5.01 -- Apply procedures to prepare journal entries for notes payable and notes
receivable transactions.
Textbook Chapters: 20
I. A promissory note is a written and signed promise to pay a sum of money on a specific date.
a. Promissory notes are used when a business borrows money from a bank or other
lending agency for a period of time. These are called Notes Payable.
b. Businesses may request a note from a customer who wants credit beyond the usual
time given for sales on account. These are called Notes Receivable.
c. Notes can be useful in a court of law as written evidence of a debt.
d. The time of a note issued for less than one year is usually stated in days. The time
used in calculating interest is usually stated as a fraction of 360 days.
e. The time between the date a note is signed and the date a note is due (maturity date)
is typically expressed in days. The maturity date is calculated by counting the exact
number of days. The date on which the note is written is not counted, but the maturity
date is counted.
II. Calculating Interest, Maturity Date, and Maturity Value on a Note
a. Interest = Principal X Interest Rate X Time in Years
b. Maturity Date --Example: 90-day Note, signed May 18, Maturity Date is August 16
i. Calculate the number of days remaining in May (13) by subtracting the date of
the note (18) from the number of days in May (31): 31 – 18 = 13.
ii. Calculate the number of days remaining in the term of the note (77) by
subtracting the number of days in the previous month (13) from the term of the
note (90). Because 77 is greater than the number of days in June (30), add all of
the days in June (30).
iii. Calculate the number of days remaining in the term of the note (47) by
subtracting the number of days in the previous months, 43 (13+30), from the term
of the note, 90. Because 43 is greater than the number of days in July (31), add
all of the days in July (31).
iv. Calculate the number of days remaining in the term of the note (16) by
subtracting the number of days in the previous months, 74 (13+30+31), from the
term of the note, 90: 90 – 74 = 16. Because 16 is less than the number of days
in August (31), add only 16 days in August. The Maturity Date is August 16.
c. Maturity Value = Principal + Interest
III. Procedures for Journalizing Notes Payable Transactions
a. Issuance of a note payable
i. Write the date in the Date column of the Cash Receipts Journal.
ii. Write the receipt number in the Doc. No. column.
iii. Debit Cash for the principal amount of the note.
iv. Credit Notes Payable for the principal amount of the note.
b. Payment of principal and interest on a note payable
i. Write the date in the Date column of the Cash Payments Journal.
ii. Write the check number in the Doc. No. column.
iii. Debit Notes Payable for the principal amount of the note.
iv. Debit Interest Expense for the amount of the interest paid.
v. Credit Cash for the total amount paid (maturity value of the note).
c. A note payable issued for an extension of time
i. Write the date in the Date column of the General Journal.
ii. Debit Accounts Payable (referencing the appropriate vendor account) for the
principal amount of the note.
iii. Credit Notes Payable for the principal amount of the note.
d. Payment on a note payable for an extension of time
i. Write the date in the Date column of the Cash Payments Journal.
ii. Write the check number in the Doc. No. column.
iii. Debit Notes Payable for the principal amount of the note.
iv. Debit Interest Expense for the interest paid.
v. Credit Cash for the total amount paid.
IV. Procedures for Journalizing Notes Receivable Transactions
a. Acceptance of a note receivable from a customer
i. Write the date in the Date column of the General Journal.
ii. Write the note number in the Doc. No. column.
iii. Debit Notes Receivable for the principal amount of the note.
iv. Credit Accounts Receivable (referencing the appropriate customer) for the
principal amount of the note.
b. Collection of principal and interest on a note receivable
i. Write the date in the Date column of the Cash Receipts Journal.
ii. Write the receipt number in the Doc. No. column.
iii. Debit Cash for the total amount received (maturity value of the note receivable).
iv. Credit Interest Income for the amount of the interest received.
v. Credit Notes Receivable for the principal amount of the note.
c. A dishonored note receivable
i. Write the date in the Date column of the General Journal.
ii. Debit Accounts Receivable (referencing the appropriate customer account) for
the total amount of the note, including interest due.
iii. Credit Notes Receivable for the principal amount of the note.
iv. Credit Interest Income for the interest due on the note.
KEY TERMS
Promissory note
Creditor
Note payable
Principal (face value
Term (time
Issue date
Payee
Maturity date
Maker
Maturity value
Current liabilities
Long-term liabilities
Interest-bearing note
Non-interest-bearing note
Bank discount
Proceeds
Interest Expense
Note receivable
Interest income
Dishonored note
5.01 Sample Questions
1.
Carson's Shoe Store signed a 90-day,
interest-bearing, 10% note for $5,000.00 with
First National Bank. What is Carson's Shoe
Store's journal entry for the issuance of the
note payable?
A.
Debit Cash $5,500.00; credit
Notes Payable $5,500.00
B.
Debit Cash $5,000.00; credit
Notes Payable $5,000.00
C.
Debit Notes Payable $5,000.00;
credit Cash $5,000.00
D.
Debit Notes Payable $5,500.00;
credit Cash $5,500.00
2.
Master Marketing received a payment of
a note receivable in the amount of $1,295.00.
Interest on the note receivable was $95.00.
What is the journal entry to record the payment
of the note receivable?
A.
Debit Cash $1,295.00; Credit
Interest Income $95.00; Credit Notes
Receivable $1,200.00
B.
Debit Cash $1,295.00; Credit
Accounts Receivable $1,295.00
C.
Debit Accounts Receivable
$1,295.00; Credit Cash $1,295.00
D.
Debit Cash $1,200.00; Debit
Interest Expense $95.00; Credit
Accounts Receivable $1,295.00
3.
Blowing Rock Hardware paid First
American Bank in full for a 180-day, 12%,
interest-bearing note for $10,000. Using a 360day year, what is the journal entry for the
payment of the note payable?
A.
Debit Cash $10,600.00; credit
Notes Payable $10,600.00
B.
Debit Cash $10,600.00; credit
Notes Payable $10,000.00; credit
Interest Expense $600.00
C.
Debit Notes Payable $10,600.00;
credit Interest Expense $600.00; credit
Cash $10,000.00
D.
Debit Notes Payable $10,000.00;
debit Interest Expense $600.00; credit
Cash $10,600.00
4.
Wholesome Food Distributors granted
an extension of time for the account payable of
Moore Food Store for a 90-day, 8%, $10,000
note. Using a 360-day year, what is the journal
entry for Moore Food Store to record the
payment of the note payable?
A.
Debit Cash $10,000.00; credit
Notes Payable $10,000.00
B.
Debit Notes Payable $10,000.00;
debit Interest Expense $200.00; credit
Cash $10,200.00
C.
Debit Cash $10,200.00; credit
Notes Payable $10,000.00; credit
Interest Expense $200.00
D.
Debit Notes Payable $10,200.00;
credit Interest Expense $200.00; credit
Cash $10,000.00
5.
Tucker's Cafe signed a $15,000, 180day, 10%, interest-bearing note on May 1,
2009. Using a 360-day year, what is the
maturity value of the note?
A.
$15,750.00
B.
$16,040.00
C.
D.
$16,500.00
$16,750.00
6.
Carson's Candy Shoppe signed a 60day, 10% note to Jello Beans for an extension
of time on its account payable in the amount of
$2,000.00. What is the correct entry for
Carson's Candy Shoppe to record the note
payable for an extension of time?
A.
Debit Notes Payable $2,000.00;
credit Accounts Payable/Jello Beans
$2,000.00
B.
Debit Notes Payable $2,033.33;
credit Accounts Payable/Jello Beans
$2,033.33
C.
Debit Accounts Payable/Jello
Beans $2,033.33; Credit Notes Payable
$2,033.33
D.
Debit Accounts Payable/Jello
Beans $2,000.00; credit Notes Payable
$2,000.00
Please use the following situation for this
question.
Scenario 5.01 C
Master Marketing signed a $40,000, 90-day
note at 6% on June 1, 2009. Master Marketing
uses a 360-day year.
7.
Using the information given in Scenario
5.01 C, what is the total amount of interest to
be paid on this note?
A.
$400.00
B.
$581.78
C.
$600.00
D.
$2,400.00
8.
Carson Tyler has an overdue account in
the amount of $415.50 with Mountain Oil
Company. Mountain Oil Company agrees to
accept a note receivable from Carson. What is
the journal entry to record the acceptance of
the note receivable?
A.
Debit Cash $415.50; credit
Accounts Receivable/Carson Tyler
$415.50
B.
Debit Accounts
Receivable/Carson Tyler $415.50; credit
Notes Receivable $415.50
C.
Debit Notes Receivable $415.50;
credit Accounts Receivable/Carson
Tyler $415.50
D.
Debit Accounts
Receivable/Carson Tyler $415.50; credit
Cash $415.50
9.
Carson's Candy Shoppe signed a 60day, 10% note to Jello Beans for an extension
of time on its account payable in the amount of
$2,000.00. What is the correct entry for
Carson's Candy Shoppe to record the note
payable for an extension of time?
A.
Debit Notes Payable $2,000.00;
credit Accounts Payable/Jello Beans
$2,000.00
B.
Debit Notes Payable $2,033.33;
credit Accounts Payable/Jello Beans
$2,033.33
C.
Debit Accounts Payable/Jello
Beans $2,033.33; credit Notes Payable
$2,033.33
D.
Debit Accounts Payable/Jello
Beans $2,000.00; credit Notes Payable
$2,000.00
Please use the following situation for this
question.
Scenario 5.01 B
Grandfather Tours signed a $12,000, 180-day
note at 9% on March 1, 2009. Grandfather
Tours uses a 360-day year.
10.
Using the information given in Scenario
5.01 B, what is the total amount of interest to
be paid on this note?
A.
$ 108.00
B.
$ 535.60
C.
$ 540.00
D.
$1,080.00
11.
Beach Bums Surf Shop signed a 90day, 5%, interest-bearing note for $3,000.00
with First National Bank. What is the journal
entry for the issuance of the note payable?
A.
Debit Cash $3,037.50; credit
Notes Payable $3,037.50
B.
Debit Cash $3,000.00; credit
Notes Payable $3,000.00
C.
Debit Notes Payable $3,000.00;
credit Cash $3,000.00
D.
Debit Notes Payable $3,150.00;
credit Cash $3,150.00
12.
Sneakers Snack Shop signed a
$30,000, 90-day, 8%, interest-bearing note on
August 1, 2009. Using a 360-day year, what is
the maturity value of the note?
A.
$30,400.00
B.
$30,592.00
C.
$30,600.00
D.
$32,400.00
13.
Sports Warehouse received a payment
in the amount of $697.50 for a note receivable.
Interest on the note receivable was $47.50.
What is the journal entry to record the payment
of the note receivable?
A.
Debit Cash $697.50; Credit
Accounts Receivable $697.50
B.
Debit Accounts Receivable
$697.50; Credit Cash $697.50
C.
Debit Cash $697.50; Credit
Interest Income $47.50; Credit Notes
Receivable $650.00
D.
Debit Cash $650.00; Debit
Interest Expense $47.50; Credit
Accounts Receivable $697.50
14.
Marty Smith dishonored a 180-day, 5%
note for $5,000.00. What is the journal entry to
record the dishonored note receivable?
A.
Debit Notes Receivable
$5,125.00; debit Interest Expense
$125.00; credit Accounts
Receivable/Marty Smith $5,125.00.
B.
Debit Accounts Receivable/Marty
Smith $5,000.00; credit Notes
Receivable $5,000.00
C.
Debit Accounts Receivable/Marty
Smith $5,125.00; credit Interest Income
$125.00; credit Notes Receivable
$5,000.00
D.
Debit Notes Receivable
$5,125.00; credit Accounts
Receivable/Marty Smith $5,125.00
Please use the following situation for this
question.
Scenario 5.01 C
Master Marketing signed a $40,000, 90-day
note at 6% on June 1, 2009. Master Marketing
uses a 360-day year.
15.
Using the information given in Scenario
5.01 C, what is the maturity date of the note
payable?
A.
September 1, 2009
B.
August 30, 2009
C.
August 29, 2009
D.
August 28, 2009
5.02 -- Apply procedures to prepare journal entries for uncollectible
accounts transactions.
Textbook Chapters: 17
I.
II.
III.
IV.
V.
VI.
VII.
Uncollectible Accounts
a. Uncollectible accounts are accounts receivable that cannot be collected.
b. The adjustment for uncollectible accounts expense is recorded as an adjusting entry in
the general journal.
Writing Off an Uncollectible Account Using the Direct Write-Off Method
a. The direct write-off method is used primarily by small businesses and those with few
charge customers.
b. When the business determines that the amount owed by an individual customer is not
going to be paid, that uncollectible account is removed from the accounting records.
c. The direct write-off method is the only method a business can use for income tax
purposes.
Estimating and Recording Uncollectible Accounts Expense Using the Allowance Method
a. The allowance method of recording losses from uncollectible accounts attempts to
record the expense of uncollectible accounts in the same fiscal year as the related sales
are recorded.
b. An estimate of the uncollectible accounts is recorded to the contra asset account
Allowance for Uncollectible Accounts and the expense account Uncollectible Accounts
Expense (Bad Debts Expense).
c. Estimate uncollectible accounts expense by calculating a percentage of total sales on
account.
d. The allowance method of estimating uncollectible accounts expense (percentage of
total sales on account) assumes that a portion of every dollar of sales on account will
become uncollectible.
e. At the end of a fiscal period, an adjustment for uncollectible accounts expense is
planned on a worksheet. This adjustment is recorded on the worksheet as an adjusting
entry.
Collecting Uncollectible Accounts Receivable
a. Occasionally, after an account is written off, the customer pays the delinquent account.
Several accounts must be changed to recognize payment of a written-off account
receivable.
b. Two entries are recorded for the collection of a written-off account receivable.
Procedure for Journalizing Uncollectible Accounts Receivable Using the Direct Write-Off
Method
a. Debit Uncollectible Accounts Expense.
b. Credit Accounts Receivable/Customer’s account.
Procedure for Estimating Uncollectible Accounts Expense and Journalizing the Adjusting Entry
Using the Allowance Method
a. Total sales X Percentage of sales expected to be uncollectible = Uncollectible Accounts
Expense
b. Adjustment for uncollectible accounts expense
i. Debit Uncollectible Accounts Expense.
ii. Credit Allowance for Uncollectible Accounts.
Procedure for Journalizing the Collection of Uncollectible Accounts Receivable
a. Re-open an account receivable previously written off
i. Debit Accounts Receivable/Customer’s account.
ii. Credit Allowance for Uncollectible Accounts.
b. Record cash received for an account previously written off
i. Debit Cash.
ii. Credit Accounts Receivable/Customer’s account.
KEY TERMS
Uncollectible account
Writing off an account
Allowance for Uncollectible
Accounts
Uncollectible Accounts
Expense
Direct write-off method
Allowance method
Book value of accounts
receivable
Percentage of net sales
Aging of accounts
5.02 Sample Questions
1.
Hair Design Supply Company estimates
uncollectible accounts expense by calculating
a percentage of total sales on account. Total
sales on account for the year are
$1,200,000.00. In the past, actual uncollectible
accounts expense has been about 2.0% of
total sales on account. What is the estimated
uncollectible accounts expense for the year?
A.
$24.00
B.
$240.00
C.
$2,400.00
D.
$24,000.00
2.
On Your Mark Writing Supplies
estimates uncollectible accounts expense by
calculating a percentage of total sales on
account. Total sales on account for the year
are $175,000.00. In the past, actual
uncollectible accounts expense has been
about 1.0% of total sales on account. What is
the estimated uncollectible accounts expense
for the year?
A.
$17.50
B.
$175.00
C.
$1,750.00
D.
$17,500.00
3.
Pet Food Wholesale estimates
uncollectible accounts expense by calculating
a percentage of total sales on account. Total
sales on account for the year are $750,000.00.
In the past, actual uncollectible accounts
expense has been about 1.0% of total sales on
account. What is the estimated uncollectible
accounts expense for the year?
A.
$75.00
B.
C.
D.
$750.00
$7,500.00
$75,000.00
4.
Western Textile Company estimates
uncollectible accounts expense by calculating
a percentage of total sales on account. Total
sales on account for the year are
$5,275,000.00. In the past, actual uncollectible
accounts expense has been about 1.0% of
total sales on account. What is the estimated
uncollectible accounts expense for the year?
A.
$52.75
B.
$527.50
C.
$5,275.00
D.
$52,750.00
5.
On Your Mark Writing Supplies received
a check for $225.00 from Pen & Paper, whose
account was previously written off. On Your
Mark Writing Supplies uses the Allowance
Method for uncollectible accounts. What is the
correct entry to re-open the account for Pen &
Paper?
A.
Debit Accounts Receivable/ Pen
& Paper, $225.00; Credit Allowance for
Uncollectible Accounts, $225.00
B.
Debit Accounts Receivable/ Pen
& Paper, $225.00; Credit Uncollectible
Accounts Expense, $225.00
C.
Debit Uncollectible Accounts
Expense, $225.00; Credit Accounts
Receivable/ Pen & Paper, $225.00
D.
Debit Uncollectible Accounts
Expense, $225.00; Credit Allowance for
Uncollectible Accounts, $225.00
6.
Steve's Auto Shop uses the direct writeoff method when handling uncollectible
accounts receivable. John Taylor owes
$375.00 on account. Steve's Auto Shop
determined this account to be uncollectible.
Which is the correct entry for writing off this
account?
A.
Debit Accounts Receivable/John
Taylor, $375.00; Credit Uncollectible
Accounts Expense, $375.00
B.
Debit Accounts Receivable/John
Taylor, $375.00; Credit Allowance for
Uncollectible Accounts, $375.00
C.
Debit Uncollectible Accounts
Expense, $375.00; Credit Accounts
Receivable/John Taylor, $375.00
D.
Debit Uncollectible Accounts
Expense, $375.00; Credit Allowance for
Uncollectible Accounts, $375.00
7.
Legal Eagles Law Firm uses the direct
write-off method when handling uncollectible
accounts receivable. Joe Coffey owes $250.00
on account. Legal Eagles Law Firm determined
this account to be uncollectible. Which is the
correct entry for writing off this account?
A.
Debit Accounts Receivable/Joe
Coffey, $250.00; Credit Allowance for
Uncollectible Accounts, $250.00
B.
Debit Accounts Receivable/Joe
Coffey, $250.00; Credit Uncollectible
Accounts Expense, $250.00
C.
Debit Uncollectible Accounts
Expense, $250.00; Credit Accounts
Receivable/Joe Coffey, $250.00
D.
Debit Uncollectible Accounts
Expense, $250.00; Credit Allowance for
Uncollectible Accounts, $250.00
8.
Kitchen Supply Warehouse uses the
direct write-off method when handling
uncollectible accounts receivable. Coffey's
Diner owes $450.00 on account. Kitchen
Supply Warehouse determined this account to
be uncollectible. Which is the correct entry for
writing off this account?
A.
Debit Accounts
Receivable/Coffey's Diner, $450.00;
credit Allowance for Uncollectible
Accounts, $450.00
B.
Debit Accounts
Receivable/Coffey's Diner, $450.00;
credit Uncollectible Accounts Expense,
$450.00
C.
Debit Uncollectible Accounts
Expense, $450.00; credit Accounts
Receivable/Coffey's Diner, $450.00
D.
Debit Uncollectible Accounts
Expense, $450.00; credit Allowance for
Uncollectible Accounts, $450.00
9.
Workman Tools estimates its
uncollectible accounts expense for the year to
be $950.00. What is the correct entry to record
the estimated uncollectible accounts expense?
A.
Debit Uncollectible Accounts
Expense, $950.00; credit Accounts
Receivable, $950.00
B.
Debit Uncollectible Accounts
Expense, $950.00; credit Allowance for
Uncollectible Accounts, $950.00
C.
Debit Accounts Receivable,
$950.00; credit Uncollectible Accounts
Expense, $950.00
D.
Debit Allowance for Uncollectible
Accounts, $950.00; credit Uncollectible
Accounts Expense, $950.00
10.
Hair Design Supply estimates its
uncollectible accounts expense for the year to
be $4,250.00. What is the correct entry to
record the estimated uncollectible accounts
expense?
A.
Debit Uncollectible Accounts
Expense, $4,250.00; credit Accounts
Receivable, $4,250.00
B.
Debit Uncollectible Accounts
Expense, $4,250.00; credit Allowance
for Uncollectible Accounts, $4,250.00
C.
Debit Accounts Receivable,
$4,250.00; credit Uncollectible Accounts
Expense, $4,250.00
D.
Debit Allowance for Uncollectible
Accounts, $4,250.00; credit
Uncollectible Accounts Expense,
$4,250.00
11.
Mary Ann's Sewing Notions received a
check for $75.00 from Cathy Martin, whose
account was previously written off. Mary Ann's
Sewing Notions uses the Allowance Method for
uncollectible accounts. What is the correct
entry to re-open the account for Cathy Martin?
A.
Debit Accounts Receivable/Cathy
Martin, $75.00; credit Allowance for
Uncollectible Accounts, $75.00
B.
Debit Accounts Receivable/Cathy
Martin, $75.00; credit Uncollectible
Accounts Expense, $75.00
C.
Debit Uncollectible Accounts
Expense, $75.00; credit Accounts
Receivable/Cathy Martin, $75.00
D.
Debit Uncollectible Accounts
Expense, $75.00; credit Allowance for
Uncollectible Accounts, $75.00
12.
Mother Goose Children's Clothing
received a check for $125.00 from Little
Angels, whose account was previously written
off. Mother Goose Children's Clothing uses the
Allowance Method for uncollectible accounts.
What is the correct entry to re-open the
account for Little Angels?
A.
Debit Accounts Receivable/Little
Angels, $125.00; credit Allowance for
Uncollectible Accounts, $125.00
B.
Debit Accounts Receivable/Little
Angels, $125.00; credit Uncollectible
Accounts Expense, $125.00
C.
Debit Uncollectible Accounts
Expense, $125.00; Credit Accounts
Receivable/Little Angels, $125.00
D.
Debit Uncollectible Accounts
Expense, $125.00; credit Allowance for
Uncollectible Accounts, $125.00
13.
Mitchell Building Supplies uses the
direct write-off method when handling
uncollectible accounts receivable. Lark
Construction owes $1,200.00 on account.
Mitchell Building Supplies determined this
account to be uncollectible. Which is the
correct entry for writing off this account?
A.
Debit Accounts Receivable/Lark
Construction, $1,200.00; credit
Allowance for Uncollectible Accounts,
$1,200.00
B.
Debit Accounts Receivable/Lark
Construction, $1,200.00; credit
Uncollectible Accounts Expense,
$1,200.00
C.
Debit Uncollectible Accounts
Expense, $1,200.00; credit Accounts
Receivable/Lark Construction,
$1,200.00
D.
Debit Uncollectible Accounts
Expense, $1,2000.00; credit Allowance
for Uncollectible Accounts, $1,200.00
14.
Kitchen Supply Warehouse uses the
direct write-off method when handling
uncollectible accounts receivable. Coffey's
Diner owes $450.00 on account. Kitchen
Supply Warehouse determined this account to
be uncollectible. Which is the correct entry for
writing off this account?
A.
Debit Accounts
Receivable/Coffey's Diner, $450.00;
credit Allowance for Uncollectible
Accounts, $450.00
B.
Debit Accounts
Receivable/Coffey's Diner, $450.00;
credit Uncollectible Accounts Expense,
$450.00
C.
Debit Uncollectible Accounts
Expense, $450.00; credit Accounts
Receivable/Coffey's Diner, $450.00
D.
Debit Uncollectible Accounts
Expense, $450.00; credit Allowance for
Uncollectible Accounts, $450.00
15.
Maple Tree Candy Factory estimates
uncollectible accounts expense by calculating
a percentage of total sales on account. Total
sales on account for the year are $185,000.00.
In the past, actual uncollectible accounts
expense has been about 0.5% of total sales on
account. What is the estimated uncollectible
accounts expense for the year?
A.
$9.25
B.
$92.50
C.
$925.00
D.
$9,250.00
16.
Pet Food Wholesale estimates its
uncollectible accounts expense for the year to
be $1,500.00. What is the correct entry to
record the estimated uncollectible accounts
expense?
A.
Debit Uncollectible Accounts
Expense, $1,500.00; credit Accounts
Receivable, $1,500.00
B.
Debit Uncollectible Accounts
Expense, $1,500.00; credit Allowance
for Uncollectible Accounts, $1,500.00
C.
Debit Accounts Receivable,
$1,500.00; credit Uncollectible Accounts
Expense, $1,500.00
D.
Debit Allowance for Uncollectible
Accounts, $1,500.00; credit
Uncollectible Accounts Expense,
$1,500.00
17.
Maple Tree Candy Factory estimates its
uncollectible accounts expense for the year to
be $800.00. What is the correct entry to record
the estimated uncollectible accounts expense?
A.
Debit Uncollectible Accounts
Expense, $800.00; credit Accounts
Receivable, $800.00
B.
Debit Uncollectible Accounts
Expense, $800.00; credit Allowance for
Uncollectible Accounts, $800.00
C.
Debit Accounts Receivable,
$800.00; credit Uncollectible Accounts
Expense, $800.00
D.
Debit Allowance for Uncollectible
Accounts, $800.00; credit Uncollectible
Accounts Expense, $800.00
18.
Mary Ann's Sewing Notions received a
check for $75.00 from Cathy Martin, whose
account was previously written off. Mary Ann's
Sewing Notions uses the Allowance Method for
uncollectible accounts. What is the correct
entry to re-open the account for Cathy Martin?
A.
Debit Accounts Receivable/Cathy
Martin, $75.00; credit Allowance for
Uncollectible Accounts, $75.00
B.
Debit Accounts Receivable/Cathy
Martin, $75.00; credit Uncollectible
Accounts Expense, $75.00
C.
Debit Uncollectible Accounts
Expense, $75.00; credit Accounts
Receivable/Cathy Martin, $75.00
D.
Debit Uncollectible Accounts
Expense, $75.00; credit Allowance for
Uncollectible Accounts, $75.00
5.03 -- Apply procedures to prepare journal entries for straight-line
depreciation of plant assets transactions.
Textbook Chapters: 18
I.
II.
III.
IV.
Plant Assets
a. Assets that will be used for a number of years in the operation of a business are known
as plant assets.
b. A business may have several types of plant assets including equipment, buildings, and
land.
c. Most plant assets are useful for only a limited period of time. The cost of a plant asset
should be depreciated over its useful life.
d. Plant assets may continue to be used after their estimated useful lives have ended;
however, no additional depreciation is recorded.
Straight-Line Depreciation
a. Generally Accepted Accounting Principles require that the cost of a plant asset be
expensed over the plant asset’s useful life.
b. The annual expense is recorded in Depreciation Expense and the contra-asset account
Accumulated Depreciation.
c. Straight-line depreciation is the easiest and most widely used method of depreciation.
d. To calculate straight-line depreciation, a business must know the cost of the plant asset,
the estimated salvage (disposal) value, and the estimated useful life.
e. The straight-line method of depreciation charges an equal amount of depreciation
expense in each full year in which the asset is used.
Depreciation Expense
a. A month is the smallest unit of time used to calculate depreciation.
b. A plant asset may be placed in service at a date other than the first day of a fiscal
period.
c. A partial year’s depreciation may also be recorded in the year the plant asset is sold or
disposed of.
Accumulated Depreciation and Book Value
a. Depreciation is not recorded as a reduction of the plant asset account.
i. The amount of the depreciation of a plant asset’s useful life is known as
accumulated depreciation.
b. Plant Asset Records
i. A separate record is kept for each plant asset. An accounting form on which a
business records information about each plant asset is called a plant asset
record.
ii. Plant asset records may vary in arrangement for different businesses, but most
records contain similar information.
iii. Plant asset records include annual depreciation expense amounts, accumulated
depreciation, and ending book value. Plant asset records may also include
information regarding the disposal of the asset.
c. Book Value
i. The original cost of a plant asset minus accumulated depreciation is known as
the book value of a plant asset.
ii. The ending book value for one year becomes the beginning book value for the
next year.
d. Journalizing and Posting Depreciation Expense
i. The adjustment for Depreciation Expense is recorded in the Adjustments column
of the worksheet.
V.
VI.
VII.
VIII.
ii. The adjustment is also entered as an adjusting entry in the General Journal.
iii. The adjusting entry is then posted to the general ledger.
Procedure for Calculating Straight-Line Depreciation
a. Subtract the asset’s estimated salvage (disposal) value from the asset’s original cost.
The difference is the estimated total depreciation expense for the asset’s entire useful
life.
b. Est. Total Deprec. Expense = Original Cost – Est. Salvage Value
c. Divide the estimated total depreciation expense by the years of estimated useful life.
The result is the estimated annual depreciation expense.
d. Est. Annual Deprec. Expense = Est. Total Deprec. Exp. ÷ Years of Useful Life
Procedure for Calculating Depreciation Expense for Part of a Year
a. Divide the annual depreciation expense by 12, the number of months in a year. The
result is the monthly depreciation expense.
b. Monthly Depreciation Expense = Annual Depreciation Expense ÷ 12
c. Multiply the monthly depreciation expense by the number of months the plant asset is
used in a year. The result is the partial year’s depreciation expense.
d. Partial Deprec. Exp. = Monthly Deprec. Exp. X Months Asset Used
Procedure for Calculating Accumulated Depreciation and Book Value
a. The accumulated depreciation of a plant asset is calculated by adding the depreciation
expense for the current year to the prior year’s accumulated depreciation.
b. Accum. Deprec. = Prior Year Accum. Deprec. + Current Year Deprec. Exp.
c. The book value is calculated by subtracting the accumulated depreciation from the
original cost of the plant asset.
d. Book Value = Original Cost of Plant Asset – Accumulated Depreciation
e. The book value can also be calculated by subtracting the year’s depreciation from that
year’s beginning book value.
f. Book Value = Year's Beginning Book Value – Year's Depreciation
Procedure for Journalizing and Posting Annual Depreciation Expense
a. Recording on the worksheet
i. Debit Depreciation Expense for the total annual depreciation expense amount.
ii. Credit Accumulated Depreciation for the total annual depreciation expense
amount.
b. Journalizing in the General Journal
i. Write the date in the Date column of the General Journal.
ii. Debit Depreciation Expense for the total annual depreciation expense amount.
iii. Credit Accumulated Depreciation for the total annual depreciation expense
amount.
c. Posting to the General Ledger
i. Post the debit to Depreciation Expense.
ii. Post the credit to Accumulated Depreciation.
KEY TERMS
Plant asset
Depreciation expense
Straight-line method of
depreciation
Estimated salvage value
(estimated disposal value)
Estimated useful life
Plant asset record
Declining balance method of
depreciation
5.03 Sample Questions
1.
Mountain Business Services
purchased a computer on January 1,
2009 for $3,600.00. The estimated
salvage (disposal) value is $200.00 and
the estimated useful life is 5 years. What
is the annual depreciation expense?
A.
$200.00
B.
$360.00
C.
$680.00
D.
$720.00
2.
Burger Boy Diner purchased a
commercial oven on January 1, 2009 for
$5,800.00. The estimated salvage
(disposal) value is $200.00 and the
estimated useful life is 7 years. What is
the annual straight-line depreciation
expense?
A.
$200.00
B.
$400.00
C.
$800.00
D.
$828.50
3.
Joe's Taxi Service purchased a
new taxi on January 1, 2010 for
$22,000.00. The estimated salvage
(disposal) value is $1,000.00 and the
estimated useful life is 3 years. What is
the annual depreciation expense?
A.
$7,333.33
B.
$7,000.00
C.
$3,500.00
D.
$1,000.00
4.
Creative Art Supplies purchased
a new display easel on January 1, 2010
for $850.00. The estimated salvage
(disposal) value is $50.00 and the
estimated useful life is 5 years. What is
the annual depreciation expense?
A.
$850.00
B.
$170.00
C.
$160.00
D.
$50.00
5.
Burger Boy Diner purchased a
commercial oven on August 1, 2010 for
$6,800.00. The estimated salvage
(disposal) value is $500.00 and the
estimated useful life is 7 years. What is
the depreciation expense for 2010?
A.
$375.00
B.
$485.00
C.
$525.00
D.
$900.00
6.
Joe's Taxi Service purchased a
new taxi on March 1, 2010 for
$24,000.00. The estimated salvage
(disposal) value is $3,000.00 and the
estimated useful life is 3 years. What is
the depreciation expense for 2010?
A.
$7,000.00
B.
$5,833.33
C.
$2,857.14
D.
$1,166.67
7.
NC Office Supply purchased a
heating system on September 1, 2010
for $18,500.00. The estimated salvage
(disposal) value is $500.00 and the
estimated useful life is 10 years. What is
the depreciation expense for 2010?
A.
$1,800.00
B.
$1,200.00
C.
$616.67
D.
$600.00
8.
Steve's Auto Parts purchased a
display case on January 1, 2009 for
$3,400.00. The estimated salvage
(disposal) value is $200.00 and the
estimated useful life is 10 years. What is
the accumulated straight-line
depreciation at the end of 2011?
A.
$320.00
B.
$640.00
C.
$680.00
D.
$960.00
9.
Joe's Taxi Service purchased a
new taxi on March 1, 2009 for
$24,000.00. The estimated salvage
(disposal) value is $3,000.00 and the
estimated useful life is 3 years. What is
the accumulated depreciation at the end
of 2011?
A.
$7,000.00
B.
$19,833.33
C.
$21,000.00
D.
$24,000.00
10.
NC Office Supply purchased a
heating system on September 1, 2009
for $18,500.00. The estimated salvage
(disposal) value is $500.00 and the
estimated useful life is 10 years. What is
the accumulated depreciation at the end
of 2011?
A.
$1,800.00
B.
$2,400.00
C.
$4,200.00
D.
$5,400.00
11.
Creative Art Supplies purchased
a delivery van on March 1, 2009 for
$12,500.00. The estimated salvage
(disposal) value is $500.00 and the
estimated useful life is 10 years. What is
the accumulated depreciation at the end
of 2011?
A.
$1,200.00
B.
$2,400.00
C.
$3,400.00
D.
$3,600.00
12.
Steve's Auto Repair has
depreciation expense of $3,500.00 at
the end of the fiscal year. What is the
entry to journalize the depreciation
expense?
A.
Debit Accumulated
Depreciation $3,500.00; Credit
Depreciation Expense $3,500.00
B.
Debit Depreciation
Expense $3,500.00; Credit
Accumulated Depreciation
$3,500.00
C.
Debit Depreciation
Expense $3,500.00; Credit
Equipment $3,500.00
D.
Debit Equipment
$3,500.00; Credit Accumulated
Depreciation $3,500.00
13.
Joe's Taxi Service has
depreciation expense of $12,200.00 at
the end of the fiscal year. What is the
entry to journalize the depreciation
expense?
A.
Debit Equipment
$12,200.00; credit Accumulated
Depreciation $12,200.00
B.
Debit Depreciation
Expense $12,200.00; credit
Equipment $12,200.00
C.
Debit Depreciation
Expense $12,200.00; credit
Accumulated Depreciation
$12,200.00
D.
Debit Accumulated
Depreciation $12,200.00; credit
Depreciation Expense
$12,200.00
14.
Michael's Soda Shoppe has
depreciation expense of $1,250.00 at
the end of the fiscal year. What is the
entry to journalize the depreciation
expense?
A.
Debit Equipment
$1,250.00; credit Accumulated
Depreciation $1,250.00
B.
Debit Depreciation
Expense $1,250.00; credit
Equipment $1,250.00
C.
Debit Depreciation
Expense $1,250.00; credit
Accumulated Depreciation
$1,250.00
D.
Debit Accumulated
Depreciation $1,250.00; credit
Depreciation Expense $1,250.00
15.
NC Office Supply has
depreciation expense of $7,525.00 at
the end of the fiscal year. What is the
entry to journalize the depreciation
expense?
A.
Debit Equipment
$7,525.00; credit Accumulated
Depreciation $7,525.00
B.
Debit Depreciation
Expense $7,525.00; credit
Equipment $7,525.00
C.
Debit Depreciation
Expense $7,525.00; credit
Accumulated Depreciation
$7,525.00
D.
Debit Accumulated
Depreciation $7,525.00; credit
Depreciation Expense $7,525.00
16.
Creative Art Supplies has
depreciation expense of $950.00 at the
end of the fiscal year. What is the entry
to journalize the depreciation expense?
A.
Debit Accumulated
Depreciation $950.00; credit
Depreciation Expense $950.00
B.
Debit Depreciation
Expense $950.00; credit
Accumulated Depreciation
$950.00
C.
Debit Depreciation
Expense $950.00; credit
Equipment $950.00
D.
Debit Equipment $950.00;
credit Accumulated Depreciation
$950.00
5.01
1. B
2. A
3. D
4. B
5. A
6. D
7. C
8. C
9. D
10. C
11. B
12. C
13. C
14. C
15. B
5.00 Sample Questions Answer Key
5.02
5.03
1. D
2. C
3. C
4. D
5. A
6. C
7. C
8. C
9. B
10. B
11. A
12. A
13. C
14. C
15. C
16. B
17. B
18. A
1. C
2. C
3. B
4. C
5. A
6. B
7. D
8. D
9. B
10. C
11. C
12. B
13. C
14. C
15. C
16. B