6 questions about accounting (MBA)

Chapter 06Reporting and Analyzing
Cash and Internal Controls
C1
Control of Cash
An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines:
Handling cash is
separate from
recordkeeping of
cash.
Cash receipts are
promptly deposited
in a bank.
Cash
disbursements are
made by check.
6-2
C2
Cash, Cash Equivalents, and
Liquidity
Cash
Currency, coins, and amounts on deposit in
bank accounts, checking accounts, and
many savings accounts. Also includes items
such as customer checks, cashier checks,
certified checks, and money orders.
Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
2. Close to maturity date and not sensitive to
interest rate changes.
6-3
C2
Cash, Cash Equivalents, and
Liquidity
Liquidity
How easily an asset can be converted into
cash to be used to pay for services or
obligations.
Inventory
Cash
6-4
C2
Cash Management Principles
When companies fail, one of the most
common causes is their inability to
manage cash. The goals of cash
management are twofold:
◼ Plan cash receipts to meet cash
payments when due.
◼ Keep the minimum level of cash
necessary to operate.
6-5
P1
Control of Cash Receipts
Over-the-Counter
Cash Receipts
◼
◼
Cash register with
locked-in record of
transactions.
Compare cash
register record with
cash reported.
6-6
Control of Cash Disbursements
P1
◼
◼
◼
All expenditures should be made by check.
The only exception is for small payments
from petty cash.
Separate authorization for check signing
and recordkeeping duties.
Use a voucher system.
6-7
P2
Petty Cash System of Control
Small payments required in most
companies for items such as postage,
courier fees, repairs, and supplies.
6-8
P2
Operating a Petty Cash Fund
Petty Cash
Company
Cashier
Petty
Cashier
May 1
Petty cash
Cash
400
400
Accountant
6-9
P2
Operating a Petty Cash Fund
Petty Cash
Petty
Cashier
6-10
P2
Operating a Petty Cash Fund
A petty cash fund
is used only for
business
expenses.
Petty
Cashier
39¢
Stamps
$45
Courier
$80
6-11
P2
Operating a Petty Cash Fund
Petty cash
receipts with
either no
signature or a
forged signature
usually indicate
misuse of petty
cash.
Receipts
Petty
Cashier
39¢
Stamps
$45
Courier
$80
6-12
P2
Operating a Petty Cash Fund
Receipts
$125
Company
Cashier
To reimburse
petty cash fund
May 31
Use a Cash
Over and Short
account if needed.
Petty
Cashier
Postage expense
Delivery expense
Cash
45
80
125
Accountant
6-13
P2
Petty Cash Example
Tension Co. maintains a petty cash fund of $400.
The following summary information was taken from
petty cash vouchers for July:
Travel Expenses
Customer Business Lunches
Express Mail Postage
Miscellaneous Office Supplies
$79.30
93.42
55.00
32.48
Let’s look at replenishing the fund if the balance on
July 31 was $137.80.
6-14
P2
Petty Cash Example
What amount of cash will be required
to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
6-15
Petty Cash Example
P2
What amount of cash will be
required to replenish the petty
cash fund?
a.
b.
c.
d.
$260.20
$262.20
$139.80
$137.80
Desired balance
Actual balance
Amount needed
$ 400.00
137.80
$ 262.20
Let’s prepare the journal entry to replenish the
petty cash fund.
6-16
P2
Petty Cash Example
Journal entry to replenish petty cash fund
Dr.
July 31 Travel Expense
79.30
Entertainment Expense
93.42
Postage Expense
55.00
Office Supplies Expense
32.48
Cash Over and Short
2.00
Cash
Cr.
262.20
6-17
Bank Reconciliation
P3
A bank reconciliation is prepared periodically to explain the
difference between cash reported on the bank statement and the
cash balance on company’s books.
Bank Statement
First National Bank
Nashville, TN 37459
May 31, 2011
*
Clothes Mart
Nashville, TN
Why are the
balances different?
Acct No 278609
Previous
Balance
Total Checks
1488.79
5/1
5/2
1,367.09
107
5/4
5/7
5/9
5/12
108
109
110
111
Total
Deposits
2,604.22
55.00
Current
Balance
2,725.92
Account: Cash
GENERAL LEDGER
Acct. No.
1,251.88
279.50
44.75
21.81
37.55
5/15
5/18
5/21
5/27
5/30
112
113
114
175.98
288.31
12.54
5/31
115
451.65
Date
Item
May 31 Balance
PR
Debit
Credit
102
Balance
DR (CR)
2,481.18
825.04
527.30
6-18
P3
Reconciling Items
Bank Statement Balance
⚫ Add:
Deposits in transit.
⚫ Deduct:
Outstanding
checks
⚫ Add or Deduct:
Bank errors.
•
•
•
•
•
Book Balance
Add: Collections
made by the bank.
Add: Interest earned
on checking account.
Deduct:
Nonsufficient funds
check (NSF).
Deduct: Bank
service charge.
Add or Deduct:
Book errors.
6-19
P3
Bank Reconciliation
Two sections:
1. Reconcile bank statement balance to
the adjusted bank balance.
2. Reconcile book balance to the adjusted
book balance.
The adjusted balances should be equal.
6-20
P3
Bank Reconciliation Example
Let’s prepare a July 31 bank reconciliation
statement for the Simmons Company.
◼
◼
The July 31 bank statement indicated a
balance of $9,610.
The cash general ledger account on that
date shows a balance of $7,430.
Additional information necessary for the
reconciliation is shown on the next screen.
6-21
P3
Bank Reconciliation Example
1.
Outstanding checks totaled $2,417.
2.
A $500 check mailed to the bank for deposit had not
reached the bank at the statement date.
3.
The bank returned a customer’s NSF check for $225
received as payment on account receivable.
4.
The bank statement showed $30 interest earned during
July.
5.
Check No. 781 for supplies expense cleared the bank for
$268 but was erroneously recorded in our books as $240.
6.
A $486 deposit by Acme Company was erroneously
credited to our account by the bank.
6-22
P3
Bank Reconciliation Example
Simmons Company
Bank Reconciliation
July 31, 2011
Bank Balance, July 31
Add: Deposit in Transit
Less: Bank Error
$
486
Outstanding Checks
2,417
Adjusted Balance, July 31
Book Balance, July 31
Add: Interest
Less: Recording Error
NSF Check
Adjusted Balance, July 31
$
(2,903)
$ 7,207
$
$
9,610
500
28
225
$
7,430
30
(253)
7,207
6-23
P3
Adjusting Entries from a
Bank Reconciliation
Only amounts shown on the book portion
of the reconciliation require an adjusting
entry.
Dr.
30
July 31 Cash
Interest revenue
July 31 Supplies expense
Accounts receivable
Cash
Cr.
30
28
225
253
6-24
P3
Adjusting Entries from a
Bank Reconciliation
After posting the reconciling entries the cash account
looks like this:
Account: Cash
GENERAL LEDGER
Acct. No.
Date
Item
July 31 Balance
31 Adjusting entry
31 Adjusting entry
PR
Debit
Credit
30
253
101
Balance
DR (CR)
7,430
7,460
7,207
Adjusted balance on July 31.
6-25
A1
Days’ Sales Uncollected
How much time is likely to pass before
we receive cash receipts from credit sales?
Days’
=
sales
uncollected
Accounts receivable
Net sales
× 365
6-26
End of Chapter 06
6-27
Chapter 08
Reporting and Analyzing
Long-Term Assets
C1
Plant Assets
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant & Equipment
8-2
C1
Plant Assets
Acquisition
1. Compute cost
Use
2. Allocate cost to periods
benefited
3. Account for subsequent
expenditures
Disposal
4. Record disposal
8-3
C1
Land and Buildings
Land is not a depreciable asset,
but land improvements are.
The cost of buildings include many costs;
the purchase price plus the following:
Cost of purchase or
construction
Title fees
Attorney fees
Brokerage
fees
Taxes
8-4
C1
Machinery and Equipment
Purchase
price
Taxes
Transportation
charges
Installing,
assembling, and
testing
Insurance while
in transit
8-5
C1
Lump-Sum Asset Purchase
The total cost of a combined
purchase of land and building
is separated on the basis of
their relative market values.
On January 1, Matrix, Inc. purchased land and
building for $200,000 cash. The appraised
values are building, $162,500, and land, $87,500.
How much of the $200,000 purchase price will be
charged to the building and land accounts?
8-6
C1
Lump-Sum Asset Purchase
Asset
Appraised
Value
% of
Value
b*
Land
Building
Total
a
$ 87,500
162,500
$ 250,000
Purchase
Price
Apportioned
Cost
c
b × c
35%
35% × $ 200,000 = $ 70,000
65%
65% ×
200,000 =
130,000
100%
100%
$ 200,000
* $87,500
$87,500÷÷$250,000
$250,000==35%
35%
$162,500 ÷ $250,000 = 65%
8-7
P1
Depreciation
Depreciation is the process of allocating
the cost of a plant asset to expense in the
accounting periods benefiting from its use.
Balance Sheet
Acquisition
Cost
(Unused)
Income Statement
Cost
Allocation
Expense
(Used)
8-8
Factors in Computing
Depreciation
P1
The calculation of depreciation requires
three amounts for each asset:
1.
Cost
2.
Salvage value
3.
Useful life
8-9
P1
Depreciation Methods
1.
Straight-line
2.
Units-of-production
3.
Declining-balance
8-10
P1
Straight-Line Method
Depreciation
=
expense for period
Depreciation
=
expense per year
Cost – Salvage value
Useful life
$50,000 – $5,000
= $9,000
5 years
Depreciation Expense
Accumulated Depreciation – Equipment
Dr.
9,000
Cr.
9,000
To record annual depreciation
8-11
P1
Straight-Line Method
Year
2011
2012
2013
2014
2015
Depreciation
Expense
(debit)
Accumulated
Depreciation
(credit)
Accumulated
Depreciation
$
$
$
$
9,000
9,000
9,000
9,000
9,000
45,000
$
9,000
9,000
9,000
9,000
9,000
45,000
9,000
18,000
27,000
36,000
45,000
Book
Value
$ 50,000
41,000
32,000
23,000
14,000
5,000
Salvage
Value
Depreciation
= (100% ÷ 5 years) = 20% per year
Rate
8-12
P1
Units-of-Production Method
Step 1:
Depreciation
per unit
=
Step 2:
Depreciation
expense
=
Cost – Salvage value
Total units of production
Number of
Depreciation
× units produced
per unit
in the period
8-13
P1
Units-of-Production Method
On December 31, 2011, equipment was
purchased for $50,000 cash. The
equipment is expected to produce 100,000
units during its useful life and has an
estimated salvage value of $5,000.
If 22,000 units were produced in 2011, what
is the amount of depreciation expense?
8-14
P1
Units-of-Production Method
Step 1:
Depreciation
=
per unit
$50,000 – $5,000
100,000 units
= $.45 per unit
Step 2:
Depreciation
= $.45 per unit × 22,000 units = $9,900
expense
8-15
P1
Units-of-Production Method
Year
Units
2011
2012
2013
2014
2015
22,000
28,000
32,000
18,000
100,000
Depreciation
Expense
Accumulated
Depreciation
$
$
$
9,900
12,600
14,400
8,100
45,000
9,900
22,500
22,500
36,900
45,000
Book
Value
$ 50,000
40,100
27,500
27,500
13,100
5,000
No depreciation expense if the equipment is idle
8-16
P1
Declining Balance Method
Depreciation
Expense
Early Years
High
Later Years
Low
Repair
Expense
Low
High
Early years’ total expense approximates
later years’ total expense.
8-17
P1
Double-Declining-Balance Method
Step 1:
Straight-line
= 100 % ÷ Useful life = 100% ÷ 5 = 20%
rate
Step 2:
Double-declining= 2 × Straight-line rate = 2 × 20% =
balance rate
40%
Step 3:
Depreciation
=
expense
DoubleBeginning period
×
decliningbook value
balance rate
40% × $50,000 = $20,000 for 2011
8-18
P1
Double-Declining-Balance Method
2011 Depreciation:
40% × $50,000 = $20,000
2012
Depreciation:
40% × ($50,000 – $20,000) = $12,000
8-19
P1
Double-Declining-Balance Method
Year
2011
2012
2013
2014
2015
Depreciation
Expense
Accumulated
Depreciation
$
$
$
20,000
12,000
7,200
4,320
2,592
46,112
Book
Value
$ 50,000
20,000
30,000
32,000
18,000
39,200
10,800
43,520
6,480
46,112
3,888
Below salvage value
8-20
P1
Double-Declining-Balance Method
Year
2011
2012
2013
2014
2015
Depreciation
Expense
Accumulated
Depreciation
$
$
$
20,000
12,000
7,200
4,320
1,480
45,000
20,000
32,000
39,200
43,520
45,000
Book
Value
$ 50,000
30,000
18,000
10,800
6,480
5,000
We usually must force depreciation expense in the
last year so that book value equals salvage value.
8-21
C3
Partial-Year Depreciation
Calculate the straight-line depreciation on
December 31, 2011, for equipment purchased
on June 30, 2011. The equipment cost $75,000,
has a useful life of 10 years and an estimated
salvage value of $5,000.
Depreciation
Depreciation
=
=
=
($75,000 – $5,000) ÷ 10
$7,000 for all 2011
$7,000 × 6/12 = $3,500 for 6
months
8-22
C3
Change in Estimates for
Depreciation
On January 1, 2011, equipment was purchased
that cost $30,000, has a useful life of 10 years, and
no salvage value. During 2014, the useful life was
revised to eight years total (five years remaining).
Calculate depreciation expense for the year ended
December 31, 2011, using the straight-line method.
Book value at
date of change
–
Salvage value at
date of change
Remaining useful life at date of change
8-23
C3
Change in Estimates for
Depreciation
Asset cost
Accumulated depreciation, 12/31/2013
($3,000 per year × 3 years)
Remaining book value
Divide by remaining life
Revised annual depreciation
Dec. 31 Depreciation Expense
Accumulated Depreciation – Equipment
$ 30,000
9,000
$ 21,000
÷ 5
$ 4,200
Dr.
4,200
Cr.
4,200
To record depreciation for 2014
8-24
P1
Reporting Depreciation
Property, plant, and equipment:
Land and buildings
Machinery and equipment
Office furniture and equipment
Land improvements
Total
Less Accumulated depreciation
Net property, plant, and equipment
$ 150,000
200,000
175,000
50,000
$ 575,000
(122,000)
$ 453,000
8-25
C2
Additional Expenditures
Treatment
Financial Statement Effect
Current Current
Statement
Expense Income Taxes
Capital
Balance sheet
Expenditure account debited
Deferred Higher
Revenue
Income statement Currently
Expenditure account debited recognized Lower
Higher
Lower
If the amounts involved are not material, most
companies expense the item.
8-26
C2
Revenue and Capital
Expenditures
Type of
Capital or
Expenditure Revenue
Identifying Characteristics
Ordinary
Revenue 1. Maintains normal operating condition.
Repairs
2. Does not increase productivity.
3. Does not extend life beyond original
estimate.
Betterments
Capital 1. Major overhauls or partial
and
replacements.
Extraordinary
2. Extends life beyond original estimate.
Repairs
8-27
P2
Disposals of Plant Assets
Update depreciation
to the date of disposal
Journalize disposal by:
Recording cash
received (debit)
or paid (credit)
Removing accumulated
depreciation (debit)
Recording a
gain (credit)
or loss (debit)
Removing the
asset cost (credit)
8-28
P2
Discarding Plant Assets
Update
depreciation
If Cash > BV,
record
a gain (credit)
to the date of disposal.
If Cash < BV, record a loss (debit) If Cash =Journalize BV, no gain or loss disposal by: Recording cash received (debit) or paid (credit) Removing accumulated depreciation (debit) Recording a gain (credit) or loss (debit) Removing the asset cost (credit) 8-29 P2 Disposal of Assets On September 30, 2011, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 2009. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years. Annual depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to September 30, 2011:9/12 × $8,000 = $6,000 Dr. Sep. 30 Depreciation Expense 6,000 Accumulated Depreciation - Machine Cr. 6,000 To update depreciation to date of disposal 8-30 P2 Determine Book Value of Asset Cost $ 100,000 Accumulated depreciation: ( 3 yrs. × $8,000) + $6,000 = 30,000 Book value $ 70,000 8-31 P2 Determine Gain or Loss on Disposal If Cash > BV, record a gain (credit)
If Cash < BV, record a loss (debit) If Cash = BV, no gain or loss Cost Accumulated depreciation $ 100,000 30,000 Book value Cash received Loss on disposal 70,000 60,000 $ (10,000) 8-32 P2 Record the Disposal in the Journal Dr. Sep. 30 Cash 60,000 Accumulated Depreciation - Machine 30,000 Loss on Disposal of Asset 10,000 Machine Cr. 100,000 To record disposal of equipment 8-33 P3 Natural Resources: Cost Determination and Depletion Step 1: Depletion per unit = Cost - Salvage value Total units of capacity Step 2: Depletion expense = Depletion per unit Units extracted × and sold in period 8-34 P3 Depletion of Natural Resources Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore. 8-35 P3 Depletion Expense Step 1: Depletion per unit = $1,000,000 - $0 40,000 tons = $25 per ton Step 2: Depletion = $25 per ton expense × 13,000 units = $325,000 8-36 P4 Intangible Assets Noncurrent assets without physical substance Often provide exclusive rights or privileges Intangible Assets Useful life is often difficult to determine Usually acquired for operational use 8-37 P4 Cost Determination and Amortization Record at current cash equivalent cost, including purchase price, legal fees, and filing fees o o o o o o o Patents Copyrights Leaseholds Leasehold improvements Franchises & licenses Goodwill Trademarks & trade names 8-38 P4 Types of Intangibles Patents The exclusive right granted to its owner to manufacture and sell a patented item or use a process for 20 years. A patent is generally amortized, using the straight-line method, over its useful life, not to exceed 20 years. Matrix, Inc. purchased a patent for $10,000. The patent is expected to have a useful life of 10 years. Amortization Expense - Patents Accumulated Amortization - Patents Dr. 1,000 Cr. 1,000 To amortize patent costs 8-39 P4 Types of Intangibles Copyrights The exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years. Leaseholds The rights the lessor grants to the lessee under the terms of a lease. Most leases have a determinable life. 8-40 P4 Types of Intangibles Leasehold Improvements A lessee may pay for alterations or improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease. Franchises and Licenses The right granted by a company or the government to deliver a product or service under specified conditions. Trademarks and Trade Names A symbol, name, phrase, or jingle identified with a company, product, or service. 8-41 P4 Goodwill Goodwill Occurs when one company buys another company Only purchased goodwill is an intangible asset Goodwill is not amortized. It is tested each year to determine if there has been any impairment in carrying value. 8-42 A1 Total Asset Turnover Total asset turnover = Net sales Average total assets Provides information about a company’s efficiency in using its assets 8-43 End of Chapter 08 8-44 Chapter 7 Reporting and Analyzing Receivables 7-1 C1 Accounts Receivable ◼ ◼ Amounts due from customers for credit sales. Credit sales require:  Maintaining a separate account receivable for each customer.  Accounting for bad debts that result from credit sales. 7-2 C1 Sales on Credit On July 16, Barton, Co. sells $950 of merchandise on credit to Webster, Co., and $1,000 of merchandise on account to Matrix, Inc. Jul. 16 Accounts Receivable - Webster Sales 950 950 To record credit sales to Webster Co. Accounts Receivable - Matrix Sales 1,000 1,000 To record credit sales to M atrix, Inc. 7-3 C1 Sales on Credit Accounts Receivable Ledger Webster, Co. Date PR Debit Credit Jul. 16 950 Balance 950 Matrix, Inc. Date PR Debit Credit Jul. 16 1,000 Balance 1,000 Schedule of Accounts Receivable Webster, Co. $ 950 Matrix, Inc. 1,000 Total $ 1,950 General Ledger Accounts Receivable Date PR Debit Credit Balance Jul. 16 1,950 1,950 7-4 C1 Sales on Credit On July 31, Barton, Co. collects $500 from Webster, Co., and $800 from Matrix, Inc. on account. Jul. 31 Cash 500 Accounts Receivable - Webster 500 To record cash collections on account Cash Accounts Receivable - Matrix 800 800 To record cash collections on account 7-5 C1 Sales on Credit Accounts Receivable Ledger Webster, Co. Date PR Debit Credit Jul. 16 950 Jul. 31 500 Balance 950 450 Matrix, Inc. Date PR Debit Credit Jul. 16 1,000 Jul. 31 800 Balance 1,000 200 Schedule of Accounts Receivable Webster, Co. $ 450 Matrix, Inc. 200 Total $ 650 General Ledger Accounts Receivable Date PR Debit Credit Balance Jul. 16 1,950 1,950 Jul. 31 1,300 650 7-6 P1/P2 Valuing Accounts Receivable Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two methods of accounting for bad debts:  Direct write-off method  Allowance method 7-7 P1 Direct Write-Off Method On August 4, Barton determines it cannot collect $350 from Martin, Inc., a credit customer. Aug. 4 Bad Debts Expense Accounts Receivable - Martin DR 350 CR 350 To write off uncollectible account 7-8 P1 Direct Write-Off Method On September 9, Martin decides to pay $200 that was previously written off. Sep. 9 Accounts Receivable - Martin Bad Debts Expense DR 200 CR 200 To reinstate account previously written-off Sep. 9 Cash 200 Accounts Receivable - Martin 200 To record payment on account 7-9 P1 Matching vs. Materiality The matching principle requires expenses to be reported in the same accounting period as the sales they help produce. The materiality constraint states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions. 7-10 P2 Allowance Method At the end of each period, estimate total bad debts expected to be realized from that period’s sales. There are two advantages to the allowance method: 1. It records estimated bad debts expense in the period when the related sales are recorded. 2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. 7-11 P2 Recording Bad Debts Expense At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2011, is $278,000. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts DR 3,000 CR 3,000 To record estimated bad debts Contra-asset account Bal. Accounts Receivable 278,000 Allowance for Doubtful Accounts Dec. 31 3,000 7-12 P2 Recording Bad Debts Expense At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2011, is $278,000. Barton, Co. Partial Balance Sheet December 31, 2011 Cash Accounts receivable Less: Allowance for doubtful accounts $ 278,000 3,000 $ 275,000 7-13 P2 Estimating Bad Debts Expense Two Methods 1. Percent of Sales Method; and 2. Accounts Receivable Methods Percent of Accounts Receivable Method Aging of Accounts Receivable Method. 7-14 P2 Percent of Sales Method Bad debts expense is computed as follows: Current Period Sales × Bad Debt % = Estimated Bad Debts Expense Barton has credit sales of $1,400,000 in 2011. Management estimates 0.5% of credit sales will eventually prove uncollectible. What is bad debts expense for 2011? 7-15 P2 Percent of Sales Method $ × = $ 1,400,000 0.50% 7,000 Barton’s accountant computes estimated Bad Debts Expense of $7,000. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts DR 7,000 CR 7,000 To record estimated bad debts 7-16 P2 Percent of Accounts Receivable Method  Compute the estimate of the allowance for doubtful accounts. Year-end Accounts Receivable × Bad Debt %  Bad debts expense is computed as: Estimated Adj. Bal. in Allowance for Doubtful Accounts - Unadj. Year-End Bal. in Allowance for Doubtful Accounts = Estimated Bad Debts Expense 7-17 P2 Percent of Accounts Receivable Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for Doubtful Accounts on December 31, 2011. Past experience suggests that 4% of receivables are uncollectible. What is Barton’s bad debts expense for 2011? 7-18 P2 Percent of Accounts Receivable Desired balance in Allowance for Doubtful Accounts. $ 100,000 × 4.00% = $ 4,000 Allowance for Doubtful Accounts 900 Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts 3,100 4,000 DR 3,100 CR 3,100 To record estimated bad debts 7-19 P2 Aging of Accounts Receivable Method  Each receivable is grouped by how long it is past its due date.  Each age group is multiplied by its estimated bad debts percentage.  Estimated bad debts for each group are totaled. 7-20 P2 Aging of Accounts Receivable Barton, Co. Schedule of Accounts Receivable by Age December 31, 2011 Accounts Estimated Receivable Percent Uncollectible Days Past Due Balance Uncollectible Amount   Not Yet Due 1 - 30 Days Past Due 31 - 60 Days Past Due 61 - 90 Days Past Due Over 90 Days Past Due  $ 64,500 18,500 10,000 3,900 3,100 $ 100,000 1% $ 3% 7% 40% 60% $ 645 555 700 1,560 1,860 5,320 7-21 P2 Aging of Accounts Receivable Barton’s unadjusted balance in the allowance account is $900. Allowance for Doubtful Accounts 900 4,420 5,320 We estimated the proper balance to be $5,320. DR Dec. 31 Bad Debts Expense 4,420 Allowance for Doubtful Accounts CR 4,420 To record estimated bad debts 7-22 P2 Writing Off a Bad Debt With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts. Barton determines that Martin’s $300 account is uncollectible. Dec. 31 Allowance for Doubtful Accounts Accounts Receivable - Martin DR 300 CR 300 To write-off an uncollectible account 7-23 P2 Recovery of a Bad Debt Subsequent collections on accounts written off require that the original write-off entry be reversed before the cash collection is recorded. Feb. 8 Accounts Receivable - Martin Allowance for Doubtful Accounts DR 300 CR 300 To reinstate account previously written off Feb. 8 Cash 300 Accounts Receivable - Martin 300 To record full payment on account 7-24 P2 Summary % of Sales % of Receivables Aging of Receivables Emphasis on Matching Emphasis on Realizable Value Emphasis on Realizable Value Accts. Rec. Accts. Rec. Sales Bad Debts Exp. Income Statement Focus All. for Doubtful Accts. Balance Sheet Focus All. for Doubtful Accts. Balance Sheet Focus 7-25 C2 Notes Receivable $1,000.00 Term Payee July 10, 2011 Ninety days after date I promise to pay to Principal the order of Barton Company, Los Angeles, CA One thousand and no/100 --------------------------------- Dollars Payable at First National Bank of Los Angeles, CA Maker Interest Rate 12% per annum Value received with interest at No. 42 Due Oct. 8, 2011 Julia Browne Due Date 7-26 C2 Principal of the note Interest Computation × Annual interest rate Even for maturities less than one year, the rate is annualized. Time × expressed in years = Interest If the note is expressed in days, base a year on 360 days. 7-27 C2 Computing Maturity and Interest On March 1, 2011, Matrix, Inc. purchased a copier for $12,000 from Office Supplies, Inc. Matrix gave Office Supplies a 9% note due in 90 days in payment for the copier. What is the maturity date of the note? 7-28 C2 Computing Maturity and Interest Days in March Minus the date of the note Days remaining in March Days in April Days in May to maturity Period of the note in days 31 1 30 30 30 90 The note is due and payable on May 30, 2011. How much interest will Matrix pay to Office Supplies, Inc. on this note? 7-29 C2 Computing Maturity and Interest Principal of the note × Annual interest rate $ 12,000 × 9% Time × expressed = Interest in years × 90/360 = $ 270 Total interest due at May 30. 7-30 P3 Recognizing Notes Receivable Here are the entries to record the note on March 1, and the settlement on May 30, 2011. Mar. 1 Notes Receivable Sales DR 12,000 CR 12,000 Sold goods in exchange for note DR 12,270 May 30 Cash Interest Revenue Notes Receivable CR 270 12,000 Collected note and interest due 7-31 P3 Recording a Dishonored Note On May 30, 2011, Matrix informs us that the company is unable to pay the note or interest. Accounts Receivable - Matrix Interest revenue Notes Receivable 12,270 270 12,000 To charge accounts receivable for dishonored note 7-32 C3 Disposing of Receivables Companies sometimes want to convert receivables to cash before they are due. ◼ They can sell or factor receivables. ◼ They may pledge receivables as security for a loan. ◼ 7-33 A1 Accounts Receivable Turnover This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Accounts receivable turnover = Net sales Average accounts receivable, net 7-34 End of Chapter 7 7-35 College of Administration and Finance Sciences Assignment (2) Deadline: Saturday 27/07/2024 @ 23:59 Course Name: Principles of Accounting Student’s Name: Course Code: ACCT490 Student’s ID Number: Semester: Summer CRN: Academic Year: 1445-6 H For Instructor’s Use only Instructor’s Name: Habiba Moabber Students’ Grade: /30 Level of Marks: High/Middle/Low Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answers must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism. • Submissions without this cover page will NOT be accepted. College of Administration and Finance Sciences Assignment Question(s): (Marks 30) Q1- A. What is a bank reconciliation and why is it important for companies to do it periodically? B. Prepare a Bank Reconciliation Statement for XYZ company that has: • Bank statement of SR9,000. • Cash account of SR7,500. Additional information for the reconciliation: ✓ Deposit in transit. ✓ NSF Check. ✓ Outstanding check. ✓ Collections made by the bank. Required: provide an amount of each information to bring the adjusted balances to be equal (5 Marks). Answer: Q2- Discuss the different methods available to account for bad debts. Assume that you have a company. And the management estimates that 2.5% of sales will be uncollectible. Provide an amount of sales and prepare the journal entry using the percent of sales method (5 Marks). Answer: College of Administration and Finance Sciences Q3- You are a senior accountant and you were approached by an entrepreneur of a small business to provide a consultation regarding depreciation. The entrepreneur does not understand why he should depreciate his companies PPE and what options he has for depreciation. Thus, you are asked to persuade him regarding the importance of depreciation and the different alternatives available for him. Which deprecation method do you recommend and why. (5Marks). Answer: Q4- Sultan Company has credit sales of $2.60 million for year 2016. On December 31, 2016, the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $14,905. Sultan prepares a schedule of its December 31, 2016, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here. (5Marks). December 31, 2011 Accounts Receivable Age of Accounts Receivable Expected Percent Uncollectible $730,000 Not Yet Due 1.25% 354,000 1 to 30 days past due 2.00% 76,000 31 to 60 days past due 6.50% 48,000 61 to 90 days past due 32.75% 12,000 over 90 days past due 67.00% Calculate: 1. Using the aging of accounts receivable method, find the estimate the required balance of the Allowance for Doubtful Accounts at December 31, 2016. 2. Prepare the adjusting entry to record bad debts. College of Administration and Finance Sciences Answer: Q5- Use the following financial statements to calculate any five different financial ratios and give your opinion about each one. Important note: last period’s numbers equals current period’s numbers less $5,000. This applies to all totals in the below financial statements. (5 Marks) College of Administration and Finance Sciences College of Administration and Finance Sciences Answer: Q6- Why would corporations offer stock dividends? What are the different methods to account for stock dividends? Support your answer with proper numeric examples. Write no less than 300 words. (5 Marks) Answer: Chapter 06 Reporting and Analyzing Cash and Internal Controls C1 Control of Cash An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separate from recordkeeping of cash. Cash receipts are promptly deposited in a bank. Cash disbursements are made by check. 6-2 C2 Cash, Cash Equivalents, and Liquidity Cash Currency, coins, and amounts on deposit in bank accounts, checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders. Cash Equivalents Short-term, highly liquid investments that are: 1. Readily convertible to a known cash amount. 2. Close to maturity date and not sensitive to interest rate changes. 6-3 C2 Cash, Cash Equivalents, and Liquidity Liquidity How easily an asset can be converted into cash to be used to pay for services or obligations. Inventory Cash 6-4 C2 Cash Management Principles When companies fail, one of the most common causes is their inability to manage cash. The goals of cash management are twofold: ◼ Plan cash receipts to meet cash payments when due. ◼ Keep the minimum level of cash necessary to operate. 6-5 P1 Control of Cash Receipts Over-the-Counter Cash Receipts ◼ ◼ Cash register with locked-in record of transactions. Compare cash register record with cash reported. 6-6 Control of Cash Disbursements P1 ◼ ◼ ◼ All expenditures should be made by check. The only exception is for small payments from petty cash. Separate authorization for check signing and recordkeeping duties. Use a voucher system. 6-7 P2 Petty Cash System of Control Small payments required in most companies for items such as postage, courier fees, repairs, and supplies. 6-8 P2 Operating a Petty Cash Fund Petty Cash Company Cashier Petty Cashier May 1 Petty cash Cash 400 400 Accountant 6-9 P2 Operating a Petty Cash Fund Petty Cash Petty Cashier 6-10 P2 Operating a Petty Cash Fund A petty cash fund is used only for business expenses. Petty Cashier 39¢ Stamps $45 Courier $80 6-11 P2 Operating a Petty Cash Fund Petty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash. Receipts Petty Cashier 39¢ Stamps $45 Courier $80 6-12 P2 Operating a Petty Cash Fund Receipts $125 Company Cashier To reimburse petty cash fund May 31 Use a Cash Over and Short account if needed. Petty Cashier Postage expense Delivery expense Cash 45 80 125 Accountant 6-13 P2 Petty Cash Example Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July: Travel Expenses Customer Business Lunches Express Mail Postage Miscellaneous Office Supplies $79.30 93.42 55.00 32.48 Let’s look at replenishing the fund if the balance on July 31 was $137.80. 6-14 P2 Petty Cash Example What amount of cash will be required to replenish the petty cash fund? a. $260.20 b. $262.20 c. $139.80 d. $137.80 6-15 Petty Cash Example P2 What amount of cash will be required to replenish the petty cash fund? a. b. c. d. $260.20 $262.20 $139.80 $137.80 Desired balance Actual balance Amount needed $ 400.00 137.80 $ 262.20 Let’s prepare the journal entry to replenish the petty cash fund. 6-16 P2 Petty Cash Example Journal entry to replenish petty cash fund Dr. July 31 Travel Expense 79.30 Entertainment Expense 93.42 Postage Expense 55.00 Office Supplies Expense 32.48 Cash Over and Short 2.00 Cash Cr. 262.20 6-17 Bank Reconciliation P3 A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books. Bank Statement First National Bank Nashville, TN 37459 May 31, 2011 * Clothes Mart Nashville, TN Why are the balances different? Acct No 278609 Previous Balance Total Checks 1488.79 5/1 5/2 1,367.09 107 5/4 5/7 5/9 5/12 108 109 110 111 Total Deposits 2,604.22 55.00 Current Balance 2,725.92 Account: Cash GENERAL LEDGER Acct. No. 1,251.88 279.50 44.75 21.81 37.55 5/15 5/18 5/21 5/27 5/30 112 113 114 175.98 288.31 12.54 5/31 115 451.65 Date Item May 31 Balance PR Debit Credit 102 Balance DR (CR) 2,481.18 825.04 527.30 6-18 P3 Reconciling Items Bank Statement Balance ⚫ Add: Deposits in transit. ⚫ Deduct: Outstanding checks ⚫ Add or Deduct: Bank errors. • • • • • Book Balance Add: Collections made by the bank. Add: Interest earned on checking account. Deduct: Nonsufficient funds check (NSF). Deduct: Bank service charge. Add or Deduct: Book errors. 6-19 P3 Bank Reconciliation Two sections: 1. Reconcile bank statement balance to the adjusted bank balance. 2. Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. 6-20 P3 Bank Reconciliation Example Let’s prepare a July 31 bank reconciliation statement for the Simmons Company. ◼ ◼ The July 31 bank statement indicated a balance of $9,610. The cash general ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next screen. 6-21 P3 Bank Reconciliation Example 1. Outstanding checks totaled $2,417. 2. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. 3. The bank returned a customer’s NSF check for $225 received as payment on account receivable. 4. The bank statement showed $30 interest earned during July. 5. Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240. 6. A $486 deposit by Acme Company was erroneously credited to our account by the bank. 6-22 P3 Bank Reconciliation Example Simmons Company Bank Reconciliation July 31, 2011 Bank Balance, July 31 Add: Deposit in Transit Less: Bank Error $ 486 Outstanding Checks 2,417 Adjusted Balance, July 31 Book Balance, July 31 Add: Interest Less: Recording Error NSF Check Adjusted Balance, July 31 $ (2,903) $ 7,207 $ $ 9,610 500 28 225 $ 7,430 30 (253) 7,207 6-23 P3 Adjusting Entries from a Bank Reconciliation Only amounts shown on the book portion of the reconciliation require an adjusting entry. Dr. 30 July 31 Cash Interest revenue July 31 Supplies expense Accounts receivable Cash Cr. 30 28 225 253 6-24 P3 Adjusting Entries from a Bank Reconciliation After posting the reconciling entries the cash account looks like this: Account: Cash GENERAL LEDGER Acct. No. Date Item July 31 Balance 31 Adjusting entry 31 Adjusting entry PR Debit Credit 30 253 101 Balance DR (CR) 7,430 7,460 7,207 Adjusted balance on July 31. 6-25 A1 Days’ Sales Uncollected How much time is likely to pass before we receive cash receipts from credit sales? Days’ = sales uncollected Accounts receivable Net sales × 365 6-26 End of Chapter 06 6-27 Chapter 7 Reporting and Analyzing Receivables 7-1 C1 Accounts Receivable ◼ ◼ Amounts due from customers for credit sales. Credit sales require:  Maintaining a separate account receivable for each customer.  Accounting for bad debts that result from credit sales. 7-2 C1 Sales on Credit On July 16, Barton, Co. sells $950 of merchandise on credit to Webster, Co., and $1,000 of merchandise on account to Matrix, Inc. Jul. 16 Accounts Receivable - Webster Sales 950 950 To record credit sales to Webster Co. Accounts Receivable - Matrix Sales 1,000 1,000 To record credit sales to M atrix, Inc. 7-3 C1 Sales on Credit Accounts Receivable Ledger Webster, Co. Date PR Debit Credit Jul. 16 950 Balance 950 Matrix, Inc. Date PR Debit Credit Jul. 16 1,000 Balance 1,000 Schedule of Accounts Receivable Webster, Co. $ 950 Matrix, Inc. 1,000 Total $ 1,950 General Ledger Accounts Receivable Date PR Debit Credit Balance Jul. 16 1,950 1,950 7-4 C1 Sales on Credit On July 31, Barton, Co. collects $500 from Webster, Co., and $800 from Matrix, Inc. on account. Jul. 31 Cash 500 Accounts Receivable - Webster 500 To record cash collections on account Cash Accounts Receivable - Matrix 800 800 To record cash collections on account 7-5 C1 Sales on Credit Accounts Receivable Ledger Webster, Co. Date PR Debit Credit Jul. 16 950 Jul. 31 500 Balance 950 450 Matrix, Inc. Date PR Debit Credit Jul. 16 1,000 Jul. 31 800 Balance 1,000 200 Schedule of Accounts Receivable Webster, Co. $ 450 Matrix, Inc. 200 Total $ 650 General Ledger Accounts Receivable Date PR Debit Credit Balance Jul. 16 1,950 1,950 Jul. 31 1,300 650 7-6 P1/P2 Valuing Accounts Receivable Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two methods of accounting for bad debts:  Direct write-off method  Allowance method 7-7 P1 Direct Write-Off Method On August 4, Barton determines it cannot collect $350 from Martin, Inc., a credit customer. Aug. 4 Bad Debts Expense Accounts Receivable - Martin DR 350 CR 350 To write off uncollectible account 7-8 P1 Direct Write-Off Method On September 9, Martin decides to pay $200 that was previously written off. Sep. 9 Accounts Receivable - Martin Bad Debts Expense DR 200 CR 200 To reinstate account previously written-off Sep. 9 Cash 200 Accounts Receivable - Martin 200 To record payment on account 7-9 P1 Matching vs. Materiality The matching principle requires expenses to be reported in the same accounting period as the sales they help produce. The materiality constraint states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions. 7-10 P2 Allowance Method At the end of each period, estimate total bad debts expected to be realized from that period’s sales. There are two advantages to the allowance method: 1. It records estimated bad debts expense in the period when the related sales are recorded. 2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. 7-11 P2 Recording Bad Debts Expense At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2011, is $278,000. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts DR 3,000 CR 3,000 To record estimated bad debts Contra-asset account Bal. Accounts Receivable 278,000 Allowance for Doubtful Accounts Dec. 31 3,000 7-12 P2 Recording Bad Debts Expense At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2011, is $278,000. Barton, Co. Partial Balance Sheet December 31, 2011 Cash Accounts receivable Less: Allowance for doubtful accounts $ 278,000 3,000 $ 275,000 7-13 P2 Estimating Bad Debts Expense Two Methods 1. Percent of Sales Method; and 2. Accounts Receivable Methods Percent of Accounts Receivable Method Aging of Accounts Receivable Method. 7-14 P2 Percent of Sales Method Bad debts expense is computed as follows: Current Period Sales × Bad Debt % = Estimated Bad Debts Expense Barton has credit sales of $1,400,000 in 2011. Management estimates 0.5% of credit sales will eventually prove uncollectible. What is bad debts expense for 2011? 7-15 P2 Percent of Sales Method $ × = $ 1,400,000 0.50% 7,000 Barton’s accountant computes estimated Bad Debts Expense of $7,000. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts DR 7,000 CR 7,000 To record estimated bad debts 7-16 P2 Percent of Accounts Receivable Method  Compute the estimate of the allowance for doubtful accounts. Year-end Accounts Receivable × Bad Debt %  Bad debts expense is computed as: Estimated Adj. Bal. in Allowance for Doubtful Accounts - Unadj. Year-End Bal. in Allowance for Doubtful Accounts = Estimated Bad Debts Expense 7-17 P2 Percent of Accounts Receivable Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for Doubtful Accounts on December 31, 2011. Past experience suggests that 4% of receivables are uncollectible. What is Barton’s bad debts expense for 2011? 7-18 P2 Percent of Accounts Receivable Desired balance in Allowance for Doubtful Accounts. $ 100,000 × 4.00% = $ 4,000 Allowance for Doubtful Accounts 900 Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts 3,100 4,000 DR 3,100 CR 3,100 To record estimated bad debts 7-19 P2 Aging of Accounts Receivable Method  Each receivable is grouped by how long it is past its due date.  Each age group is multiplied by its estimated bad debts percentage.  Estimated bad debts for each group are totaled. 7-20 P2 Aging of Accounts Receivable Barton, Co. Schedule of Accounts Receivable by Age December 31, 2011 Accounts Estimated Receivable Percent Uncollectible Days Past Due Balance Uncollectible Amount   Not Yet Due 1 - 30 Days Past Due 31 - 60 Days Past Due 61 - 90 Days Past Due Over 90 Days Past Due  $ 64,500 18,500 10,000 3,900 3,100 $ 100,000 1% $ 3% 7% 40% 60% $ 645 555 700 1,560 1,860 5,320 7-21 P2 Aging of Accounts Receivable Barton’s unadjusted balance in the allowance account is $900. Allowance for Doubtful Accounts 900 4,420 5,320 We estimated the proper balance to be $5,320. DR Dec. 31 Bad Debts Expense 4,420 Allowance for Doubtful Accounts CR 4,420 To record estimated bad debts 7-22 P2 Writing Off a Bad Debt With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts. Barton determines that Martin’s $300 account is uncollectible. Dec. 31 Allowance for Doubtful Accounts Accounts Receivable - Martin DR 300 CR 300 To write-off an uncollectible account 7-23 P2 Recovery of a Bad Debt Subsequent collections on accounts written off require that the original write-off entry be reversed before the cash collection is recorded. Feb. 8 Accounts Receivable - Martin Allowance for Doubtful Accounts DR 300 CR 300 To reinstate account previously written off Feb. 8 Cash 300 Accounts Receivable - Martin 300 To record full payment on account 7-24 P2 Summary % of Sales % of Receivables Aging of Receivables Emphasis on Matching Emphasis on Realizable Value Emphasis on Realizable Value Accts. Rec. Accts. Rec. Sales Bad Debts Exp. Income Statement Focus All. for Doubtful Accts. Balance Sheet Focus All. for Doubtful Accts. Balance Sheet Focus 7-25 C2 Notes Receivable $1,000.00 Term Payee July 10, 2011 Ninety days after date I promise to pay to Principal the order of Barton Company, Los Angeles, CA One thousand and no/100 --------------------------------- Dollars Payable at First National Bank of Los Angeles, CA Maker Interest Rate 12% per annum Value received with interest at No. 42 Due Oct. 8, 2011 Julia Browne Due Date 7-26 C2 Principal of the note Interest Computation × Annual interest rate Even for maturities less than one year, the rate is annualized. Time × expressed in years = Interest If the note is expressed in days, base a year on 360 days. 7-27 C2 Computing Maturity and Interest On March 1, 2011, Matrix, Inc. purchased a copier for $12,000 from Office Supplies, Inc. Matrix gave Office Supplies a 9% note due in 90 days in payment for the copier. What is the maturity date of the note? 7-28 C2 Computing Maturity and Interest Days in March Minus the date of the note Days remaining in March Days in April Days in May to maturity Period of the note in days 31 1 30 30 30 90 The note is due and payable on May 30, 2011. How much interest will Matrix pay to Office Supplies, Inc. on this note? 7-29 C2 Computing Maturity and Interest Principal of the note × Annual interest rate $ 12,000 × 9% Time × expressed = Interest in years × 90/360 = $ 270 Total interest due at May 30. 7-30 P3 Recognizing Notes Receivable Here are the entries to record the note on March 1, and the settlement on May 30, 2011. Mar. 1 Notes Receivable Sales DR 12,000 CR 12,000 Sold goods in exchange for note DR 12,270 May 30 Cash Interest Revenue Notes Receivable CR 270 12,000 Collected note and interest due 7-31 P3 Recording a Dishonored Note On May 30, 2011, Matrix informs us that the company is unable to pay the note or interest. Accounts Receivable - Matrix Interest revenue Notes Receivable 12,270 270 12,000 To charge accounts receivable for dishonored note 7-32 C3 Disposing of Receivables Companies sometimes want to convert receivables to cash before they are due. ◼ They can sell or factor receivables. ◼ They may pledge receivables as security for a loan. ◼ 7-33 A1 Accounts Receivable Turnover This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Accounts receivable turnover = Net sales Average accounts receivable, net 7-34 End of Chapter 7 7-35 Chapter 08 Reporting and Analyzing Long-Term Assets C1 Plant Assets Tangible in Nature Actively Used in Operations Expected to Benefit Future Periods Called Property, Plant & Equipment 8-2 C1 Plant Assets Acquisition 1. Compute cost Use 2. Allocate cost to periods benefited 3. Account for subsequent expenditures Disposal 4. Record disposal 8-3 C1 Land and Buildings Land is not a depreciable asset, but land improvements are. The cost of buildings include many costs; the purchase price plus the following: Cost of purchase or construction Title fees Attorney fees Brokerage fees Taxes 8-4 C1 Machinery and Equipment Purchase price Taxes Transportation charges Installing, assembling, and testing Insurance while in transit 8-5 C1 Lump-Sum Asset Purchase The total cost of a combined purchase of land and building is separated on the basis of their relative market values. On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values are building, $162,500, and land, $87,500. How much of the $200,000 purchase price will be charged to the building and land accounts? 8-6 C1 Lump-Sum Asset Purchase Asset Appraised Value % of Value b* Land Building Total a $ 87,500 162,500 $ 250,000 Purchase Price Apportioned Cost c b × c 35% 35% × $ 200,000 = $ 70,000 65% 65% × 200,000 = 130,000 100% 100% $ 200,000 * $87,500 $87,500÷÷$250,000 $250,000==35% 35% $162,500 ÷ $250,000 = 65% 8-7 P1 Depreciation Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use. Balance Sheet Acquisition Cost (Unused) Income Statement Cost Allocation Expense (Used) 8-8 Factors in Computing Depreciation P1 The calculation of depreciation requires three amounts for each asset: 1. Cost 2. Salvage value 3. Useful life 8-9 P1 Depreciation Methods 1. Straight-line 2. Units-of-production 3. Declining-balance 8-10 P1 Straight-Line Method Depreciation = expense for period Depreciation = expense per year Cost - Salvage value Useful life $50,000 - $5,000 = $9,000 5 years Depreciation Expense Accumulated Depreciation - Equipment Dr. 9,000 Cr. 9,000 To record annual depreciation 8-11 P1 Straight-Line Method Year 2011 2012 2013 2014 2015 Depreciation Expense (debit) Accumulated Depreciation (credit) Accumulated Depreciation $ $ $ $ 9,000 9,000 9,000 9,000 9,000 45,000 $ 9,000 9,000 9,000 9,000 9,000 45,000 9,000 18,000 27,000 36,000 45,000 Book Value $ 50,000 41,000 32,000 23,000 14,000 5,000 Salvage Value Depreciation = (100% ÷ 5 years) = 20% per year Rate 8-12 P1 Units-of-Production Method Step 1: Depreciation per unit = Step 2: Depreciation expense = Cost - Salvage value Total units of production Number of Depreciation × units produced per unit in the period 8-13 P1 Units-of-Production Method On December 31, 2011, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000. If 22,000 units were produced in 2011, what is the amount of depreciation expense? 8-14 P1 Units-of-Production Method Step 1: Depreciation = per unit $50,000 - $5,000 100,000 units = $.45 per unit Step 2: Depreciation = $.45 per unit × 22,000 units = $9,900 expense 8-15 P1 Units-of-Production Method Year Units 2011 2012 2013 2014 2015 22,000 28,000 32,000 18,000 100,000 Depreciation Expense Accumulated Depreciation $ $ $ 9,900 12,600 14,400 8,100 45,000 9,900 22,500 22,500 36,900 45,000 Book Value $ 50,000 40,100 27,500 27,500 13,100 5,000 No depreciation expense if the equipment is idle 8-16 P1 Declining Balance Method Depreciation Expense Early Years High Later Years Low Repair Expense Low High Early years’ total expense approximates later years’ total expense. 8-17 P1 Double-Declining-Balance Method Step 1: Straight-line = 100 % ÷ Useful life = 100% ÷ 5 = 20% rate Step 2: Double-declining= 2 × Straight-line rate = 2 × 20% = balance rate 40% Step 3: Depreciation = expense DoubleBeginning period × decliningbook value balance rate 40% × $50,000 = $20,000 for 2011 8-18 P1 Double-Declining-Balance Method 2011 Depreciation: 40% × $50,000 = $20,000 2012 Depreciation: 40% × ($50,000 - $20,000) = $12,000 8-19 P1 Double-Declining-Balance Method Year 2011 2012 2013 2014 2015 Depreciation Expense Accumulated Depreciation $ $ $ 20,000 12,000 7,200 4,320 2,592 46,112 Book Value $ 50,000 20,000 30,000 32,000 18,000 39,200 10,800 43,520 6,480 46,112 3,888 Below salvage value 8-20 P1 Double-Declining-Balance Method Year 2011 2012 2013 2014 2015 Depreciation Expense Accumulated Depreciation $ $ $ 20,000 12,000 7,200 4,320 1,480 45,000 20,000 32,000 39,200 43,520 45,000 Book Value $ 50,000 30,000 18,000 10,800 6,480 5,000 We usually must force depreciation expense in the last year so that book value equals salvage value. 8-21 C3 Partial-Year Depreciation Calculate the straight-line depreciation on December 31, 2011, for equipment purchased on June 30, 2011. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation Depreciation = = = ($75,000 - $5,000) ÷ 10 $7,000 for all 2011 $7,000 × 6/12 = $3,500 for 6 months 8-22 C3 Change in Estimates for Depreciation On January 1, 2011, equipment was purchased that cost $30,000, has a useful life of 10 years, and no salvage value. During 2014, the useful life was revised to eight years total (five years remaining). Calculate depreciation expense for the year ended December 31, 2011, using the straight-line method. Book value at date of change – Salvage value at date of change Remaining useful life at date of change 8-23 C3 Change in Estimates for Depreciation Asset cost Accumulated depreciation, 12/31/2013 ($3,000 per year × 3 years) Remaining book value Divide by remaining life Revised annual depreciation Dec. 31 Depreciation Expense Accumulated Depreciation - Equipment $ 30,000 9,000 $ 21,000 ÷ 5 $ 4,200 Dr. 4,200 Cr. 4,200 To record depreciation for 2014 8-24 P1 Reporting Depreciation Property, plant, and equipment: Land and buildings Machinery and equipment Office furniture and equipment Land improvements Total Less Accumulated depreciation Net property, plant, and equipment $ 150,000 200,000 175,000 50,000 $ 575,000 (122,000) $ 453,000 8-25 C2 Additional Expenditures Treatment Financial Statement Effect Current Current Statement Expense Income Taxes Capital Balance sheet Expenditure account debited Deferred Higher Revenue Income statement Currently Expenditure account debited recognized Lower Higher Lower If the amounts involved are not material, most companies expense the item. 8-26 C2 Revenue and Capital Expenditures Type of Capital or Expenditure Revenue Identifying Characteristics Ordinary Revenue 1. Maintains normal operating condition. Repairs 2. Does not increase productivity. 3. Does not extend life beyond original estimate. Betterments Capital 1. Major overhauls or partial and replacements. Extraordinary 2. Extends life beyond original estimate. Repairs 8-27 P2 Disposals of Plant Assets Update depreciation to the date of disposal Journalize disposal by: Recording cash received (debit) or paid (credit) Removing accumulated depreciation (debit) Recording a gain (credit) or loss (debit) Removing the asset cost (credit) 8-28 P2 Discarding Plant Assets Update depreciation If Cash > BV,
record
a gain (credit)
to the date of disposal.
If Cash < BV, record a loss (debit) If Cash =Journalize BV, no gain or loss disposal by: Recording cash received (debit) or paid (credit) Removing accumulated depreciation (debit) Recording a gain (credit) or loss (debit) Removing the asset cost (credit) 8-29 P2 Disposal of Assets On September 30, 2011, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 2009. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years. Annual depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to September 30, 2011:9/12 × $8,000 = $6,000 Dr. Sep. 30 Depreciation Expense 6,000 Accumulated Depreciation - Machine Cr. 6,000 To update depreciation to date of disposal 8-30 P2 Determine Book Value of Asset Cost $ 100,000 Accumulated depreciation: ( 3 yrs. × $8,000) + $6,000 = 30,000 Book value $ 70,000 8-31 P2 Determine Gain or Loss on Disposal If Cash > BV, record a gain (credit)
If Cash < BV, record a loss (debit) If Cash = BV, no gain or loss Cost Accumulated depreciation $ 100,000 30,000 Book value Cash received Loss on disposal 70,000 60,000 $ (10,000) 8-32 P2 Record the Disposal in the Journal Dr. Sep. 30 Cash 60,000 Accumulated Depreciation - Machine 30,000 Loss on Disposal of Asset 10,000 Machine Cr. 100,000 To record disposal of equipment 8-33 P3 Natural Resources: Cost Determination and Depletion Step 1: Depletion per unit = Cost - Salvage value Total units of capacity Step 2: Depletion expense = Depletion per unit Units extracted × and sold in period 8-34 P3 Depletion of Natural Resources Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore. 8-35 P3 Depletion Expense Step 1: Depletion per unit = $1,000,000 - $0 40,000 tons = $25 per ton Step 2: Depletion = $25 per ton expense × 13,000 units = $325,000 8-36 P4 Intangible Assets Noncurrent assets without physical substance Often provide exclusive rights or privileges Intangible Assets Useful life is often difficult to determine Usually acquired for operational use 8-37 P4 Cost Determination and Amortization Record at current cash equivalent cost, including purchase price, legal fees, and filing fees o o o o o o o Patents Copyrights Leaseholds Leasehold improvements Franchises & licenses Goodwill Trademarks & trade names 8-38 P4 Types of Intangibles Patents The exclusive right granted to its owner to manufacture and sell a patented item or use a process for 20 years. A patent is generally amortized, using the straight-line method, over its useful life, not to exceed 20 years. Matrix, Inc. purchased a patent for $10,000. The patent is expected to have a useful life of 10 years. Amortization Expense - Patents Accumulated Amortization - Patents Dr. 1,000 Cr. 1,000 To amortize patent costs 8-39 P4 Types of Intangibles Copyrights The exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years. Leaseholds The rights the lessor grants to the lessee under the terms of a lease. Most leases have a determinable life. 8-40 P4 Types of Intangibles Leasehold Improvements A lessee may pay for alterations or improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease. Franchises and Licenses The right granted by a company or the government to deliver a product or service under specified conditions. Trademarks and Trade Names A symbol, name, phrase, or jingle identified with a company, product, or service. 8-41 P4 Goodwill Goodwill Occurs when one company buys another company Only purchased goodwill is an intangible asset Goodwill is not amortized. It is tested each year to determine if there has been any impairment in carrying value. 8-42 A1 Total Asset Turnover Total asset turnover = Net sales Average total assets Provides information about a company’s efficiency in using its assets 8-43 End of Chapter 08 8-44 College of Administration and Finance Sciences Assignment (2) Deadline: Saturday 27/07/2024 @ 23:59 Course Name: Principles of Accounting Student’s Name: Course Code: ACCT490 Student’s ID Number: Semester: Summer CRN: Academic Year: 1445-6 H For Instructor’s Use only Instructor’s Name: Habiba Moabber Students’ Grade: /30 Level of Marks: High/Middle/Low Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answers must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism. • Submissions without this cover page will NOT be accepted. • Add at least 3 references (APA style) College of Administration and Finance Sciences Assignment Question(s): (Marks 30) Q1- A. What is a bank reconciliation and why is it important for companies to do it periodically? B. Prepare a Bank Reconciliation Statement for XYZ company that has: • Bank statement of SR9,000. • Cash account of SR7,500. Additional information for the reconciliation: ✓ Deposit in transit. ✓ NSF Check. ✓ Outstanding check. ✓ Collections made by the bank. Required: provide an amount of each information to bring the adjusted balances to be equal (5 Marks). Answer: Q2- Discuss the different methods available to account for bad debts. Assume that you have a company. And the management estimates that 2.5% of sales will be uncollectible. Provide an amount of sales and prepare the journal entry using the percent of sales method (5 Marks). Answer: College of Administration and Finance Sciences Q3- You are a senior accountant and you were approached by an entrepreneur of a small business to provide a consultation regarding depreciation. The entrepreneur does not understand why he should depreciate his companies PPE and what options he has for depreciation. Thus, you are asked to persuade him regarding the importance of depreciation and the different alternatives available for him. Which deprecation method do you recommend and why. (5Marks). Answer: Q4- Sultan Company has credit sales of $2.60 million for year 2016. On December 31, 2016, the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $14,905. Sultan prepares a schedule of its December 31, 2016, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here. (5Marks). December 31, 2011 Accounts Receivable Age of Accounts Receivable Expected Percent Uncollectible $730,000 Not Yet Due 1.25% 354,000 1 to 30 days past due 2.00% 76,000 31 to 60 days past due 6.50% 48,000 61 to 90 days past due 32.75% 12,000 over 90 days past due 67.00% Calculate: College of Administration and Finance Sciences 1. Using the aging of accounts receivable method, find the estimate the required balance of the Allowance for Doubtful Accounts at December 31, 2016. 2. Prepare the adjusting entry to record bad debts. Answer: Q5- Use the following financial statements to calculate any five different financial ratios and give your opinion about each one. Important note: last period’s numbers equals current period’s numbers less $5,000. This applies to all totals in the below financial statements. (5 Marks) College of Administration and Finance Sciences College of Administration and Finance Sciences Answer: Q6- Why would corporations offer stock dividends? What are the different methods to account for stock dividends? Support your answer with proper numeric examples. Write no less than 300 words. (5 Marks) Answer: