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Flashcards in Ch. 4: Working Capital Deck (11)
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1
Q

What is Allowance for Doubtful Accounts? What type of line item is it?

Assume a firm makes a $100 sale, but does not expect to collect $5 of that sale. Show the journal entry recording the ADA.

Then, show the journal entry that occurs when the expectation of $5 in ADA comes true, and the company only receives $95.

A

Allowance for Doubtful Accounts is a contra asset account that is an estimate of uncollectable receivables.

($5) ADA (Asset)

($5) Bad Debt Expense (Owner’s Equity)

Then:

($95) AR

$95 cash

($5) AR (write off)

$5 ADA

2
Q

What is net realizable value and what is the formula?

A

NRV= AR-ADA

It is the amount of AR a company expects to receive after adjusting for ADA.

3
Q

What type of receivable do you book when payment is expected to be greater than 90 days?

What is the simple interest rate formula?

Example:

A firm sells a product and agrees to be paid $3,000 in one year. The customer agrees to a 10% interest rate. Show the journal entry on April 1, 20x1 from the seller’s perspective.

Then, show the entry on Dec 31, 20x1 showing accrued interest.

Then, show the entry on April 1, 20x2

A

Note receivable

Principal x rate x time

April 1, 20x1

$3,000 note receivable

$3,000 revenue

Dec 31, 20x1

$225 interest receivable

$225 interest income

April 1, 20x2

($3,000) note receivable

$3,000 cash

($225) interest receivable

$225 cash

$75 cash

$75 interest income

4
Q

A firm buys $30 of inventory on account. That inventory costs $10 to the seller.

Record the transaction from the buyer’s and seller’s perspective.

A

Buyers Perspective

$30 inventory

$30 accounts payable

Seller’s Perspective

($10) inventory

$30 AR

$30 Revenue

($10) COGS

5
Q

What is a sales discount?

What is a sales return?

What is a sales allowance?

What type of revenue account are the above?

A

Sales discounts encourage buyers to pay earlier on credit than normal.

Buyers sometimes return inventory for a full refund.

Sellers offer allowances to prevent the buyer from returning the product, this offering allowances or a partial refund.

These are all contra-revenue accounts.

6
Q

What is the idea of 2/10 Net 30?

Example:

A firm makes a $1000 credit sale of inventory that costs $600.

First entry: Record the sale from the buyer and seller’s perspective.

Second entry: record the buyer returning half of the inventory for both perspectives.

Third entry: Assume the seller offers a $100 allowance to prevent further returns. Show both perspectives

Fourth entry: assume the buyer pays 98% of the remaining amount, since it is within the 10 day discount window.

A

A buyer will get a 2% discount on amounts paid within 10 days, but all of it must be paid within 30 days or be considered past due.

First Entry

Buyer:

$1000 inventory

$1000 AP

Seller

$1000 AR

($600) inventory

$1000 revenue

($600) COGS

Second Entry

Buyer

($500) inventory

($500) AP

Seller

($500) AR

$300 inventory

($500) sales return

$300 COGs

Third Entry

Buyer

($100) inventory

($100) AP

Seller

($100) AR

($100) sales allowance

Fourth Entry

Buyer

($392) cash

($8) inventory

($400) AP

Seller

$392 cash

($400) AR

($8) Sales Discount (Owner’s Equity)

7
Q

What are the three types of inventory production facilities have?

All three types of inventory create ___?

A

DM, WIP, FG

COGM and then COGS

8
Q

What happens to depreciation on equipment and facilities involved in production of goods to sell?

Example:

Show the journal entry for $100 in depreciation for the facility housing equipment.

A

It becomes capitalized as a part of inventory.

($100) AD

$100 Inventory

Capitalized depreciation as a part of inventory IS expensed but only when inventory is sold.

9
Q

Why is it important to analyze the values of the three different types of inventory?

A

It shows potential problems with selling, supply chain issues, etc.

If there are a lot of DM, but not WIP, and FG, perhaps there are production problems.

If there is a big buildup of FG, perhaps they can’t sell their product?

10
Q

What are the 4 types of inventory costing?

When prices are rising, which type of costing would give the lowest NI?

A

Specific identification, LIFO, FIFO, and Weighted Average.

LIFO would give the lowest NI in the event of rising prices.

11
Q

How is inventory revalued yearly?

Example:

Firm has inventory valued at $90, but the market values it at $60. What is the entry to make the adjustment.

A

It is revalued according to lower of cost or market. Market value is what it would currently cost to get the inventory currently held.

Example:

($30) inventory

($30) COGS