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:
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