Exam Revision - Chapter 9 10
Exam Revision - Chapter 9 10
Exam Revision - Chapter 9 10
Chapter 9 - Receivables
Objective 1: Explain Account Receivables
1. Define:
a. Account Receivable: an account that tracks the amounts owed by customers for services
and goods
b. Note Receivable: an account that tracks the written promise for amounts to be received
c. Trade Receivable: notes receivable and accounts receivable that are the result of sales
transactions
d. Other Receivable: receivables that are not the result of sales transactions ( interest
receivable)
Review: A company sold merchandise on account for $5,000 with the terms 2/10, n/30. The customer
returns $500 worth of merchandise after 2 days, and pays the amount due on day 8.
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Objective 2: Valuing Accounts Receivable
1. Define:
Term Definition
Direct Write-Off Method A method of accounting for bad debts – write off uncollectible
accounts at the same time they are deemed uncollectible (non
GAAP method)
Allowance Method A method of accounting for bad debts of that involves
estimating uncollectible accounts at the end of the period
(GAAP)
Cash (net) realizable value The net balance that is expected to be collected (Account
receivable less estimated uncollectible accounts)
Percentage of receivables basis A method of estimating uncollectibale receivable balances that
uses account receivable
Aging the accounts receivable A report that shows the A/R balances by the length of time
outstanding (unpaid)
Factor of accounts receivable Sale of A/R to a financial institution for immediate cash (less a
fee)
Allowance for Doubtful Accounts A contra-asset account that records the estimated amount of
uncollectible accounts (come together with A/R)
3. Allowance Method:
1. How is it done? Requires 2 steps. At the period end, estimate an amount that is
uncollectible and record an expense and allowance for doubtful accounts. When the
company determines an A/R balance is uncollectible, remove the A/R and reduce the
Allowance for doubtful accounts.
2. When is it done? Step 1 – at the end of the period (year, quarter, ect.). Step 2 – during
the year when the company determines an A/R balance is uncollectible
a. During the year, a company has credit sales of $300,000. Of this amount, $50,000 of receivables
remains uncollected at year end. The company estimates 2% of receivables will be uncollectible. The
balance in the Allowance for Doubtful accounts is a $200 debit balance. Prepare the period end
adjusting journal entry:
Bad debt expense 1,200
Allowance for doubtful accounts 1,200
What is the cash realizable value of the accounts receivable? 50,000 - 1,000 = 49,000
b. What if the balance in the Allowance for Doubtful accounts is a $200 credit balance instead? Prepare
the period end adjusting journal entry:
Bad debt expense 800
Allowance for doubtful accounts 800
What is the cash realizable value of the accounts receivable? 50,000 - 1,000 = 49,000
c. The company determines that a receivable balance from XYX Co. is not collectible and management
authorizes a write-off of $350.
Allowance for doubtful accounts 350
Account receivable 350
1. Define:
1. Maker: the person or company borrowing the cash and promisin gto pay bak the loan
2. Payee: the person or company that lent the cash and will receive the cash payment in
the future
4. Honoring of note: this means paying the note (dishonouring is failure to pay)
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2. Determining Maturity Dates: Omit the date of the note, but include the due date. (you need to
know how many days each month has)
Example: $10,000, 5%, 90 day note, issued on July 1
July 2-31= 30 days
August 1-31= 31 days
Total is 61 so far. 90-61= 29. Note is due on September 29th
c. Land Improvements: structures that are on land such as sidewalks, lighting, fencing,
parking lots
f. Ordinary Repairs: maintian the operating efficiency and productive life of a long-lived
asset
2. Explain and give examples of costs that get assets “ready for intended use”:
Frieght-in (transporation to you), taxes, installation, repairs to get it ready for use (old
assets), modifications or customization. Does not include any repairs or costs once the
asset is installed and ready for use.
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Objective 2: Depreciation Methods
1. Define:
Term Definition
Useful Life The time that the company expects to use the plant
asset (this is an estimate)
Salvage Value The amount that the company expects to sell the
plant asset for at the end of the useful life (this is an
estimate)
Straight-line Depreciation method that allocates equal amounts of
depreciation over the life of the plant asset
Units-of-Activity Depreciation method that allocates equal amounts of
depreciation of the units produced by the plant asset
Declining Balance Depreciation method that applies a consistentrate to
the book value of the asset – records more
depreciation at the start of the life than the end
2. Journalize Depreciation
Depreciation expense DEBIT
Accumulated Depreciation CREDIT
b. Loss on Disposal:
Cash DEBIT
Accumulated Depreciation DEBIT
Loss (expense) DEBIT
Plant Asset (equipment, building, ect) CREDIT
Depreciation Examples:
Straight Line Example
The New Times Company purchased a new machine on January 1, 2017. The new machine cost $120,000,
had an estimated useful life of five years, and an estimated salvage value of $15,000 at the end if it’s useful
life. It was expected that the machine would produce 210,000 widgets during its useful life. The company used
the machine for exactly three years. During these three years, the annual production of widgets was 80,000,
50,000, and 30,000 units, respectively. On January 1, 2020, the machine is sold for $45,000.
Equation:
Depreciation Calculation:
Journal Entry:
Depreciation expense 21,000
Accumulated Depreciation 21,000
Sale:
Cash 45,000
Accumulated Depreciation 12,000
Loss (expense) 63,000
Machine 120,000
Units-of-Activity Example
The New Times Company purchased a new machine on January 1, 2017. The new machine cost
$120,000, had an estimated useful life of five years, and an estimated salvage value of $15,000 at the
end if it’s useful life. It was expected that the machine would produce 210,000 widgets during its
useful life. The company used the machine for exactly three years. During these three years, the
annual production of widgets was 80,000, 50,000, and 30,000 units, respectively. On January 1,
2020, the machine is sold for $45,000.
Equation:
Depreciation Calculation:
Sale:
Cash 45,000
Accumulated Depreciation 80,000
Machine 120,000
Gain (revenue) 5,000
Depreciation Calculation:
Sale:
Cash 45,000
Accumulated Depreciation 93,480
Machine 120,000
Gain (revenue) 18,480
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