1
Intermediate Accounting
Study Guide Chapter 7
Objectives:
1.Explain when accounts receivable are generally recognized.
2.Name four types of non-trade receivables.
3.Indicate how to report noncurrent receivables on the balance sheet.
4.Indicate which one of the following values is used to report accounts receivable:
(a)Discounted present value
(b)Net realizable value
5.Explain the difference between the direct write-off and the allowance methods of accounting for bad debts, and indicate which method is required by GAAP. Give two reasons why this method is required by GAAP.
6.Be able to record the following journal entries using the allowance method:
(a)Adjusting entry
(b)The write-off of an account
(c)Reinstatement and payment of an account
7.Be able to calculate the following based on the use of the percentage of sales method and the percentage of accounts receivable method: (assuming either a debit or credit balance in the allowance account.)
(a)Estimated uncollectible accounts
(b)The amount of the adjusting entry
(c)Balance in the allowance account after the adjustment
8.Explain when warranty costs must be estimated and reported in advance.
1
Chapter 7 Objectives (continued)
9.Be able to record the following journal entries in relation to warranties and service contracts:
(a) adjustment to record estimated warranty obligation
(b) to record actual warranty repairs
(c) to record cash received from service contracts (TBAIC)
(d) to record estimated revenue earned from service contracts (TBAIC)
(e) to record repairs made under service contracts (TBAIC).
10.From the discussion on page 336 and exhibit 7-5, be able to identify assets that are reported as unrestricted cash in the current asset section of the balance sheet.
11.Explain how to report a credit balance in cash resulting from the issuance of checks in excess of the amount on deposit.
12.Explain what is meant by compensating balances, and indicate the SEC's recommendation for reporting legally restricted compensating balances resulting from short-term and long-term financing arrangements. How should compensating balances that are not legally restricted be reported?
13.Name three of the six characteristics of a system of cash control.
14.Be able to prepare a 2-column bank reconciliation and journalize the entries associated with the reconciliation.
15.Name two methods of accounts receivable financing.
16. State the three conditions that must be met for the
transfer of accounts receivable to be treated as a sale.
17. Explain the difference between a sale of receivables with
recourse and one without recourse.
1
Chapter 7 Objectives (continued)
18.Be able to give the journal entry necessary to record each of the following:
(a)A sale of accounts receivable without recourse assuming the accounting for an allowance for doubtful accounts and withheld proceeds to protect against sales returns and allowances.
(b) A sale of accounts receivable with recourse given the
same data in (a) plus the estimated amount of the
recourse obligation.
(c)An assignment of specific accounts receivable with additional finance charges
19.Explain the two ways in which trade notes receivable are created.
20.Name two examples of non-trade notes receivable.
21.Be able to indicate at what value notes receivable are initially recorded, and indicate how this value is determined in a loan transaction and in a sales transaction.
22.Explain what is meant by a non-interest-bearing note. Indicate the account used to record the difference between the face value and a lower present value of a non-interest-bearing note, and indicate its account classification.
23.Be able to indicate the journal entries necessary to record the following transactions for an interest-bearing and a non-interest-bearing note:
(a)Receipt of the note
(b)Adjustment for accrued interest earned
(c)Receipt of payment
24.Explain when implicit interest is not recorded on a non-interest-bearing note.
25.Describe three situations where valuation problems arise when notes are received in exchange for property, goods or services.
26.Indicate the two valuation alternatives for notes received under one of the situations in question # 25.
1
Chapter 7 Objectives (continued)
27.Be able to show the journal entries necessary to record the following transactions:
(a)The receipt of a note in exchange for land assuming the fair value of the land is less than the face value of the note. (The note will be an interest-bearing note.)
(b)The compound entry to record the accrued interest and the amortization of the note in part (a)
(c)The entry to record the receipt of payment on the above note and interest
28.Indicate if the following require an adjustment in preparing a cash flow statement assuming the use of the net accounts receivable method:
(a)Bad Debts Expense (direct method)
(b)Bad Debts Expense (indirect method)
(c)write-off of uncollectible accounts (direct method)
(d)write-off of uncollectible accounts (indirect method)
29.Be able to record the following journal entries related to a petty cash fund: (See separate expanded material.)
(a)establishment of the fund
(b)replenishment of the fund with a shortage
(c)to increase or decrease the original level of the fund
1
ASSIGNMENT:
1.Question #8 (Indicate which items would be reported as unrestricted cash in the current asset section of the balance sheet.)
*2.Exercise 7-26
*3.Exercise 7-28 (Also indicate the balance in the allowance account after each entry)
*4.Exercise 7-29
*5.Exercise 7-32 - Part 1 (Also give the entry to record the actual repair.)
*6.Exercise 7-33
7. Exercise 7-35 (Just indicate which items would be reported as unrestricted cash in the current asset section of the balance sheet.)
*8. Exercise 7-40
*9.Record the following journal entries:
(a) to establish a petty cash fund in the amount of $2000
(b) to reimburse the petty cash fund assuming the balance in the fund is $400 and receipts show the following expenditures: Misc. Selling Expense $490 and Misc.
Administrative Expense $1100
*10.Record the following journal entries:
(a)Company A assigns accounts receivable to its bank in the amount of $100,000 to secure a loan of 70,000. Assume a 10% note is issued for the loan and the bank charges a 1% finance charge on the receivables in addition to the interest on the note.
(b)Company B sold, without recourse, $20,000 of accounts receivable for $19,000. The bank withheld $500 of the payment as a protection against sales returns and allowances, and there was an allowance for doubtful accounts of $300 associated with the receivables.
(c) Assume the same circumstances as in (b), but assume
the accounts were sold with recourse and the
estimated recourse obligation is $800
*11.Record the following journal entries relating to an interest-bearing note:
(a)Receipt of a $2,000 note for a sale of $2000
(b)Adjustment for accrued interest in the amount of $50
(c)Receipt of payment on the note and interest of $150
*12.Record the following journal entries relating to a non-interest-bearing note:
(a)Receipt of a $2,150 note for a sale of $2,000
(b)Adjustment for accrued interest in the amount of $50
(c)The receipt of payment on the note
* Solutions provided
1
Chapter 7 Assignments (continued)
*13.The Roland Corporation receives a $20,000 one-year, interest-bearing note in exchange for land with a cost of $16,000 and a fair market value of $18,000. Record the following journal entries:
(a)The exchange of the land for the note
(b)The entry to record accrued interest of $1000 and amortization of the discount in the amount of $600
(c)The receipt of payment on the note and interest of $3000
* Solutions provided
1
Intermediate Accounting
Study Guide Chapter 9
Objectives:
1.Be able to name the three cost elements of work in process.
2.Name three examples of manufacturing overhead.
3.Explain the rule used to determine what goods to include in an inventory count, and name three situations where this rule may cause a firm to include inventory in its count that is not in its physical possession.
4.Be able to record journal entries similar to those on page 455 for the net purchase method and the gross purchase method.
5.Be able to state two common advantages of the FIFO and the weighted average inventory methods.
6.Explain why LIFO provides for the lowest net income during periods of rising prices.
7.Explain why the weighted average method provides inventory values that more closely parallel FIFO than LIFO.
8.Explain the following benefits of LIFO: (TBAIC)
(a)Tax benefits
(b)Better measurement of income
9.Explain the following disadvantages of LIFO:(TBAIC)
(a)Poor stockholders' PR
(b)Unrealistic value for inventory on the balance sheet
(c)Unanticipated profit recognition
(d)Unrealistic flow assumptions
10.Explain why firms using LIFO often use FIFO to maintain internal perpetual records and adjust their inventory to LIFO at the end of the fiscal year.
1
Chapter 9 Objectives (continued)
11.Be able to calculate the value of ending inventory using LIFO, FIFO, and weighted average assuming a periodic and a perpetual inventory system.
12.Explain what is meant by a LIFO reserve, and indicate how it is reported.
13.Show the journal entry necessary to avoid interim LIFO liquidation.
14.Explain the LIFO conformity rule, and explain how the IRS relaxed this rule in 1981.
Go to page 486.
15.List the three alternatives that can be used to measure the cost of ending inventory that exceeds the number of units of beginning inventory in a LIFO inventory pool. (See footnote #23)
16.Be able to value ending inventory using a LIFO inventory pool.
17.Explain how dollar-value LIFO differs from LIFO inventory pools.
18.Name three types of indexes that can be used in dollar-value LIFO. (TBAIC)
19.Be able to calculate a current price index using the double extension method and the link-chain method.
20.Given current price indexes and ending inventory at current prices, be able to value ending inventory using the dollar-value LIFO method.
Go back to page 471.
21.Indicate when each of the following is recognized:
(a)Inventory write-downs due to unrealized decreases in value
(b)Inventory write-ups due to unrealized increases in value
1
Chapter 9 Objectives (continued)
22.Indicate how the application of LCM differs for financial reporting and tax reporting in relation to Lifo inventory. (see footnote #15)
23.Indicate how market is determined in the LCM method of valuing inventory, and indicate how to calculate the ceiling and the floor.
24.Be able to work a problem similar to Exercise 9-44.
25.Explain why the most common application of LCM method is to individual inventory items. (see footnote #17)
26.Be able to show the journal entries to record the write-down and the recovery of a previous write-down under each of the following applications of the LCM method:
(a)Individual application
(b)Category application
(c)Total inventory application
27.Explain the two methods of treating a loss on decline in market value of inventory.
28.Explain how the allowance for the decline in value of inventory is shown on the balance sheet.
29.Indicate if the LCM method implements or violates the following accounting principles: (TBAIC)
(a)Conservatism
(b)Cost concept
(c)Consistency
(d)Matching
1
ASSIGNMENT:
Note: Solutions will be available for all of the assignment
1.Exercise 9-32 (Instruction #1 only and assume a perpetual system)
2.Exercise 9-34 (Ending Inventory = 400 units)
3.Work Exercise 9-35
4.Compute the value of ending inventory under a LIFO inventory pool method assuming the following:
(Round to the nearest 4.)
Year#1 Beg. Inventory 1000 units @ $10.00
Purchases 200 units @ $10.20
500 units @ $10.40
100 units @ $10.60
Ending Inventory 1200 units
Year#2 Purchases 300 units @ $10.60
200 units @ $10.65
100 units @ $10.66
Ending Inventory 1300 units
Year #3 Ending Inventory 1100 units
Year #4 Ending Inventory 900 units
5.From the following information calculate the value of ending inventory each year using dollar value LIFO:
Year Inventory at Year-end Index
Year-end Prices
#1 $20,500 1.00
#2 34,000 1.18
#3 55,600 1.36
#4 37,800 1.14
#5 72,250 1.72
#6 53,900 2.05
6. From the following information in relation to a cosmetics company, calculate a year-end index using the double extension method:
Product / Quantity / Base Year Cost / Current End-of- Year CostBath Oil / 2000 / $8.00 / $8.80
Body Lotion / 1000 / 4.50 / 4.80
Eye Shadow / 5000 / 6.00 / 6.15
Base Makeup / 3000 / 5.50 / 5.70
Blush / 6000 / 8.50 / 8.55
Facial Cream / 1000 / 6.20 / 6.60
1
Chapter 9 Problems (continued)
7. On Dec. 31, a company took a statistical sample of its inventory. The sample provided the following information:
Quantity Previous Year Current Year
Costs Costs
Product A 750 $20.00 $22.60
Product B250 $4.50 $5.75
Product C140 $7.10 $7.80
Product D376 $3.50 $3.90
The link-chain cumulative index at the end of the previous year was 1.51.
Compute the cumulative index at the end of the current year using the link-chain method.
8.Exercise 9-44
9.Exercise 9-45
10.Exercise 9-46
1
Intermediate Accounting
Study Guide Chapter 10
Objectives:
1.Name three examples of acquisition costs for each of the following:
(a)Land
(b)Land improvements
(c)Building
(d)Equipment
2.Name four types of intangible assets in addition to patents and goodwill
3.Explain how the acquisition cost of each of the following is calculated:
(a)Patents
(b)Goodwill
4. Explain when an order backlog is recognized as an
intangible asset.
5.Explain how to value individual assets when they are acquired for one lump-sum and when a price cannot be clearly identified with specific assets.
6.Explain how the value of each of the following is determined when equipment is acquired using a deferred payment contract without reference to interest.
(a)Equipment
(b)Discount on notes payable
(c)Notes payable
(d)Cash
7.Be able to answer the following questions in relation to the transaction in question # 6.
(a)What type of account is discount on notes payable?
(b)What debit and credit is required to amortize the discount?
8.Be able to indicate at what value an asset should be recorded when it is acquired by the issuance of a company's stock in each of the following situations:
(a)When the market value of the stock can be determined
(b)When the market value of the stock cannot be determined
1
Chapter 10 Objectives (continued)
9.List specific costs that should be added to the cost of a
self-constructed asset.
10.Explain the two methods of assigning overhead costs to self-constructed projects.
11.Explain why a company should not recognize a profit due to the cost savings from a self-constructed asset over a purchased asset.
12.Explain when a cost excess of a self-constructed asset over a purchased asset should be recognized as an impairment loss.
13.Explain what is meant by capitalized interest.
14.Be able to indicate on which of the following assets, interest capitalization is allowed:
(a)A discrete construction project involving the construction of a building for the enterprise's own use
(b)A discrete construction project involving the construction of equipment for the enterprise's own use
(c)A discrete construction project of an asset to be leased and the asset is not part of regular inventory
(d)The purchase of equipment from a supplier
(e)The manufacture of repetitive inventory
15.Provide the following information in relation to the capitalization of interest:
(a)The interest rate to use to calculate interest that is eligible for capitalization on the portion on the total weighted average accumulated construction expenditures that does not exceed the amount of the construction loan and the rate to use on the portion that do exceed the amount of the construction loan.
(b)Situation when the total interest eligible for capitalization is not the actual interest expense that is capitalized
(c)Two methods used to disclose capitalized interest for income statement reporting.
1
Chapter 10 Objectives (continued)
16.Be able to calculate the following in relation to capitalized interest:
(a)Maximum interest that can be capitalized
(b)Weighted-average interest rate
(c)Interest eligible for capitalization
(d)Interest actually capitalized.
17.Indicate the value used to record property acquired through donation, and indicate the type of account credited to record its acquisition.
18.Explain the treatment of valuable resources discovered on land already owned.
19. Explain the requirement of FASB Statement #69 in relation
to publicly traded oil and gas firms.
20. Give an example of an asset restoration cost, and show
the entry to record restoration costs.
21.From a conceptual viewpoint, how should accountants decide whether to record an expenditure as an asset (capitalize it) or as an expense?
22.Indicate if the following should normally be expensed or capitalized: (See exhibit 10-7)
(a)Normal maintenance and repair
(b)Renewals or replacement parts that do not extend the estimated useful life
(c)Renewals or replacement parts that do extend the estimated useful life
(d)Enlargement of existing facilities
(e)Changes in assets to provide increased or improved service
(f)Minor costs that are usually capitalized (TBAIC)
23.Be able to show the journal entry necessary to record a replacement from the following information:
(a)Cost of new part
(b)Cost of old part
(c)Accumulated depreciation associated with old part
24.Explain the usual treatment of R&D costs, and explain the exception to this treatment. Explain how FASB justifies this treatment.
1
Chapter 10 Objectives (continued)
25.Indicate if the following should normally be expensed or capitalized: (TBAIC)
(a)Purchase of land to construct a research facility
(b)Self construction of a building to be used for research
(c)Purchase of specialized equipment to be used solely for current research
(d)Purchase of equipment that will be used for research but can be used for other purposes or future research.
(e)Research salaries and materials
(f)Purchase of a patent
(g)Legal costs to obtain or protect a patent
(h)Developmental costs for computer software incurred up to the point where technical feasibility has been established
(i) Developmental costs for computer software incurred after technical feasibility has been established.
26.Name one proof of the technical feasibility of computer software.
27. Explain how international treatment of R&D costs differ
from U.S. treatment, and indicate what is likely to be the
future treatment in the U.S..
28.Explain the following methods of accounting for the exploration costs associated with oil and natural gas wells:
(a)Full cost approach
(b)Successful efforts approach
29.Explain why small drilling firms prefer the full cost approach.
30.Explain how each of the following FASB Statements relates to the methods described in objective # 28:
(a)Statement # 19
(b)Statement # 25
31. Explain the general thrust of SFAS #141 and 142 as they
relate to the reporting of intangible assets, and indicate
the extent to which companies have followed this
requirement.