit sales for the year .................................................868,000 Accounts receivable, end of year.................................180,000 Allowance for bad debts, end of year ........................53,000 What was Vaststrom Company's BAD DEBT EXPENSE for the year?
Set up A/R chart Set up Allowance chart Find write offs Use those numbers to find BDE in allowance chart A/R ↑Beginning Balance ↑New Credit Sales ↓Cash Collections ↓Write-offs Allowance ↑Beginning Balance ↑Bad Debt Expense ↓Write-offs Use ending balances for both to do calculations as well Answer: 31,000
Smart Company purchased a patent for $100,000 in cash on April 1 of Year 1. The patent has an estimated remaining economic and legal life of 10 years. As is typical with intangible assets, the patent is assumed to have no estimated salvage value. Smart Company uses the straight-line method for computing amortization expense for its intangible assets. Which ONE of the following is included in the journal entry necessary to record amortization expense on the patent for Year 3?
THEY ARE ASKING FOR YEAR 3. THAT IS JUST ONE YEAR!!! THAT WOULD BE 10,000!
True statements about a financial statement auditor and one false statement:
TRUE: -must be a certified public accountant (CPA) -hired to provide an independent check of the assumptions made in preparing the financial statements -hired and paid by the company being audited FALSE: -Protected from lawsuits by U.S. federal "safe harbor" laws
What personal concerns should a company accountant have when that accountant is asked to make accounting assumptions in order to turn a loss into a profit?
The accountant might develop a reputation as being someone who is willing to interpret the accounting rules "flexibly" in order to help the company meet profit targets.
What is the cost of capital?
The cost of capital is the cost of obtaining the external financing necessary to fund a company's operations and expansion. The cost of debt capital is the after-tax interest cost associated with borrowing the money. The cost of equity financing is the expected return necessary to induce investors to provide equity capital
According to the AICPA Code of Professional Conduct, what precept should guide members of the AICPA as they encounter conflicting pressures among their clients, investors, the business community, the government, and so forth?
The guiding precept in balancing conflicting pressures among clients' interests and the public's interest is that acting ethically and in the public interest is also in the best long-run interest of the client
The Sarbanes-Oxley Act
The most comprehensive legislation affecting financial reporting since the creation of the SEC. 1. Created the Public Company Accounting Oversight Board 2. Strengthened rules regarding auditor independence 3. requires ceo and cfo to take personal responsibility for financial reports 4. requires the external auditor to report on the adequacy of the company's internal controls
What audit work could have been conducted to verify the existence of Tino's $300 million in vegetable oil and what could not have been done?
They could have: -examined tino's shipping records -check the quality of a sample of the oil -physically inspect the oil to make sure it is there -do some general calculations to determine whether it is reasonable that there could be $300 million in vegetable oil in one tank farm They could not have: -inspected tino's general ledger to determine whether both closing and adjusting entries had been properly made
Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll. Compute the TOTAL employee COMPENSATION EXPENSE for one week.
Total employee compensation expense = GROSS PAY + Social Security + Medicare 400,000 + 24,800 + 5,800 = 430,600 *SOCIAL SECURITY AND MEDICARE ARE LEVIED ON BOTH THE EMPLOYEE AND THE EMPLOYER. *COMPANY DOES NOT PAY STATE INCOME TAX
What has to happen at the end of each year with nominal accounts?
Transfer those amounts to permanent home (retained earnings) and reset the balances to $0 for a new year
Hahnny Company purchased a machine for $100,000 in cash on January 1 of Year 1. The machine has an estimated salvage value of $20,000. It is expected that the machine will be used for 20,000 hours during its useful life. During the first four years of use, the machine usage was as follows: Year 1, 2,500 hours; Year 2, 3,000 hours; Year 3, 4,000 hours; Year 4, 5,000 hours. Hahnny Company uses the units-of-production method for computing depreciation expense. What is the BOOK VALUE of the machine as of the END of Year 4?
Units-of-production method $80,000 cost for 20,000 hours $4/hour do the math 42,000
Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll. Which ONE of the following is in the SUMMARY JOURNAL ENTRY to record the payment of payroll for one week?
You have to show both the employee and employer amounts (double social security and medicare)
zero coupon bond
a bond that has no periodic interest payments, only the payment of the face value of the bond at the maturity date
Pecos Yo Company purchased a machine for $100,000 in cash on August 1 of Year 1. The machine has an estimated useful life of 10 years and an estimated salvage value of $10,000. Pecos Yo Company uses the straight-line method for computing depreciation expense. Which ONE of the following is included in the journal entry necessary to record depreciation expense on the machine for Year 2?
depreciates $9000 per year depreciated 3,750 for year one but this is asking about year 2 depreciated 9000 in year 2 depreciation expense 9000 accumulated depreciation. 9000
comparative income statements
divide everything by sales
Pecos Yo Company purchased a machine for $100,000 in cash on August 1 of Year 1. The machine has an estimated useful life of 10 years and an estimated salvage value of $10,000. Pecos Yo Company uses the straight-line method for computing depreciation expense. Which ONE of the following is included in the journal entry necessary to record the sale of the machine for $75,000 cash at the end of Year 5?
end of year 5 they sold it for 75,000 it should be worth: 60,250 Cash 75,000 Accumulated Depreciation 39,750 Gain on sale of machine 14,750 Machine 100,000
one key part to enron's business
energy price insurance
Danger of focusing a financial analysis solely on the data found in the historical financial statements?
might ignore current year data
fraud triangle
opportunity, pressure, rationalization
Before 1992, how did companies such as General Motors account for retiree healthcare benefits?
pay-as-you-go accounting
return on equity
roe = return on sales * asset turnover * asset-equity ratio roe = net income / sales * sales / assets * assets / equity
Adjusted PPE turnover ratio
sales / ppe 15,000/(2500 + 3500) = 2.50 reported + leased
P/E Ratio
serves as an index of the investor's expectations of a company's earnings growth potential in the future
Public perception and public relations impact _____________
shareholder value
most risky investment for a bond investor
subordinated debenture with a 2050 maturity date. when it's in the future we don't know what will happen
Hane Company purchased a machine for $30,000. Also associated with this purchase were $1,800 in sales taxes and $4,000 in machine preparation, shipping, and installation costs. Hane paid a total of $10,000 cash and signed a note payable agreeing to pay the remaining $25,800 in the future. Which ONE of the following is included in the single journal entry necessary to record this purchase of a machine? Again, assume that all of these data are recorded in a single journal entry.
the cost to buy the machine, get it ready to use, install, get it here alllll counts Machine. 35,800 cash. 10,000 note payable. 25,800
why are accounting numbers often used in debt covenants in loan contracts?
why we use debt covenants: reduces risk for bank lower interest rate for lender why we use accounting numbers: easy to confirm, easy to identify accounting numbers are generated by a known financial reporting system, so debt covenant violations are easy to identify
