Estimating Bad Debts and Long-Term Assets

Flashcards from BA 215 Lecture Notes Week 6

Objective of Estimating Bad Debts

To ensure Accounts Receivable is stated at Net Realizable Value and Bad Debt Expense is recorded when the Revenue is recorded.

Allowance for Doubtful Accounts

A contra-asset account used in the allowance method for bad debt expense.

Net Realizable Value

Accounts Receivable less Allowance for Doubtful Accounts.

Percent of Accounts Receivable Method

Calculate the ending balance of Allowance for Doubtful Account (AFDA), then use a T-account to determine the plug amount to get AFDA to the number calculated. This plug amount is the bad debt expense.

Percent of A/R – Aging Method

Same as percent of A/R, but uses different estimated bad debt percentages based on how old the A/R balance is, then adds those up to get the ending balance in AFDA. Follow the rest of the steps to find the plug when calculating Bad Debt Expense.

Write-off

What we call a specific customer’s account that we determine is not collectible.

Journal Entry for Write Off

Reduces A/R, and since we already had planned for it we take it out of the allowance account.

Recovery of a Write-off

Reinstates the receivable and restores the allowance, followed by an entry to collect the cash.

Principal

The amount borrowed.

Interest

The annual rate charged.

Expensed

Amount recognized on income statement immediately.

Capitalized

Amount recognized on balance sheet and expensed later.

Acquisition cost

All normal and reasonable expenditures necessary to get the asset in place and ready for intended use.

Land Improvements

Parking lots, driveways, fences, walkways, and lighting systems.

Depreciation

Using up of an asset over time. Matches expense to revenue in the proper period.

Depreciation

Decline in asset book value over its useful life.

Factors in Computing Depreciation

Cost, Salvage Value, and Useful Life

Book Value

Capitalized Cost of the Asset less Accumulated Depreciation

Straight Line Depreciation Formula

(Cost − Salvage Value) / Useful Life

Trademark

A name or symbol that identifies a company or a product.

Patent

Grants its owner an exclusive legal right to produce and sell a product that has one or more unique features. Legal life is 20 years.

Copyright

Protects writings, musical compositions, works of art, and other intellectual property. The protection extends for the life of the creator plus 70 years.

Franchises

Grant the exclusive right to sell products or perform services in certain geographic areas.

Goodwill

The value attributable to favorable factors such as reputation, location and superior products.

Disposals of Plant Assets

Removing the asset cost, recording a gain or loss, recording cash received or paid, and removing accumulated depreciation.

Ordinary repairs

Necessary to keep an asset in normal, good condition and are expensed right away.

Improvements (aka Betterments)

Extend or improve the useful life of the asset or improve the productivity and get capitalized.