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EXAM REVIEW
ACCOUNTING 101 - UNIT III - CHAPTERS 7, 8 & 9
STUDY SUGGESTIONS
Review your class notes, homework exercises and problems. Be sure to review any chapter appendicies assigned on the General Course Outline. Review Demonstration Problem, Summary and Key Terms at the end of each chapter. Answer the Multiple Choice Quiz at the end of each chapter. Answer Multiple Choice Quiz A and B on the textbook website www.mhhe.com/wild. Know accounting terms and concepts by answering the Discussion Questions at the end of each chapter. Know the account classification (i.e. asset, liability, or owner's equity) and normal balance of all accounts. Know the what the financial ratios mean and how to calculate them. Other online help is available ay a variety of sites such as: http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html http://www.simplestudies.com/
Chapter 7 – Accounting for Receivables Explain the difference between the direct write-off method and the allowance method. Journalize the entries for the allowance method of accounting for uncollectible accounts. Estimate uncollectible accounts expense based on sales and based on an analysis (aging) of receivables. Journalize the entries for the direct write off of uncollectible receivables. Journalize the entries for the write off of uncollectible receivables using the allowance method. Journalize the entries for notes receivable transactions. Journalize the entries to write off of dishonored notes receivable. Journalize accrued interest revenue prior to maturity date. Calculate interest revenue at the maturity date and at an interim date, the term of the note and the maturity date of the note. Know the different methods of selling receivables. Compute days’ sales outstanding (uncollected) and accounts receivable turnover.
Chapter 8 - Accounting for Long-Term Assets Know how to determine the cost of long-term assets. Know how to classify fixed asset costs as either capital expenditures or revenue expenditures (operating expenses).
Revised September 2007 Compute depreciation expense the using straight-line, the units-of-production, and the declining-balance methods. Adjust depreciation expense calculations when the asset is owned for less than a full year (partial year depreciation). Compute and journalize adjustments to depreciation for changes in estimates, such as salvage value or useful life. Compute depletion expense and journalize the entry for depletion of natural resources. Journalize entries for acquiring and amortizing intangible assets, such as patents and copyrights. Journalize entries for the disposal of fixed assets: Discarding assets Selling assets Exchanging assets for similar assets Compute total asset turnover.
Chapter 9 – Accounting for Current Liabilities Liabilities are probable future payments for which there are current obligations to pay due to the occurrence of past events. Understand the difference between current and long-term liabilities. Understand the different types of current liabilities: Determinable - known and determinable in amount Estimated – known and the amount can be reasonably estimated Contingent - depends upon a probable future event occurring; amount may be known or reasonably estimated Journalize employer payroll taxes and employee payroll deductions. Journalize the entries for notes payable transactions. Journalize accrued interest expense prior to maturity date. Calculate interest expense at the maturity date and at an interim date, the term of the note and the maturity date of the note. Journalize other accrued liabilities such as warranties, vacation, bonus and deferred revenue. Compute the times interest earned ratio.
Problem 3 - Estimated uncollectible amounts based on analysis (aging) of receivables Before the year-end adjustment the Allowance for Doubtful Accounts has a debit balance of $5,000. Using the aging of receivables method, the desired balance of the Allowance for Doubtful Accounts is estimated as $35,000.
a. What is the uncollectible accounts expense for the period?
b. What is the journal entry required?
c. What is the balance of the Allowance for Doubtful Accounts after adjustment?
d. If the accounts receivable balance is $325,000, what is the net realizable value of the receivables after adjustment?
Problem 4 - Entries for receipt and dishonor of note receivable A 60-day, 12% note for $15,000, dated March 1 is received from a customer on account. The maker dishonors the note at maturity. a. What is the journal entry to record the receipt of the note?
b. What is the maturity date of the note?
c. What is the maturity value of the note?
d. What is the journal entry to record the dishonor of the note receivable?
Problem 5 - Compute Accounts receivable turnover and the number of day's sales in receivables The Nicholas Company had net sales on account of $6,570,000 during 1998. The beginning and ending accounts receivable were $475,000 and 535,000 respectively.
a. Compute accounts receivable turnover for 1998
b. Compute the number of days' sales in receivables at year-end.
Problem 6 - Straight-line depreciation A machine with a cost of $50,000 has an estimated residual value of $5,000 and an estimated useful life of 5 years. What is the amount of annual depreciation computed by the straight-line method?
Problem 7 - Depreciation by the units-of-production method A truck that cost $40,000 has a residual value of $5,000 and an estimated useful life of 100,000 miles. a. Compute the depreciation rate per mile.
b. Compute the first year's depreciation if the truck was driven 12,000 miles?
Problem 8 - Depreciation by the declining-balance method Production equipment acquired at the beginning of the year at a cost of $85,000 has an estimated residual value of $10,000 and an estimated useful life of 10 years. It is depreciated using the declining-balance method at twice the straight-line rate. a. What is the depreciation expense for the first year?
b. What is the depreciation expense for the second year?
Problem 9 - Disposal of fixed asset A metal stamping machine acquired on January 1, 1990 at a cost of $ 55,000 had an estimated residual value of $ 5,000 and an estimated life of 10 years. It was sold on July 1, 1998 for $ 10,000. a. What was the annual depreciation using the straight-line method?
b. What was the book value on July 1, 1998 when it was sold?
c. Journalize the entry to record the sale, including the depreciation for the current year.
Problem 10 - Asset trade for similar asset A truck with a cost of $35,000 and accumulated depreciation of $32,500 is traded for a new truck priced at $ 45,000 with a trade-in allowance of $ 5,000. a. What is the book value of the old truck?
b. What is the cost of the new truck for financial reporting purposes?
c. What is the journal entry to record the purchase?
series of four concerts beginning November 5. Record the journal entries for October 31 and for the second concert on November 6.
Problem 17 –Income Taxes Snavely Company accrues income taxes each quarter based on the expected tax rate for the year. Through September (9 months), income before income taxes was $1,000, and the estimated tax rate was 30%. Snavely had an excellent 4th^ quarter, and by December 31, income before income taxes had doubled. The tax rate had increased to 40% for the year. The taxes will be paid during January of the following year. Prepare the journal entry Snavely should record on December 31.
Problem 18- Entries for a note payable The company purchases inventory using a 60-day, 12% note for $15,000, dated December 1. The maker honors the note at maturity. a. What is the journal entry to record the issuance of the note?
b. What is the maturity date of the note?
c. What is the maturity value of the note?
d. What is the journal entry on December 31?
e. What is the journal entry on the maturity date?
SOLUTIONS TO SAMPLE PROBLEMS
Problem 1
a. The two methods of accounting for uncollectible receivables are the direct write-off method and the allowance method.
b. The journal entry used to write-off an uncollectible account when using the direct write-off method: Uncollectible Accounts Expense Debit Accounts Receivable Credit
c. The journal entry used to write-off an uncollectible account when using the allowance method: Allowance for Doubtful Accounts Debit Accounts Receivable Credit
d. The journal entry used to reinstate an account when using the direct write-off method: Accounts Receivable Debit Uncollectible Accounts Expense Credit
e. The journal entry used to reinstate an account when using the allowance method: Accounts Receivable Debit Allowance for Doubtful Accounts Credit
f. The two methods used to estimate uncollectible accounts expense when using the allowance method are the estimate based on sales and the estimate based on analysis of receivables.
Problem 2 a. The uncollectible accounts expense for the period is $15,000 (1% of $1,500,000)
b. The journal entry required is: Uncollectible Accounts Expense 15, Allowance for Doubtful Accounts 15,
c. The balance of the Allowance after adjustment is $40,000. (25,000 + 15,000)
d. The net realizable value after adjustment is $285,000. (325,000 - 40,000)
Problem 8 Depreciation by the declining-balance method a. First year: 20% of $85,000 = $17, b. Second year: 20% of ($85,000 - $17,000) = $13,
Problem 9 - Disposal of fixed asset a. ($55,000 - $5,000) / 10 years = $5,000 per year b. $55,000 - (8.5 years X $5,000) = $12, c. Depreciation Expense (for 1/2 year) 2, Accumulated Depreciation-Equipment 2, Cash 10, Accumulated Depreciation-Equipment 42, Loss on Disposal of Fixed Assets 2, Equipment 55,
Problem 10 - Asset traded for a similar asset a. The book value is $2,500; ($35,000- $32,500) The amount of cash paid is $40,000; ($45,000 - $5,000) b. The cost of the new truck is:$42,500; ($40,000 + $2,500) (cash paid + book value of old truck) c. Truck (new) 42, Accumulated Depreciation-Truck (old) 32, Truck (old) 35, Cash 40,
Problem 11 - Asset traded for a similar asset a. The book value is $5,000; ($35,000- $30,000) The amount of cash paid is $42,500; ($45,000 - $2,500) b. The cost of the new truck is:$45,000; ($42,500 + $5,000 - $2,500) Cost of new truck = book value of old truck + cash paid - loss on trade-in c. Truck (new)^ 45, Accumulated Depreciation-Truck (old) 30, Loss on Disposal of Fixed Assets 2, Truck (old) 35, Cash 42,
Problem 12 - Depletion entries a. $15,000,000 / 60,000,000 = $.25 per ton 11,500,000 X $.25 = $2,875,000 depletion expense b. Depletion Expense 2,875, Accumulated Depletion 2,875,
Problem 13 - Amortization of patent rights Amortization Expense - Patents 6, Accumulated Amortization - Patents 6,
Problem 14 - Classifying liabilities Current Notes Payable due in 7 months Wages Payable FICA Taxes Payable First year of Mortgage Payable due in 10 years First 12 months of Note payable due in 15 months payable monthly
Long-term Final 9 years of Mortgage Payable due in 10 years Final 3 months of Note payable due in 15 months payable monthly
Problem 15– Contingent Liabilities Although the amount of damages can be estimated for both lawsuits, only the first case should be recorded as a liability since there is a high probability of loss. The second case should be disclosed in the footnotes to the financial statements.
Problem 16 – Deferred Revenue Oct. 31 Cash 5,000, Unearned Ticket Revenue 5,000,
Nov. 6 Unearned Ticket Revenue 1,250,
Earned Ticket Revenue 1,250,
Problem 17 –Income Taxes Taxes for the year: $2,000,000 X 40% = $800, Taxes through September: $1,000,000 X 30% = $300, 4 th quarter tax expense $500,
Income tax expense 500, Income taxes payable 500,
