Adjusting Entries
Expenses incurred but not yet paid by the end of the period are known as this type of expense.
Accrued expenses
Example: accrued salaries, accrued interest, accrued taxes, accrued utilities
What is the original amount borrowed on a note payable called?
Principal
Which inventory method assumes the first units purchased are the first units sold?
FIFO
A piece of equipment is purchased and used in daily business operations for several years. How should this asset be classified?
PPE or Plant Assets
Under FOB destination, who pays the transportation costs?
The Seller
What term describes allocating the cost of a plant asset over its useful life?
Depreciation
What is the definition of interest?
The cost of borrowing (usually denoted as a percentage)
Which plant asset is not depreciated?
Land
A machine cost $8,400 and has accumulated depreciation of $4,200. What is the book value of the machine?
$8,400 − $4,200 = $4,200
Initial Purchase Price - Accum. Depr. = Book Value
When title (ownership) transfers to the buyer once goods are given to the shipping company, the terms are called this.
FOB Shopping Point
A company owes 15 days of interest on a $6,000 note at 8%. What is the accrued interest (use a 365 day year)?
Interest = Principal × Rate × Time
Interest = $6,000 × 0.08 × (15 ÷ 365)
Interest = $6,000 × 0.08 × 0.0411
Interest ≈ $19.73
A company signs a 120 day note on November 3. What is the maturity date?
March 3rd
November remaining: 27 days
December: 31 days
January: 31 days
February: 28 days
March: 3 days
During a period of rising inventory costs, which inventory method usually results in higher net income, FIFO or LIFO?
FIFO
A company buys equipment for $9,500 and spends $1,200 on installation. Which amount should be depreciated?
$10,700
When should warranty expense be recorded: when the product is sold or when repairs are made//the warranty is used?
When the product is sold
Which accounting concept requires expenses to be recorded in the same period as the related revenue?
Matching Principle (Which follows the accrual basis of accounting)
A company signed a $9,600 note payable at 5 percent interest on December 10. What amount of interest should be accrued on December 31, using a 365 day year?
Interest Calc: Principal x Interest x Time
Annual interest: $9,600 × 0.05 = $480
Days accrued: December 10–31 = 22 days
Accrued interest: $480 × (22 ÷ 365) = $28.77
Cost of goods sold is $135,000 and average inventory is $27,000. What is the inventory turnover ratio?
COGS / Average Inventory
$135,000 ÷ $27,000 = 5.0
Equipment cost $8,400, has a salvage value of $900, and a useful life of 5 years. What is the annual straight line depreciation?
(Initial Book Value - Salvage Value) / Useful Life
$8,400 − $900 = $7,500
$7,500 ÷ 5 = $1,500
$1,500
A business wrote off a $1,860 past-due account. Using the direct write-off method, the entry in the general journal includes
a debit to Uncollectible Accounts Expense and a credit to Accounts Receivable
If a company fails to record accrued expenses at the end of the period, how will net income be affected?
It will be overstated because not all expenses are recorded
When a note payable is paid at maturity, which accounts are affected and how?
Debit: Interest Expense, Note Payable (and interest payable if applicable)
Credit: Cash
Net credit sales are $360,000. Beginning accounts receivable was $24,000 and ending accounts receivable was $36,000. What is the accounts receivable turnover?
Average A/R
($24,000 + $36,000) ÷ 2 = $30,000
Accounts receivable turnover
$360,000 ÷ $30,000 = 12.0
Equipment cost $15,000 and has accumulated depreciation of $9,000. The equipment is sold for $7,000. Calculate the gain or loss.
Book value
$15,000 − $9,000 = $6,000
Sale price
$7,000
Gain
$7,000 − $6,000 = $1,000 gain
The adjusting entry to record estimated uncollectible accounts expense using the percentage of sales method includes a
Debit to Uncollectible Accounts Expense and credit to Allowance for Uncollectible Accounts