Financial Accounting 202 – Final Exam Review – Flashcards
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benefit of selling on credit
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Increase sales by selling to a wider range of customers
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cost of selling on credit
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Some customers don't pay: results in Uncollectible-account expense
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problems with direct write off method
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1. overstates accounts receivable on the balance sheet because of no allowance account 2. violates matching principle
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Book value
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cost - accumulated deprecation = book value
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Double declining balance method
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100% / useful life in years (ex. 5) = 20% 20% x 2 = 40% Cost x 40% = depreciation expense
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When to use straight line method:
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For assets that generate revenue over time
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When to use unit of production
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For assets that depreciate due to wear and tear
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When to use DDB
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For assets that produce more revenue in their early years
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Straight line method
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(Cost -- Salvage value) / Useful life in periods = depreciation expense per year (10,000-1,000)/5 years = 1,800 a year
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Adjusting entry using straight line depreciation
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Debit: Depreciation expense, 1,800 Credit: Accumulated depreciation 1,800
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Units of production method
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Depreciation per unit: Cost -- salvage / total units of production = depreciation per unit Depreciation expense: depreciation per unit x units produced in period = expense example: (10,000-1,000)/36,000 shoes = $0.25 per shoe $0.25 x 7,000 shoes = $1,750
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Change in estimates for depreciation (typically change in useful life)
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Book value - revised salvage value / revised remaining useful life $6,400- 400 / 4 years = 1,500 per year
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Examples or ordinary repairs (revenue expenditure)
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cleaning, lubricating, adjusting, oil changing, replacing small parts of a machine
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Journal entry for ordinary repairs
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Debit: Repairs expense Credit: Cash
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Betterment/improvements
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any improvements that add to the useful life
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Journal entry for betterment/improvments
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ex: Debit: Machinery 1,800 Credit: Cash 1,800
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Determining cost to be depreciated after improvement of useful life
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Original cost - accumulated depreciation + amount of useful life added EX: 8,000 - 3,000 + 1,800 = 6,800
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Determining depreciation expense for remaining useful life after improvement
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Cost to be depreciated after improvement / remaining useful life ex: 6,800 / 5 = 1,360
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Journal entry for fully depreciated plant asset
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Debit: Accumulated depreciation -- Machinery, 9000 Credit: Machinery, 9000
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Journal entries for an asset that is not fully depreciated
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1. Debit: Depreciation expense...... 500 Credit: Accumulated depreciation.... 500 (To record 6 months depreciation: 1,000 x (6/12) = 500) 2. Debit: Accumulated depreciation.... 6500 Loss on disposal of equipment.... 1500 Credit: Equipment ..... 800
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cost principle
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The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired
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patent
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exclusive right granted to its owner to manufacture and sell a patented item or to use a process for 20 years
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journal entry for patents
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Patent costing 25,000 for a useful life of 10 years debit: amortization expense -- patents, 2500 credit: accumulated amortization--patents, 2500
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journal entry for copyright
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debit: amortization expense -- copyrights credit: accumulated amortization--copyrights
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goodwill
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amount by which a company's value exceeds the value of its individual assets and liabilities * not recorded unless company purchases another company
