Chapters 7-9 Study Guide

Accounting Quiz 3

Chapter Seven

1)Bank Reconciliation

Definition: analysis of the items and amounts that result in the cash balance reported in the bank statement to differ from the balance of cash account in the ledger
An adjusted cash balance determined in the bank reconciliation is reported on the balance sheet
Review homework example including journal entries

2)Cash Equivalents

Definition: when a company may temporarily have excess cash so the company normally invests in highly liquid investments in order to earn interest
Examples: U.S. Treasury bills or money market funds
Companies will report cash and cash equivalents on the balance sheet

3)Cash Short and Over

Definition: when the amount of cash on hand differs from the amount of cash sales
If there is cash over, Cash Short and Over is credited
If there is cash short, Cash Short and Over is debited
Debit balance in cash short and over is reported in miscellaneous expense on the income statement
A credit balance is included in the other income section
Journal entry for cash short: debit cash and cash short and over, credit sales
Journal entry for cash short: debit cash, credit cash short and over and sales

4)Petty Cash

Used when a company pays small amounts for items such as postage, office supplies, or minor repairs
Replenished at periodic intervals when it is depleted or reaches the minimum amount
Replenished: the accounts debited are determined by summarizing the petty cash receipts
Petty cash is only debited when the fun is initially established or increased, and is only credited when the fund is being decreased
Journal entry: debit petty cash, credit cash
Journal entry to replenish: credit office supplies, store supplies, and miscellaneous administrative expense, credit cash

5)Internal Control Objectives

Assets are safeguarded and used for business purposes
Business information is accurate
Employees and managers comply with laws and regulations

6)Cost Concept

Definition: amounts are initially recorded in the accounting record at their cost or purchase price

7)Objectivity Concept

Definition: requires that the amounts recorded in the accounting records be based on objectivity evidence or final agreed-upon cost

Chapter Eight

8)Percent of Sales Method

Used to estimate uncollectible accounts
The amount of the adjusting entry is the amount estimated for bad debt expense

The estimate is credited to the unadjusted balance of allowance for doubtful accounts

Review the example on page 356
Journal entry: debit bad debt expense, credit allowance for doubtful accounts

9)Analysis of Receivables Method

Based on the assumption that the longer an account receivable is outstanding, the less likely it will be collected
Steps of the method

The due date of each account receivable is determined
The number of days each account is past due is determined
Each account is placed in an aged class according to its due date
The totals for each aged class are determined
The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class
The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class

This process is referred to as aging the receivables

Review examples on page 358-359
Journal entry: debit bad debt expense, credit allowance for doubtful accountsfor whatever amount is needed to bring the net of AR-ADA to the estimated collectible amount as determined by the aging process.

10)Direct Write-off Method

Bad debt expense is not recorded until the customer’s account is determined to be worthless then the customer’s account is written off– violates the matching principle
Journal entry: debit bad debt expense, credit customer’s account receivable
Collected later

Journal entry: debit customer’s accounts receivable, credit bad debt expense and debit cash, credit customer’s accounts receivable

Primarily used by small companies

11)Allowance for Doubtful Accounts

Estimates the uncollectible accounts receivable at the end of the accounting period

Bad Debt Expense is recorded by an adjusting entry based on the estimate

Since it is an estimate, no specific customer account can be decreased or credited

Thus, Allowance for Doubtful Accounts is a contra asset account with a normal credit balance

Journal Entry: debit bad debt expense, credit allowance for doubtful accounts
Income statement: the amount of bad debt expense will be matched against the related revenues of the period
Balance sheet: the value of the receivables is reduced to the amount expected to be collected or realized

This is called the net realizable value of the receivables

Write-offs

The allowance account will have a credit balance at the end of the period, if the write-offs are less than the beginning balance
The allowance account will have a debit balance at the end of the period, if the write-offs are more than the beginning balance

Study examples on page 354-355
Primarily used by large companies

12)Characteristics of Notes Receivable and Maturity Date

Makeralso called promisor is the party making the promise to pay
Payeealso called promisee is the party to whom the note is payable
Face amount is the amount he note is written for on its face on an interest-bearing note this is the proceeds, on a non-interest bearing note the proceeds are the face amount less the interest (discount)
Issuance date is the date a note is issued
Due date or maturity date is the date the note is to be paid
Term of a note is the amount of time between the issuance and due dates
Interest rate is that rate of interest that must be paid on the face amount for the term of the note
Study the example of the maturity date on page 362

Chapter Nine

13)Amortization

Definition: the amount of cost to transfer to expense
Results from: the passage of time or a decline in the usefulness of the intangible asset
Used for: patents and copyrightsand other intangible assets

Patents: normally computed using the straight-line method, recorded by debiting an amortization expense account and crediting the patents account

14)Depletion

Definition: the process of transferring the cost of natural resources to an expense account
Steps for depletion

a)Determine the depletion rate

Depletion rate =

b)Multiply the depletion rate by the quantity extracted from the resource during the period

Depletion expense = depletion rate *quantity extracted

Journal entry: debit depletion expense, credit accumulated depletion

15)Depreciation spreads out the cost of an asset over its useful life

Definition: recording of the cost of fixed assets as an expenseover its useful life
Adjusting entry depreciation debits depreciation expense, credits the contra asset called accumulated depreciation or allowance for depreciation
Three methods of depreciation

Straight-line method: provides the same amount of depreciation expense for each year of the asset’s useful life

Annual depreciation =
Partial each is annual depreciation multiplied by months used over twelve

Units-of-production method: provides the same amount of depreciation expense for each unit of production

Determine the depreciation per unit

Depreciation per unit =

Compute the depreciation expense as:

Depreciation expense = depreciation per unit * total units of production used

This method is used often when a fixed asset’s in-service time varies from year to year which matches depreciation expense with asset’s revenue

Double-declining-balance method: provides for a declining periodic expense over the expected useful life of the asset

Determine the straight-line percentage using the expected useful life
Determine the double-declining-balance rate by multiplying the straight-line rateby two
Compute the depreciation expense by multiplying the double-declining-balance times the book value of the asset
Depreciation cost does not go below residual value

16)Disposal of Fixed Assets

Discarding fixed assets

Study examples from homework and page 406 and web page T-accounts

Selling fixed assets

Study examples from homework and page 407and web page T-accounts

17)Intangible Assets

Definition: assets that do not physically exist

Patent: exclusive right to benefit from an innovation, estimated useful life not to exceed legal life, amortization expense
Copyright: exclusive right to benefit from a literary, artistic, or musical composition
Trademark: exclusive use of a name, term, or symbol
Goodwill: excess of purchase price of a business over the fair value of its net assets (assets – liabilities)