Maxwell Review

Question 1

cash and cash equivalents

Answer 1

-cash and items convertible into cash within 90 days
-ex’s: checking account, savings account, money market funds (like another savings account), treasury bills (maturing within 90 days of purchase, certificates of deposit (maturing within 90 days of purchase), petty cash

Question 2

bank reconciliations - key question to ask

Answer 2

what do the accounting records know that the bank doesn’t know? or what does the bank know that the accounting records don’t know?

Question 3

bank reconciliations - accounting records know about, bank doesn’t know about

Answer 3

-deposits in transit: a deposit we have sent to the bank, but it hasn’t cleared the bank yet; increase book cash balance
-outstanding checks: a check we have mailed that has not cleared the bank yet; decreases book cash balance

Question 4

bank reconciliations - bank knows about, accounting records don’t know about –> deposits in transit

Answer 4

-bank/service fees: the bank knows, but the books don’t; decrease book cash balance
-bank credits (cash back reward, interest income): bank knows, book don’t; increase book balance
-NSF check: bank knows, books don’t because we send a check to a vendor and they deposit it, but it doesn’t clear the bank due to insufficient funds; increase book cash balance
-errors (recording $130 but depositing $120): bank knows correct amount, books don’t

Question 5

held checks

Answer 5

-checks that we haven’t mailed yet, so we shouldn’t deduct them from the cash balance
-ex: company decreases its bank balance on Dec 30 but didn’t mail the check until Jan 3. the company should not record the outstanding check until Jan 3

Question 6

negative cash balances

Answer 6

-treated as a current liability
-if a company has two bank accounts with two different banks, and one account has a positive balance and the other a negative balance, we report the positive balance as a current asset and the negative as a current liability
-if the accounts are within the same bank, net them together
-ex: bank cash balance of $5,000 and there’s a $20,000 outstanding check –> you’d have a ($15,000) book cash balance

Question 7

cash and cash equivalent common footnote

Answer 7

we classify all highly liquid instruments with an original maturity of three months or less as cash equivalents

Question 8

JE for recording a credit on sale

Answer 8

debit AR, credit revenue

Question 9

JE for receiving cash payment

Answer 9

debit cash, credit AR

Question 10

AR discounts

Answer 10

-provide discounts to customers to receive the cash payments more quickly
-ex: 2/10 n/30

Question 11

gross AR

Answer 11

-assuming the customer will not take the discount, so we record AR for the full amount without the discount
-gross = full amount of something (pre taxes)
-JE when first making the sale: debit AR, credit rev
-JE if customer takes discount: debit cash, credit AR, debit sales discount (contra rev) for the difference
-JE if customer doesn’t take discount: debit cash, credit AR full amount

Question 12

net AR

Answer 12

-assuming the customer will take the discount, so we record the JE after subtracting out the discount
-net = after subtracting something out (like taxes)
-JE when first making the sale: debit AR (with discounted amount), credit rev
-JE if customer doesn’t take discount: debit cash full amount, credit AR what discounted amount would’ve been, credit sales discount (rev) the difference

Question 13

bad debt

Answer 13

-us GAAP requires companies to estimate their uncollectible AR
-direct write off method is not allowed under US GAAP
-how to estimate amount of bad debt? BS or IS approach

Question 14

JE for bad debt: initial estimate of bad debt

Answer 14

debit bad debt expense, credit allowance for doubtful accounts (contra asset account)

Question 15

JE for bad debt: writing off bad debt

Answer 15

debit allowance for doubtful accounts, credit AR

Question 16

JE for bad debt: reversing previous uncollectibles (ends up actually collecting)

Answer 16

1. debit AR, credit allowance for doubtful accounts
2. debit cash, credit AR

Question 17

allowance for doubtful accounts calculation

Answer 17

beginning allowance for doubtful accounts
+bad debt expense
-uncollectible AR written off
=ending allowance for doubtful accounts

Question 18

balance sheet approach for bad debt

Answer 18

-estimate bad debt by taking a % of the AR balance
-gives the balance that allowance for doubtful account should be

Question 19

income statement approach for bad debt

Answer 19

-we estimate a % of credit sales that are uncollectible
-determines bad debt expense, not allowance for doubtful accounts balance

Question 20

pledging AR

Answer 20

-pledging AR as collateral for a loan
-bank has right to take AR balance if payments aren’t made

Question 21

factoring AR

Answer 21

-for when we have AR but need cash now
-we factor the amount with a bank to pay us now for it
-AR proceeds belong to the bank

Question 22

factoring AR without recourse (responsibility)

Answer 22

-factoring without recourse means that even if the customer never makes their payment, the bank has no legal right to demand that we, the company, pay the bank for the receivable
-we treat the transaction as a sale (record as gain or loss) of our AR balance (cash debit, loss on sale of rec. debit, AR credit –> if it was a gain, credit the gain)

Question 23

factoring AR with recourse (responsibility)

Answer 23

-factoring with recourse means that the bank can demand us to pay them back the money if the customer doesn’t pay
-we can treat as a sale –> same JE as factoring AR without recourse
-we can treat as a loan –> record a JE for a loan (debit cash, credit notes payable)

Question 24

what is due from factoring?

Answer 24

-when the bank factors our AR balance, they typically hold onto part of the payment, which is recorded as “due from factor” which we debit as a receivable
-this allows the bank to cover expenses if there are any sales returns or discounts that the customer takes, which would lower the amount paid to the bank
-JE: debit the due from factor account when bank pays $x back to us when they were holding $x for potential sales returns/discounts

Question 25

discounting notes receivable

Answer 25

-like factoring AR
-we have a notes rec. but we need the cash now
-discount both the principal and the interest payments
-steps:
1. calc the amount if we had not discounted the note rec (principal + interest)
2. multiply the amount by the annualized effective rate the bank wants to earn
3. subtract the amount in step 1 from the amount the ban wants to earn in step 2

Question 26

inventory accounts

Answer 26

-1 type of inventory account for product resellers (non-manufacturers)
-3 types of inventory accounts for manufactures:
1. raw materials: materials we have purchased but not yet used to manufacture
2. WIP: we have started units but not finished them (DM, DL, OH)
3. FG: goods we have finished making but not yet sold

Question 27

selling inventory

Answer 27

-once goods are sold, we expense them to COGS
-JE: debit COGS, credit inventory

Question 28

periodic method of inventory

Answer 28

-inventory is periodically updated (once a year)
-formula:
beginning inventory
+purchases
-COGS **plug number
=ending inventory

Question 29

perpetual method of inventory

Answer 29

-inventory is continually updated after every purchase
-there’s no plug number because we record COGS after each sale

Question 30

FIFO method of inventory

Answer 30

-first in, first out
-when we sell inventory, we determine the COGS by the oldest items
-can be either periodic or perpetual

Question 31

LIFO method of inventory

Answer 31

-last in, first out
-when we sell inventory, we determine the COGS by the most recently purchased items
-can be either periodic or perpetual
-due to inflation, typically causes COGS to be higher under LIFO

Question 32

moving average inventory

Answer 32

-moving average is for the perpetual inventory method
-after every sell, we calculate the average of inventory to find COGS

Question 33

weighted average inventory

Answer 33

-weighted average is for the periodic method
-we calculate the average inventory and COGS at the end of each period

Question 34

FOB shipping point

Answer 34

-inventory transfers at the point of shipment
-selling inventory: write it off when it ships
-buying inventory: include in inventory as of shipping date

Question 35

FOB destination

Answer 35

inventory transfers only once it arrives
-selling inventory: write it off when you receive it
-buying inventory: include in inventory once you receive it

Question 36

dollar LIFO inventory

Answer 36

-instead of focusing on the units, we will focus on the dollar amounts of the units
-this attempts to remove the inflation impact of price of inventory
-steps:
1. what’s the price index?
2. what’s the layer?
3. take the layer and multiply it by the price index
4. add the layer in the dollar value LIFO column

Question 37

lower of cost or market

Answer 37

-used for LIFO and retail method
-pick the middle amount between these three options to find “market value” –> replacement cost, net realizable value, net realizable value - normal profit margin
-replacement cost: if we were to buy the same inventory today, how much would it cost?
-normal profit margin: how much profit we make per unit sold

Question 38

lower of cost of net realizable value

Answer 38

-used for LIFO and all others
-net realizable value = sales price - costs associated with selling the item

Question 39

inventory on consignment

Answer 39

-sending your inventory to another company to sell it for you
-consignor: sends inventory to consignee
-consignee: sells inventory for consignor
-inventory says on consignor’s books
-what’s in consignor’s records? sales rev, COGS, commission exp, advertising exp
-what’s in consignee’s records? commission rev

Question 40

reversal of inventory errors

Answer 40

sending when errors are made using the periodic method, they will reverse out after 2 years

Question 41

writing down (impairing) inventory JE

Answer 41

1. debit inventory, credit cash
2. debit impairment loss, credit inventory

Question 42

% ownership in a company determines the accounting method

Answer 42

-0 to 20: adjusted cost method (no investment income until dividends paid)
-20 to 50%: equity method (investment income as % of investee’s net income)
-50%+: consolidation method (consolidated financial statements)

Question 43

0-20% ownership in a company - adjusted cost method

Answer 43

-we do not have significant influence over a company (but shareholders get to vote about the future of the company)
-we update the investment to its fair value at year end
-we record dividend income only when dividends are paid
-steps:
1. record initial investment
2. update the fair value of investment to record unrealized gain/loss
3. record dividends paid by the investment

Question 44

20-50% ownership in a company - equity method

Answer 44

-even if we own less than 20% but have significant influence, we still use the equity method
-we do not update the investment to its fair value at year end
-steps:
1. record initial investment
2. increase investment by our % ownership * investee’s net income
3. decrease investment by dividends paid

Question 45

50%+ ownership in a company - consolidation method

Answer 45

-when we own more than half a company, the company’s financial statements are no longer presented on their own
-instead, they are consolidated into the parent company’s financial statements

Question 46

investing in a company’s bonds

Answer 46

-we dont own the company, so there’s no ownership % determination like with the investment in a company’s stocks
-the way we determine accounting for bonds is the purpose of our investment
-three possibilities: held to maturity, trading, and available for sale

Question 47

held to maturity with investing in a company’s bonds

Answer 47

-once we buy the bond, we will not sell it and will hold it until it matures, recording an amortization expense for the discount/premium
-the market value of the bond throughout its life is irrelevant
-no need to update its fair value
-recorded as a non current asset

Question 48

trading with investing in a company’s bonds

Answer 48

-we buy the bond just to re-sell it once its value is high enough
-record unrealized gain/loss in the income statement
-market value is relevant
-recorded as a current asset

Question 49

available for sale with investing in a company’s bonds

Answer 49

-we are not going to hold it until maturity, but we don’t know when we’re going to sell it
-record unrealized gain/loss in the OCI statement
-market value is relevant
-recorded as either current or non current asset

Question 50

3 levels of investments

Answer 50

1. identical asset in active market
2. either identical asset in inactive market or similar asset in active market
3. unobservable management input, based on income it produces or costs it reduces

Question 51

fair value election

Answer 51

-when an asset or liability is not measured at its fair value but you want to measure it as its fair value
-can’t be revoked

Question 52

0-20% ownership JE

Answer 52

1. record initial investment: debit investment, credit cash
2. update fair value of investment to record unrealized gain/loss: debit investment, credit unrealized gain
3. record dividends when paid: debit cash, credit dividend income

Question 53

20-50% ownership JE

Answer 53

1. record initial investment: debit investment, credit cash
2. increase investment by our % ownership* investee’s net income: debit investment, credit equity in earnings
3. decrease investment by dividends paid: debit cash, credit investment

Question 54

market approach

Answer 54

finding fair value from the market (level 1 and 2)

Question 55

income approach

Answer 55

our value will depend on how much income the asset generations (level 3)

Question 56

cost approach

Answer 56

recording a fixed asset at its cost (level 3)

Question 57

capitalized land

Answer 57

-any cost associated with preparing the fixed asset is capitalized
-examples: purchase price, commissions, costs of razing (tearing down an old building), title and recording fees, site development, decrease by sale of proceeds from sale of scraps, legal fees, draining of swamps

Question 58

capitalizing land improvements

Answer 58

-land is capitalized and not depreciated
-land improvements are capitalized and depreciated
-examples: fences, water systems, sidewalks, paving, landscaping, lighting

Question 59

capitalizing buildings

Answer 59

-everything that prepares the building for use
-examples: purchase price, digging holes for the foundation or basement, architecture fees

Question 60

capitalizing equipment

Answer 60

-everything that prepares the equipment for use
-examples: amount paid, less: any discounts, freight costs, installation charges, all taxes paid

Question 61

capitalize vs expense

Answer 61

-improvements are capitalized (make an asset last longer or increase the usefulness of the asset)
-repairs are expensed (any cost that is not an improvement)
-example with improvement: we spend $6,000 replacing a vehicle’s engine, which makes it last longer –> capitalize
-example with repairs: we spend $6,000 replacing the broken windshield on a vehicle, which doesn’t enhance the asset –> expense

Question 62

depreciation methods

Answer 62

-three main methods: straight line, double declining, units of production

Question 63

what is the salvage value

Answer 63

price we will be able to sell it once we’re done using it

Question 64

depreciable base

Answer 64

cost - salvage value

Question 65

net book value

Answer 65

cost - accumulated deprecation

Question 66

straight line depreciation

Answer 66

-evenly depreciate an asset throughout its useful life
-most common depreciation method, due to its simplicity
-formula: (cost - salvage value) / useful life

Question 67

double declining depreciation

Answer 67

-depreciates a fixed asset twice as fast as straight line
-greater amount of depreciation at beginning of fixed asset’s life, less depreciation towards end of its life
-no consideration of salvage value
-amount of depreciation changes each year because its based on the net book value
-annual depreciation: (2straight line rate)NBV
-straight line rate: 1/useful life

Question 68

unit of production depreciation

Answer 68

-depreciating an asset based on the output it will generate
-steps:
1. identify how many units the fixed asset will generate
2. divide the depreciable base by the number of units it will generate
-depreciation per unit: (cost-salve value)/total units asset will produce
-annual depreciation: units produced*depreciation per unit

Question 69

depletion expense

Answer 69

-depreciation for nature resources that don’t replenish (like mining gold)
-similar to units of production depreciation method
-depletion per unit: (cost-salvage value)/total amount extracted

Question 70

held for sale assets

Answer 70

-when a company no longer uses a fixed asset to generate revenue, or when a company discontinues operations
-steps: 1. stop depreciating the fixed asset. 2. reclass the fixed asset to “held for sale.” 3. if fair value is below carrying value, impair it
-when reclassifying it, if the fair value is below the carrying value, then we write it down (impair it)
-if the value recovers, we can reverse the impairment (only up to the point of the previous carrying value)

Question 71

selling a fixed asset

Answer 71

-we need to write off the fixed asset and its accumulated depreciation
-steps: 1. record cash proceeds (debit). 2. write off fixed asset (credit). 3. write off accumulated depreciation (debit). 4. plug number is gain (credit) or loss (debit)
-gain (loss) = proceeds - NBV
-we record gains (losses) in the “other income” section of the income statement

Question 72

capitalizing interest for a construction project

Answer 72

-when we are constructing a fixed asset, instead of expensing/buying the interest, we capitalize the interest
-how much interest do we capitalize?
-steps: 1. find the average cost of construction expenditures. 2. multiply the average cost by the interest rate

Question 73

non monetary transactions

Answer 73

-when we exchange a fixed asset for something other than cash (or boot), it lacks commercial substance and we therefore have limitations on the gains
-boot = cash + mortgage relief

Question 74

non monetary transactions: 4 situations when a transaction lacks commercial substance

Answer 74

1. when there is no cash exchanged at all for the property –> don’t recognize any gain in the transaction
2. when we receive cash from the other party (<25% of total consideration) –> we recognize a proportional amount of the gain (cash/total consideration)
3. when we pay cash for the property (<25% of total consideration) –> no gain recorded
4. when we pay or receive cash for the property (>25% of total consideration) –> record entire gain

**general rule: when we aren’t receiving cash, GAAP doesn’t like for us to record gains (if a transaction lacking commercial substance results in a loss, there are NO limitations)

Question 75

intangible assets

Answer 75

-assets that aren’t tangible (patents, goodwill, copyrights, franchises)
-amortization = depreciation of an intangible asset
-typically calculate amortization on straight line basis
-R&D and start up costs are expensed immediately
-can’t internally generate goodwill (only created when we purchase another company)
-one intangible we capitalize is when we successfully defend a lawsuit for our intangible asset

Question 76

research and development costs

Answer 76

-R&D is the attempt to discover a NEW product or process
-generally, expense all R&D costs immediately
-when purchasing fixed assets for research, generally expense right away
-if the fixed asset can be used for alternative uses, then we will capitalize it and depreciate it over its useful life
-once we discover a new product, then additional costs are not R&D costs (like quality control and marketing research is not R&D)

Question 77

what is included in R&D

Answer 77

-design and testing of prototypes
-research for new knowledge
-testing to discover new processes

Question 78

what is not included in R&D

Answer 78

-marketing
-legal fees to obtain a patent
-quality control

Question 79

software costs

Answer 79

-technological feasibility: the point at which we have finished planning, designing, coding and testing the software –> expense everything before, capitalize everything after
-when we develop computer software to sell: take the greater of straight line amortization or amortization as a % of revenue
-when we develop computer software for our internal use, use straight line amortization

Question 80

impairment of assets

Answer 80

-impairment: reduction in the value of an asset
-record impair expense
-occurs when the carrying value of the asset is no long true
-carrying value = amount an item is recorded for on the balance sheet
-decrease the asset down to its fair value

Question 81

impairment of goodwill (infinite live assets)

Answer 81

-only need to compare carrying value to fair value of goodwill
-is the fair value of the goodwill lower than its carrying value? If yes, then impair the goodwill down to its fair value

Question 82

impairment of fixed assets (finite live assets)

Answer 82

-are the undiscounted cash flows this asset will generate less than the carrying value of the asset (recoverability test - will we recover our investment through future cash flows)? if yes, impair asset; if no, don’t impair asset
-if impairing asset, impair it down to its fair value

Question 83

purchasing a fixed asset JE

Answer 83

debit fixed asset, credit cash

Question 84

non monetary transactions: example for when there is no cash exchanged at all for the property

Answer 84

**do NOT recognize any gain in the transaction

we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.

we exchange our truck for a new vehicle, with NO cash in the transaction. the new vehicle has a fair value of $25,000. NO gain is allowed

JE: new vehicle (plug) debit, accumulated depreciation debit, old truck credit

Question 85

non monetary transactions: example for when we receive <25% in cash

Answer 85

**recognize a proportional amount of the gain

we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.

we received a new vehicle worth $20,000. we also received $2,000 cash.
total consideration = 20,000 (new vehicle) + 2,000 = 22,000
total gain = 22,000 - 20,000 (NBV) = 2,000 total gain

total consideration = 22,000
boot is what % of the consideration? 2,000/22,000 = 9%
% of gain we can recognize = 9%

JE: new vehicle (plug) debit, accumulated depreciation debit, old truck credit, gain credit

Question 86

non monetary transactions: example for when we pay <25% in cash

Answer 86

**no gain recorded

we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.

we received a new vehicle worth $25,000. we pay $5,000 cash to the owner.

boot as a % of total consideration = 5,000/30,000 = 16.67%

JE: new vehicle (plug) debit, accumulation depreciation debit, truck credit, cash credit

Question 87

non monetary transactions: example for when we pay or receive >25% in cash

Answer 87

**recognize the entire gain

we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.

we received a new vehicle worth $15,000. we also received $7,000 cash.

boot as a % of total consideration = 7,000/(15,000+7000) = 31.8%

NBV = 20,000
total consideration = 15,000 + 7,000 = 22,000
gain = 22,000 - 20,000 = 2,000

JE: new vehicle (plug) debit, accumulated depreciation debit, truck credit, gain credit

Question 88

consolidating financial statements

Answer 88

only make the consolidating entry when we’re consolidating the financial statements together (>50% ownership)

Question 89

consolidating JE

Answer 89

debit subsidiary’s equity accounts, credit parent’s investment in the sub

debit FV increase of sub’s assets, credit non controlling interest

debit goodwill (or bargain purchase if it’s a credit balance)

Question 90

goodwill

Answer 90

-diff between FV of the company and what we pay for it
-future earnings ability of the company

Question 91

non controlling interest

Answer 91

% of a company that we don’t own

Question 92

non controlling interest JE for consolidating investments

Answer 92

debit sub’s equity accounts, credit parent’s investment in the sub, credit non controlling interest

Question 93

consolidation after initial purchase of company

Answer 93

-use equity method of accounting for the investment on a yearly basis
-our income = % investment*sub’s net income
-our income is known as “equity in earnings”

Question 94

initial JE for purchasing a company for consolidation

Answer 94

JE for investing in a company via cash: debit investment, credit cash

JE for investing in a company via issuing stock: debit investment, credit common stock

Question 95

what does equity mean?

Answer 95

it’s the amount of money that owners in the company have the right to withdraw
**we can’t have equity in ourselves (eliminate the equity in ourselves with a debit)

Question 96

what does an investment mean?

Answer 96

we own something, such as a % in a company
**we can’t have an investment in ourselves (eliminate the investment in ourselves with a credit)

Question 97

entry for yearly activity with consolidation

Answer 97

-use equity method
-increase investment by our % ownership*investee’s net income
-decrease investment by dividends paid

Question 98

JE for reporting earnings of subsidiary with consolidation

Answer 98

investment debit, cash credit

investment debit, equity in earnings credit

sub’s equity account debit, parent investment in sub credit

Question 99

intercompany payables/receivables are eliminated

Answer 99

-need this when you own >50% and when there’s sales between parent and sub
-eliminate 100% of the receivable and payable between the companies
-ex: AR and Ap, or bonds payable and bonds receivable

Question 100

5 steps to eliminating entries

Answer 100

1. write of JE from the parent company and subsidiary perspective
2. ignore cash (because it has a net affect of 0)
3. add up total amounts recorded for each account
4. compare to the correct amounts for each account
5. the difference between the recorded and the correct amounts is the eliminating entry

Question 101

most common eliminating entry

Answer 101

inventory
-eliminate COGS exp, revenue, and inventory

fixed assets
-eliminate gain/loss, fixed assets, accumulated depreciation, depreciation expense

Question 102

why do we have eliminating entries?

Answer 102

-GAAP doesnt like for related-party transactions to inflate a company’s financial statements

Question 103

accounts payable

Answer 103

we can either record the AP assuming we take the discount (net method) or assuming we don’t take the discount (gross method)

Question 104

accuing expenses

Answer 104

US GAAP accounting says we should record an expense when we incur it, not when we pay it

Question 105

accruing expense example

Answer 105

facts:
-our monthly rent costs $1,000. it must be paid by the 5th day of the next month
-we don’t have to pay the december, year 1 rent until January 5, year 2
-we will record the expense in december, because we have incurred the expense in december
JE:
-JE dec 31 year 1: debit rent expense $1,000, credit rent payable $1,000
-JE jan 5, year 2: debit rent payable $1,000, credit cash $1,000
**the matching principle has the expense showing up on year 1 financial statements, since the expense applies to year 1

Question 106

accruing salaries and wages

Answer 106

-US GAAP accounting says that we should record an expense when we incur it, not when we pay it
-we record the expense and accrual for salaries and wages in the period the employees are working, not when we pay them

Question 107

accruing salaries and wages example

Answer 107

facts:
-we have 100 employees we pay $200 per day
-for the last week of year 1, we don’t have the payment until jan 7 of year 2
-salaries and wages expense = $100,000 (100 employees$200 per day5 workdays)
JE:
-JE dec 31, year 1: debit salary and wage expense $100,000, credit salary and wage payable $100,000
-JE jan 7, year 2: debit salary and wage payable $100,000, credit cash $100,000

Question 108

withholding employee taxes

Answer 108

-employer holders onto part of the employee’s pay for the employee’s payroll taxes
-social security and medicare payroll taxes: employers are required to pay 7.65% of an employee’s pay to the federal government; employees are required to pay 7.65% of an employee’s pay to the federal government
-when an employer pays an employee, they will withhold 7.65% of their wages to pay the social security and medicare payroll taxes to the federal government

Question 109

withholding employee taxes example

Answer 109

facts:
-we pay $100,000 to our employees (gross pay)
-we will withhold 7.65% of the pay for the employee’s social security and medicare payroll taxes ($7,650)
-the actual amount we will pay the employee’s is $92,350 (net pay)

JE:
-JE: debit salary and wage expense $100,000, credit payroll taxes payable $7,650 & cash $92,350

Question 110

employee bonuses

Answer 110

-bonuses are expenses, just like salaries and wages are expenses
-sometimes, bonuses are based on a % of net income (even though bonus expense decreases net income)
-we have to solve for “x” to find the bonus amount

Question 111

accruing employee vacation

Answer 111

-employees accumulate PTO as they work for the company
-we need to record an expense for it, because we record expenses when they are incurred
-if an employee earns through PTO in year 1, yet doesn’t use it until year 2, we should record it in year 1, which is when they earned it
-if PTO does not roll forward to future periods, then there is no need to accrue for it

Question 112

notes payable

Answer 112

-loan from the bank
-the ST portion of the principal you will pay off over 12 months is the current portion
-the LT portion of the principal you will pay off after 12 months in the non current portion
-each payment goes to both interest expense and to paying down the principal
-JE initial: debit cash, credit NP
-JE after 1st payment: debit NP & interest expense, credit cash

Question 113

accounts payable discount example

Answer 113

facts:
-we are a restaurant and purchase food supplies for $5,000
-we have 60 days to pay the food supplier
-if we pay within 10 days, we receive a 2% discount, meaning we would only need to pay $4,9000 (5000*.98) –> terms 2/10 net 60

JE:
-either record as a discount (net method) or no discount (gross method)
-gross: debit inventory 5000, credit AP 5000
-net: debit inventory 4,900, credit AP 4,900

Question 114

bonus expense example

Answer 114

facts:
-we pay our employees a bonus of 5% of net income
-if net income before the bonus expense is $250,000, how much is the bonus expense?

solve:
net income = 250,000 - bonus
net income = x
bonus = .05x
x = 250,000 - .05x
1.05x = 250,000
x = 238,095
bonus = .05*238,095 = 11,905

Question 115

subsequent events

Answer 115

-events happening between the end of the financial statement date and the issuance of the financial statements
-“did anything occur in the subsequent event period that requires disclosure, accrual, or both?”
-“did the condition of the item exist as of year end?” –> if yes = disclose and accrue; if no = disclose but don’t accrue

Question 116

subsequent event example

Answer 116

facts
-a company’s year end is 12/31/2021
-company issues the financial statements on 4/1/2022