Review


This is the quiz 1,2 for Chapter 15 & 16

http://www.quizyourfriends.com/take-quiz.php?id=1105301641066906&a=1&

http://www.quizyourfriends.com/take-quiz.php?id=1105301827218686&a=1&

ch 12 review answers

Capital Assets

  • Assets that are used in the operation of a company and have useful lives that are longer than one period

Amortization

  • cost that helps match the cost of a capital asset over the time the asset is used
  • Amortization Expense and Accumulated Amortization are used to record amortization over the period and the useful life of an asset
  • Amounts used to calculate amortization are:
    • Cost – the initial cost of the asset
    • Salvage Value – the estimated value of the asset at the end of its useful life
    • Useful Life – the estimated length of time the asset can be used
    • Units Produced – the estimated number of units the asset can produce through its useful lifetime
    • Methods of Amortization:
      •  Straight Line Method– the same amount is amortized each full period of the asset’s useful life
        •  
  • Double Declining Balance Method* – larger amounts are amortized during the earlier years of the asset’s useful life and decreases year after year
    • * salvage is not used in calculations, and be careful not to exceed the total value
  • Units of Production Method*– amortization calculated by the number of units that are produced in each period
    • * Remember to Check if the estimated total units of production is equal to the actual units of production
    • To journalize amortization, debit amortization expense and credit accumulated amortization

Partial Year Amortization:

  • Two methods of amortization
    • Nearest whole month
    • Half year rule: first year is always half a year regardless of time of purchase

Revising Amortization Rates

  • When it is discovered that the original estimate was inaccurate one must change the amortization
    • One revises the rate when:
      • Assumptions are changed
      • The device changed or an addition was made 
      • Example: Ronald has purchased a tickle machine for $1000 on Jan 2nd 2005 and estimates it will have a life of 4 years and have a final salvage value of $100. At 2006 he sprays it with scented lavender adding $225 to the device and increased the life by 1 year. What was the amortization expense in 2006.
      •  (1000-100)/4 = 225
      • 1 * 225 =225
      • ((1000-225)+225))/(4-1+1) = 225

 

Disposal of Capital Assets

  • Discarding, selling or exchanging assets due to obsolescence or damage

 

Journalizing Steps

  1. Record amortization expense up to date of disposal
  2. Update accumulated amortization
  3. Remove the balance of disposable asset
  4. Record the cash or account receivable
  5. Journalize any loss or gain from the book value

 

  • If the asset is fully amortized, and there is no loss, it would be journalized as an example below:
    • Ex, A machine costing $2000, with accumulated amortization of $2000 is discarded on April 17th, 2005.

 

Apr 17   Accumulated amortization, machine      2000

                                Machine                                                                              2000

                    To record disposal of asset.

  • If the asset is not fully amortized, then record a loss (debit) equal to the book value.     
    • Ex. A machine costing $8000 with accumulated amortization of $6000 on December 31st, 2008 is discarded on July 1st, 2009. The equipment is being amortized for 8 years w/o salvage value.

 

 

Jul 1       Amortization expense, machine                                              500        

                                Accumulated amortization, machine                      500

                    To record amortization.

 

Jul 1       Accumulated amortization, machine                      6500

                Loss of disposal                                                                                1500      

                                Machine                                                                                              8000

                   To record the disposal of machine.

 

Selling Capital Assets

  • When the value received for the asset sold is greater than its book value, it is a gain.
  • When the value received for the asset sold is less than its book value, it is a loss.
  • Debit: cash received and accumulated amortization
  • Credit: asset cost
    • Ex. Fitness equipment costing $16000 with accumulated amortization of $12000 (on Dec 31st, 2009) is sold on April 1, 2010 for $7000. Annual amortization is $4000 (straight-line).

 

Apr 1     Amortization expense, equipment                                         1000

                                Accumulated amortization, equipment                                                1000

                   To record amortization.

 

Apr 1     Cash                                                                                                                      7000

                Accumulated amortization, equipment                                                13000

                                Equipment                                                                                                         16000

                                Gain of disposal                                                                                               4000

                   To record disposal of equipment.

Intangible Assets

Intangible assets serves are rights, privileges and competitive advantage to the owner of these capital assets. Intangible assets as the name suggests has no physical form and are usually acquired for operational use. These assets are also non-current assets, and their useful life is hard to determine due

Examples of Intangible assets:

  • Patents
  • Copyrights
  • Leaseholds
  • Leasehold Improvements
  • Goodwill
  • Trademarks and Trade Names

 

Amortization for Intangible assets

  • Amortize over a shorter economic/ legal life, and has a maximum of 40years
  • No contra accounts (ie of contra account is accumulated amortization)
  • Amortization account is an expense
  • Use straight line method unless told otherwise

Patents

  • Is an exclusive right to a company to manufacture and sell patented goods/ machine
  • When purchased the account “Patents” is debited
  • The cost is amortize over the shorter of its legal life/ estimated useful life

 

Copyright

  • Granted by the federal government or by international agreement
  • Gives the owner the exclusive right to publish and sell their artistic work (music, literacy, or art)
  • Useful life: the life of the creator + 50 years (however most copyright has a shorter life)
  • Amortized over its useful life

Goodwill

  • Goodwill is no longer amortized under revised Canadian GAAP
  • The amount by which the amount paid for a company exceeds its market value
  • ONLY purchased goodwill is intangible

Chapter 10 – Receivables
Receivables

  • amount that another party owes, amount that can be received
  • 2 most common types of receivables are accounts receivables and note receivables
  • Accounts Receivable (aka trade receivables) – amount that another party owes a company from credit sales
  • can arise when:
    • credit is directly given to the customer by the business or
    • when customers use credit cards that are issued by third parties
    • when companies directly give credits, they must:
      • maintain seperate accounts receivables for each customer
      • account for bad debts from credit sales

Valuing Accounts Receivable

  • when credits are granted to customers, some customers may not pay the promised amount, and the accounts of these customers are called uncollectible accounts or bad debts
  • the total amount of uncollectable accounts is an expense of selling on credit
  • there are two methods of accounting for uncollectable accounts:
    • allowance method
    • direct write-off method

 Allowance Method

  • the matching principle states that any bad debt expense should be matched and recorded in the same period as the sales it help produce
  • allowence method matches the expected loss from the uncollectible accounts receivable of each period
  • expected loss is an estimated amount

Accounting for Bad Debt

  • an allowance is recorded for the expected loss by using the Allowance for Doubtful Accounts, which is a contra-asset account (contra-asset account is used because at the time of adjusting, the customers that will not pay are unknown
  • Allowance for Doubtful Accounts – can be either debit or credit balance
  • done at the end of the period
  • realizable value – amount that can be collected from credit customers

Journal Entry for Adjusting for Bad Debt
Bad Debt Expense                                                                           xx

Allowance for doubtful accounts                                                                xx

Writing Off Bad Debt

  • when accounts are identified as uncollectable, they have to be written off
  •  the uncollectable accounts are removed from accounts receivable
  • when writing off bad debt, the expense account is not debited because it has already been estimated and recorded

Journal Entry for Writing Off Bad Debt:

Allowance for Doubtful Accounts                                               XX

Accounts Receivable – NAME                                                                      XX

Recovery of a Bad Debt

  • when a customer’s account is written off and the customer pays part or all of the amount owed after the account is written off, a bad debt has to be recovered

Journal Entry for Recovering Bad Debt:
Accounts Receivable – NAME                                                                      X

Allowance for Doubtful Accounts                                                                               X

Cash                                                                                                                      X

Accounts Receivable – NAME                                                                                      X
Percent of sales method

This method is also known as the “income statement method”. This method uses the Net Sales and experiences from previous cycles to estimate the amount of uncollectable accounts.

A company has credit sales of $200 000 in 2010. and based on experiences they assume that 0.5% of all sales are uncollectable.

Calculations: $200,000 x 0.005 = $1000

Dec 31 Bad Debt Expense ……………………………………… 1000
Allowance for doubtful accounts ………… 1000

Account Receivable Method
This method is also known as the “balance sheet method”. This method uses Accounts receivable and allowance for doubtful accounts to estimate bad debts. This method can be done in two different ways.

Method 1: using a percentage to estimate the total uncollectable account receivables

Method 2: Determine by using “aging” account receivable

Percent of Accounts Receivable Method
This method assumes that there will be a percentage of all outstanding accounts receivable that is uncollectable. Estimates are based on past experience (Ms. Cuttle will give this amount)

A company has $50,000 of outstanding accounts receivable on December 31. From past experience it suggests that 5% of the account receivable is uncollectable. Assume that the unadjusted balance in AFDA on December 31 is currently 500.

Calculation: $50,000 x 0.005 = 2,500

AFDA

500   Unadjusted balance (Dec 31)?       Bad Debt expense
2500 Desired adjusted balance

2500 = 500 + ?
2000 = Bad debt expense

The adjusting entry
Dec 31 Bad debt expense …………………………………….. 2000
Allowance for doubtful accounts ………. 2000

After determining the adjusted balance in the AFDA the accounts receivable can now be adjusted with 2 different way.

The more common and easier to understand method:
Current Assets:
Accounts receivable ……………………………………………… X
Less: Allowance for doubtful accounts …………………….        Y Z

or

Current assets:
accounts receivable (net of Y estimated uncollectable accounts) … Z

Aging of Accounts Receivable Method
The aging of accounts receivable method looks at each accounts receivable and basically classify them depending on if its current (not due yet) or if its due which are usually in 30 days intervals. The longer it takes get the money from the customer the less likely the company will be paid.

Direct Write-Off Method
It records the debits lost from an accounts receivable that has been deemed uncollectable
Violates Matching Principle – because many times expenses are not matched with revenues (different periods)
Materiality principle allows this method when bad debts are much smaller in relation to other items

For example: Giggle Corp. specializes in the sale of giggles. Their client Mr. Fraser has been unhappy for some time so he purchased a giggle for $1000. He was so happy, he fled the country. As a result, Giggle Corp has deemed that his debt will not be collected. Journalize:
April 1           Bad Debt Expense                                                                     1000-
Accounts Receivable – Fraser                                    1000-
To write off bad debt

In summary, the journal entry to write off directly is
–      Debit: Bad Debt Expense
–      Credit: Accounts Receivable – (Name)

Notes Receivable
A note is a written promise to give an extension to the consumer with an interest for the time period. Creditors generally prefer it over accounts receivable. Promissory note is a written promise to pay a specific amount of money either on demand or at a definite future date.

The period of a note is sometimes expressed in months or years. When months are used, the note matures and is payable in the month of its maturity on the same day of the month as the original date.
Example: A three-month note dated July 10th, is payable on October 10th.

Interest Calculation
Interest = principal   x   annual interest rate   x   exact days/365 ( i = Prt )
Example: Calculate interest on a $1000, 12%, 90 days note
$1000 x 0.12 x 90/365 = $29.59

Receipt of Note
Date   Cash………….…………………………..……       xx
Notes Receivable……………………………..……              xx
Interest Revenue……………………………..……              xx

To record payment of the note.

End-of-period Interest Adjustment
Accrued interest is computed and recorded when notes receivables are outstanding at the end of an accounting period. This recognizes both the interest revenue when it is earned and the interest receivable owned by the note’s holder.

Date   Interest Receivables………….…………………………..……       xx
Interest Revenue…………………………………..……              xx
To record the issues of a note for extensions of a past due account.

Honoring a Note
Example: Note dated December 16th for $3000, interest rate: 12%, 60 days

Feb. 14 Cash………………………………………………….3059.18
Interest Revenue………………………………………..44.39
Interest Receivable……………………………………..14.79
Notes Receivable………………………………………..3000
Received payment of a note and its interest.

Dishonouring a Note
A note is dishonored when the customer does not pay the note at maturity.
Date Accounts Receivable…………………………………………….xx
Interest Revenue……………………………………………….xx
Notes Receivable……………………………………………….xx
To charge the account for John Smith for a dishonored note including interest.

Important – the ratios (A/R turnover and Days Sales Uncollected) are on the test!

Questions

  • pg 538, #2 to 6
  • pg 551, #10-2B, 10-3B, 10-4B
Answers to problems here and in pdf format if you are having trouble with the word file.

6-2b

chapter 7 questions

Here are the Review Answers for questions 4-6B and 5-12A which I really hope are the questions I assigned you.  If they aren’t, someone email be and I’ll try to post the correct answers.

Next Page »