Accounting 201 Test 3
Buy items at $1, $2, and $3 in that order; __&__ are the costs assigned to the first two items sold under FIFO.
$1 and $2
On January 1, a company lends a customer $100,000 at 10% interest. The amount of interest revenue that should be recorded for the quarter ending March 31 equals:
$2,500 (100,000*10%*3/12)
On Oct. 1, 2017 a company buys equipment for $110,000, expects to use it for 10 years, and then sell it for $10,000. Using the straight-line method, on Dec. 31, 2017, the company should report depreciation for the equipment of:
$2,500 (110,000-10,000)*1/10=10,000 10,000*3/12=2,500
Buy items at $1, $2, and $3 in that order; ____ is the cost assigned to the first item sold under LIFO.
$3
Jim Inc. reported net credit sales of $100,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $1,000. The company has experienced bad debt losses of 3% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as an estimate of Bad Debt Expense?
$3000
Jim Inc. reported net credit sales of $100,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $1,000. Using the aging of accounts receivable method, $5,000 of the company's AR are estimated to be uncollectible. What is the current years Bad Debt Expense?
$4000
A trucking company sold its fleet of trucks for $75,000. The trucks originally cost $500,000 and had Accumulated Depreciation of $420,000 recorded through the date of disposal. What gain or loss did the trucking company record when it sold the fleet of trucks?
$5,000 loss 500,000-420,000=80,000 Book Value
The amount of uncollectible accounts at the end of the year is estimated to be $5,000, using the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts account is an $2,000 credit before adjustment. What is the adjusted balance of the Allowance for Doubtful Accounts at the end of the year?
$5000 TRICK QUESTION - it tells you end of year will be 5000 and then asks you after the adjustment what will it be....which is $5000. Your adjustment would be $3000
The Weighted Average CoGS amount when 2 items are purchased at $0.50 ea. and 3 at $3 ea.; and 4 are sold. (Try it without a calculator.)
$8 (Total Cost $10/Total Items 5 = $2/item, 4 sold at $2 = 8)
The Doodad Company purchases a machine for $500,000. The machine has an estimated residual value of $100,000. The company expects the machine to produce 1 million units. The machine is used to make 200,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is:
$80,000 (500,000-100,000)*(200,000/1,000,000)
Declining Balance Method of Depreciation
(Cost - Accum. Depr.) x 2/Useful Life = Depr. Expense ** Ignore residual value for this method only!!!!! ** First year Accum. Depr. is always Zero!!! ** Second year Accum. Depr. is depr. exp from year 1
Straight-Line Depreciation Method
(Cost - Residual Value) * 1/Useful Life
Units of Production Depreciation Method
(Cost - Residual Value) x Actual Production during period/Estimated Total Production = Depreciation Expense
2 Methods for Estimating Bad Debts
1 - % Credit Sales 2 - Aging of Accounts Receivalbe
Allowance Method - what are the two steps?
1 - End of period adjustment to record estimated bad debts 2 - remove or write off specific customer balances when they are known to be uncollectible.
The value of inventory can fall below its cost for what 2 reasons?
1 - it is easily replaced by identical goods at lower cost 2 - it has become outdated or damaged
Disposal of Tangible Asset
1. Update depreciation up to date of disposal - Debit deprec. expense, Credit Accum. depreciation 2. Debit Cash, Debit Accum. Deprec., Credit Equipment, 3. Debits and Credits have to equal, so either Credit Gain on Disposal or Debit Loss on Disposal
ABC Company had net accounts receivable of $40,000 at the beginning of the year and $60,000 at the end of the year. If the company's net sales revenue during the year was $500,000, what is the receivables turnover ratio?
10 times (500,000/(40,000+60,000)/2)
Your company has net sales revenue of $20 million during the year. At the beginning of the year, fixed assets are $9 million. At the end of the year, fixed assets are $11 million. What is the fixed asset turnover ratio?
2 20million / 10million
The records of Jamie, Inc. included the following information: Sales Revenue 3,500,000 Cost of goods sold 1,000,000 Beginning inventory 400,000 Ending inventory 450,000 What is the inventory turnover ratio?
2.35 times (1,000,000/425,000)
You have 1,000 ipads with a book value of $150,000. The fair value of the ipads is estimated to be $125,000 because of their outdated technology. Your company should report an asset impairment loss of:
25,000
Days to Sell
365/Inventory Turnover Ratio Higher number means longer time to sell
Days to Collect on Receivables
365/Receivable Turnover Ratio
Notes Receivable
A company issues a promissory note to document its right to collect money from another party. Interest is charged from the day they are created through the date they are due.
Asset Impairment Losses
A loss is recognized when an asset suffers a permanent impairment. 1. eliminate the asset's accumulated deprec. 2. eliminate the asset's cost 3. record loss on impairment
How are extraordinary repairs, replacements and additions recorded?
Add to Cost of Asset on Balance Sheet
Acquisition of Tangible Assets Basket Purchase
Allocate cost based on the proportion to the relative market values.
Accounts Receivable, net equals Accounts Receivable (gross) minus:
Allowance for Doubtful Accounts
What does acquisition cost include?
Anything necessary to get asset ready for use - shipping, freight, installation costs, appraisal costs
Where does the total depreciation to date for an asset get reported?
As accumulated depreciation on Balance Sheet
FIFO - First in First Out Inventory Method
Assumes earliest items received are the first ones sold
LIFO - Last in First Out Inventory Method
Assumes latest items received are the first ones sold
The account used to report an estimate of this period's credit sales that customers are likely to fail to pay.
Bad debt expense
Perpetual Inventory System
Beg. Inventory + Purchases - COGS = End. Inventory
Periodic Inventory System
Beg. Inventory + Purchases - Ending Inventory = COGS
Cost of an asset less accumulated depreciation
Book Value
Inventory Turnover Ratio
COGS/Avg. Inventory Higher ratio means faster turnover
Because long-lived tangible assets have economic benefits beyond the current period the cost of acquiring them is initially ______.
Capitalized (means added to cost)
Book Value of an asset
Cost - Accumulated Depreciation
The principle that requires all reasonable and necessary costs of acquiring and preparing an asset for use should be recorded as a cost of the asset.
Cost Principle
Where is inventory reported?
Current asset on Balance Sheet
What JE is recorded when company sells goods on account?
Debit Accounts Receivable, Credit Sale Revenue
What JE is recorded for known bad debts?
Debit Allowance for Doubtful Accounts, Credit Accounts Receivable
What JE is recorded for estimating bad debts? (Estimating because bad debts are not known)
Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
What is the JE for the Lower of Cost or Market adjustment if the inventory's market value is below its cost?
Debit COGS, Credit Inventory
Record a Note Receivalbe
Debit Note Receivable, Credit Cash
The allocation of the cost of long-lived tangible assets over their productive lives.
Depreciation
How are ordinary repairs and maintenance expenses recorded?
Expense on Income Statement
COGS - Oldest Cost, Inventory - Newest Cost
FIFO
When costs are rising, _________ leads to a higher inventory value (making the balance sheet appear stronger).
FIFO
Which inventory method assigns the oldest unit costs to CoGS and the newest unit costs to Inventory.
FIFO
What are the types of inventory
Finished goods, raw materials
A contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region.
Franchise
Consignment Inventory
Goods that a company holds that are not on its Balance Sheet
Purchase price of the corporation less the fair market value of identifiable assets (net of liabilities).
Goodwill
Receivable Turnover Ratio
How many times the process of selling and collecting money is repeated during the period. Net Sales Revenue/Avg. Net Receivables
Specific Identification Inventory Method
Identifies and records the cost of each item sold as part of COGS. (if it tells you the items sold cost $10 and $20, your COGS would be 10+20= $30).
Disadvantage of extending credit
Increased salaries - hire ppl to make sure customers are credit worthy, track how much customers owe, follow up to collect from customers
The process of buying and selling inventory.
Inventory Turnover
Where is cost of goods sold reported?
It is deducted from Net Sales to get to Gross Profit on Income Statement
COGS - Newest Cost, Inventory - Oldest Cost
LIFO
When costs are decreasing over time, _________ leads to a higher inventory value (making the balance sheet appear stronger).
LIFO
Fixed Asset Turnover
Net Revenue/Average Net Fixed Assets
What is the JE for the Lower of Cost or Market adjustment if the inventory's market value is above its cost?
No JE needed because the inventory is already recorded at the lower of cost or market
Intangible Assets
No Physical Substance, ex. Goodwill, patents, copyrights, trademarks
Why do companies have to estimate bad debts?
Not all customers who purchase on credit will actually pay.
Tangible Assets
Physical Substance, ex. land, buildings, furniture
How do you calculate interest on a note receivable?
Principal x Interest x Time (time is always # months in period/12)
Other goals of inventory management
Quality of inventory meets customer expectations and company standards, control or minimize cost of acquiring and storing inventory.
Is Inventory that is shipped FOB Destination and is in transit at the end of the year recorded on the seller or buyer's books?
Seller because it hasn't reached it's destination (Still in transit)
Record Interest on a note receivable
This is recorded at the end of each year Debit Interest Receivable, Credit Interest Revenue
Primary goal of inventory management
To ensure there are sufficient quantities on hand to meet customer needs
Weighted Average Inventory Method
Uses weighted average of the cost of goods available for sale for the cost of the goods sold and for ending inventory.
COGS - Average Cost, Inventory - Average Cost
Weighted Average
XYZ has a truck that originally cost $50,000. The company expects to be able to sell the truck for $5,000 at the end of its useful life. The balance of the related Accumulated Depreciation account is $15,000. The depreciable cost of the truck is:
What is $45,000 (cost-residual value)
Joy, Inc. purchased a new car on January 1, 2016. The car cost $20,000. It has an estimated life of 5 years and the estimated residual value is $2,000. Joy uses the double-declining-balance method to compute depreciation. What is the depreciation expense for 2016 and 2017?
What is 8,000 and 4,800 2016: 20,000*2/5=8,000 2017: (20,000-8,000)*2/5=4,800
Lower of Cost or Market (LCM) Rule
When the value of inventory falls below cost, the value should be written down to the market price. This is done by recording COGS that appears on the income statement. Debit COGS, Credit Inventory
Long-lived assets
acquired for use over one year, not intended for resale.
When using the Aging of accounts receivable method to estimate bad debts, this is what you are calculating when you multiply accounts receivable by your bad debt loss rates:
ending balance in the allowance for doubtful accounts
Percentage of Credit Sales Method
estimates bad debt expense by multiplying the historical percentage of bad debt losses by current sales
Aging of Accounts Receivable Method
estimates uncollectible accounts based on the age of each account receivable. Don't forget here you are calculating ending allowance for doubtful accounts, so you then subtract the beginning allowance for doubtful accounts to get your bad debt expense!
Patent
exclusive right by federal govt. to sell or manufacture an invention
Copyright
exclusive right granted by federal govt. to protect artistic or intellectual property
Merchandise inventory
finished goods held for sale to customers
Advantage of extending credit
helps customers buy products and services, which increases a firm's revenues
Licensing Right
limited permission to use a product or service according to specific terms and conditions
Depreciation Expense
process that matches costs with periods benefited by their use
Merchandising Companies
purchase finished goods from suppliers to resale to customers
Manufacturing Companies
purchase raw materials from suppliers and produce goods to sell to customers
Trademark
symbol or design or logo