Intermediate Accounting Exam 2

what is the formula for interest rate per compounding period

=annual interest rate/# of compounding periods

what is the formula for the number of compounding periods

= # of years x # of compounding periods per year

when are the payments of an annuity due

payments are at the beginning

annuity due now

goes one period after

when are the payments on an ordinary annuity

payments are at the end

first rent will occur one period from now

when is time value of money useful in accounting

bonds, pensions, notes, leases, sinking funds, asset impairments, business combinations, installment contracts

when is time value of money useful in personal applications

purchasing a home, planning for retirement, evaluating alternative investments

what is interest

the payment for the use of money

excess cash received or repaid over and above the principal (amount lent or borrowed)

what are the three components of interest

pure rate of interest (2-4%)

credit risk rate of interest (0-5%)

expected inflation rate of interest (0-??%)

what is simple interest

computed on the amount of principal only

what is the formula for simple interest

p x i x n

p= principal

i= rate of interest for a single period

n-number of periods

what is compound interest

computed on the principal and on any interest earned that has not been paid or withdrawn

what does the formula look like for compound interest

p x (1+i)^n

what are the four fundamental variables in compound interest problems

i= rate of interest

n= number of time periods

FV= future value

PV= present value

what are single sum problems

involve a single amount of money that either exists now or will in the future

what are annuity problems

involve a series of equal periodic payments or receipts (called rents) over equal time periods

issuing a bond includes what?

a promise to pay the face value at maturity AND periodic cash interest payments

what is the i in a bond problem

the market rate

how do you calculate the payments in a bond

face value of the bond x stated interest rate

what is a deferred annuity

the rents occur 2 or more periods from now

• has both an annuity component and a lump sum component

what does cash equivalents mean

short-term, highly liquid investmentsw

what are some examples of cash equivalents

treasury bills, CD’s, commercial paper and money market funds

how do trade and cash discounts impact the amount of receivables reported on the balance sheet

deducts from the list price

what does 2/10 n/30 mean

2% discount if you pay within 10 days, gross amount due in 30 days

what is the net realizable value for accounts receivable

A/R- AFDA

what journal entry is needed to record bad debt expense

DB: bad debt expense

CB: AFDA

what journal entry is needed to write off uncollectible accounts

DB: AFDA
CB: A/R

what is the formula for accounts receivable turnover

net sales/ average net A/R outstanding

what is the formula to find the average collection period

365/ accounts receivable turnover

what is meant by without recourse

the factor is taking on more risk by being responsible for any bad debts

• purchaser assumes risk of collectability and absorbs any credit losses (outright sale of receivables)

  • seller records a loss or gain= difference in proceeds and face value of receivables

  • seller records a Due from Factor account (reported as a receivable) is used to account for any proceeds retained by the factor to cover sales discounts and returns. factor maintains a corresponding “due to” account

if cash is restricted for a short term purpose, what should you do

include with cash and disclose in the footnotes

if cash is restricted for a long term purpose, what should you do

classify it as a long term asset (usually investments)

what are accounts receivable

amounts owed by customers to the business

what are uncollectible accounts

bad debts that are a normal operating expense for entities that extend credit to customers

what are the two methods of uncollectible accounts

allowance method and direct write off method

what is the allowance method

reocrd estimate of bad debts as an AJE, adheres to matching

how can AFDA have a debit balance before AJE’s

too many write offs due to underestimating in a previous period

what is the direct write off method

do not record an estimate, only write off A/R and record bad debt expense when a specific account is deemed uncollectible, not permitted by GAAP

what are the exceptions to the direct write off method

credit sales are “immaterial”

required by IRS for tax reporting

what is the entry to record collection of an account previously written off

DB: A/R

CB: AFDA

DB: Cash

CB: A/R

what are the two ways to estimate bad debt expense under the allowance method

percentage of sales (income statement approach) and percentage of A/R or aging of A/R (balance sheet approach)

what is the percentage of sales approach

bad debt expense= % x Net credit sales

** expense does not depend on the existing balance of AFDA

what is the percentage of A/R or aging of A/R approach

balance of AFDA= A/R balance x % estimated uncollectible

indicates the desired balance fo AFDA

Bad Debt Expense is the amount necessary to bring AFDA to the desired balance

**expense does depend on the existing balance of AFDA

how should you record short term notes

at face value

how should you record long term notes

at present value of amount of the cash expected to collect

what is an interest bearing note

carries stated rate of interest

interest is paid separately and in addition to the face value of the note

cash flows= principal repayment + interest payments

if the stated rate= market rate then what?

the note’s present value is equal to the face value

how is interest revenue and cash interest received calculated in an interest bearing note

face value x stated rate x # of months/12 (short term)

what is the journal entry for the receipt of interest bearing note

DB: note receivable (face value)

CB: cash or asset

what is the journal entry for year end AJE for accrued interest in an interest bearing note

DB: interest receivable

CB: interest revenue

what is the journal entry on maturity date/installment date for an interest bearing note

DB: cash

CB: Note receivable

interest receivable

interest revenue

what value do you use to record property, goods or services with a non-interest bearing note

record at fair market value of property, goods, services OR the fair market value of the note (PV), whichever is more clearly determinable

what is a non-interest bearing note

interest is included in face amount, reocrd at the PV of note

what is an imputed interest rate

rate at which debtor can obtain financing of a similar nature under prevailing economic conditions

what is the value in notes receivable for an non-interest bearing note

FV or the total of the payments (single sum or installment payments)

what is the discount on N/R

difference between face value (or payments) and present value

a contra-asset account with a normal credit balance

represents interest revenue included in the face value of the note

amortized to interest revenue over the life of the note

what is carrying value

the present value of the note (term note-PVLS and installment note- PVOA)

** installment notes: no FV, principle is paid through payments

how do you find the carrying value

previous carrying value + discount amortized - installment payment received

balance of notes receivable - balance of discount on N/R

what are the cash flows for a non-interest bearing note

cash flows= face value or payments

how do you find interest revenue for non-interesting bearing notes

carrying value x market rate (imputed rate)

how do you find the discount amortized on a non-interest bearing note

discount amortized= interest revenue - cash interest received

** interest revenue will equal discount amortized if no cash

what is the journal entry for the receipt of a non-interest bearing note

DB: note receivable (face value)

CB: Discount on N/R

Cash/asset/revenue

what is the year-end AJE for accrued interest for a non-interest bearing note

DB: discount on N/R

CB: Interest Revenue

what is the AJE for an installment payment

DB: Cash

CB: N/R

what is the journal entry on maturity date for a non-interest bearing note

DB: Discount on N/R

CB: interest revenue

DB: cash

CB: N/R

what are the two methods of disposition of A/R and N/R

assigning and factoring

what is assigning

secured borrowing

pledging receivables as security for a loan

assignor continues to collect the receivables and remits the amount (plus interest) to the lender

recorded as a borrowing transaction (liability)

what is factoring

sale of receivables

factor (purchaser) collects receivables from customers

what are the 3 conditions that must be met to be considered a sale for factoring

1. transferred assets must be isolated from transferor

2. transferee has right to pledge or sell assets

   1. transferor does not maintain control through repurchase agreement

what does with recourse mean

seller guarantees payment to purchaser in the event the debtor fails to pay

what is a recourse obligation account

used to recognize the probable payment to the factor for uncollectible accounts

what is securitization

creating a financial instrument by combining assets such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and then marketing them to investors

• the principal and interest on the debt, underlying the security, is paid back to the various investors regularly

what is a purchase commitment

an agreement to buy inventory weeks, months or years in advance

what is the formula for inventory turnover

cogs/ average inventory

what is meant by LIFO liquidation

older inventory being matched with current revenues- distorts Net Income and leads to substantial tax payments

which method produces the highest inventory amount

FIFO

which method produces the highest net income

FIFO

what method results in the payment of the lowest amount of income taxes

LIFO

what method uses the most current costs in the computation of cost of goods sold

LIFO

which method reports the most current costs on the balance sheet

FIFO

how is net realizable value determined for inventory

estimated selling price less reasonably predictable costs of completion and disposal (selling) and transportation

what is the journal entry for the purchase of inventory

DB: inventory

CB: Cash/ Accounts Payable

what is the journal entry for the sale of inventory

DB: COGS

CB: Inventory

DB: Cash / A/R

CB: Revenue

what are the two major classifications of inventory

merchandising firm and manufacturing firm

what kind of inventory does a merchandising firm have

finished goods

what kind of inventory does a manufacturing firm have

raw materials, work in process, and finished goods

what is FOB shipping point

title passes at the shipping point

what is FOB destination

title passes at the destination

what are consigned goods

goods out on consignment remain the property of the consignor

what are the three special sale agreements

buyback agreements, high rates of return and installment sales

what are sales with a buyback agreement

generally, no sale is recorded

what are sales with high returns

if returns are unpredictable, goods should not be removed from the seller’s inventory account

what are installment sales

the goods should be considered sold if the % of bad debts can be reasonably estimated

what happens during a purchase commitment

the seller retains the title to the goods

under GAAP no asset or liability is reported at the inception of the agreement

purchaser may hedge against the risk of a decline in the market price of the good by entering into a contract to sell the same quantity of the same goods in the future

if the purchase commitment is non-cancelable and material,

it should be disclosed in the footnotes

if the contract price> market price at balance sheet date, what should happen

a loss should be recorded

what is the journal entry to record a loss on a purchase commitment

DB: unrealized loss-purchase commitments

CB: Liability- purchase commitments

what is the journal entry on the date of sale of a purchase commitment with a loss

DB: Inventory

Liability- Purchase Commitments

CB: Cash (Gain or loss-purchase commitments)

what is the gross profit method of estimating inventory

Beginning Inventory

+Net Purchases

=COGAFS

-COGS (Net Sales x COGS %)

=Ending Inventory

how do you find the gross profit %

Gross profit/net sales

how do you find the COGS %

1- gross profit %