Notes Receivable
Best Company uses accrual accounting and issues monthly statements. On January 1, 2021, Best lends Arie $6,000 and signs a 2%, 6-month note. What is Best's required entry on January 31, 2021?
Debit Interest Receivable for $10 and credit Interest Revenue for $10.
Calculation: $5,000 x .02 x 1/12
At the end of the period, Ivy Company has Accounts Receivable of $100,000. If Ivy uses the allowance method, the Allowance for Doubtful Accounts (AFDA) has a $1,000 credit balance and Ivy estimates uncollectible accounts as 20% of the receivables balance, what is Ivy's required adjustment at the end of the period?
Debit Bad Debts Expense for $19,000 and credit AFDA for $19,000.
Is the cost to replace a damaged roof a revenue expenditure or a capitalizable cost?
The cost to replace a roof is a capitalizable cost.
Tritan Company disposed of equipment that originally cost $50,000. At the time of disposal, the accumulated depreciation had a balance of $20,000. What is the required journal entry at the date of disposal?
Accumulated Depreciation. 20,000
Loss on Disposal 30,000
Equipment 50,000
Horace Company pays $80,000 to purchase equipment with a $10,000 salvage value and and estimated useful life of five years or 10,000 hours. What amount of depreciation expense will Horace record in the current year if the company uses the units-of-activity method and uses the equipment for 4,000 hours?
Answer: $28,000 Depreciation Expense
($80,000-$10,000)/10,000 hours = $7/ hour
$7 x 4,000 = $28,000 Depreciation Expense
What is the total amount that a payee will collect at the maturity date on an $6,000, 5%, 60-day note? Use 360 days for purposes of calculating interest.
Answer: $6,050
Face Value of $6,000 + $50 Interest
Interest = $6,000 x .05 x 60/360=$50
The AFDA is a contra-asset.
Is the cost to update the wiring of a purchased warehouse to bring the wiring up to code a capitalizable cost or a revenue expenditure if the warehouse cannot be used unless the wiring is updated?
The cost to update the wiring of a purchased warehouse is a capitalizable cost if the warehouse cannot be used until the wiring is updated.
Ria Company uses straight-line depreciation. On January 1, 2019, Ria purchased equipment for $30,000, recorded an estimated salvage value of $10,000 and an estimated useful life of 5 years. On January 1, 2021, the company sells the equipment for $18,000. What is the gain or loss on disposal?
Answer: $6,000 Loss on Disposal
$30,000 - $10,000 = $20,000 Depreciable Cost
1/5 years = 20% straight-line rate
$20,000 x 20% = $4,000 Depreciation Expense
At Jan. 1, 2021, Accumulated Depreciation is $8,000 and book value is $30,000 - $8,000= $24,000
Proceeds - Book Value = $18,000 - $24,000 = $6,000 Loss
Is land a depreciable plant asset? If not, what not?
No - Land is not a depreciable plant asset because land is not expected to wear out or decline in its productive ability over time.
What journal entry will a payee prepare on the date an outstanding accounts receivable is settled with a $10,000, 2%, 5-year note?
Debit Notes Receivable and credit Accounts Receivable for $10,000.
Define the term "cash realizable value."
Cash realizable value is the estimated amount of end-of-the-period receivables that are likely to be collected and is determined by subtracting AFDA from the receivables balance at the end of the period.
Is the cost of removing a shed to install a parking lot a land improvement cost?
No, The cost of removing a shed to install a parking lot is a cost of land, a cost to get land ready for use as a parking lot.
RW Company uses the units-of-activity method of depreciation. On January 1, 2021, RW purchases equipment for $50,000 and records an estimated salvage value of $10,000 and an estimated useful life of 10 years or 10,000 hours. What is the gain/loss on disposal if RW uses the equipment for 1,000 hours in 2021 and sells the equipment for $28,000?
Answer: $18,000 Loss on Disposal
Depreciable Cost = $50,000 - $10,000= $40,000
Rate = $40,000/10,000 hours = $4/hour
2021 Depreciation Expense = $4 x 1,000 hrs = $4,000 = Accumulated Depreciation at sale
Book Value at Sale = $50,000- $4,000 = $46,000
Gain/Loss = Proceeds - Book Value at Sale
Gain/Loss = $28,000 - $46,000 = -$18,000 Loss
On January 1, 2015, Rust Company pays $30,000 for a delivery van with an estimated useful life of 10 years or 100,000 miles and an estimated salvage value of $5,000. If Rust uses straight-line depreciation and closes its books every December 31, what is the book value of the van at January 1, 2021?
Answer: Book Value 1/1/21 is $15,000
($30,000 - $5,000) x 1/10 = $2,500 depr. expense
After 6 yrs, accum depreciation is: 6 x $2,500 = $15,000
After 6 yrs, book value= $30,000 -$15,000 = $15,000
AD Company issues statements every December 31. What entry will AD, a payee, prepare at the maturity date of a $100,000, 2%, six month note issued on January 1 is not honored at the maturity date, but the AD expects to collect the note at a later date?
Debit Accounts Receivable for $101,000, credit Notes Receivable for $100,000, and credit Interest Revenue for $1,000.
How does a company using the allowance approach write off a $10,000 account that is determined to be uncollectible?
Debit AFDA $10,000 and credit Accounts Receivable $10,000.
Stan Company purchases used equipment and pays $25,000 for the equipment, $1,875 in sales tax, $1,000 in shipping costs, and $500 to repair the equipment so that it is ready for use. Stan also pays $100 to test the equipment after using the equipment for six months. What is the capitalizable cost of the equipment?
The capitalizable cost is $28,375.
Herman Company sells equipment for $8,000. If the equipment originally cost $20,000 and the accumulated depreciation is $15,000 at the time the equipment is sold, what is the gain or loss on disposal?
Answer: $3,000 Gain on Disposal
Proceeds - Book Value = Gain/Loss
$8,000 - ($20,000 - $15,000) =
$3,000 gain on disposal
On January 1, 2020, Tory Company pays $40,000 for equipment with a 5-year useful life or 20,000 hours and estimated salvage value of $10,000. What is the balance of Tory's accumulated depreciation account at January 1, 2022, if Tory uses straight-line depreciation?
Answer: $12,000
($40,000 - $10,000) x 1/5 = $6,000 Depr. Expense
After two years, Accumulated Depreciation = $12,000
What term is used to describe a party that purchases goods by signing a $100,000, 5%, 2-year note?
Maker of the Note
How does a company using the direct write off approach write off a $5,000 account that is determined to be uncollectible?
Debit Bad Debts Expense $5,000 and credit AFDA $5,000.
A dental office pays $100,000 to redecorate its waiting area in the dental office by repainting the waiting area, adding a fireplace and replacing the lighting fixtures in the ceiling. Is this cost capitalizable?
Yes, The cost is a significant improvement cost and is therefore capitalizable.
On January 1, 2020, Bower Company pays $80,000 to purchase equipment and $5,000 to install the equipment. The equipment has an estimated useful life of 10 years and an estimated salvage value of $25,000. At January 1, 2021, Bower sells the equipment for $70,000. What is the gain or loss on disposal?
Answer: $10,000 Loss on Disposal
Depreciable Cost ($80,000 + $5,000)- $25,000
Depreciable Cost = $50,000
Straight-line Rate = 1/10 = 10%
Depreciation Expense = $50,000x10%=$5,000
Accumulated Depreciation at Sale $5,000
Proceeds - Book Value = Gain/Loss
$70,000 - ($85,000 - $5,000) = -$10,000 Loss
Imus Company wishes to attract stockholders in 2022. On July 1, 2021, Imus pays $50,000 for equipment with an estimated salvage value of $10,000 ad estimated useful life of 10 years or 20,000 hours. If Imus uses the equipment for 1,500 hours in 2021 and issues statements at December 31, should Imus use the straight-line method of depreciation in 2021?
Yes, Straight-line depreciation results in lowest depreciation expense in 2021.
Straight-line:
($50,000 - $10,000) x 1/10 = $4,000
Prorate $4,000 x 6/12 = $2,000 Deprec Expense
Units-of-Activity:
($50,000 - $10,000)/20,000 hrs = $2/hour
$2 x 1,500 hrs = $3,000 Depreciation Expense