EXAM 3 Acct 284 (Chapters 8-10)
PRACTICE: A company lends $1,000 to two employees at a rate of 6% on December 1st. One employee is to repay the note in 3 months, the other in 6 months. At December 31st, how much interest will the company accrue?
$10 EXPLANATION: Each employee owes one month interest which is 1/2 of the 6% annual rate. Interest = $2,000 (principal) x 6% (Interest rate) x 1/12 (Month out of the year) = $10
What is a benefit and a negative of the following method: Percentage of credit sales?
(+): Simple to apply (-): Less accurate
How do you calculate the double declining rate? AND how do you calculate the depreciation expense for the year using DDR?
(1/Estimated life) x 2 DDE x the book value at the BEGINNING of the year
What is the equation for calculating double-declining-balance depreciation equals _________
(Cost - Accumulated depreciation) x 2/Useful life
What is the straight-line method of depreciation equations?
(Cost-Residual value) x (1/Useful life)
straight line depreciation equation
(cost-salvage value)/useful life
What is the typical sequence of accounting for sales made on account using the allowance method? HINT: (3 steps)
1.) Accounts receivable are debited in the period the revenue is recognized 2.) Bad debt expense is estimated and recorded with an adjusting entry 3.) Specific customer balances are written off
What are the 2 steps required to use the allowance method?
1.) make an end-of-period adjustment to record the estimated bad debts 2.) Write-off specific customer balances when they are know to be uncollectible
PRACTICE: Accounts receivable has a $2,300 balance, and the allowance for doubtful accounts has a $200 credit balance. An $80 account receivable is written off. Net receivables after the write-off is equal to __________
2100 EXPLANATION: 2300(AR balance) - 200 (Allowance for DA) (IGNORE WRITTEN OFF AMOUNT)
The estimated amount of credit sales that customer will likely fail to pay is recorded as a bad debt expense is A.) The same period of sales B.) The period before sales are made C.) The period after sales are made
A
If a bond says its at a 6% stated right and a 8% market interest rate then the bond has been sold at ___________
A discount
If a bond says its at a 6% stated right and a 4% market interest rate then the bond has been sold at ___________
A premium
Recording depreciation expense affects the accounting equation by causing__________
A to decrease, SE decrease
To estimate depreciation, you MUST know ________
Acquisition cost Estimated useful life Estimated residual (salvage) value
What are acquisition costs?
All reasonable and necessary costs to acquire and prepare an asset for use
What is bad debt expense?
An adjusting entry to record the estimated amounts of bad credit sales. Alternative definition: estimated amount of this period's credit sales that customers will fail to pay
What would be the effect of forgetting to record the adjusting entry for estimated bad debts?
Assets and SE would be overstated
Assets are financed with _________ (two possible answers)
Assets or credits
Sales on account have what effect on the balance sheet and income statement?
Balance Sheet: Accounts receivable increases (Assets and SE increase) Income Statement: Sales revenue increases
Term
Bond issue that matures on a single date
Bondholders are willing to pay a premium to acquire a bond because the __________
Bonds stated interest rate is higher than the market interest rate
Callable bonds
Bonds that can be paid off at anytime
The difference between the equipment account and its accumulated depreciation is called the ______ value
Book
What is the main difference between book and tax depreciation?
Book is governed by GAAP and tax is governed by the IRS
The entry to record the write-off of a specific customer's account requires a ____________.
Credit to accounts receivable, debit to allowance for doubtful accounts
PRACTICE: Using the aging approach, management estimates that 10% of the $10,000 of accounts receivable will be uncollectible. The allowance for doubtful accounts has a $100 unadjusted debit balance. The entry to record estimated bad debts includes a ___________.
Credit to allowance for doubtful accounts of $1,100 Debit to bad debt expense of $1,100 EXPLANATION: To arrive at the desired $1,000 credit balance in the allowance for DA, bad debt expense must be debited for $1,100 (1,100-100=desired amount of 1,000)
What are the benefits of using the aging of accounts receivable method?
Data is more detailed and more accurate
How would you record a bad debt expense?
Debit bad debt expense, credit to allowance for doubtful accounts
The entry to record the receipt of an interest payment __________________ (Include both debits and credits)
Debit: Cash Credit: Interest receivable
The entry to record the receipt of the principal payment __________________ (Include both debits and credits)
Debit: Cash Credit: Notes receivable
The entry to record the adjusting entry to record interest owed is __________________ (Include both debits and credits)
Debit: Interest receivable Credit: Interest receivable
The entry to record the issuance of a notes receivable is a __________________ (Include both debits and credits)
Debit: Notes receivable Credit: cash
Which of the following amortize: definite life or indefinite life assets?
Definite
Depreciation allocates the cost of a long lived asset to _____________
Depreciation expense over the periods the asset is used to generate revenue
The entry to record depreciation debits _________________ and credits _______________
Depreciation expense, accumulated depreciation
What is EBITDA?
Earnings before interest, taxes, depreciation, and amortization
What are 3 things you would use notes receivables for?
Extending payment periods, selling large dollar-value items, lending money to individuals or businesses
What are 3 required deductions to employees payrolls?
FICA tax Federal Income Tax Medicare
Long-lived tangible assets are typically found on the balance sheet __________
Grouped together as a single line tiem called property, plant, and equipment
What is maturity?
How long it takes to repay a debt, (usually with interest)
What are some disadvantages of extending credit?
Increases wage costs Bad debt costs Delayed receipt of cash
Trademarks, licensing rights, franchises, copyrights, patents and goodwills are all examples of _____________
Intangible assets
How do you calculate interest?
Interest = Principal x Annual interest rate x Time
Who determines a bonds issue price?
Investors
What is a benefit of of extending credit?
It increases revenue
Why doesn't inventory depreciate?
Its expensed when sold
From the issuing company's perspective, a bond is a _______ and from the bondholder's perspective, the bond is a ________
Liability, asset
Are direct write-offs acceptable by GAAP?
NO
Is R&D an intangible asset?
NO
The write-off of a specific credit customers account does what to the income statement and net receivable balance on the balance sheet?
NOTHING
What is the fixed asset turnover ratio equation?
Net sales / avg. net fixed assets
What effect does maturity have on the amount of interest earned per month?
None
What is the main difference between notes receivable and accounts receivable?
Notes receivable generally charge the borrowers interest from the day signed to they day they are collected
How would you record the disposal of assets?
Record deprication up to the date of sale, and then record a gain or loss by subtracting the book value on the date of sale from the sales price
What are 2 advantages of using national credit cards?
Reduction of bad debts expense, avoid lengthy cash collection periods
what is a write off?
Removal of an uncollectible account account and its corresponding allowance from the accounts record
If a customer pays after an account is written off, what should you do?
Reverse the write off and record the cash receipt as usually
Amortizing intangible assets affects the accounting equation by causing__________
SE to decrease, and assets to decrease
Accepting only cash and cancelling a credit card program that previously allowed customers to purchase merchandise on credit may cause what two things?
Sales to decrease, bad debt expenses to decrease
What is the effect of a write-off of a specific customer's account on net receivables on the balance sheet?
Stays the same
What effect does the collection of a notes receivable, excluding interest, have on the accounting equation?
TOTAL ASSETS REMAIN SAME
What effect does maturity have on the amount of total interest earned at the end of the repayment period?
TOTAL interest increases with a higher maturity
PPE are _________
Tangible/fixed assets
What is interest revenue?
The amount of interest earned
What is Net Receivables, and how would you determine it?
The amount of receivables actually expected to be collected Receivables - estimated uncollectible amount
What is residual value?
The estimated amount a long-lived asset is expected to be sold for at the end of its useful life
What are Notes Receivable?
The principal amount on a loan
When writing off a specific bad debt, what is the impact on income?
There is none, and consequently there is non on the balance sheet
what depreciation method are allowed by GAAP?
Units-of-production, straight-line, declining-balance
what is an Contingent Liability
a potential liability that depends on some future event cause by a past event
What is Principal?
a sum of money lent or invested on which interest is paid.
Bond ________ is the process that causes the balance in premium on bonds payable to decline each period
amortization
Using the allowance method, bad debt expense is recorded _____________ (Sentence form)
as an estimate in the period of the related sales
Convertible bonds
bonds that can be exchanged for shares of common stock in the issuing company
Serial bonds
bonds that mature in installments
Accountants say costs have been ___________ when they are recorded as assets rather than as expenses
capitalized
Book Value Equation
cost - accumulated depreciation (or amortization)
What are capital expenditures?
expenditures that are added to the acquisition cost of an asset
Revenue Expenditures are
expenditures that are expensed as incurred
A bonds maturity date is the date on which the _____________
face value of the bond is paid
A high receivable turnover ratio for a company is a sign that the company
is effective in granting and collecting credit
Using the aging of receivables method, an unadjusted allowance for doubtful accounts will have a credit balance when the amount of the write offs recorded during the period is ____________ the amount allowed in the prior accounting period
less than
Land is depreciated ________
never
Income is _______ when bad debt expenses is recorded
reduced
What is Interest receivable?
the amount of interest earned but not yet collected
Asset impairment occurs when
the estimated future cash flows fall below book value
Amortization is ___________
the reduction of a loan balance through payments made over a period of time
Debentures
unsecured bonds
