ACCT201: Exam 3 Review

What is the two main difference between Accounts Receivables and Notes Receivables?

- Notes Receivables typically have a contract and interest associated with it

What is accounts receivable?

they are amounts that are due from customers from credit sales

What is a Installment Accounts Receivable?

Amounts owed by customers from credit sales where payments are made in periodic amounts over an extended period of time

What are the two methods for accounting for uncollectible accounts?

1. Direct write off method

2. Allowance Method

What are the uncollectible accounts related to Accounts Receivables called?

Bad Debts

What is the direct write-off method?

Records the loss from an uncollectible account receivable when it is determined to be uncollectible

When is a company allowed to use the Direct Write off method instead of the Allowance method?

is only allowable if the bad debt expense is considered immaterial (not significant)

What is the journal entry related to recording a write off of uncollectible account for the Direct Write-Off Method?

Dr. Bad Debt Expense

Cr. Accounts Receivable

What is the Allowance Method?

the allowance method matches the estimated loss from uncollectible against the sales they helped produce

When is the an adjusting entry made for the allowance method?

An adjusting entry is recorded at the end of each accounting period estimating bad debt expense

What are the two main advantages of the allowance method?

1. records bad debts expense when the related sales are recorded

2. reports accounts receivable on the balance sheet at the estimated amount of cash to be collected

What is the main disadvantage of a company choosing to use the direct write-off method?

the direct write off method does NOT best match sales and expenses

What must a company consider when determining if they can use the direct write off method instead of the allowance methdo?

Companies need to consider the matching principle and the materiality constraint when considering the use of the direct write off method

Why do we create an adjusting entry for the allowance method at the end of the accounting period?

Adjusting entry to record estimate of bad debts expense and adjust Accounts Receivable to their REALIZABLE VALUE (how much the company expects to be able to ACTUALLY collect)

What is the adjusting entry look like for the allowance method that is made at the end of the accounting period?

DR. Bad Debts Expense

CR. Allowance for doubtful accounts

What is the allowance for doubtful accounts?

Allowance for doubtful accounts is a contra asset account and is used because at the time of the adjusting entry the company does not know which customers will not pay

What is realizable value?

is the expected proceeds from converting an asset into cash or accounts receivable less the allowance for doubtful accounts

What is the entry for allowance method to write off a bad debt once a specific account is identified as uncollectible?

Dr. Allowance for Doubtful

CR. Accounts Receivable

What is the entry that is made to recover a bad debt that has already been written off and is later collected (allowance method)?

1. Reversal of Write off:

DR. Accounts Receivable

CR. Allowance for Doubtful Accounts

2. Normal Collection of Account entry

Dr. Cash

Cr. Accounts Receivable

What are the three methods for estimating bad debts for the allowance method?

1. Percent of sales method

2. Percent of receivables method

3. aging of receivables method

How do you calculate the bad debt expense for the percent of sales method?

The Bad Debt Expense is calculated by multiplying the credit sales for the period by the percentage of credit sales for the period by the percentage of credit sales expected to be uncollectible (gives us the number that will be used in the adjusting entry).

How do you calculate the bad debt expense amount for the adjusting entry for the percent of receivables method?

our adjustment is for the amount needed to make the allowance for doubtful accounts balance equal to the portion of accounts receivables that is estimated to be uncollectible

What are the 3 main components of a notes receivable (also you can think of it like a loan)

1. has a written promise to pay the loan amount (legal binding)

2. Composed of Principal - specified amount of money that the signer of the note agrees to pay back

3. Usually composed with interest - the cost for borrowing money

If a customer is unable to pay back their Accounts Receivable balance, a company might ask to replace the receivable with ..... as an extension to pay their account?

Notes Receivable

What is the Banker's Rule?

Banker rule uses a 360 day year and is used for interest computations

What is the maturity date?

maturity date is the day the note must be paid back in full.

How do you compute interest?

Interest=Principal of note X annual interest rate X time expressed in years

When would a Note Receivable be generally preferred to than a Accounts Receivable?

when the credit period is long and when the receivable is for a large amount

What is the entry to record the issuance of a Note?

DR. Note Receivable

CR. Sales(the account may vary depending on the transaction)

What is the entry to record receiving the payment of both interest and principal for a note?

DR. Cash

Cr. Interest Revenue

Cr. Notes Receivable

What is the entry for accruing Interest at the end of an accounting period?

DR. Interest Receivable

Cr. Interest Revenue

What does the Accounts receivable turnover ratio measure?

-the quality and liquidity of accounts receivables

- indicates how often the average accounts receivable balance was converted to cash during the year

How do we calculate accounts receivable turnover ratio

net sales/ average accounts receivables

What is a plant asset?

tangible assets used in a company's operations that have a useful life of more than one accounting period

How do we record the cost of a plant asset?

-recorded at cost when acquired (how much we purchased it for) + all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use

What makes Land so special compared to all other non-current assets?

Land has an unlimited life - therefore it is NOT DEPRECIATED!

What are Land Improvements?

Costs that increase the usefulness of land

-Examples: parking lot surfaces, driveways, fences, and lighting systems

Why do we put land improvement costs to a separate account from Land?

So that way their costs can be allocated to the periods they benefit (depreciated)

What is a lump sum purchase?

is the purchase of plant assets as a group in a single transaction for a lump sum price

How do we allocate the cost of individual assets from a lump-sum purchase?

determined by allocating the cost of the purchase among the different types of assets acquired based on their relative market values

What is the definition of depreciation?

-The loss of value in a plant asset!

-OR it can also be defined as the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use

What are the three factors that are included in computing depreciation?

-cost

-salvage value

-useful life

What are the three main depreciation methods?

-Straight-line method

-units of production method

-declining balance method

What is the Straight-Line method formula?

(cost -salvage)/(useful life)

How do you compute the depreciation expense for units-of-production method?

1. (cost-salvage value)/(total number of units expected to be produced during its useful life) = depreciation per unit

2. Depreciation cost per unit X number of units produced in the period = period's depreciation expense

How do you compute the declining-balance method's depreciation expense?

Asset's beginning of period book value X multiple of the Straight line rate

*Salvage Value is not considered*

*Book Value = Assets cost - Accumulated Depreciation to date *

What type of account is Accumulated depreciation and what is its normal balance?

-contra asset

-normal credit balance

*offsets the value of the plant asset it relates to*

What are the four steps in accounting for disposals (or sale) of plant assets?

1. record depreciation up to the date of disposal

2. record the removal of the disposed assets account balances

3. record any cash received or paid in the disposal

4. record any gain or loss

What are intangible assets?

nonphysical assets that confer on their owners long term rights, privileges or competitive advantages

What are the two categories of intangible assets?

** we seperate them into two groups: those with limited lives (we amortize - kinda like depreciation- over its limited live) and indefinite lives (we do not amortize because its like land - doesn't usually lose value)

What is amortization and what account do we use to record it?

-amortization is similar to depreciation and depletion expect that only the straight-line method is generally used for amortization

-to record amortization on balance sheet - we use accumulated amortization to record the effects of amortization (same processes as we do for depreciation we just use the different name)

What are some expample of intangible assets?

-patents

-copyrights

-franchises and licenses

-trademarks and trade names

-goodwill

-leaseholds

-leasehold improvements

How do we calculate total asset turnover and what does it measure?

-net sales/ average total assets

-measure of a company's ability to use its assets most efficiently and effectively

What is striaghtline method?

charges the same amount of depreciation expense for each period of the asset's useful life (most commonly used)

What is the units-of-production method?

charges a varying amount to expense for each period of an asset's useful life depending on its usage

What is the declining balance method?

is an accelerated depreciation method that yields larger depreciation expense during the early years of an asset's life and less depreciation in the later years

What is a current liability and what are some examples?

-obligations due within one year or the companys operating cycle (whichever is longer)

-examples: accounts payable, short term notes payable, wages payable, taxes payable, and unearned revenue

What are long term liabilities?

-obligations not expected to be paid within the longer of one year or the company's operating cycle

-examples: LT notes payable, bonds payable and lease liabilities

What is sales tax payable?

amount the seller has collected but not remitted to the proper governmental agency

What is the journal entries associated with sales taxes payable by the seller?

-to record cash sale subject to sales tax:

Dr. cash

Cr. Sales

Cr. Sales tax payable

-When sales taxes are remitted:

Dr. Sales tax payable

Cr. Cash

What is unearned revenue?

represents the amounts received in advance from customers for future products or services

-sometimes also called deferred revenues, collections in advance, and prepayments

What are Payroll Liabilities?

Employers incur expenses and liabilities associated with having employees: Salaries and wages earned, employee benefits, and payroll taxes levied on the employer.

What are the types of withholdings related to employee payroll deductions?

-represent the amount withheld from an employee's gross pay

-types of withholding

1. employee FICA taxes (social security and medicare)

2. employee income tax withholdings

3. employee voluntary deductions

What is the entry that an employer would make to accrue payroll expense and liabilities?

Dr. Salaries expense

Cr. FICA payable

Cr. Federal income taxes payable

Cr. Employee medical insurance payable

Cr. Employee union dues payable

Cr. Salaries payable (net pay)

What is the formula and definition of times interest earned?

-times interest earned ration is measure of the risk of business will not earn sufficient income over interest

-times interest earned = (income before interest and income taxes)/interest expense