FAR 3 - Assets & Related Topics

Question 1

What 2 methods are used to record accounts receivable with discounts? How are they recorded in the general ledger?

Answer 1

Gross & Net Method
Under the Gross method the sale is recorded as the original amount and the discount is only taken once payment is received within the discount period.
Under the net method the sale is recorded with the discount included and a journal entry is required if customer does not take advantage of discount period.

Question 2

What are the two methods of accounting for the write-off of uncollectible accounts?

Answer 2

Direct Write-off (non-GAAP)
Dr. Bad Debt Expense
Cr. Accounts Receivable
Bad debts are not matched to sales, and accounts receivable are overstated. Only do a JE when written off
Allowance Method (GAAP)
Dr. Allowance for uncollectible accounts
Cr. Accounts Receivable
Matches bad debts with credit sales. Accounts receivable fairly states.

Question 3

Name two methods for estimating uncollectible accounts under the allowance method

Answer 3

1) Percentage of accounts receivable at year-end

2) Aging of accounts receivable at year-end (B/S approach)

Question 4

What is CECL and why was it issued by FASB in 2016?

Answer 4

Current Expected Credit Losses
A response to the 2008 financial crisis when it was clear that losses where only book when incurred and not over the life of a loan. It did not answer what % of the loans do we think is not collectable. Reserves need to be adjusted for expected future losses.

Question 5

What is the normal balance for allowance for uncollectible accounts?

Answer 5

Credit (contra asset account)

Question 6

What is the journal entry when a receivable is determined to be uncollectible?

Answer 6

Dr Allowance for doubtful accounts

Cr Accounts Receivable

Question 7

What is the journal entry to be made when a receivable previously written off is collected under the Direct Method (Not GAAP)?

Answer 7

Dr Cash

Cr Uncollectible accounts recovered (revenue)

Question 8

What is the journal entry to be made when a receivable previously written off is collected under the Allowance Method (GAAP)?

Answer 8

Restore the account previously written off
Dr Accounts Receivable
Cr Allowance for uncollectible accounts
Record cash collection on the account
Dr Cash
Cr Accounts Receivable

Question 9

What is factoring accounts receivable without recourse?

Answer 9

It’s when a bank (third party) buys a company’s debt, and the risk of uncollectible accounts is transferred to the buyers

Question 10

Define cash and cash equivalents

Answer 10

Cash includes both currency and demand deposits ($ can be withdrawn without prior notice) with financial institutions
Cash equivalents investments readily convertible to cash (90 days or less from the date of purchase)

Question 11

What is the difference between factoring with recourse and without recourse?

Answer 11

With Recourse
Third party can return the account to the company if it proves uncollectible. Potential liability and risk of loss remains with the company.
Without Recourse
The third party assumes the risk of loss if the account is uncollectible.

Question 12

Describe the computational steps required in “discounting a note”

Answer 12

1) Compute maturity value (remember to include interest to maturity)
2) Compute the “discount” (remember to use maturity value
3) Get proceeds by subtracting discount from maturity value
4) Compute interest income as the difference between proceeds and the face of note.

Question 13

When does the title to goods pass for each of the following:
FOB destination
FOB shipping point
Consigned goods

Answer 13

FOB destination - when received by buyer
FOB shipping point - when given to a common carrier
Consigned goods - when sold to a third party by consignee
FOB - Freight on Board

Question 14

Explain the difference between periodic and perpetual inventory methods

Answer 14

Periodic
*The quantity of inventory is determined only physical count
*Ending inventory is physically counted and priced
Perpetual
*Inventory is updated for each purchase and for each sale
*Keeps a running total of inventory balances

Question 15

Name the different methods of valuing inventory

Answer 15

Specific Identification
FIFO
LIFO (unit and dollar value)
Averaging
Weighted average (associated with periodic)
Moving average (associated with perpetual)

Question 16

During periods of rising prices, the use of LIFO vs FIFO has what effect on the valuation of ending inventory and reported net income?

Answer 16

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.
LIFO = Lowest

Question 17

How are the cost of internally developed intangible assets recorded?

Answer 17

Under GAAP assets not acquired from others should be expensed when incurred because GAAP prohibits the capitalization of R&D costs.

Question 18

How are asset costs acquired from others recorded?

Answer 18

At cost. Legal and registration fees incurred to obtain an intangible asset should be capitalized.

Question 19

What interest is used if borrowings for constructing a fixed asset are not tied specifically to the construction of that asset?

Answer 19

Weighted average interest rate for the other borrowings
face value/sum of all borrowing * interest + face value of borrowing #2/sum of all borrowing * interest = weighted average interest rate.

Question 20

How should interest incurred during construction of an asset be treated?

Answer 20

It should be capitalized based on the weighted average accumulated expenditures, as part of the fixed asset. Interest incurred before or after the construction should be expensed.

Question 21

What are the different types of depreciation methods?

Answer 21

1) Straight Line
2) Sum of the Years’ Digits
3) Units of Production (productive output)
4) Declining Balance - doubles the straight-line rate and ignores salvage value.

Question 22

What are some examples of intangible assets?

Answer 22

Patents, copyrights, franchises, trademarks and goodwill.

Question 23

How are intangible assets acquired from other enterprises or individuals recorded?

Answer 23

As an asset at cost. Legal and registration fees incurred to obtain an intangible asset should also be capitalized.

Question 24

How are intangible assets internally developed recorded?

Answer 24

Under GAAP assets not acquired from others should be expensed when incurred. GAAP prohibits the capitalization of R&D costs

Question 25

How are finite life intangible assets reported?

Answer 25

at cost less amortization and impairment. Known useful life.

Question 26

How are indefinite life intangible assets reported?

Answer 26

at cost less impairment.

Question 27

What type of R&D costs can be capitalized?

Answer 27

Materials, equipment or facilities (tangible assets) that have alternative future uses, are depreciated over their useful lives.