REVIEW FOR EXAM NO. 3, ACCT-2301 (SAC) (Chapters 7-9)

Transcription

1 REVIEW FOR EXAM NO. 3, ACCT-2301 (SAC) (Chapters 7-9) A. Chapter Internal Control Objectives. a. Safeguards to protect assets. b. Procedures to insure reliable financial reports. c. Methods to insure compliance with laws and regulations. d. Policies to direct operations toward common goals. 2. Control of Cash Receipts. a. Preventive controls (prevent theft and misuse). b. Detective controls (detect theft and misuse). c. Cash Over/Short Account. (1) No normal balance (2) Debit Balance - Miscellaneous Expense on Income Statement (3) Credit Balance - Other Revenue on Income Statement 3. Voucher System. a. Special form for recording relevant data about a liability and details of its payment. b. Supporting Documents: (1) Purchase requisition (2) Purchase order (3) Receiving report (4) Vendor invoice c. Designed to control cash disbursements and acceptance of obligations. 4. Petty Cash. a. Established to avoid writing numerous checks for frequent small purchases. b. Fund should always contain receipts and money equal to the authorized fund amount. c. Entry to Establish a Fund: Jul 5 Petty Cash...$25.00 Cash in Bank... $25.00 d. Entry to Replenish a Fund: (Performed when the fund is depleted, or at least at the end of the accounting period) Jul 19 Postage...$ 7.50 Transportation Expense Office Supplies Misc. General Expense Cash... $

2 5. Cash/Bank Reconciliation. a. Balance on the depositor's books and the balance on the bank statement do not always agree. b. Purpose of the reconciliation is to prove the accuracy of the depositor's and bank's records. Also, it produces the data for adjusting entries. c. Items Causing Differences between Bank and Depositor's Records: (1) Outstanding Checks (written, recorded, and sent, but not paid by bank) (2) Unrecorded Deposits (in-transit) (3) Charges for Service/Uncollectible Items (4) Collections (i.e., promissory notes) (5) Errors (bank and depositor) (6) NSF checks (customer checks returned for non-sufficient funds) d. Bank Reconciliation Example: (1) Statement Preparation: WESTERN SHOP Bank Reconciliation, November 30, 2Oxx Depositor Record Balance...$1,420 Bank Statement Balance...$1,295 Add: Error on Check #8l Add: Deposit of Nov $1,465 $1,610 Deduct: Bank Service Deduct: Outstanding Checks... (150) Charge... ( 5) Adjusted Balance... $1,460 Adjusted Balance... $1,460 (2) General Journal Adjusting Entries: Nov 30 Cash...$45.00 Store Supplies... $45.00 To record adjustment for error in posting a purchase on credit. Nov 30 Bank Service Charges...$ 5.00 Cash... $ 5.00 To record Service charge for collecting a note receivable. C. CHAPTER Valuation of Accounts Receivable. a. Matching Principle recognizes uncollectible receivables (losses) at the time the sales occur. 2

3 b. Bad Debts Expense/Allowance for Bad Debts Accounts is an estimate, since it is not known as to who will default, when, or in what amount. c. Uncollectible Receivables Accounting Methods. (1) Direct Write-Off Method: (a) Does not match revenues and expenses during the accounting period. (b) Acceptable procedure only when the amount is insignificant (not material). (2) Allowance Method: (a) Percentage of Sales (Income Statement Approach): historical bad debt percentage of credit sales for the current period add computed amount to the allowance account (b) Percent of Receivables (Balance Sheet Approach): total receivable amount is multiplied by a historical percentage adjust the allowance account to computed amount (c) Aging/Analysis of Accounts Receivable (Balance Sheet Approach): detailed analysis of outstanding accounts receivable individual accounts adjust the allowance account to computed amount d. Illustrated Entries for Recording Bad Debts Expense: (1) Direct Write-Off Method: 20x1 Mar 27 Bad Debts Expense...$ 360 Accounts Receivable-Mary Spencer... $ 360 To record write-off of an uncollectible account. (2) Allowance Method: 20x1 Dec.31 Bad Debts Expense... $1,810 Allowance for Bad Debts... $1,810 To record estimated amount of uncollectible accounts. 20x2 Mar 27 Allowance for Bad Debts... $ 285 Accounts Receivable-Arno Fall... $ 285 To record write-off of an uncollectible account. 2. Notes Receivable. a. Characteristics: (1) Promissory note written promise to pay. (2) Specific amount of money (face value or principal). (3) Payable at a definite time. (4) Note is a negotiable instrument and can be transferred by endorsement. 3

4 b. Life of a Note: (1) Can be expressed in terms of: (a) Days (b) Months (2) Determination of maturity date. c. Interest: (1) Rate of interest on a note is the rate charged for use of the principal for one year. (2) Formula for calculating interest: ( P x i x t = I ) Example Note ($1,000 note, 9% interest rate, for 120 days) Interest Principal x Rate x Time = Amount $ 1,000 9% 120 Days $30 $1, /360 $30 d. Maturity Value. (Formula: MV = P + I ) The sum of the principle (face) amount and the interest earned. e. Dishonored Note. (1) Maker fails to pay the note on the due date. (2) The maturity value is transferred from Notes Receivable to Accounts Receivable. f. Discounting Notes Receivable: (1) Discount - Interest charged by the bank. (Formula: MV x Di x Dt = DI) (2) Discount Period - Time note held by the bank. (3) Computation of Proceeds: (Formula: MV - DI) (a) (+) Maturity Value (MV) (b) (-) Discount on MV (DI) (c) (=) Proceeds (cash received from bank) g. Journal Entries Related to Notes Receivable: Review entries on Pages Selling Receivables. a. A company can sell all or a portion of their receivables to a bank or financial institution. b. The process is called factoring. c. The buyer is called the factor. d. Example journal entry for sale of receivables (factoring fee - 4%): May 10 Cash... $4,800 Factoring Fee Expense Accounts Receivable... $5,000 Sold accounts receivable. 4

5 C. Chapter Plant Assets. a. Definition - Tangible assets used in business and have a permanent or long life. b. Cost of Plant Assets. (1) All costs necessary to make asset ready for it's intended purpose. (2) Cost of land includes purchase price plus all related fees, commissions, etc. Does not include such items as fencing, sidewalks, paving parking lots, signs, etc., which are depreciable and are accounted for separately as land improvements. 2. Lump-Sum Purchase. a. Single purchase involving several plant asset (i.e., land, building, machinery, etc.) b. Cost allocated on the basis of their relative market values. 3. Depreciation Definition. Allocating to expense, the cost of an asset over it's useful life, in a systematic manner. 4. Accumulated Depreciation - contra-account (subtracts from the related asset account on the face of the Balance Sheet). 5. Depreciation Factors/Considerations. a. Acquisition Cost b. Residual Value (RV), Salvage Value (SV), Trade-In (TI), or ScrapValue (all the same). c. Useful Life d. Depreciable Cost (Cost - Residual Value) e. Book Value (BV) = (Cost - Accumulated Depreciation) 6. Depreciation Methods. a. Information Available: Cost of Machine...$ 20,000 Estimated Residual Value...$ 2,000 Estimated Production (Over life)... 24,000 Units Estimated Useful Life... 5 Years Current Year Production... 5,000 Units b. Straight-Line Depreciation: $ 20,000 - $ 2,000 = $ 3,600/Year 5 Years c. Units of Production Depreciation: (1) Rate Computation: $ 20,000 - $ 2,000 = $.75/Unit 24,000 Units (2) Depreciation: 5,000 Units x $.75 = $ 3,750 5

6 d. Double-Declining-Balance Depreciation: (1) Rate Computation: 100% = 20% (x 2) = 40% 5 Yrs.. (2) Depreciation: Carrying Annual Accum. Yr Amount Factor Deprec. Deprec. 1 $20,000 40% $8,000 $ 8, ,000 40% 4,800 12, ,200 40% 2,880 15, ,320 40% 1,728 17, ,592 40% 592(*) 18,000 (*) Note: You cannot depreciate below the Residual Value of $2,000. The actual computation is $1, but only $592 can be taken as the depreciation amount. 7. Revising Depreciation Estimates. a. Information Available: Cost of Truck...$ 5,000 Residual Value...$ 800 Useful Life...6 Years b. At the end of Year 5, it is determined that: (1) The truck's useful life remaining is now 2 years, instead of 1 year. (2) The new residual value will be $500. c. New Depreciation Calculation. Step (1): Accumulated Depreciation: $5,000 - $800 = $4,200 = $ 700/Year 6 Years 6 5 Years X $700 = $ 3,500 Step (2): Book Value (5th Year): Cost of Truck...$ 5,000 Less: Accumulated Depreciation... (3,500) Book Value...$ 1,500 Step (3): New Useful Life Base: Original Estimated Life... 6 Expired Time (years)... (5) Remaining Original Life... 1 Extension (Additional year)... 1 New Life Base

7 Step (4): Computation of New Depreciation: 8. Capital and Revenue Expenditures. Formula = Book Value - New Residual Value Remaining (New) Useful Life $1,500 - $500 = $500/Year 2 Years a. Revenue Expenditures (Ordinary repairs): (1) Benefits current period only. (2) Maintains the expected productive life of the related asset. (does not add to life) (3) Maintains asset in current working condition. (does not add productive capabilities) (4) Debit expense account. b. Capital Expenditures. (Adds to utility of plant assets for several accounting periods) (1) Additions - enlarges or adds a new feature. (debit asset account) (2) Betterments/Improvements - increases operating efficiency or capacity, but does not always increase an asset s life. (debit asset account) (3) Extraordinary Repairs - extends service/useful life. (debit accumulated depreciation acct) 9. Disposal of Assets. a. Sale. (1) Information Available: Cost of Machine...$5,000 Accumulated Depreciation... 4,200 Cash Received on Sale (2) Journal Entry to Record Sale: Cash...$ 900 Accumulated Depreciation-Machines... 4,200 Machinery... $ 5,000 Gain on Sale of Assets b. Disposal (Discarded). (1) Information Available: (Same as above, except no cash is received) (2) Journal Entry to Record Discarding: Accumulated Depreciation - Machines...$ 4,200 Loss on Disposal of Assets Machinery... $5,000 c. Exchange of Plant Assets. (1) Commercial Substance Definition - An exchange has commercial substance if a firm s future cash flows change as a result of the transaction. 7

8 (2) Commercial Substance Rules: (a) Record gains and losses when commercial substance exists. (b) Gains and losses are absorbed into the cost of the new asset when commercial substance does not exist. d. Trade-In of Asset (With a Gain). (Commercial Substance does not exist) (1) Information Available: Cost of Old Machine...$5,000 Accumulated Depreciation... 4,000 Cost of New Machine... 7,000 Trade-In... 2,000 (2) Computations: Step (1): Gain/Loss Computation: Cost of Old Machine...$ 5,000 Accumulated Depreciation... (4,000) Book Value...$ 1,000 Trade-In... (2,000) Gain on Exchange...$(1,000) Step (2): Cash Paid (Boot): Cost of New Machine...$ 7,000 Less: Trade-In... (2,000) Cash Paid (Boot)...$ 5,000 Step (3): Cost Basis of New Machine: Cash Paid...$ 5,000 Book Value (Old Machine)... 1,000 Cost Basis (New Machine)...$ 6,000 Note: Gains must be absorbed into the cost of the new machine if commercial substance does not exist. (3) Journal Entry to Record Exchange: Check the above computations by the following: Purchase Price (New Machine)...$ 7,000 Gain on Exchange (Old Machine)... (1,000) Cost Basis (New Machine)... $ 6,000 Machinery (New Machine)... $6,000 Accumulated Deprec-Machinery... 4,000 Machinery (Old Machine)... $5,000 Cash... 5,000 8

9 e. Trade-In of Asset (With a Loss). (Commercial Substance exists) (1) Information Available: Same as in Paragraph 1.d.(1) above, except the Trade-In Allowance is $500. (2) Computations: Cost of Old Machine...$ 5,000 Accumulated Depreciation... (4,000) Book Value...$ 1,000 Trade-In Allowance... (500) Loss on Exchange...$ 500 (3) Cash Paid (Boot): Cost of New Machine...$ 7,000 Less: Trade-In Allowance... (500) Cash Paid...$ 6,500 (4) Journal Entry to Record Exchange: Machinery (New Machine)...$7,000 Accumulated Depreciation - Machines... 4,000 Loss on Exchange of Assets Machinery (Old Machine)... $5,000 Cash... 6,500 f. Depreciation account is updated for any partial year use, up to the date of disposal, before recording the disposal of an asset. 10. Journal Entries Related to Acquisition and Disposal of Plant Assets: a. Discarding b. Selling (Gain and Loss) c. Exchange (Gain/Loss) 11. Natural Resources. a. Long-term assets. b. Physically extracted in operations and is not replaced. Referred to as wasting assets. c. Depleted based on units of production (similar to depreciation). d. Depletion is recorded by charging to an expense account and crediting an accumulated depletion account. e. Data: Cost...$400,000 Depletion Calculation: Salvage Value...$ 20,000 $400,000 - $20,000 = $0.38 per ton Est. Production...1,000,000 tons 1,000,000 tons st 1 year Production... 90,000 tons 90,000 x $0.38 = $34,200 f. Journal Entry: Depletion Expense...$ 34,200 Accumulated Depletion - Coal... $ 34,200 g. Natural Resources are reflected on the Balance Sheet at cost, less accumulated depletion. 9

10 12. Intangible Assets. a. Assets that have no physical existence, but have value. b. Examples. (1) Patents (3) Goodwill (2) Copyrights (4) Trademarks c. Amortization - Write-off of intangible assets to expense, over their useful life. Write-offs are made to expense and the asset account direct: d. Patents. (1) Gives owner/inventor exclusive rights for a period of 20 years. (2) These assets are amortized over the useful life, not to exceed 20 years (cost / useful life = $5,500 / 10 years = $550) (3) Journal Entry: Patents Expense...$ 550 Patents... $550 e. Goodwill. (1) The value of all favorable attributes that are related to a business as a whole. A business is said to have goodwill when it's rate of expected future earnings is greater than that normally expected in the industry. (2) Recorded only when there is an exchange transaction that involves the purchase of an entire business and the price paid exceeds the fair market value of the net assets acquired. (3) Goodwill is not amortized. It is tested annually to determine if there is any impairment of its value. f. Copyrights. (1) Gives the artist, author, composer, etc. the exclusive right to publish and sell musical, literary, or artistic works, during the life of the creator and for 70 years thereafter. (2) Amortized over its useful life. (cost / useful life = $15,000 / 20 years = $750) (3) Journal Entry: Copyright Expense...$ 750 Copyrights... $750 10