discussion ?s chp 7, 8 & 9

Immediately after a used truck is acquired, a new motor is installed at a total cost of $3,850. Is this a capital expenditure or a revenue expenditure?

Capital expenditure

Why should the employee who handles cash receipts not have the responsibility for maintaining the accounts receivable records? Explain.

To reduce the possibility of errors and embezzlement, the functions of operations and accounting should be separated. Thus, one employee should not be responsible for handling cash receipts (operations) and maintaining the accounts receivable records (accounting).

Alpine Company solicited bids from several contractors to construct an addition to its office building. The lowest bid received was for $1,200,000. Alpine decided to construct the addition itself at a cost of $1,100,000. What amount should be recorded in the building account?

$1,100,000

A firm has consistently adjusted its allowance account at the end of the fiscal year by adding a fixed percent of the period's sales on account. After seven years, the balance in Allowance for Doubtful Accounts has become very large in relationship to the balance in Accounts Receivable. Give two possible explanations.

(1) The percentage rate used is excessive in relationship to the accounts written off as uncollectible; hence, the balance in the allowance is excessive. (2) A substantial volume of old uncollectible accounts is still being carried in the accounts receivable account.

Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

An estimate based on analysis of receivables provides the most accurate estimate of the current net realizable value.

Assume that Brooke Miles, accounts payable clerk for West Coast Design Inc., stole $48,350 by paying fictitious invoices for goods that were never received. The clerk set up accounts in the names of the fictitious companies and cashed the checks at a local bank. Describe a control procedure that would have prevented or detected the fraud.

Controls that could have prevented or detected the fraud include: (1) requiring supporting documentation such as receiving reports and purchase orders of all payments, (2) requiring approval by an independent party, and (3) allowing payments to only vendors who have been previously approved by upper management.

The maker of a $240,000, 6%, 90-day note receivable failed to pay the note on the due date of November 30. What accounts should be debited and credited by the payee to record the dishonored note receivable?

Debit Accounts Receivable for $243,600 Credit Notes Receivable for $240,000 Credit Interest Revenue for $3,600

Bullwinkle Co. acquired an adjacent vacant lot with the hope of selling it in the future at a gain. The lot is not intended to be used in Bullwinkle business operations. Where should such real estate be listed in the balance sheet?

Real estate acquired as speculation should be listed in the balance sheet under the caption "Investments," below the current assets section.

After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $673,400, and Allowance for Doubtful Accounts has a balance of $11,900. Describe how the accounts receivable and the allowance for doubtful accounts are reported on the balance sheet.

The accounts receivable and allowance for doubtful accounts may be reported at a net amount of $661,500 ($673,400 - $11,900) in the current assets section of the balance sheet. In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet. Alternatively, the accounts receivable may be shown at the gross amount of $673,400 less the amount of the allowance for doubtful accounts of $11,900, thus yielding net accounts receivable of $661,500.

Why should the responsibility for maintaining the accounting records be separated from the responsibility for operations? Explain.

The responsibility for maintaining the accounting records should be separated from the responsibility for operations so that the accounting records can serve as an independent check on operations.

Before a voucher for the purchase of merchandise is approved for payment, supporting documents should be compared to verify the accuracy of the liability. Give an example of supporting documents for the purchase of merchandise.

The three documents supporting the liability are the vendor's invoice, the purchase order, and the receiving report. The invoice should be compared with the receiving report to determine that the items billed

The note receivable dishonored in Discussion Question 9 is paid on December 30 by the maker, plus interest for 30 days at 9%. What entry should be made to record the receipt of the payment?

debit: cash for 24,542 credit: AR 24,360 [$240,000 +($240,000 x 6% x 90 / 360)] credit: interest revenue 1827 ($243,600 x 30 /360 x 9% =1827

Keyser Company purchased a machine that has a manufacturer's suggested life of 20 years. The company plans to use the machine on a special project that will last 12 years. At the completion of the project, the machine will be sold. Over how many years should the machine be depreciated?

12 years

A. Under what conditions is the use of an accelerated depreciation method most appropriate? B. Why is an accelerated depreciation method often used for income tax purposes?

A. An accelerated depreciation method is most appropriate for situations in which the decline in productivity or earning power of the asset is proportionately greater in the early years of use than in later years, and the repairs tend to increase with the age of the asset. B. An accelerated depreciation method reduces income tax payable to the IRS in the earlier periods of an asset's life. Thus, cash is freed up in the earlier periods to be used for other business purposes.

(A) How are cash equivalents reported in the financial statements? (B) What are some examples of cash equivalents?

A. Cash and cash equivalents are usually reported as one amount in the current assets section of the balance sheet. B. Examples of cash equivalents include certificates of deposit, U.S. government securities, corporate notes and bonds, and commercial paper.

Is it necessary for a business to use the same method of computing depreciation (A) for all classes of its depreciable assets and (B) for financial statement purposes and in determining income taxes?

A. No B. No

For some of the fixed assets of a business, the balance in Accumulated Depreciation is exactly equal to the cost of the asset. (A) Is it permissible to record additional depreciation on the assets if they are still useful to the business? Explain. (B) When should an entry be made to remove the cost and the accumulated depreciation from the accounts?

A. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would create a negative book value, which is meaningless. B. The cost and accumulated depreciation should be removed from the accounts when the asset is no longer useful and is removed from service. Presumably, the asset will then be sold, traded in, or discarded.

Neptune Company issued a note receivable to Sailfish Company. (A) Who is the payee? (B) What is the title of the account used by Sailfish Company in recording the note?

A. Sailfish Company B. Notes Receivable

Distinguish between the accounting for capital expenditures and revenue expenditures.

Capital expenditures include the cost of acquiring fixed assets and the cost of improving an asset. These costs are recorded by increasing (debiting) a fixed asset account. Capital expenditures also include the costs of extraordinary repairs, which are recorded by decreasing (debiting) the asset's accumulated depreciation account. Revenue expenditures are recorded as expenses and are costs that benefit only the current period and are incurred for normal maintenance and repairs of fixed assets.

What kind of an account (asset, liability, etc.) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit?

Contra asset, credit balance

Dan's Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its customers in the form of an account receivable. The few customers who are allowed to carry accounts receivable are long-time residents of Twin Bridges with a history of doing business at Dan's Hardware. What method of accounting for uncollectible receivables should Dan's Hardware use? Why?

Dan's Hardware should use the direct write-off method because it is a small business that has a relatively small number and volume of accounts receivable.

What are the three classifications of receivables?

Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or (3) other receivables.

The balance of Cash is likely to differ from the bank statement balance. What two factors are likely to be responsible for the difference?

The cash balance and the bank statement balance are likely to differ because of (1) a delay by the bank or company in recording transactions or (2) errors by the bank or company in recording transactions.

The ticket seller at a movie theater doubles as a ticket taker for a few minutes each day while the ticket taker is on a break. Which control procedure of a business's system of internal control is violated in this situation?

The control procedure requiring that responsibility for a sequence of related operations be divided among different persons is violated in this situation. This weakness in the internal control may permit irregularities. For example, the ticket seller, while acting as ticket taker, could admit friends without a ticket.

If a note provides for payment of principal of $85,000 and interest at the rate of 6%, will the interest amount to $5,100? Explain.

The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note. The maker of a $240,000, 6%, 90-day note receivable failed to pay the note on the due date of November 30. What accounts should be debited and credited by the payee to record the dishonored note receivable?

What is the purpose of preparing a bank reconciliation?

The purpose of a bank reconciliation is to determine the reasons for the difference between the balance according to the company's records and the balance according to the bank statement and to correct those items representing errors in recording that may have been made by the bank or by the company.

O'Neil Office Supplies has a fleet of automobiles and trucks for use by salespersons and for delivery of office supplies and equipment. Collins Auto Sales Co. has automobiles and trucks for sale. Under what caption would the automobiles and trucks be reported in the balance sheet of (A) O'Neil Office Supplies and (B) Collins Auto Sales Co.?

A. Property, plant, and equipment or Fixed assets B. Current assets (inventory)

A. Over what period of time should the cost of a patent acquired by purchase be amortized? B. In general, what is the required accounting treatment for research and development costs? C. How should goodwill be amortized?

A. The cost of a patent should be amortized over the shorter of its legal life or years of usefulness. B. Research and development costs should be expensed as incurred. C. Goodwill should not be amortized but written down when impaired.

(A) Name and describe the five elements of internal control. (B) Is any one element of internal control more important than another?

A. The five elements of internal control are the control environment, risk assessment, control procedures, monitoring, and information and communication. The control environment is the overall attitude of management and employees about the importance of controls. Risk assessment includes evaluating various risks facing the business, including competitive threats, regulatory changes, and changes in economic factors. Control procedures are established to provide reasonable assurance that business goals will be achieved. Monitoring is the evaluation of the internal control system. Information and communication provide management with feedback about internal control. B. No. One element of internal control is not more important than another element. All five elements are necessary for effective internal control.

Knott Inc. has a petty cash fund of $750. (A) Since the petty cash fund is only $750, should Knott implement controls over petty cash? (B) What controls, if any, could be used for the petty cash fund?

A. Yes. Even though the petty cash fund is only $750, if the fund is replenished frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $39,000 ($750 × 52 weeks) could be subject to theft. B. Controls for petty cash include: (1) designating one person who is responsible for the fund, (2) maintaining a written record of all payments, (3) requiring support (receipts) for payments from the fund, and (4) periodic review of the funds on hand and the payments by an independent person.