1
Intermediate Accounting
Study Guide Chapter 7
Objectives:
1.
Explain when accounts receivable are generally
recognized.
2.
Name four types of non-trade receivables.
3.
Indicate how to report noncurrent receivables on the
balance sheet.
4.
Indicate which one of the following values is used to
report accounts receivable:
(a) Discounted present value
(b) Net realizable value
5.
Explain the difference between the direct write-off and
the allowance methods of accounting for bad debts, and
indicate which method is required by GAAP. Give two
reasons why this method is required by GAAP.
6.
Be able to record the following journal entries using the
allowance method:
(a) Adjusting entry
(b) The write-off of an account
(c) Reinstatement and payment of an account
7.
Be able to calculate the following based on the use of
the percentage of sales method and the percentage of
accounts receivable method: (assuming either a debit or
credit balance in the allowance account.)
(a) Estimated uncollectible accounts
(b) The amount of the adjusting entry
(c) Balance in the allowance account after the
adjustment
8.
Explain when warranty costs must be estimated and
reported in advance.
2
Chapter 7 Objectives (continued)
9.
Be able to record the following journal entries in
relation to warranties and service contracts:
(a) adjustment to record estimated warranty obligation
(b) to record actual warranty repairs
(c) to record cash received from service contracts
(TBAIC)
(d) to record estimated revenue earned from service
contracts (TBAIC)
(e) to record repairs made under service contracts
(TBAIC).
10.
From the discussion on page 336 and exhibit 7-5, be able
to identify assets that are reported as unrestricted cash
in the current asset section of the balance sheet.
11.
Explain how to report a credit balance in cash resulting
from the issuance of checks in excess of the amount on
deposit.
12.
Explain what is meant by compensating balances, and
indicate the SEC's recommendation for reporting legally
restricted compensating balances resulting from shortterm and long-term financing arrangements. How should
compensating balances that are not legally restricted be
reported?
13.
Name three of the six characteristics of a system of cash
control.
14.
Be able to prepare a 2-column bank reconciliation and
journalize the entries associated with the
reconciliation.
15.
Name two methods of accounts receivable financing.
16.
State the three conditions that must be met for the
transfer of accounts receivable to be treated as a sale.
17.
Explain the difference between a sale of receivables with
recourse and one without recourse.
3
18.
Chapter 7 Objectives (continued)
Be able to give the journal entry necessary to record
each of the following:
(a) A sale of accounts receivable without recourse
assuming the accounting for an allowance for
doubtful accounts and withheld proceeds to protect
against sales returns and allowances.
(b) A sale of accounts receivable with recourse given the
same data in (a) plus the estimated amount of the
recourse obligation.
(c) An assignment of specific accounts receivable with
additional finance charges
19.
Explain the two ways in which trade notes receivable are
created.
20.
Name two examples of non-trade notes receivable.
21.
Be able to indicate at what value notes receivable are
initially recorded, and indicate how this value is
determined in a loan transaction and in a sales
transaction.
22.
Explain what is meant by a non-interest-bearing note.
Indicate the account used to record the difference
between the face value and a lower present value of a
non-interest-bearing note, and indicate its account
classification.
23.
Be able to indicate the journal entries necessary to
record the following transactions for an interest-bearing
and a non-interest-bearing note:
(a) Receipt of the note
(b) Adjustment for accrued interest earned
(c) Receipt of payment
24.
Explain when implicit interest is not recorded on a noninterest-bearing note.
25.
Describe three situations where valuation problems arise
when notes are received in exchange for property, goods
or services.
26.
Indicate the two valuation alternatives for notes
received under one of the situations in question # 25.
4
Chapter 7 Objectives (continued)
27.
Be able to show the journal entries necessary to record
the following transactions:
(a) The receipt of a note in exchange for land assuming
the fair value of the land is less than the face
value of the note. (The note will be an interestbearing note.)
(b) The compound entry to record the accrued interest
and the amortization of the note in part (a)
(c) The entry to record the receipt of payment on the
above note and interest
28.
Indicate if the following require an adjustment in
preparing a cash flow statement assuming the use of the
net accounts receivable method:
(a) Bad Debts Expense (direct method)
(b) Bad Debts Expense (indirect method)
(c) write-off of uncollectible accounts (direct method)
(d) write-off of uncollectible accounts (indirect
method)
29.
Be able to record the following journal entries related
to a petty cash fund: (See separate expanded material.)
(a) establishment of the fund
(b) replenishment of the fund with a shortage
(c) to increase or decrease the original level of the
fund
5
ASSIGNMENT:
1.
*2.
*3.
*4.
*5.
*6.
7.
*8.
*9.
*10.
*11.
*12.
Question #8 (Indicate which items would be reported as
unrestricted cash in the current asset section of the
balance sheet.)
Exercise 7-26
Exercise 7-28 (Also indicate the balance in the allowance
account after each entry)
Exercise 7-29
Exercise 7-32 - Part 1 (Also give the entry to record the
actual repair.)
Exercise 7-33
Exercise 7-35 (Just indicate which items would be
reported as unrestricted cash in the current asset
section of the balance sheet.)
Exercise 7-40
Record the following journal entries:
(a) to establish a petty cash fund in the amount of $2000
(b) to reimburse the petty cash fund assuming the balance
in the fund is $400 and receipts show the following
expenditures: Misc. Selling Expense $490 and Misc.
Administrative Expense $1100
Record the following journal entries:
(a) Company A assigns accounts receivable to its bank in
the amount of $100,000 to secure a loan of 70,000.
Assume a 10% note is issued for the loan and the
bank charges a 1% finance charge on the receivables
in addition to the interest on the note.
(b) Company B sold, without recourse, $20,000 of
accounts receivable for $19,000. The bank withheld
$500 of the payment as a protection against sales
returns and allowances, and there was an allowance
for doubtful accounts of $300 associated with the
receivables.
(c) Assume the same circumstances as in (b), but assume
the accounts were sold with recourse and the
estimated recourse obligation is $800
Record the following journal entries relating to an
interest-bearing note:
(a) Receipt of a $2,000 note for a sale of $2000
(b) Adjustment for accrued interest in the amount of $50
(c) Receipt of payment on the note and interest of $150
Record the following journal entries relating to a noninterest-bearing note:
(a) Receipt of a $2,150 note for a sale of $2,000
(b) Adjustment for accrued interest in the amount of $50
(c) The receipt of payment on the note
* Solutions provided
6
Chapter 7 Assignments (continued)
*13.
The Roland Corporation receives a $20,000 one-year,
interest-bearing note in exchange for land with a cost of
$16,000 and a fair market value of $18,000. Record the
following journal entries:
(a) The exchange of the land for the note
(b) The entry to record accrued interest of $1000 and
amortization of the discount in the amount of $600
(c) The receipt of payment on the note and interest of
$3000
* Solutions provided
7
Intermediate Accounting
Study Guide Chapter 9
Objectives:
1.
Be able to name the three cost elements of work in
process.
2.
Name three examples of manufacturing overhead.
3.
Explain the rule used to determine what goods to include
in an inventory count, and name three situations where
this rule may cause a firm to include inventory in its
count that is not in its physical possession.
4.
Be able to record journal entries similar to those on
page 455 for the net purchase method and the gross
purchase method.
5.
Be able to state two common advantages of the FIFO and
the weighted average inventory methods.
6.
Explain why LIFO provides for the lowest net income
during periods of rising prices.
7.
Explain why the weighted average method provides
inventory values that more closely parallel FIFO than
LIFO.
8.
Explain the following benefits of LIFO: (TBAIC)
(a) Tax benefits
(b) Better measurement of income
9.
Explain the following disadvantages of LIFO:(TBAIC)
(a) Poor stockholders' PR
(b) Unrealistic value for inventory on the balance sheet
(c) Unanticipated profit recognition
(d) Unrealistic flow assumptions
10.
Explain why firms using LIFO often use FIFO to maintain
internal perpetual records and adjust their inventory to
LIFO at the end of the fiscal year.
8
Chapter 9 Objectives (continued)
11.
Be able to calculate the value of ending inventory using
LIFO, FIFO, and weighted average assuming a periodic and
a perpetual inventory system.
12.
Explain what is meant by a LIFO reserve, and indicate how
it is reported.
13.
Show the journal entry necessary to avoid interim LIFO
liquidation.
14.
Explain the LIFO conformity rule, and explain how the IRS
relaxed this rule in 1981.
Go to page 486.
15.
List the three alternatives that can be used to measure
the cost of ending inventory that exceeds the number of
units of beginning inventory in a LIFO inventory pool.
(See footnote #23)
16.
Be able to value ending inventory using a LIFO inventory
pool.
17.
Explain how dollar-value LIFO differs from LIFO inventory
pools.
18.
Name three types of indexes that can be used in dollarvalue LIFO. (TBAIC)
19.
Be able to calculate a current price index using the
double extension method and the link-chain method.
20.
Given current price indexes and ending inventory at
current prices, be able to value ending inventory using
the dollar-value LIFO method.
Go back to page 471.
21.
Indicate when each of the following is recognized:
(a) Inventory write-downs due to unrealized decreases in
value
(b) Inventory write-ups due to unrealized increases in
value
9
Chapter 9 Objectives (continued)
22.
Indicate how the application of LCM differs for financial
reporting and tax reporting in relation to Lifo
inventory. (see footnote #15)
23.
Indicate how market is determined in the LCM method of
valuing inventory, and indicate how to calculate the
ceiling and the floor.
24.
Be able to work a problem similar to Exercise 9-44.
25.
Explain why the most common application of LCM method is
to individual inventory items. (see footnote #17)
26.
Be able to show the journal entries to record the writedown and the recovery of a previous write-down under each
of the following applications of the LCM method:
(a) Individual application
(b) Category application
(c) Total inventory application
27.
Explain the two methods of treating a loss on decline in
market value of inventory.
28.
Explain how the allowance for the decline in value of
inventory is shown on the balance sheet.
29.
Indicate if the LCM method implements or violates the
following accounting principles: (TBAIC)
(a) Conservatism
(b) Cost concept
(c) Consistency
(d) Matching
10
ASSIGNMENT:
Note: Solutions will be available for all of the assignment
1.
2.
3.
4.
5.
Exercise 9-32 (Instruction #1 only and assume a perpetual
system)
Exercise 9-34 (Ending Inventory = 400 units)
Work Exercise 9-35
Compute the value of ending inventory under a LIFO
inventory pool method assuming the following:
(Round to the nearest 4.)
Year#1 Beg. Inventory 1000 units @ $10.00
Purchases 200 units @ $10.20
500 units @ $10.40
100 units @ $10.60
Ending Inventory 1200 units
Year#2 Purchases 300 units @ $10.60
200 units @ $10.65
100 units @ $10.66
Ending Inventory 1300 units
Year #3 Ending Inventory 1100 units
Year #4 Ending Inventory 900 units
From the following information calculate the value of
ending inventory each year using dollar value LIFO:
Year
Inventory at
Year-end
Index
#1
#2
#3
#4
#5
#6
6.
Year-end Prices
$20,500
34,000
55,600
37,800
72,250
53,900
1.00
1.18
1.36
1.14
1.72
2.05
From the following information in relation to a cosmetics
company, calculate a year-end index using the double
extension method:
Product
Quantity
Base Year Cost
Current Endof- Year Cost
Bath Oil
2000
$8.00
$8.80
Body Lotion
1000
4.50
4.80
Eye Shadow
5000
6.00
6.15
Base Makeup
3000
5.50
5.70
Blush
6000
8.50
8.55
11
Facial Cream
1000
6.20
6.60
Chapter 9 Problems (continued)
7.
8.
9.
10.
On Dec. 31, a company took a statistical sample of its
inventory. The sample provided the following information:
Quantity
Previous Year Current Year
Costs
Costs
Product A
750
$20.00
$22.60
Product B
250
$4.50
$5.75
Product C
140
$7.10
$7.80
Product D
376
$3.50
$3.90
The link-chain cumulative index at the end of the
previous year was 1.51.
Compute the cumulative index at the end of the current
year using the link-chain method.
Exercise 9-44
Exercise 9-45
Exercise 9-46
12
Intermediate Accounting
Study Guide Chapter 10
Objectives:
1.
Name three examples of acquisition costs for each of the
following:
(a) Land
(b) Land improvements
(c) Building
(d) Equipment
2.
Name four types of intangible assets in addition to
patents and goodwill
3.
Explain how the acquisition cost of each of the following
is calculated:
(a) Patents
(b) Goodwill
4.
Explain when an order backlog is recognized as an
intangible asset.
5.
Explain how to value individual assets when they are
acquired for one lump-sum and when a price cannot be
clearly identified with specific assets.
6.
Explain how the value of each of the following is
determined when equipment is acquired using a deferred
payment contract without reference to interest.
(a) Equipment
(b) Discount on notes payable
(c) Notes payable
(d) Cash
7.
Be able to answer the following questions in relation to
the transaction in question # 6.
(a) What type of account is discount on notes payable?
(b) What debit and credit is required to amortize the
discount?
8.
Be able to indicate at what value an asset should be
recorded when it is acquired by the issuance of a
company's stock in each of the following situations:
(a) When the market value of the stock can be determined
(b) When the market value of the stock cannot be
determined
13
Chapter 10 Objectives (continued)
9.
List specific costs that should be added to the cost of a
self-constructed asset.
10.
Explain the two methods of assigning overhead costs to
self-constructed projects.
11.
Explain why a company should not recognize a profit due
to the cost savings from a self-constructed asset over a
purchased asset.
12.
Explain when a cost excess of a self-constructed asset
over a purchased asset should be recognized as an
impairment loss.
13.
Explain what is meant by capitalized interest.
14.
Be able to indicate on which of the following assets,
interest capitalization is allowed:
(a) A discrete construction project involving the
construction of a building for the enterprise's own
use
(b) A discrete construction project involving the
construction of equipment for the enterprise's own
use
(c) A discrete construction project of an asset to be
leased and the asset is not part of regular
inventory
(d) The purchase of equipment from a supplier
(e) The manufacture of repetitive inventory
15.
Provide the following information in relation to the
capitalization of interest:
(a) The interest rate to use to calculate interest that
is eligible for capitalization on the portion on the
total weighted average accumulated construction
expenditures that does not exceed the amount of the
construction loan and the rate to use on the portion
that do exceed the amount of the construction loan.
(b) Situation when the total interest eligible for
capitalization is not the actual interest expense
that is capitalized
(c) Two methods used to disclose capitalized interest
for income statement reporting.
14
Chapter 10 Objectives (continued)
16.
Be able to calculate the following in relation to
capitalized interest:
(a) Maximum interest that can be capitalized
(b) Weighted-average interest rate
(c) Interest eligible for capitalization
(d) Interest actually capitalized.
17.
Indicate the value used to record property acquired
through donation, and indicate the type of account
credited to record its acquisition.
18.
Explain the treatment of valuable resources discovered on
land already owned.
19.
Explain the requirement of FASB Statement #69 in relation
to publicly traded oil and gas firms.
20.
Give an example of an asset restoration cost, and show
the entry to record restoration costs.
21.
From a conceptual viewpoint, how should accountants
decide whether to record an expenditure as an asset
(capitalize it) or as an expense?
22.
Indicate if the following should normally be expensed or
capitalized: (See exhibit 10-7)
(a) Normal maintenance and repair
(b) Renewals or replacement parts that do not extend the
estimated useful life
(c) Renewals or replacement parts that do extend the
estimated useful life
(d) Enlargement of existing facilities
(e) Changes in assets to provide increased or improved
service
(f) Minor costs that are usually capitalized (TBAIC)
23.
Be able to show the journal entry necessary to record a
replacement from the following information:
(a) Cost of new part
(b) Cost of old part
(c) Accumulated depreciation associated with old part
24.
Explain the usual treatment of R&D costs, and explain the
exception to this treatment. Explain how FASB justifies
this treatment.
15
Chapter 10 Objectives (continued)
25.
Indicate if the following should normally be expensed or
capitalized: (TBAIC)
(a) Purchase of land to construct a research facility
(b) Self construction of a building to be used for
research
(c) Purchase of specialized equipment to be used solely
for current research
(d) Purchase of equipment that will be used for research
but can be used for other purposes or future
research.
(e) Research salaries and materials
(f) Purchase of a patent
(g) Legal costs to obtain or protect a patent
(h) Developmental costs for computer software incurred
up to the point where technical feasibility has been
established
(i) Developmental costs for computer software incurred
after technical feasibility has been established.
26.
Name one proof of the technical feasibility of computer
software.
27.
Explain how international treatment of R&D costs differ
from U.S. treatment, and indicate what is likely to be the
future treatment in the U.S..
28.
Explain the following methods of accounting for the
exploration costs associated with oil and natural gas
wells:
(a) Full cost approach
(b) Successful efforts approach
29.
Explain why
approach.
30.
Explain how each of the following FASB Statements relates
to the methods described in objective # 28:
(a) Statement # 19
(b) Statement # 25
31.
Explain the general thrust of SFAS #141 and 142 as they
relate to the reporting of intangible assets, and indicate
the extent to which companies have followed this
requirement.
small drilling firms prefer the full cost
16
Chapter 10 Objectives (continued)
32.
Explain how SFAS #141 and 142 changed the reporting of
the amortization of intangible assets.
33.
Explain the current treatment of internally generated
intangible assets, and indicate the likely future
treatment of these assets.
34.
Name and give one example of eaxh of the five categories
of intangible assets identified by FASB in SFAS #141.
35.
Indicate the current treatment of organizational costs.
(See FYI on page 568.)
36.
Name two general methods used to estimate the fair value
of intangible assets.
37.
Indicate the current treatment of acquired in-process
R&D, and give the reason for this treatment.
38.
Explain the difference in the pooling of interests and
the purchase methods of accounting for business
combinations, and indicate which method must be used
under current GAAP.
39.
Explain how SFAS #141 affects the following in a business
combination:
(a) definition of goodwill
(b) valuation of each identifiable asset
(c) write-off of goodwill
40.
Explain what is meant by negative goodwill, and indicate
how it is treated under current GAAP.
41.
Indicate which type of noncurrent asset is recorded at
fair value under current GAAP.
42.
Explain how IFRS #16 treats upward revaluations of
noncurrent operating assets in the financial statements,
and explain how the treatment of upward revaluation differ
from downward revaluations.
17
ASSIGNMENT:
1.
*2.
*3.
4.
*5.
*6.
*7.
Exercise 10-21 (Just indicate the debit entry for each
item including the legal fees to defend the patent.)
Exercise 10-22
Exercise 10-30
(a) Remember that capitalized interest becomes part of
the accumulated construction costs for future
periods.
(b) The cost of equity capital is irrelevant to your
calculations.
(c) Assume 0 months for Dec. 31 expenditures.
Exercise 10-35
Exercise 10-36
Exercise 10-38
Problem 10-60 (Parts D & G only, and assume cannot
determine the cost of the old flooring on part D.)
*Solutions provided
18
Intermediate Accounting
Study Guide Chapter 11
Objectives:
1.
Identify the term used to describe the allocation and
write-off of the cost of each of the following: (See the
introduction to the chapter.)
(a) Equipment and building
(b) Minerals
(c) Intangible assets
2.
Name four factors that must be recognized in determining
the periodic charge for depreciation.
3.
Explain when residual value may be ignored.
4.
Name two physical factors and the primary functional
factor that limit the life of a plant asset.
5.
Indicate the debit and credit to record depreciation on
each of the following:
(a) Factory equipment (Assuming the use of a perpetual
system)
(b) Office equipment
6.
Name the depreciation method most commonly used by
companies for financial reporting.
7.
Be able to calculate annual depreciation using the
following methods: (full-year or partial-year)
(a) Straight-line
(b) Double declining balance
(c) Sum-of-the-years-digits
(d) Service-hours
(e) Productive-output
8.
Explain how composite depreciation differs from group
depreciation in terms of the type of assets to which it
applies.
9.
Explain how group depreciation differs from unit
depreciation in relation to the following:
(a) Useful life
(b) Recognition of gains and losses on retirement of
assets
19
Chapter 11 Objectives (continued)
10.
Explain how each of the following is calculated in a
group depreciation method:
(a) Depreciation rate
(b) Periodic depreciation charge
11.
Be able to show the entry to record the retirement of an
asset under group depreciation.
12.
Indicate the journal entry to record each of the
following:
(a) depreciation of an asset retirement obligation
(b) increase in the present value of an asset retirement
obligation
13.
Be able to calculate unit depletion and annual depletion
charges for financial purposes.
14.
Be able to show the journal entry necessary to record
each of the following:
(a) The purchase of mineral deposits with a given
residual value of the land
(b) Periodic depletion of the mineral deposit
(Use accumulated depletion)
15.
Explain when the depreciation of a building should be
equal to the rate of depletion on a natural resource.
16.
Indicate if a change in the following would be treated as
a change in an estimate or a change in accounting
principle:
(a) Useful life
(b) Residual value
(c) Cost allocation method
17.
Indicate which of the changes in objective #19 would have
to be adjusted for prior periods as well as current and
future periods.
18.
Indicate the treatment of an asset impairment under U.S.
GAAP.
20
Chapter 11 Objectives (continued)
19.
Provide the following information in relation to SFAS
#144:
(a) two events that may cause an impairment
(b) two values compared to determine if an impaired loss
should be reported
(c) two values compared to determine the amount of the
loss
(d) treatment of a recovery of a previous recognized
impairment loss
(e) difference compared to SFAS #121 (See footnote #7 on
p.628.)
20.
Explain how international determination of impairment loss
differs from that used in the U.S..
21.
Indicate if the following are amortized:
(a) intangible assets with a finite and determinable life
(b) intangible assets without a finite and determinable
life
22.
Indicate the allocation method most frequently used for
the amortization of intangibles.
23.
Be able to show the journal entry necessary to record the
amortization of an intangible asset.
24.
Indicate the impairment test for each of the following:
(a) intangible assets with a finite and determinable life
(b) intangible assets without a finite and determinable
life
25.
Complete the following steps in the procedure for
calculating goodwill impairment:
(a) Compute the ______________ of each reporting unit to
which goodwill has been assigned.
(b) If the ___________ of the reporting unit exceeds the
______________ of the net assets (assets - liab.)no
impairment loss is recognized.
(c) Implied fair value of goodwill = ____________of
reporting unit less _________ of net assets
(d) Impairment loss = ____________ less the implied fair
value of goodwill
21
Chapter 11 Objectives (continued)
26.
Be able to record the retirement of an asset under each
of the following situations:
(a) Discard
(b) Sale
(c) Exchange with commercial substance
(d) Exchange without commercial substance
27.
From the following information, be able to record the
decline in value of a building held for sale:
(a) cost, (b) accumulated depreciation, (c) fair value,
(d) estimated selling costs
28.
Explain the five alternatives for determining a partial
period for depreciation purposes.
29.
Indicate the depreciation method used for each of the
following asset categories under MACRS:
(a) 3,5,7, and 10-year personal property
(b) 15 and 20-year personal property
(c) Real property
30.
Indicate which method in question #28 is used for MACRS.
22
ASSIGNMENT:
Solutions will be provided for the entire assignment.
1.
Exercise 11-24
2.
Exercise 11-29 (Round the decimal to four places or the %
to two places.)
3.
Exercise 11-30 (Part 1 Only)
4.
Exercise 11-33 (Do for 2007 only) (Also show the three
journal entries necessary to record the purchase of the
property, the land improvement (road), and the annual
depletion.)
5.
Exercise 11-37
6.
Exercise 11-39
7.
Exercise 11-44 (Show journal entries for each disposal
assuming the transaction lacks commercial substance and
that it has commercial substance. Remember that the list
price is not the market value. Ignore the reference to
the size of the cash payment.)
8.
Problem 11-49 (In the declining balance method, round the
decimal to three places or the % to one place.)
9.
Problem 11-66 (Entries for March 15 and Nov. 1 only)
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