Principles of Accounting II Assignment 2 (Two-part Assignment) READ Thoroughly !!!

BBA 2301, Principles of Accounting II 1

Course Learning Outcomes for Unit II Upon completion of this unit, students should be able to:

1. Prepare corporate financial statements. 1.1 Identify receivables account content. 1.2 Identify long-lived asset account content.

2. Interpret financial statements.

2.1 Distinguish between receivables and long-lived assets on the balance sheet.

3. Interpret long-term financial balance sheets. 3.1 Determine the impact of asset depreciation on revenue.

Course/Unit Learning Outcomes

Learning Activity

1.1

Unit Lesson Chapter 9, pp. 9-1 to 9-20 Video: Accounts Receivables, Video 1, What Are Accounts Receivable? Video: Allowance for Doubtful Accounts – Accounts Receivable Unit II Case Study

1.2

Unit Lesson Chapter 10, pp. 10-1 to 10-22 Video: Depreciation, Amortization, and Depletion Explanation (Financial

Accounting Tutorial #57) Book chapter: “Introduction to Long-Lived Assets” Unit II Case Study

2.1

Unit Lesson Chapter 9, pp. 9-1 to 9-20 Chapter 10, pp. 10-1 to 10-22 Unit II Case Study

3.1

Unit Lesson Chapter 9, pp. 9-1 to 9-20 Chapter 10, pp. 10-1 to 10-22 Video: Depreciation, Amortization, and Depletion Explanation (Financial

Accounting Tutorial #57) Unit II Case Study

Required Unit Resources Chapter 9: Accounting for Receivables, pp. 9-1 to 9-20 Chapter 10: Plant Assets, Natural Resources, and Intangible Assets, pp. 10-1 to 10-22 In order to access the following resources, click the links below. Boundless. (n.d.). Introduction to long-lived assets. In Boundless accounting. http://oer2go.org/mods/en-

boundless/www.boundless.com/accounting/textbookbooks/boundless-accounting- textbookbook/controlling-and-reporting-of-real-assets-property-plant-equipment-and-natural- resources-6/introduction-to-long-lived-assets-41/index.html

UNIT II STUDY GUIDE

Accounting: Receivable and Long-Lived Assets

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For the video resources below, transcripts and closed captioning are available upon accessing the videos. Grech, E. (2014, November 2). Accounts receivables, video 1, what are accounts receivable? [Video].

Cielo24. https://c24.page/ncp5kkfyecgdkwh8s7a6zhdp7h Kimball, K. (2017, November 20). Allowance for doubtful accounts – Accounts receivable [Video]. Cielo24.

https://c24.page/gg7536qxkw42pfjeqa65tyu262 Notepirate. (2014, March 3). Depreciation, amortization, and depletion explanation (financial accounting

tutorial #57) [Video]. Cielo24. https://c24.page/gfbvqj9yp43fpjwf4b8qzjqsq5

Unit Lesson

Introduction This unit focuses on one of the required financial statements, which is the balance sheet. Specifically, this lesson reviews two asset accounts. Recall asset accounts are items that you own. In previous accounting courses, you learned about two important assets: cash and inventories. While their significance may vary from one industry to another, no one can argue that they are not worthy of management’s attention. In this unit, you will learn about two more important asset accounts, accounts receivable (A/R) and long-lived assets. As previously mentioned, the import of these asset accounts will vary by industry. It is encouraged that you obtain and review the statements for a company that you have a current or future interest in as you review these lessons and chapters. Another approach to consider is to think of your personal financial situation. What are your assets, liabilities, and net worth? An example of a personal asset is the vehicle that you own or use. An example of a liability is the bank note to the car dealership. When you compute your personal net worth, it is simply the value of all of your assets minus the value of all of your liabilities. At a minimum, you should be documenting and calculating these every year. As several famous leaders and managers have theorized, you need to know where you are financially in relation to your personal and financial goals. If you do not know what progress you have made, then how are you to know what course of corrective action to take?

Receivables The term receivables refers to amounts due from individuals and companies (Weygandt et al., 2018). As a consumer, you may not worry about receivables, but if you are a business owner or credit manager, it will be a major focus. Do you ever wonder about those retailers, especially furniture stores, which always seem to be having “going out of business” sales? Why is that? One reason is that the store has inappropriate credit policies. When you purchase furniture and agree to pay for it over time, the store adds the amount to the A/R. As you make payments, the store adds the payment to the cash account and reduces the A/R. Some customers may have payment problems. If this occurs frequently, then the store’s credit policies are not in line with the product or service prices and, therefore, not in line with the selected market. Consider a vehicle purchase. One necessary stop in the dealer purchase process is with the credit manager, who may have a big say in the price you pay, including the interest rate.

Types of Receivables There are three types of receivables introduced in the textbook, which include accounts, notes, and other. For this lesson, you will focus on A/R and notes receivables (N/R). A/R refers to funds owed for products or services delivered. When you receive a utility bill, it is considered A/R for the utility company and a debit entry into the company’s subsidiary account ledger (Unit I). The net amount that a firm receives from a sale may be reduced by sales returns and sales discounts. As a consumer, you should be familiar with both.

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Almost all business-to-business activity results in an A/R. When paid, these accounts are credited, and the cash account is debited. So, the business exchanges one asset (A/R) for another (cash). N/R refers to a specific promise to pay for products or services rendered. N/R may be interest bearing or not. Usually, N/R has an interest associated with the time of the note. A note may be short-term (less than a year) or long-term (more than a year). Either way, it is an asset (i.e., something owed to you, either in the current period or a longer term). If it was something you owed to someone, depending on the time period, it would be a current or long-term liability. If the note exceeds a year duration, it is considered long-term. If the note is for less than a year, it is short-term (i.e., a current liability). Unfortunately, some of the A/R will not be collected, and there are a variety of reasons for this. These will be labeled as uncollectible or doubtful accounts. Businesses know their prior period history, and current credit policies can estimate what the collections experience will be. The textbook describes and illustrates two methods for accounting these bad debts, which include the direct method and the allowance method. The allowance method is the one followed by all except very small firms. It gives a better picture of the balance sheet throughout the period and is the one accepted for financial reporting. Some (or many) of us may have experienced a short-term period when it was difficult to pay our bills on time. One tool of business is to ask the consumer to sign a note and create an N/R debit entry to represent the consumer’s promise to pay. The note, especially if it is interest bearing, carries more weight, and the expanded time period helps those who need the time to satisfy their obligation. If a firm does not want to be involved in the collection activity, they can sell their A/R, or they may choose to accept credit cards for payment. In either case, the firm is outsourcing their collection process to another entity. The firm that buys the A/R is called a factor. The credit card companies that most of us know include Visa, Mastercard, Discover, and American Express. The collection company charges a fee to the firm and takes on the collection responsibility. As previously mentioned, using the most recent financial statements for a company that you have an interest in is a great way to understand accounting. You will see all of the receivables quantified in the balance sheet, and you will see an explanation as to how the firm valued them in the notes to the financial statements. These immediately follow the statements in the 10-K. When analyzing a company’s receivables management, there are two calculations, turnover and average collection period; learn more about these on pages 9-20 and 9-21 of the textbook. It is a good practice for anyone contemplating investment or employment to check the firm’s performance in these categories.

Long-Lived Assets: Three Categories The second asset account is the long-lived asset. It goes by many names, such as capital assets, fixed assets, strategic assets, and more. The three categories of these assets include plant assets, natural resources, and intangibles. Many think of intangibles as unquantifiable. This is not true. You will see value for these intangibles, or they will not be in your statements. Plant assets include land, improvements, buildings, and equipment. Do not just think about a large manufacturer. A legal firm or a medical group could own a building, significant computer equipment, and other

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electronic equipment. The value of the building asset for a small firm may include land, improvements, and the building itself. In large firms, each would be a line item in the list of assets on the balance sheet. When acquiring a plant asset, you need to consider its impact on your business and your financial statements at the time of acquisition, during its use, and when it is finally disposed of. Take a closer look at each element below.

 The land account value includes all of the costs involved in the acquisition, including legal and real

estate transaction costs and any site renovation. This amount is not subject to depreciation, as accountants do not believe that land deteriorates.

 Land improvements are additions made that usually have shorter lives than the land itself (e.g., parking lots, landscaping wall or terrace, fencing). These improvements will be depreciated (recording expense in multiple time periods) according to the estimated life of the improvement.

 As noted above, a building’s value at acquisition includes all of the costs. If a single purchase includes land, improvements, and the building, an estimate is made of the appropriate percentage of the total price paid for each category. The useful life of a building can vary depending on its planned use. It can be upward of 30–40 years. The costs will be depreciated over the planned useful life.

 Equipment runs the gamut from furniture, computers, and vehicles to general or specialized production equipment. Again, their total acquisition costs will be depreciated over the planned useful life of the specific type of equipment.

What is depreciation? Depreciation is the cost associated in each period that you own the asset. For those described above, it could be as short as 3–5 years or as long as 30–40 years. There are three methods of depreciation, which include straight line, units of activity, and declining balance. Straight line is the total cost divided by the number of years to find an annual expense. If you estimate that there will be value at the end of your use period, just subtract that from the total cost before making your division. See the formula for the straight line method below.

The units of activity method looks at specific units of activity. Assume a new taxi is purchased and is expected to be used for 200,000 miles. In some periods, the use may be more or less than on average. Using the actual units used will provide a more accurate picture of the asset’s expense in each period. Again, if the business expects a salvage value at the end, then reduce the acquisition cost before making a cost/unit calculation. See the formula for the units of activity method below.

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The declining balance method is more complex, as there are variations in use today. For example, if we use a double declining balance method for the first year’s depreciation, we calculate the straight line expense as before and double it! That reduces the asset value to use in the second year’s calculation. Variations include a 175%, 150%, and 125% declining balance. This method depreciates (expenses) more of the assets cost earlier in its use period. In the end, the total cost expensed is the same for all methods. The textbook has an excellent comparison table located on page 10-12 (Weygandt et al., 2018). The illustration below represents the annual depreciation expense for the declining balance method for the first year. As per the example, the book value at the beginning of the year is $13,000 X 40% (the declining balance rate) = $52000 (the annual depreciation expense). In following years, it will be 40% of the new book value (e.g., for the 2nd year [$7,800 x 40% - $3,120]). See the formula for the declining balance method below.

The future may be planned, but the unexpected often happens. For plant assets (usually other than land), they may become impaired (subject to breakage or obsolescence). If this happens, when the asset is disposed of (sold), the asset account may have a gain or loss. Therefore, if you had a piece of equipment with a book value of $3,000 and determined that you could no longer use that piece of equipment and sold it for $2,500, then you would have to record a loss of $500.

Natural Resources Natural resources is another category of fixed assets. While the majority of you may not be directly involved in the energy or extraction industries, they are very large, and they impact all of us. Just as with plant assets, the acquisition cost is everything involved in the get ready process. The cost allocation process accomplishes the same result as depreciation, but it is called depletion. Depletion represents the use of the specific resource over time. The method most used is units of activity. Of course, the key estimate is the upfront determination regarding the number of units. Relative to many others, these industries are somewhat risky. These industries are capital intensive and have a large amount of both depreciation and depletion expenses in a given year. As a result, many politicians have complained that these firms get favorable tax treatment. If you know someone in one of these businesses, you could engage them in a discussion to hear their side of the story.

Intangible Assets The last category of fixed assets is the intangibles. You should recognize the value of patents, copyrights, and trademarks as you come in contact with the firm’s products. One item, goodwill, is not as easily understood. It represents what a firm pays when acquiring another, which is more than that firm’s book value. Goodwill stays on the balance sheet and has no annual expense associated with it.

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Patents, copyrights, and trademarks all have a cost associated with them, such as acquisition (licensing) and ongoing legal fees. The costs for a patent or copyright is amortized over its life. This accomplishes the same function as depreciation and depletion. The research and development (R&D) costs that lead to a patent are not included in the book value of the patent because they are considered an expense of the period when incurred. When analyzing how well a company uses its fixed assets, two ratios often used are return on assets (ROA) and asset turnover. The importance of these assets will vary considerably by industry (e.g., manufacturing [plant assets], mining [natural resources], entertainment [intangibles]). In this course’s final unit, you will see how companies plan for capital investments. In this unit, you learned what these investments are and how to account for them.

Conclusion Assets can be thought of as simply the left side (or top) of the balance sheet, but as you have seen, there is much more to them. In this unit, we looked at long-lived assets. Consider the firm; is it primarily in the services sector? Is it a manufacturer? Is it a retailer? Depending on the answer, focus will be on different asset accounts. Of course, no matter what, current assets (i.e., cash and inventories) will be considered. You will look at the final required financial statement—the statement of cash flows—in Unit IV. As you can see, these assets are significant. Accounting for them may seem to be burdensome, but they are no match for today’s software systems. However, it is important that you understand what takes place behind the curtain to participate in a firm’s finance and accounting organization in a meaningful way.

Reference Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting principles (13th ed.). Wiley.

https://online.vitalsource.com/#/books/9781119411017

Suggested Unit Resources In order to access the following resources, click the links below. For the video resources below, transcripts and closed captioning are available upon accessing the videos. The following video describes journalizing accounting transactions related to accounts receivables. Accounting Instruction, Help, & How To. (2017, September 29). Accounts receivable journal entries [Video].

Cielo24. https://c24.page/cgx22pfz4eujmxghq45ct3h4bx The video below provides an explanation of how to account for the sale or removal of a long-lived asset. Grech, E. (2016, March 15). Long lived assets video 3 disposal [Video]. Cielo24.

https://c24.page/2rgttuync2x6kq2326nj6k9xjm

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. This is an opportunity for you to express your thoughts about the material you are studying by writing about it. Conceptual thinking is a great way to study because it gives you a chance to process what you have learned, and it increases your ability to remember it.

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In order to practice what you have learned, please attempt the exercises and problems below, which can be found in your textbook. Chapter 9:

 Brief Exercises (BE9.3), page 9-28

 Brief Exercises (BE9.11), page 9-29

 Exercises (E9.2), page 9-30

 Exercises (E9.5), page 9-31

 Exercises (E9.16), page 9-33

 Problems: Set A (P9.1A), page 9-33

 Problems: Set A (P9.7A), page 9-36 Chapter 10:

 Brief Exercises (BE10.2), page 10-33

 Brief Exercises (BE10.7), page 10-33

 Brief Exercises (BE10.12), page 10-34

 Exercises (E10.3), page 10-36

 Exercises (E10.6), page 10-36

 Exercises (E10.13), page 10-37

 Problems: Set A (P10.2A), pages 10-38 to 10-39

 Problems: Set A (P10.8A), page 10-41 If you have any questions or do not understand a concept, contact your professor for clarification. Completing these practice exercises and problems will give you practice, which will be helpful as you complete the assignment for this unit.