Exam #2 - Outline of Topics Covered
Chapter 5 Accounts Receivable and Revenue
1. Sale of Inventory
a. Record Revenue, Cash vs. credit
DR cash
CR Revenue
DR Accounts receivable
CR Revenue
Calculate a Sales Discount
oWhat does 3/15, n30 mean?
3% discount if you pay within 15 days otherwise pay in 30 days
oIf invoice is for $5,000 how much is discount?
5000 x .03 = $150
When does title transfer?
oFOB Shipping Point
Title transfers when goods leave the sellers place of business (if goods are on
the road, they belong to the buyer)
oFOB Destination
Title transfers when the goods arrive at the buyer’s place of business (if goods
are on the road, they still belong to the seller)
How do you calculate Net Sales/Net Revenue?
oRevenue – Sales Discount – Sales Returns (both contra rev. accounts that have debit
balances)
Accounts Receivables and Bad Debt Expense
oHow is Net Accounts Receivable calculated?
Accounts receivable – Allowance for doubtful accounts
oWhat does Net Accounts Receivable measure?
The cash we actually think we will receive from customers
oWhat type of account is Allowance for Doubtful Accounts and what does is represent?
Contra asset which is the estimate of Accounts Receivable we don’t think will
be collected
oAccounts Receivables are amounts due from customers who purchased on credit. The
potential cost is customers not paying their bill; bad debt expense.
oMethods of recording bad debt expense-Journal entry to record bad debt expense when
using the direct method vs. when using the allowance method
Direct Method-for companies whose accounts receivable balance is small.
Record bad debt expense as specific receivables become uncollectible.
What is the journal entry to record bad debt expense under the direct
method?
DR Bad Debt Expense $XX CR Accounts Receivable (Customer Name)
$XX
Allowance Method-estimate bad debt expense
-Aging Receivables Method
oGiven a schedule for aging receivables or the estimate of
uncollectible accounts
determine value that should be in Allowance for
Uncollectible accounts.
The amount of the journal entry to record bad debt
expense
You estimate that $10,000 o Accounts Receivable are uncollectable. Currently the balance in Allowance
for doubtful accounts $700 credit.
- $10,000 - $700 = $9,300
DR Bad Debt Expense $9,300
CR Allowance for doubtful accounts $9,300
Record the journal entry when a specific customer’s accounts receivable
becomes uncollectible.
oDR Allowance Doubtful Accounts $XX CR Accounts Receivable
(Customer Name) $XX
Notes Receivable
Journal entry to record the loan
Journal entry to record accrued interest
oWhen Note spans 2 fiscal year ends calculate interest in each year.
You loan $10,000 for 5 months on Nov. 1st, 2019 at 6% interest
- On Nov. 1st DR Notes Receivable $10,000 CR Cash $10,000
- On Dec. 31st Accrue Interest Revenue = $10,000 x .06 x 2/12 = $100
oDR Interest Receivable $100 CR Interest Revenue $100
Loan matures in April 1st, 2020. How much interest revenue do we record in 2020?
- $10,000 x .06 x 3/12 = $150
How much cash will you receive in total?
- $10,250 = $10,000 + all the interest ($100 form 2019 and $150 from 2020)
Chapter 6 Inventory
Inventory Costing Methods. Be able to calculate Cost of Goods Sold and Ending Inventory under:
oLIFO (Last in First out)
2 x $7 + 2 x $6.50 + $27
End Inventory = 5 x $6.50 + 5 x $6 = $62.50
oFIFO (First in First out)
4 x $6 = $24
End Inventory = 1 x $6 + 7 x $6.50 + 2 x $7 = $65.50
oAverage Cost
Average cost per unit = $89.50/14 units = $6.39
4 x $6.39 = 25.56
End Inventory = 10 x $6.30 = $63.90
Calculate Cost of Goods Available for Sale
o$30 + $45.50 + $14 = $89.50
Total units for sale
o5 + 7 + 2 = 14 units
Calculate Gross Profit
Beginning Inventory 5 @ $6.00 $30
Purchase 7@ $6.50 $45.50
Purchase 2@ $7.00 $14
Sell 4 @ $15.00 $60
Under LIFO : DR cost of goods sold $27 CR Inventory $27
How do we record revenue: DR Cash $60 CR Revenue $60
GROSS Profit = revenue – cost of goods sold ($60 -$27 = $33)
Lower of Cost or Market-determine whether inventory needs to be written down, and by how
much.
Inventory Shrinkage-what is inventory shrinkage (vs Lower of Cost or Market)
oWhat is the journal entry to record Inventory Shrinkage
Chapter 7 Long Term and other Assets
What’s the difference between a long term and short term asset?
oLong Term assets we have for longer than a year
Fixed Assets vs Intangible Assets vs Natural Resources
What is capitalization?
oAdding costs to and asset account (creating an asset)
Costs included in the capitalization of long-term assets such as:
oAny one time costs that gets the asset ready for use
oLand
oBuilding
oEquipment and Machinery
Buy Equipment for $50,000 with a salvage value of $5,000 and a 10 year useful life. Estimate a
total usage of 90,000 hours
How do you calculate the depreciable amount?
o$50,000 - $5,000 = $45,000
How is Net Book Value calculated?
oCost of the asset – accumulated depreciation
Depreciation
oA way to expense long term assets
oMatch costs with revenue arising from use
oWhat is the journal entry to record depreciation
DR Depreciation Expense $XX CR Accumulated Depreciation $XX
oMethods
Straight-line
($50,000-$5,000)/10 years = $4,500 (same amount every year)
Double Declining Balance
Net Book Value x 2 / useful life
Year 1 = ($50,000 x 2) / 10 = $10,000
Year 2 = ($40,000 x 2) / 10 = $8,000
Units of production
(Cost – salvage value) / total usage
($50,000-$5,000) / 90,000 hours = $.50/hour
Year 1 (20,000 hours) = $.50 x 20,000 hours
oDetermine the Gain or Loss on the Sale of a long term asset
Assume we sell that asset after year 1 and we use straight line to determine
depreciation
Proceeds – Net Book Value (+ = gain ; - = loss)
Intangible Assets-What are intangible assets
Most internally developed intangibles are expensed as incurred.
When is goodwill recorded?
How is the value of goodwill determined?
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