Current Assets & Liabilities Flashcards

Question

How is the Balance sheet used for the Allowance method?

Answer 1

The balance-sheet method multiplying the Aging % x AR balance - you split up AR into aging buckets and apply a % to each to determine what % will go bad. Older receivables should have a higher % than newer or current receivables Note: This calculates the ENDING balance of the allowance. The balance sheet method has a more accurate ending balance for the allowance; which results in a more accurate AR, net Remember, AR should be presented at its net realizable value and the balance sheet method does a better job at this that the I/S method With this method, you are calculating the ending balance for the allowance account and you have to PLUG the bad debt expense adjustment, which is your bad debt expense

Answer 2

The adjusting entry to set the allowance is: Bad debts expense (estimated) xx Allowance for bad debts (estimated) xx

Answer 3

Beginning balance + Bad debt expense + Recoveries - Write-offs = Ending balance

Answer 4

The following is a summary of J/E's that Yaeger prefers to record the accounting by transferor for the transfer of receivables WITHOUT recourse: 1. J/E to record recourse obligation BDX: Bad debt expense xx Recourse obligation - @ fair value xx 2. J/E to record AR factoring transaction ``` Cash (PLUG) xx Holdback xx Fee expense xx Interest expense xx Account receivable xx ``` 3. J/E to record bad debt expense due to sale of receivable with Recourse: Bad debt expense xx Recourse Liability @ fair value xx

Answer 5

When you factor your receivables with recourse, you are effectively guaranteeing a debt to the factor. Incase they are unable to collect on the receivables, you essentially agree to guarantee that customer debt. As such, we would expect the fee to be smaller If this was a factoring arrangement, WITHOUT recourse; then the fee would be larger, which would mean that we will need to increase bad debt expense

Answer 6

A sale of receivables with recourse is recorded using a financial components approach because the seller has a continuing involvement Under this approach, the seller would reduce receivables, recognize assets obtained and liabilities incurred and record gain or loss Note: Transfers of receivables with recourse involve selling receivables at a discount to obtain immediate cash but retaining the risk of loss if the customer does not pay the amount owed

Answer 7

A transfer may be accounted for as a sale ONLY when the transferor surrender control of the financial asset and ALL of the following conditions are met: 1. The transferred financial asset is isolated and beyond the reach of the transferor and its creditors (even in bankruptcy or receivership) 2. The transferee can pledge or exchange the asset without unreasonable constraints or conditions 3. The transferor does NOT maintain effective control over the transferred financial asset or a 3rd party beneficial interest in the asset

Answer 8

Beginning balance + Salaries expense - Payment of salary payable (salaries paid) = Ending balance Note: EE advances do NOT affect the accrued salaries payable account. When advances are made to EE's, they are a cash payment separate from the payroll function - EE advance is like a receivable due to the company from the EE

Answer 9

The following is the journal entry for reducing Unearned revenue (and increasing revenue when portion of unearned revenue is recognized as revenue): Unearned revenue xx Revenue xx

Answer 10

The following is the journal entry for recoding unearned revenue when cash is received upfront: Cash xx Unearned revenue xx

Answer 11

Generally, you would NOT have to disclose anything; EXCEPT for the following cases: These items MUST be disclosed in the financial statement footnotes; even if they are remote: 1. Guarantees of Indebtedness of others 2. Obligations of commercial banks under "standby letters of credit" 3. Agreements to repurchase receivables (or the related property that has been sold) 4. Other agreements that in substance have the same guarantee characteristics

Answer 12

Remember, you can ONLY record this when you actually won a lawsuit and IF and ONLY IF the losing party isn't going to appeal Generally, we usually don't recognize gain contingencies until they actually occur due to conservatism Note: Winning is NOT the same as collecting, so you would need to set up an allowance account to "allow" for uncollectible winnings

Answer 13

When a contingency is deemed reasonably possible, you would only be required to DISCLOSE it Note: If a contingency is remote, you can do a JE. The rules only state the minimum reporting requirements

Answer 14

When a contingency is deemed probable, you would need to do the following: 1. Make a journal entry (accrued for it) 2. Disclosure

Answer 15

Beginning balance + Adjustment for Warranty expense + Warranty expenditures - Repairs = Ending balance Note: Warranty expenditures are expenses incurred when a company honors a warranty (i.e. replace something, exchange, etc.). This is different from the warranty expense

Answer 16

You should record warranty expense in the same period as the sale. Warranty expense is a selling expense Also, in the period you made the sale, you must recognize the ENTIRE warranty expense (i.e. if the warranty is for 10 years, you should recognize the total expense for those 10 years in the period that the sale was made). This is done because of the matching principle The journal entry to record warranty expense would be as follows: Warranty expense xx Estimated warranty liability xx The journal entry to make when a company honors the warranty would be as follows: Estimated warranty liability xx Cash or Inventory xx

Answer 17

An accrual of a liability for future vacation pay is REQUIRED if all the following conditions are met: 1. Obligation arises from employee services already performed 2. Obligation arises from rights that vest or accumulate 3. Payment is probable 4. Amount can be reasonably estimated Note: The bare minimum for what a company has to pay for compensated absences as a liability is what VESTS

Answer 18

An accrual of a liability for future sick pay is REQUIRED if all the following conditions are met: 1. Obligation arises from employee services already performed 2. Obligation arises from rights that vest or accumulate 3. Payment is probable 4. Amount can be reasonably estimated Note: If sick pay benefits accumulate, but DO NOT VEST, accrual is PERMITTED but NOT required because payment is contingent upon future employee sickness