Final Exam, Ch 9-11 (Plus partial Ch 4, 6, 8) Flashcards
Defn: A monetary claim against a business or an individual.
Receivable
A ________ occurs when a business sells goods or services to another party on account (on credit)
Receivable
Defn: The party to a credit transaction who takes on an obligation/payable.
Debtor
The (3) major types of receivables:
- Accounts receivable 2. Notes receivable 3. Other receivables
Defn: The right to receive cash in the future from customers for goods sold or for services performed.
Accounts receivable
_________ receivables are usually collected within a short period of time, such as 30 or 60 days and therefore are reported as current assets on the balance sheet.
Accounts
Defn: A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future.
Notes receivable
What is another name for a Notes receivable?
Promissory note
Defn: The date when a note is due
Maturity date
Notes receivable due within one year or less are considered ________ assets. Notes receivable due beyond one year are ____________ assets.
- Current - Long-term
Separate customer accounts receivable are called _________ accounts.
Subsidiary accounts
Defn: The cost to the seller of extending credit arising from the failure to collect from some credit customers.
Bad Debts Expense
Customers’ accounts receivable that are uncollectible must be ___________ from the books because the company does not expect to receive cash in the future.
removed or written-off
(2) methods of accounting for uncollectible receivables and recording the related bad debts expense:
- Direct write-off method 2. Allowances method
Defn: A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer’s account receivable is uncollectible.
Direct write-off method
When using the Direct write-off method, how does a company journalize the transaction?
- debiting “Bad Debts Expense” account 2. crediting customers “Accounts Receivable”
Why is the direct write-off method not often used except by small, nonpublic companies?
Because it violates the matching principle
Defn: A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from
Allowance Method
What is the contra account that is utilized by the Allowance Method?
Allowance for Bad Debts account
What account does the contra-account “Allowance for Bad Debt” reduce?
Asset account: “Accounts Receivable”
How does a company use the Allowance Method?
- Estimates bad debt expense at the end of the reporting period - Records adjusting journal entry
Defn: The net value a company expects to collect from its accounts receivable.
Net Realized Value
Formula: Net Realized Value
= Accounts Receivable - Allowance for Bad Debts
Which method for accounting for Bad Debt Expense is used under GAAP?
Allowance Method
What steps does a company take to journalize bad debt expense using the Allowance Method?
- [AJE] Debit “bad debt expense account” Credit “allowance for bad debt” - Write off the account receivable: Debit “allowance for bad debt” Credit “accounts receivable”
Defn: A method of estimating uncollectible receivables that calculates bad debt expense based on a percentage of net credit sales
Percent-of-sales Method
Formula: Percent-of-Sales Method
Bad Debts Expense = (Net credit sales) x (%)
Defn: The amount loaned out by the payee and borrowed by the maker of the note.
Principal
Defn: The entity that signs the promissory note and promises to pay the required amount, also known as the “debtor”.
Payee of the note
Defn: The revenue to the payee for loaning money - the expense to the debtor.
Interest
Defn: The percentage rate of interest specified by the note.
Interest Rate
Defn: The period of time during which interest is computed; extends from the original date of the note to the maturity date.
Interest Period
Formula: Computing Interest
Amount of interest = (Principal) x (Interest rate) x (Time - fraction of 12 mos.)
Defn: Long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business
Plant Asset
Defn: The process by which businesses spread the allocation of a plant asset’s cost over its useful life.
Depreciation
Defn: A principle that states that acquired assets and services should be recorded at their actual cost.
Cost Principle
Plant assets are recorded based on the ______ Principle.
Cost
Defn: A depreciable improvement to land, such as fencing, sprinklers, paving, signs, and lighting.
Land improvement
Defn: Recording the acquisition of land, building, or other assets by debiting (increasing) an asset account.
Capitalize
When a company pays a single price for several assets as a group it is called a _______-____ purchase.
Lump-sum Purchase
Defn: A method of allocating the total cost (100%) of multiple assets purchased at one time. Total cost is divided among the assets according to their relative market values.
Relative-Market-Value Method
Defn: An expenditure that increases the capacity or efficiency of a plant asset or extends its useful life. Debited to an asset account.
Capital expenditure
Defn: Repair work that generates a capital expenditure because it extends the asset’s life past the normal expected life.
Extraordinary repair
Are expenses incurred to maintain the asset in working order, such as repair or maintenance expenses debited to the asset account as a part of capital expenditure?
No.
What kind of expenditure are expenses incurred to maintain the asset in working order, such as repair or maintenance expenses?
Revenue expenditures
Defn: An expenditure that does not increase the capacity or efficiency of an asset or extend its useful life. Debited to an expense account.
Revenue expenditures
What are the (3) main factors used to calculate the depreciation of a plant asset?
- Capitalized cost 2. Estimated useful life 3. Estimated residual value
Defn: Length of the service period expected from an asset.
Useful life
Defn: The expected value of a depreciable asset at the end of its useful life.
Residual value
Defn: The cost of a plant asset minus its estimated residual value.
Depreciable cost
Formula: Depreciable cost
Depreciable cost = (Cost) - (Estimated residual value)
What are the (3) depreciation methods for plant assets?
- Straight-line method 2. Double Declining Balance (DDB) method 3. Units-of-production method
Defn: A depreciation method that allocates an equal amount of depreciation each year.
Straight-line method
Formula: Straight-line method
= (Cost - Residual value) / Useful life
Forumula: Units-of-Production method
= (Cost - Residual Value) x Current Years Production
Total Estimated Production
Defn: A depreciation method that expenses more of the asset’s cost near the start of its useful life and less at the end of its useful life.
Accelerated depreciation method
Defn: An accelerated depreciation method that computs annual depreciation by multiplying the depreciable asset’s decreasing book value by a constant percent that is two times the straight-line depreciation rate.
Double-declining balance method
Formula: Double-declining balance method
= (Cost - Accum. Deprc. @ beginning of year) x 2 Useful Life
How does the DDB method account for the residual value of the plant asset?
Switch to the STRAIGHT-LINE METHOD halfway through the assets useful life
FORMULA: Net Book Value (NBV)
= Cost - Accumulated Depreciation
(4) steps of journalizing the disposal of a plant asset?
- Bring depreciation up to date
- Remove old asset and accumulated depreciation from books
- Record value of cash received/paid for disposal
- Determind amount of gain or loss
Comparing cash received and the market value of any other assets received with the book value of the asset disposed of is the way to determine what?
Gain or loss from disposal of plant asset
Defn: The total amount of salary, wages, commissions, and any other employee compensation before taxes and other deductions.
Gross pay
Defn: Gross pay minus all deductions.
The amount of compensation that the employee actually takes home.
Net pay
“Take-home pay” is another name for ______.
Net pay
Amounts withheld from paychecks are called __________.
Withholding deductions
How does a company journalize employee payroll?
Debit/Credit
Debit: “Salaries and Wages expense”
Credit: “Various tax payables” and “Salaries and Wages payables
Debit: “Salaries and Wages payables”
Credit: “Cash”
Employers must pay at least (3) types of payroll taxes:
- FICA tax (SSN and Medicare)
- State unemployment tax
- Federal unemployment tax
