Inventory
What costs are included in the inventory balance?
The inventory balance includes all costs to get the inventory ready to sell. this will include the cost of the product, any shipping costs the company paid for, and will be reduced by any discount the company received.
Name an attribute of a good internal control system
-Tone of the organization promotes ethical values and integrity
- Establish clear lines of authority and responsibility
- Segregation of duties (the following should be separated: authorization, recording, customer)
- Hire competent personnel
- Use control numbers
- Develop plans and budgets
- Maintain adequate accounting records
- Physical and electronic controls
How is depreciation expense calculated under the double declining method?
1. Calculate the double declining rate (1/estimated useful life in years) x 2
2. Multiply the DD rate by the book value of the asset (book value = original cost - accumulated depreciation)
*In the year amount of depreciation expense is a plug to ensure the ending book value is equal to the salvage value
Explain the relationship between financial statements (Income statement, statement of equity, balance sheet, statement of cash flows)
1. The income statement takes all revenue and subtracts all expenses to arrive at net income.
2. Net income from the income statement is included on the statement of retained earnings (Current Year net income is added to calculate ending retained earnings)
3. Ending common stock, retained and total equity from the statement of stockholder's equity is on the balance sheet
4. The ending cash balance on the statement of cash flows is on the balance sheet.
On 1/1/22 Lisa Company sold 100 cellphones on account to a customer for $250 per time. The terms were 2/10, n/30. It cost Lisa $175 to purchase the cell phones from their supplier. The customer paid for the items on 1/5/22/ What journal entry(s) are required on 1/1/22 and 1/5/22?
1/1/22 Accounts receivable 25,000
Sales revenue 25,000
(100 phones sold x $250 selling price)
1/1/22 Cost of goods sold 17,500
Inventory 17,500
(100 phones sold x $175 cost)
1/5/22 Cash 24,500
Sales discount 500
Accounts receivable 25,000
An independent party that assesses if the financial statements are prepared correctly and show an accurate picture of how the company performed for the year.
Auditor
Credit Sales Method: The Company estimates credit losses at 3% of credit sales, which were $750,000 for the year. As of December 31, the AR balance was $150,000 and the allowance for Doubtful Accounts had a credit balance of $14,000. What is the amount of the adjusting journal entry and what is the net amount of AR to be reported on the Balance Sheet?
Allowance for doubtful accounts 22,500 (750,000 x .03)
Accounts receivable 150,000
Allowance (36,500)
Accounts receivable, net 113,500
(Allowance: beg 14,000 + 22,500 current year adj)
If the Company purchased a new vehicle for $60,000 on March 1,2022, and it has an expected salvage value of $15,000 and an estimated useful life of 10 years or 150,000 miles. During 2022, the Company drove the car for 14,000 miles. What is the amount of depreciation expense to book as of December 31, 2022 using the units of production method?
Units of production rate = (cost-salvage)/est life in units
(60,000 - 15,000) / 150,000 = 0.3
Year 1: 14,000 miles x 0.3 = 4,200
Depreciation expense 4,200
Accumulated depreciation 4,200
On March 1, 2022 John company entered into a one year $250,000 notes payable with 6% interest. What is the interest expense for the first calendar year?
$12,500 interest expense for the year ended December 21, 2022
(250,000 x 0.06 = 15,000 annual interest
15,000/12= 1,250 monthly interest
March-December = 10 months
1,250 x 10 months = 12,500
Tony Company sells 150 chairs to a customer for $200 per chair. Tony bought the chairs from their supplier for $95 per chair. What is the journal entries required for this transaction?
Cash 30,000
Revenue 30,000
(150 chairs x $200 selling price)
Cost of goods sold 14,250
Inventory 14,250
(150 chairs x $95 cost to Tony)
During the bank reconciliation process, what type of adjustments require a journal entry to be booked?
Adjustments to the book balance (General Ledger balance)
Ex. Bank service charge, fixing an error on the book side, NSF check, etc.
Aging method: The allowance for doubtful accounts is $1,150 on December 31, before any adjustments. Prepare the adjusting entry for estimated credit losses on December 31
Group Balance Risk %
0-30 days past due $160,000 1%
31-60 days past due 48,000 4%
61-120 days past due 39,000 6%
121-180 days past due 21,000 14%
Over 180 days past due 14,000 25%
Group Balance Risk % Allowance
0-30 days past due $160,000 1% 1,600
31-60 days past due 48,000 4% 1,920
61-120 days past due 39,000 6% 2,340
121-180 days past due 21,000 14% 2,940
Over 180 days past due 14,000 25% 3,500
12,300
Journal Entry:
Bad debt expense 11,150
Allowance for doubtful accounts 11,150
(Total allowance 12,300 - 1,150)
The company had to fix a broken part on one of their machines. How should this cost be accounted for?
The repair should be expensed immediately. This repair doesn't add a new function or enhance the life of the asset. It it a normal repair to get the asset back to its original use. The journal entry would be debit repairs and maintenance expense credit cash.
When are expenses recorded?
(Hint: Expense matching principle)
Expenses are recognized as incurred.
Expenses incurred to generate revenues must be recognized the same period as the revenue.
What journal entires is booked when a customer returns inventory?
Sales Return and Allowance
Accounts receivable (or cash)
(The amount would be sales price x number of items returned)
Inventory
Cost of Goods sold
(The amount would be cost x number of items returned)
Why is a bank reconciliation performed?
What side of the recon are adjustments for outstanding checks and deposits in transit?
A bank reconciliation is performed to ensure the appropriate amount of cash is presented on the financial statements. It helps fix any errors and timing issues.
Outstanding checks and deposits in transit are adjustments to the bank balance to arrive at the reconciled cash balance.
What is the journal entry to write-off a specific account?
Allowance for doubtful accounts (debit)
Accounts receivable (credit)
Stacy Company has equipment that originally cost $68,000. Depreciation has been recorded for seven years using the straight-line method with a $9,000 estimated salvage value at the end of its ten-year life. After recording depreciation at the end of seven years, Stacy sells the equipment for $22,000. What is the journal entry?
Annual Depreciation (68,000 - 9,000)/10 = 5,900
Accumulated Depreciation (7years) - 5,900 x 7 = 41,300
Original cost 68,000
Accum Deprec (41,300)
Book value 26,700
Loss on sale 4,700
Equipment 68,000
If a company missed the journal entry to accrue for interest expense, what effect would this have on the financial statements?
Missed JE:
Interest Expense
Interest Payable
Expense is understated --> Net income is overstated --> When this gets closed into retained earnings, retained earnings will be overstated --> equity is overstated
Liabilities are understated