Chap 7
What is the main difference between accounts receivable and notes receivable?
Notes receivable include a written promise to pay with interest; accounts receivable do not.
What are three main types of long-term assets?
Plant assets, natural resources, and intangible assets.
What defines a current liability?
An obligation due within one year or the company’s operating cycle, whichever is longer
Which chapter covers bad debts?
Chapter 7
On June 10, a customer owes $1,000. The company estimates 2% will be uncollectible.
Record the adjusting entry for bad debt expense.
Debit: Bad Debt Expense $20
Credit: Allowance for Doubtful Accounts $20
What method records bad debts only when a specific account is uncollectible?
The Direct Write-Off Method.
The process of allocating cost of a tangible asset over its useful life is called what?
Depreciation.
What journal entry records sales tax collected from customers?
Debit: Cash
Credit: Sales Revenue and Sales Tax Payable.
Which account is used to accumulate depreciation?
Accumulated Depreciation.
A delivery truck costs $30,000, has a $3,000 salvage value, and a 5-year life.
Compute annual depreciation using the straight-line method.
Depreciation = (Cost − Salvage) ÷ Life = ($30,000 − $3,000) ÷ 5 = $5,400 per year
Under the allowance method, what is the adjusting entry for estimated uncollectibles?
Debit: Bad Debt Expense
Credit: Allowance for Doubtful Accounts
What costs are included in the acquisition cost of machinery?
Purchase price, installation, testing, and transportation (but not insurance or licensing).
Unearned revenue is classified as what type of account?
Liability.
Name one intangible asset and how it is expensed.
I Review
On May 1, a company issues a 90-day, 12% note for $10,000.
Compute the interest and record the maturity entry.
Debit: Notes Payable $10,000
Debit: Interest Expense $300
Credit: Cash $10,300
If a $2,000 account is written off under the allowance method, how does this affect total assets?
Total assets do not change; both Accounts Receivable and Allowance decrease equally.
What is the formula for straight-line depreciation?
(Cost − Salvage Value) ÷ Useful Life.
A company issues a 90-day, 10% note for $10,000. How much interest is due at maturity?
$10,000 × 10% × (90 ÷ 360) = $250.
Which liability arises when a business collects cash before earning revenue?
Unearned Revenue.
Equipment cost $25,000, accumulated depreciation is $18,000. It’s sold for $10,000 cash.
Record the journal entry and indicate if there’s a gain or loss.
Debit: Cash $10,000
Debit: Accumulated Depreciation $18,000
Credit: Equipment $25,000
Credit: Gain on Sale of Equipment $3,000
How do you calculate interest on a $5,000, 12%, 60-day note?
$5,000 × 12% × (60 ÷ 360) = $100 interest.
A patent is purchased for $50,000 and amortized over 10 years. What is annual amortization expense?
$5,000 per year.
What is the adjusting entry to record accrued interest expense on a note payable?
Debit: Interest Expense
Credit: Interest Payable
What happens when a fully depreciated asset is disposed of with no cash received?
Remove the asset and accumulated depreciation; no gain or loss is recorded.
On December 31, the company owes employees $6,000 in salaries and must accrue 6.2% FICA Social Security & 1.45% FICA Medicare, and 1% state unemployment tax (SUTA).
Record the employer’s payroll tax expense.
Debit: Payroll Tax Expense $519
Credit: FICA Taxes Payable $372
Credit: FICA Medicare Taxes Payable $87
Credit: SUTA Payable $60