Under G.A.A.P, which method would you use to record an uncollectible AR ?
Allowance Method
Allowance Method
keep expenses from being UNDERSTATED on the income statement
Allowance for Doubtful Accounts
The contra asset account for accounts receivable; normal credit balance
Journal Entry for ADA (write-off)
Managing Recievables
– Determine who to extend credit to
– Establish a payment period
-Monitor collections
– Credit Terms & Evaluate the recievable balance
EX: Journal Entry to record 5.6 million in sales on account
AR ##
Sales Rev ##
EX: Journal entry to record lending 1,000 to an employee at a rate of 6% for 3 mo.
Note Rec. ##
Cash ##
Interest in calculated _______.
Yealy (EX: 2 mo. = # x (2/12) x__ )
Failing to record bad debt exp. in the same period as related revenue violates what principle?
The correct journal entry for the collection of a note recievable includes:
Debit to Cash and a Credit to Notes Recievable
Bad Debt Expense
Accounts receivable that are uncollectible; located on the Income Statement
Differences between NR & AR
1) Promissary Note
2) longer payback period
the person/company which makes a contractual promise to pay
the person/company which has contractual right to recieve payment from the maker
Formula for Calculating Interest
=P x R x T
(P= Principle R= Rate T= Time in yrs)
Intangible Assets include
Patents, Copyright, Trademarks, Franchise & License and Goodwill
exclude others from making, using, or importing objects; lasts 20 years
a document granting exclusive right to publish and sell literary or musical or artistic work; last 70 years after the author’s death
special name, slogan, or image
Franchise & License
limited permission to use proper according to specific terms set out in a contract
permium a company pays to obtain the favorable reputation associated with another company
Liabilities are created when a company____
– Buys goods/services on credit
– Obtain short term loans
-Issues long term debt
Liabilities are ___ claims and _____ obligations
creditors; exitsting
Sales Tax Payable
are collected from customers & are expressed as a percent of sales price. REQUIRED by law to be sent to state government
Jounal entry to record Sales Tax
Cash ##
Sales Tax Payable ##
Sales Rev ##
Sales Revenue
equals the cash value before adding the tax
Sales Tax Payable
=% times subtotal
Unearned Revenue
cash recieved before revenue is earned; recorded as a liability (EX: Magazine Subscrition, Season tickets)
Current Portion of Longterm Debt
the portion due within the current year and should be classified as a current liability
How are AR shown on the BS?
as Net Receivables
What methods are used to account for bad debts?
1) direct write off
2) allowance method ( adheres to GAAP)
What are the principles of sound accounts receivable management?
– Determine who to extend credit to
– Establish a payment period
– Monitor collections
– Credit terms
– Evaluate the receivable balance
why are plant assets listed at historical cost rather than market value?
The market is constantly changing so the HC is a more reliable number
what is depreciation?
the used up portion of an asset
Which intangible assets need to be amortized?
Patents, copyrights, licenses & franchise
How are long lived assets reported on the BS?
at their Net Book Value
What are the major types of current liabilities?
Accounts Payable, Sales tax payable (*within 12 mo.; hint: payable)
Long term liabilities include
Bonds payable and notes payable
Acid Test Ratio (Quick Ratio)
(Cash + ST Invest + Net AR) / current liabilities
Current Ratio
Current Assets / Current Liabilities
* GOOD IF > 1
Working Capital
Current assets minus current Liabilities
Chuck Daniels Auto acquired a hydraulic lift on August 1, 2010. The lift cost $159,000, had an estimated useful life of 10 years and a residual value of $15,900 at the end of its useful life. On December 31, 2010, the fiscal year end, what amount of depreciation expense would be recognized under the double-declining-balance method?