Chapter 05 - Accounting for Receivables and Inventory Cost Flow MGT45 HW2 Fall 2013 11AM Section CHAPTER 5 - Accounting for Receivables and Inventory Cost Flow ANSWERS TO QUESTIONS 1. Accounts receivable are the expected future receipts that arise when a company permits its customers to buy now and pay later. The amounts are usually small with a short term to maturity. Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms. 8. Factors for use in estimating uncollectible accounts include: (1) the percentage of uncollectible accounts from years past. (2) adjustment for new circumstances that are anticipated to be experienced in the future. (3) industry averages or experiences of similar businesses. (4) examination of current accounts and company credit policies. 15. An aging of accounts receivable schedule classifies all receivables by their due date. When using an aging schedule for estimating uncollectible accounts, accounts receivable is divided into categories based on due dates. Different percentages are then applied to each category. For instance a higher percentage would be applied to the group of accounts that is more than 90 days past due than to the group that is only 30 days past due. 5-1
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
MGT45 HW2Fall 2013 11AM Section
CHAPTER 5 - Accounting for Receivables and Inventory Cost Flow
ANSWERS TO QUESTIONS
1. Accounts receivable are the expected future receipts that arise when a company permits its customers to buy now and pay later. The amounts are usually small with a short term to maturity. Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms.
8. Factors for use in estimating uncollectible accounts include:
(1) the percentage of uncollectible accounts from years past.(2) adjustment for new circumstances that are anticipated to be experienced in the future.(3) industry averages or experiences of similar businesses.(4) examination of current accounts and company credit
policies.
15. An aging of accounts receivable schedule classifies all receivables by their due date. When using an aging schedule for estimating uncollectible accounts, accounts receivable is divided into categories based on due dates. Different percentages are then applied to each category. For instance a higher percentage would be applied to the group of accounts that is more than 90 days past due than to the group that is only 30 days past due.
20. The matching concept matches revenue and expenses to the period in which they are earned or incurred. By accruing interest, the interest is recognized in the period it is earned or incurred regardless of when the cash is collected or paid.
5-1
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
26. The acceptance of major credit cards enables a business to avoid the cost of uncollectible accounts and the clerical costs of maintaining accounts receivable records. In addition, the business avoids the implicit cost of lost opportunities due to delayed cash flows.
SOLUTIONS TO EXERCISES - CHAPTER 5
EXERCISE 5-1a.
Nina’s Accounting ServiceHorizontal Statements Model
Balance Sheet Acct. Titles Event
Assets = Equity for R/E
Cash + Acct. Rec.
Allow. Ret. Ear.
20121. NA 120,000 NA 120,000 Svc. Rev.2. 90,000 (90,000) NA NA3. (24,00
0)NA NA (24,00
0)Sal. Exp.
4. NA NA 1,200 (1,200) Uncoll. Accts. Exp.
Bal. 66,000 + 30,000 1,200 = 94,800
5-2
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
Babb EnterprisesBalance Sheet Income Statement Statement of
Date Assets = Equity Rev. Exp. = Net Inc. Cash FlowsCash + Note
Rec.+ Int.
Rec.= Ret.
Ear.
5-6
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
1. 9/1/12 (25,000)
25,000 NA NA NA NA NA (25,000) IA
2. 12/31/121
NA NA 500 500 500 NA 500 NA
3. 9/1/132 NA NA 1,000 1,000 1,000
NA 1,000 NA
9/1/13 26,500 (25,000)
(1,500) NA NA NA NA 25,000 IA1,500 OA
1$25,000 x 6% x 4/12 = $5002$25,000 x 6% x 8/12 = $1,000
EXERCISE 5-14
a.
Royal Carpet CleaningHorizontal Statements Model
Balance Sheet Income Statement Statement of
Assets = Liab.
+ Equity Rev. Exp. = Net Inc.
Cash Flows
Event
Cash + Acc. Rec. = + Ret. Ear
1. NA + 87,300 = NA + 87,300 90,000
2,700* = 87,300
NA
2. 87,300 + (87,300) = NA + NA NA NA = NA 87,300 OA
5-7
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
*$90,000 x 3% = $2,700
b. (1) Total assets: Cash $ 87,300
(2) Revenue recognized: $ 90,000
(3) Cash Flow from Operating Activities:$ 87,300
(4) By accepting credit cards rather than allowing customers to purchase goods on account, Royal Carpet Cleaning avoids the risk of uncollectible accounts as well as the expense of maintaining and collecting accounts receivable.
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
*Average Cost per Unit: $2,700 2 = $1,350
5-9
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
Chapter 6Questions
2. Tangible assets are those assets that have a physical existence. Some examples include buildings and equipment. Intangible assets are those assets that represent some rights and privileges associated with owning the asset. Some examples include copyrights, leases, and trademarks.
4. Depreciation is the systematic allocation of the cost of property, plant and equipment to the accounting periods over which they are to be used. Some examples of assets that are depreciated include buildings, machinery, and office equipment.
7. Amortization is the systematic allocation of the cost of intangible assets over their estimated useful lives. Examples of intangible assets that are amortized include patents, franchises and copyrights.
13. Recognition of depreciation expense reduces total assets; while the asset account containing the asset that is being depreciated is not changed, the contra asset account, accumulated depreciation, is increased which, in turn, reduces total assets. Total equity is decreased when an expense is recognized.
16. When the total cost of an asset is expensed in the year acquired, total expense will be overstated and net income will be understated. Because all of a plant asset's cost is erroneously expensed, assets will be understated and retained earnings will be understated because net income was understated.
5-10
Chapter 05 - Accounting for Receivables and Inventory Cost Flow
EXERCISE 6-2
Long-Term Operational Assets:a. Nob. Yesc. Yesd. Noe. No f. Yesg. Noh. Yesi. Yes (If the company is in a business that uses or sells timber)j. Yes (As long as it is not held for investment purposes)k. Yesl. Yes
EXERCISE 6-5
a. Basket Purchase
b. % of* Purchase AllocatedTotal Appraised Value App. Val. Price Cost Land $ 200,000 .20 x $900,000 =$180,000Building 800,000 .80 x 900,000 = 720,000Total $1,000,000 $900,000
1. Cash payments to creditors is an asset use transaction. This type of transaction will reduce both assets and liabilities.
3. The entry to record accrued interest consists of an increase to Interest Expense and an increase to Interest Payable. The transaction is a claims exchange transaction and reduces equity and increases liabilities.
8. Collection of sales tax is not revenue. The retailer is
merely acting as a collection agency for the state. The retailer collects the sales tax and periodically remits it to the state.
10. The three categories of contingent liabilities are:
1. Probable and reasonably estimated2. Possible but not reasonably estimated3. Remote
19. A line of credit is a preapproved amount of credit that is available to a business to use as needed. It eliminates the need to get loan approval each time the company needs some additional cash. When using a line of credit, money can be borrowed one day and paid back the next or used for some prespecified period. A line of credit is generally used for short-term financing where it is not practical to issue bonds.
27. The issuance of bonds by a company is an asset source transaction. Assets increase and liabilities increase.
33. A classified balance sheet is one that separates assets and
liabilities into current and noncurrent items.
7-1
Chapter 07 - Accounting for Liabilities
SOLUTIONS TO EXERCISES - CHAPTER 7
EXERCISE 7-1
a. $-0-. Interest will be paid at maturity of the note, April 30, 2013.
b. $1,200 ($90,000 x 8% = $7,200; $7,200 x 2/12= $1,200)
c. $91,200 ($90,000 Notes Payable +$1,200 Interest Payable)
d. $93,600 [$90,000 principal + $3,600 interest ($90,000 x 8% x 6/12)]
e. $2,400 ($90,000 x 8% = $7,200; $7,200 x 4/12)
7-2
Chapter 07 - Accounting for Liabilities
EXERCISE 7-3
a. Book Sales $275,000Miscellaneous Items Sales150,000Total Sales 425,000x Sales Tax Rate 7 % Sales Tax Collected $29,750
Total Sales $425,000Less: Cost of Goods Sold (210,000 ) Gross Margin 215,000Less: Operating Expenses (130,000 ) Net Income $ 85,000
7-3
Chapter 07 - Accounting for Liabilities
EXERCISE 7-5
a. There are three categories of contingent liabilities:1. Probable and can be reasonably estimated. This category of contingent
liabilities is recognized in the financial statements. 2. Possible but cannot be reasonably estimated. This category of contingent
liabilities is disclosed in the footnotes to the financial statements.3. Remote. This category of contingent liabilities is not recognized in the
financial statements or disclosed in the footnotes.b. 1. This is a contingent liability. The event occurred. The lawsuit has been filed, and the “attorney knows that the company will have to pay…”. Therefore, the liability is probable. The “reasonably certain” amount of $500,000 is deemed “reasonably estimable” and therefore $500,000 should be accrued.
2. This is a contingent liability which can be reasonably estimated. GAAP requires that it be recorded on the books.
3. This is not a contingent liability since the likelihood of damage is not certain. It is not recorded on the books or mentioned in the financial statements.
7-4
Chapter 07 - Accounting for Liabilities
EXERCISE 7-8 a.Mabry Equipment Sales Corp. Statements Model
Assets = Liabilities + Equity
No. Cash Inv. =Accts. Pay.
Sales Tax Pay.
Warr. Pay.
Int. Pay
Notes Pay. +
Comm. Stock
Ret. Earn.
1. 50,000 NA NA NA NA NA NA 50,000 NA2. NA 175,000 175,000 NA NA NA NA NA NA3a. 216,000 NA NA 16,000 NA NA NA NA 200,0003b. NA (125,00
0)NA NA NA NA NA NA (125,000)
4. NA NA NA NA 8,000 NA NA NA (8,000)5. (12,000) NA NA (12,000) NA NA NA NA NA6. 20,000 NA NA NA NA NA 20,000 NA NA7. (5,600) NA NA NA (5,600) NA NA NA NA8. (54,000) NA NA NA NA NA NA NA (54,000)9. (125,000) NA (125,000) NA NA NA NA NA NA10.1 NA NA NA NA NA 400 NA NA (400)Bal. 89,400 50,000 = 50,000 4,000 2,400 400 20,000 + 50,000 12,600
1$20,000 x 6% x 4/12 = $400.
Income Statement Statement ofEvent Rev. – Exp. = Net Inc. Cash Flows1. NA NA NA 50,000 FA2. NA NA NA NA3a. 200,000 NA 200,000 216,000 OA3b. NA 125,00
0(125,000) NA
4. NA 8,000 (8,000) NA5. NA NA NA (12,000) OA6. NA NA NA 20,000 FA7. NA NA NA (5,600) OA8. NA 54,000 (54,000) (54,000) OA9. NA NA NA (125,000) OA10 NA 400 (400) NABal. 200,000 – 187,40
0= 12,600 89,400
7-5
Chapter 07 - Accounting for Liabilities
EXERCISE 7-8 (cont.)
b.Mabry Equipment Sales Corp.
Income StatementFor the Year Ended December 31, 2012
CHAPTER 8 - Proprietorships, Partnerships, and Corporations
ANSWERS TO QUESTIONS
1. The three major forms of business organizations are the sole proprietorship, the partnership, and the corporation.
The sole proprietorship is a business owned by one individual.
The partnership is a business that is owned by two or more persons with the intent to make a profit.
The corporation is a legal entity that is organized according to the laws of the state in which it is formed. The business organization is separate from its owners.
8. The corporate form of business has both advantages and disadvantages.Advantages: (1) Limited liability. Owners are not held personally responsible for the actions of the corporation. Generally, the maximum amount an owner can lose is limited to his/her amount of the investment.(2) Continuity of existence. Corporations do not cease to exist when an owner dies, disposes of his interest, retires, etc.(3) Free transferability of ownership interest. An owner can readily sell or transfer an interest to another party without interfering in the corporation's business.(4) Ease of raising capital. It is generally easier to attract many small investors rather than one or two investors willing to invest large sums of money or assets in a business.
Disadvantages: (1) Regulation. Corporations are subject to considerably more regulation, both state and federal, than are sole proprietorships and partnerships. Corporations are required to file separate income tax returns and public
5-12
Chapter 07 - Accounting for Liabilities
corporations are required to comply with SEC regulations.(2) Double taxation. The most important disadvantage of the corporation is double taxation. Since a corporation is a separate legal entity, it must file and pay tax on corporate profits. When these profits are distributed to the owners (shareholders), these distributions are not deductible for the corporation and are taxable income to the shareholders.
11. Contributed capital is the capital that is acquired by the corporation from owners of the corporation. For example, the sale of stock to an investor is a type of contributed capital.Retained earnings is the capital of a corporation that has been generated through the earnings process of a corporation and kept in the corporation (i.e., not distributed to owners).
13. Because corporations can be owned by millions of individuals, they are able to pool the resources of many individuals which permits access to billions of dollars of capital. Proprietorships and partnerships are bound by the financial condition of a few, private investors.
26. The primary reason for declaring a stock split is to reduce the market value of stock by increasing the number of shares outstanding on the market. This makes the stock more affordable and may, therefore, increase demand for the stock.
30. Equity financing refers to capital acquired from owners;
usually the term refers to issuance of stock.
Debt financing refers to borrowing in the form of notes and bonds payable.
5-13
Chapter 07 - Accounting for Liabilities
EXERCISE 8-10
Balance Sheet Income Statement Statement
Date Assets = Liab. +Com. Stk. + Ret.
Ear.Rev Exp
.= Net
Inc.
ofCash Flows
10/1 NA =60,000 + NA + (60,000)
NA NA = NA NA
11/20
NA = NA + NA + NA NA NA = NA NA
12/30
(60,000)
= (60,000)
+ NA + NA NA NA = NA (60,000) FA
EXERCISE 8-15
a. The accounting records are not affected by a stock split. A memo would indicate the number of shares had doubled and the par value had been reduced by one-half.
b. 300,000 shares x 2 = 600,000 new shares outstanding
$10 par value 2 = $5 new par value
c. Theoretically, the market value per share would be reduced to $90 ($180 2) after the split. However, if this is perceived as a good move by the company, the price per share may not fall that far, ending at something over $90.