Accounting 201 Deboskey Exam 2
T/F: if the declining balance depreciation rate is 200% of the straight line rate, it's double the straight line rate
T
T/F: lower-of-cost-or-market inventory accounting is an example of conservatism.
T
T/F: most companies use straight line method for tax reporting
T
T/F: sale is the most common method to dispose an asset
T
T/F: the specific identification inventory cost method is practicable for companies selling unique, expensive products
T
T/F: the weighted average cost method has effects that fall between the FIFO and LIFO methods
T
T/F: under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year
T
T/F: we record a LOSS if we sell an asset for less than it's book value
T
T/F: we record a long term asset at its cost plus all expenditures necessary to get the asset ready for use
T
what is declining balance depreciation?
accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years
what is straight line depreciation?
allocating an equal amount of depreciable cost to each year of an asset's service life
what is depreciation?
allocating the cost of an asset to an expense over its service life
what is amortization?
allocating the cost of intangible assets to expense
what is the formula for calculating the depreciation expense while using the straight line method?
asset's cost - residual value / service life
T/F: companies don't recognize trade discounts directly
T
T/F: ending inventory is reported as an asset
T
if the purchase cost of a truck was $40,000 and the residual value is $5000 with a service life of 100,000 miles what is the depreciation rate using the activity based formula?
$0.35/mile 40000 - 5000 / 100,000
If a store begins the year with $20,000 of inventory, then purchases an additional $90,000 of inventory throughout the year, what is their total ending inventory?
$110,000
If a store begins the year with $20,000 of inventory, then purchases an additional $90,000 of inventory throughout the year, and we know they have an ending inventory of $30,000, what is the cost of goods sold?
$80,000 20,000 + 90,000 = 110,000 110,000 - 30,000 = $80,000
what are the categories we classify inventory for manufacturers?
1. raw materials 2. work-in-process 3. finished goods
what are the four inventory cost methods?
1. specific identification 2. FIFO 3. LIFO 4. Weighted average cost
what is the formula for double declining depreciation rate?
2 / estimated service life
a credit manager expects 30% of the $20 million of accounts receivable still not paid not to be collected. how do we record this journal entry under the percent of receivables method?
20 X 0.30 = 6 million not collected Debit Bad debt Expense for 6 million and Credit Allowance for Uncollectible Accounts 6 million
T/F: both sales returns and sales allowances are classified as contra revenue accounts
T
How do we record the sale of a long term asset?
Debit Cash or Accounts Receivable Debit Accumulated Depreciation Credit Equipment Credit Gain
How do we return the exchange of a long term asset?
Debit Equipment (new) Debit Accumulated Depreciation Credit Cash Credit Equipment (old) Credit Gain
If Bill, who at first couldn't pay his $4000 medical service account, can now pay $1000 of the balance, how would we record this previously written off account in the journal?
Debit Accounts Receivable for $1000 Credit Allowance for Uncollectible Accts for $1000 Debit Cash for $1000 Credit Accounts Receivable for $1000
How do we record the retirement of a long term asset?
Debit Accumulated Depreciation Debit Loss Credit Equipment
Bill cannot pay his $4000 medical service account. How do we adjust the balance of accounts receivable with a journal entry?
Debit Allowance for Uncollectible Accounts $4000 Credit Accounts Receivable $4000
if we know a customer cannot pay their account, how do we record this in a journal entry?
Debit Allowance for Uncollectible Accounts and Credit Accounts Receivable
how do you record the LIFO adjustment in a journal entry?
Debit COGS for $600 Credit Inventory for $600
It's now May 1st and after 6 months Phyllis repays her promissory note of $8000 with 12% interest, which she signed on Nov 1st. How does the company record the payment of the note and interest?
Debit Cash for $8,480 Credit Notes Receivable for $8000 Credit Interest Revenue for $320 Credit Interest Receivable for $160
a company wants to exchange a truck with accumulated depreciation of $21,000 for a new one valued at $45,000 and the dealership decides to give a trade-in allowance of 23,000 with the remaining $22,000 paid in cash. how do we record this exchange
Debit Equipment (new) for $45,000 Debit Accumulated Depreciation for $21,000 Credit Cash for $22,000 Credit Equipment (old) for $40,000 Credit a Gain for $4000
Phyllis signed a promissory note on Nov 1st, promising to repay her $8000 in 6 months with 12% interest. It's December 31st, and what should the company record as an adjusting entry for interest?
Debit Interest Receivable for $160 Credit Interest Revenue for $160
On Nov 1st, Phyllis cannot pay her account of $10,000 so she signs a promissory note saying she will pay the $8,000 in 6 months with 12% interest. What does the company record for the issuance of the note?
Debit Notes Receivable for $8000 Credit Accounts Receivable for $8000
On February 1st, Bob cannot pay his account and is required to sign a promissory note of $10000 due in 6 months with 12% interest. How do we record the issuance of this note?
Debit Notes receivable for $10,000 Credit Accounts Receivable for $10,00
How do we record a sales allowance as a journal entry?
Debit Sales Allowance; Credit Accounts Receivable
how do we record a sales return in as a journal entry?
Debit Sales Revenue; Credit Cash or Accounts Receivable (if purchase was credit)
if the Allowance for Uncollectible Accounts balance was $1 million (credit) and the company is expecting this year not to collect $8 million, how much should the company record as a bad debt expense?
Debit bad debt expense $7 million Credit Allowance for Uncollectible Accts $7 million (make a T chart)
At the end of the period, do sales returns, discounts, and allowances decrease or increase net revenue?
Decrease
T/F: FIFO is known as the income statement approach
F
T/F: LIFO is allowed under IFRS
F
T/F: LIFO is known as the balance sheet approach
F
T/F: The Direct Write off method is allowed under GAAP
F
T/F: companies that use LIFO do not have to report the difference in the amount of inventory a they would report if they used FIFO instead
F
T/F: intangible assets with an indefinite useful life such as goodwill or most trademarks are amortized
F
T/F: receivables not expected to be collected should be counted as assets
F
T/F: we do NOT include the estimate of additional amounts of sales discounts, returns and allowances at the end of the period
F
T/F: we record a GAIN if we sell an asset for less than its book value
F
Which inventory cost method better approximates the current cost of inventory?
FIFO
how do you calculate the LIFO adjustment?
FIFO amount - LIFO amount
Why does FIFO lead to a high gross profit?
FIFO assumes the inventory that has a lower cost is sold first, leaving the higher priced items in inventory. This means FIFO leads to a lower amount reported for COGS, which in turn, leads to a higher gross profit
Which inventory cost method more realistically matches the current cost of inventory needed to produce current revenue?
LIFO
Why does LIFO produce a lower gross profit?
LIFO assumes the inventory that has a higher cost is sold first, leaving lower priced items in inventory. this means LIFO leads to a higher amount reported for COGS, which in turn leads to a lower gross profit
What is the formula for the weighted average unit cost?
cost of goods available to sell / number of units available to sell
It's now August 1st and Bob repays his $10,000 note that was issued to him 6 months ago along with the 12% interest. How does the company record the payment of the note?
debit Cash for $10,600 Credit Notes Receivable for $10,000 Credit Interest revenue for $600
How does a sales allowance affect the balance sheet?
decreases assets and decreases equity
what is the depreciation rate per unit formula?
depreciable cost / total units expected to be produced
what is the percent of receivables method?
estimating the amount of uncollectible accounts based on percentage of accounts receivable expected not to be collected
how do you find operating income?
gross profit - operating expenses
what is the service life?
how long the company expects to receive benefits from the asset before disposing of it
how do you find net income?
income before income tax - income tax
what is the formula for interest?
interest = face value X annual interest rate X fraction of the year
What is FIFO?
inventory cost method where first items purchased are the first ones sold
What is LIFO?
inventory cost method where last items purchased are the first sold
What is the allowance method?
involves allowing for the possibility that some accounts will be uncollectible at some point in the future
Why would a company choose FIFO?
it results in: 1. higher ending inventory 2. lower COGS 3. higher reported profit
what are manufacturing companies?
manufacture the inventory they sell, rather than buying in finished form
what is the specific identification inventory cost method?
matches each unit of inventory with its actual cost
how do you find gross profit?
net sales - COGS
how do you find income before income taxes?
operating income - non operating revenues and expenses
how do you calculate goodwill?
purchase price - (assets)
how do we record an account receivable that we do not expect to collect?
reduce assets (accounts receivable) and increase expenses (bad debt expense)
How does FIFO affect the income statement?
reports a higher gross profit
How does using FIFO affect the balance sheet?
reports higher inventory (assets)
What effect does LIFO have on the balance sheet and income statement?
reports lower inventory (assets) reports a lower gross profit
what is a trade discount?
represents a reduction in the listed price of a product or service
What is the LIFO conformity rule?
requires that a company that uses LIFO for tax reporting also uses LIFO for financial reporting
what is asset disposition?
sale, retirement, or exchange of an asset
Why would a company choose LIFO?
tax savings: because it results in a lower reported profits
what is activity based depreciation?
the allocation of an asset's cost based on use
what is net realizable value?
the estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation
what is the residual value?
the value the company expects to receive from selling the asset at the end of its useful life
what are merchandising companies?
they purchase inventories that are primarily in finished form for resale to customers
what is a sales return?
when a customer is dissatisfied and returns a product
what is retirement of an asset?
when an asset is no longer useful and cannot be sold
what is an exchange of an asset?
when companies trade assets
what is a sales allowance?
when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service
what is the direct write off method?
when we write off bad debts only at the time they actually become uncollectible
what is the expected residual value of most intangible assets?
zero
