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UA AC 310 - Exam 4 Study Guide
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AC 310 1st EditionExam # 5 Study Guide: Days 18 - 22Day 18 (March 10)Accounting for Accounts ReceivableTrade Discounts: percentage reduction from the list price; way to change prices w/o publishing new catalog / disguises real price from competitorsCash Discounts: intended to provide incentive for a quick paymentTwo ways to record cash discounts: gross method and net method1. Gross Method: record first journal entry at normal (full) priceDay of Sale:DR Accounts Receivable …… 20,000CR Sales Revenue……………..20,000Day of Collection (within discount period)DR Cash ………………………………19,600DR Sales Discount……………………..400CR Accounts Receivable………20,0002.Net Method: record first journal entry already assuming they took the discountDay of Sale:DR Accounts Receivable………19,600CR Sales Revenue……….........19,600Day of Collection (outside discount period):DR Cash………………………………..20,000CR Accounts Receivable……..19,600CR Interest Revenue………………..400**Difference between the two is the timing of the recognition of discounts not takenNet Realizable Value: amount of cash the company expects to actually collect(Accounts Receivable – End Allowance for Uncollectible Accounts)Bad Debt Expense: cost of granting credit; company faces the risk that customers may not be able to pay them backDR Bad Debt Expense…………………………………... XXXCR Allowance for Uncollectible Accounts………XXXXAllowance for Uncollectible Accounts: contra asset account to accounts receivableTwo approaches to deciding bad debt expense:1.Income Statement ApproachBad debt expense estimated as a percentage of each period’s net credit salesBD Exp.  2% of 1,200,000 = 24,000Journal Entry:DR Bad Debt Expense……………………………………. 24,000CR Allowance for Uncollectible Accounts……… 24,0002.Balance Sheet Approach (Composite Rate & Aging of Receivables)Determine BD Expense by estimating the net realizable value of accounts receivables*Determine Ending balance of Allowance for uncollectible accounts, then adjustallowance to solve for BD ExpenseNoninterest-Bearing Note: actually DOES bear interest; interest is deducted from the face amount to determine the cash proceeds available to the borrower at the outset*Discount is a contra account to the note receivable accountDay 19 (March 12)Accounting for Notes ReceivableUsing receivables to obtain immediate cash:1. Secured Borrowing- Company A borrows $500,000 from Company B—interest is 12%- Company B assigns $620,000 of its own receivables as collateral for the loan- Company B charges a finance fee of 1.5% of the receivableDR Cash (difference)……………………………………………….490,700DR Finance charge expense (1.5% x $620,000)………..9,300CR Liability—financing arrangement……………………500,000Company A still collects receivables for Company B, but gives up the cash on amonthly basis. When $400,000 of receivables are collected at month’s end,Company A records the following:DR Cash……………………………………………………….400,000CR Accounts Receivable…………………………………..400,000DR Interest Expense ($500,000 x 12% x 1/12)….5,000DR Liability—financing arrangement……………….400,000CR Cash…………………………………………………..........405,0002. Sale of Receivablesa. Factoring: a company sells its accounts receivable to a financial institutioni. Financial institution buys it for cash, handles billing and collection of the receivables, and charges a fee for this serviceb. Securitization: company creates a SPE, usually a trust/subsidiary; SPE buys a pool of receivables/loans from the company then sells related securities that are backed by the receivables- Sale without Recourse (Seller without Responsibility): the buyer cannot ask the seller for more money if the receivables prove to be uncollectibleDR CashDR Loss on sale of receivables (to balance)DR Receivable from factorCR Accounts Receivable- Sale with Recourse (Seller with Responsibility): the seller retains all of the risk of bad debtsDR CashDR Loss on sale of receivablesDR Receivable from factorCR Recourse LiabilityCR Accounts ReceivableDay 20 (March 24)Inventory valuation with LIFO Reserve and LIFO LiquationTwo types of inventory systems are used to record transactions involving inventory:1.Perpetual System: inventory is continuously updated as purchases and returns are made (think Wal-Mart’s checkout system)2.Periodic System: inventory account is adjusted at the end of a reporting period; done manuallyBeginning Inventory+Net PurchasesCost of Goods Available for Sale- Ending Inventory= Cost of Goods SoldInventory Cost Flow Assumptions:1. Specific identification: high price, low volume items (jewelry store, car dealerships)2. Average Cost3. First-in, first-out (FIFO)4. Last-in, last-out (LIFO)Average Cost: Cost of Available Goods // Units Available for SaleFIFO: assumes that items are sold in the chronological order of acquisition—first items received are the first items sold; last-in remain in inventory at the end of the periodCOGS and Ending Inventory are the same under BOTH the periodic and perpetual methodsWith INCREASING prices, FIFO will have a lower COGS (expense) than LIFO will, and therefore ahigher income.LIFO: assumes that the newest items are sold first, leaving the older units in inventoryCOGS and Ending Inventory Cost will differ under the perpetual and periodic approachesWatch for the time of sale and updated inventory purchases! Remember: new is alwaysaccounted for first with LIFO.*With rising prices, LIFO’s COGS is more. This means less income, but fewer taxes! CAN use multiple inventory costing systems for the same company. Often companies use FIFO for their internal records and LIFO for their external reporting (and income tax purposes.)Day 21 (March 26)Inventories Valuation with Lower of Cost or Market and NRVDetermining Market Value:1. Start with Replacement Cost—will be given2. Solve for the Ceiling Cost (NRV)a. NRV (Ceiling) = Selling Price minus disposal costs3.Solve for the Floor Cost (NRV – NP)a. Take Ceiling Cost (NRV) and subtract away Normal Profiti. Normal profit = Selling price x gross profit ratio*Middle Value will be your market value*Compare Market Value to Original Cost, and whichever is lower is the value of your inventory.Day 22 (March


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UA AC 310 - Exam 4 Study Guide

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