ACCT 200 1st Edition Lecture 16 Outline of Last Lecture I. Costs of Tangible/Intangible AssetsII. Slide 29 Key Terms ReviewIII. Similar Problem to Homework 2IV. E 7-16V. Gains/Losses on DisposalVI. BE 7-10Outline of Current Lecture I. Recordings and TransactionsII. Selling InventoryIII. Valuation Allowance MethodIV. Set Up Allowance for Bad AccountsV. Notes Receivable and Interest EntriesVI. Receivable TurnoverVII. LIFO/FIFO/Average CostVIII. InventoryIX. Multi-Step Income StatementX. Miscellaneous Terms and EquationsXI. Long-Term AssetsXII. Develop Cost of Tangible AssetsXIII. Basket ApproachXIV. Costs Paid After PurchaseXV. DepreciationCurrent LectureUse study guide, McGraw-Hill practice problems, old activitiesRecordings and transactions (ch 5):Record a sale on account terms 2/10 net 30Dr acct receivable 2000, cr sales 2000Customer returns 200 of items purchasedDr sales returns and allowances 200, cr acct receivableCustomer pays and takes discountBalance due=2000-200=1800; *.02=36 sales discountDr cash 1764, dr sales discount 36, cr acct receivable 1800Sell inventory when making sale: cost of inventory sold is 1000Dr acct receivable 2000, cr sales 2000Dr cost of goods sold 1000, cr inventory 1000Valuation – allowance method% of receivables methodAcct receivable 100,000, begin allowance for uncollectable accts 100 cr balance, 5% estimated uncoll accts (mgmt. makes the estimate)Questions that might be asked:What is the ending allowance for uncoll accts (contra asset)? 100,000*.05=5000 end balanceWhat is the amount of bad debt expense? End bal-beg cr bal=5000-100=4900 expWhat is the journal entry to record the bad debt expense? Dr bad debt expense 4900, cr allow for uncoll accts 4900What is net acct receivable or net realizable value? Acct rec-end allow balance=100,000-5000=95,000*if beginning balance in allowance is a debit (overdrawn): bad debt exp=end bal - (-beg bal)=end+begin balanceSet up allowance for bad accts:When it goes bad, we do a write off (eliminate acct from our records)Dr allow for uncoll accts, cr acct rec (decrease both accts)Notes rec and interest entries:Issue a note (lend money) 50,000; 5% interest rate; issue on 3/1/10 due 2/28/11 (1 year)3/1 dr notes rec 50,000, cr cash 50,000Accrue interest due 12/31/10 – 50,000*.05*(10/12)=208312/31 dr interest rec 2083, cr interest rev 2083Pay off loan at 2/282/28 dr cash 52,500, cr interest rec 2083, cr interest rev 417 (2500 total interest-2083), cr notes receivable 50,000Receivable turnover:Beg acct rec 100, end acct rec 110, sales 1380, sales return 2, sales discount 8Net sales/avg acct rec=(1380-2-8)/105=13.0476 timesAvg collection period: 365/turnover=365/13.05=27.9693 daysCh 6LIFO/FIFO/avg costUnits cost/unit total costBeg inv 100 3 300Purchase 400 4 1600Purchase 200 4.5 900Purchase 300 5 1500TOTAL 1000 4300On hand 150Calculate sold=850 (1000-150)FIFOCalc value of 850 units sold100*3, 400*4, 200*4.5, partial sold 150*5, remaining in inv 150*5COGS=$3550; remaining on hand inv=$750 end invLIFOCalc value of 850 units sold300*5, 200*4.5, partial sold 350*4, remaining in inv 50*4, 100*3COGS=$3800, remaining on hand inv=500Avg cost methodFind avg cost/unit=total cost/total units=4300/1000=4.3 avg cost/unitCOGS 850*4.3=3655; end inv 150*4.3=645Comparisons of methods:(If costs are rising)LIFO has lowest end inv, highest COGS value, lowest net incomeFIFO has highest end inv, lowest COGS value, highest net incomeAvg cost method is in the middle for allAppendix BInventory errors: If we overstate end inv then COGS is understated (profits are overstated); and also oppositeDon’t need to know how to correct or anything else, just know impact of error for current year ^Purchase entries for inv:Purchase inv for 3000 terms 2/10 net 30 (terms implies it’s bought on acct)Dr inv 3000, cr acct payable 3000Return 500 damaged itemsDr acct payable 500, cr inv 500Pay and take discount 3000-500=2500 due2500*.02 discount=50 discountDr acct payable 2500, cr cash 2450, cr inv 50Freight charges to get inv (freight in)Dr inv 100, cr cash 100Balance in inv at this point is 3000-500-50+100=2550Calculate COGS=beg inv + purchases - purchase returns - purchase discounts + freight in - end inv Multi-step income statement – gross profit, operating income, net income before taxesGross profit rate=(net sales - COGS)/net sales=gross profit/net salesProfit margin ratio=net income/net salesLower of cost or market: Permanent decline in value of inv below sales price (market), then reduce value of inv to marketpriceInv turnover ratio=COGS/avg invDays in inv=365/turnoverTypes of long-term assets:Tangible – building land, equipment, vehiclesIntangible – copyrights, patents, trademarks, goodwillKnow in general what they all are; definition of goodwillDevelop cost of tangible assets:Anything to get it ready for its intended use – purchase price, sales tax, installation, initial test; anything initial first costDoesn’t include annual insurance, annual licenseIntangibles – legal costs to get it recorded, future legal costs to defend it; purchase costResearch and development are expensedBasket approach (activity 7): (FMV of asset/total FMV)*cost of all assets=cost of the specific assetBook value=cost - accumulated depreciation^make sure to check dates (how many months/year)Costs paid after purchaseExpense them (regular maintenance costs – car oil change)Add them to asset (capitalize them) – complete new roof, add a whole bedroom to my house, redo the engineIntangibles – ongoing legal costs get added to all intangiblesDepreciation=(cost-salvage)/life=annual depreciationFirst year not a full year – annual depreciation*fraction of year ownedDr dep exp, cr accum dep (contra asset)Gains and losses: gain=revenue;