Financial Accounting Application Assignment
Abstract
This is a question and answers financial accounting-based paper that examines various accounting aspects. Part (a) of the first question discusses methods of estimating bad debt expenses and finds that they are the percent of sales method and account receivable methods. Part (b) of the question differentiates between accounts receivable and notes receivable. Part (c) of the same questions explores the computation of notes receivable, including interest rate, maturity date, and how they are entered in the journal entry. The second question discusses different types of depreciation, including straight-line method, double-declining balance method, and units of production method. Question three investigates how to determine whether the asset has made profit or loss after disposal. It is found that the asset will only make a profit if the disposal value exceeds the book value cost; otherwise, it will be a loss. Part (b) of question three discusses assets that are amortized and depleted. Finally, question four presents the differences between current liabilities and noncurrent liabilities.
Q1 a) Explain the methods that can estimate bad debt expenses in the business. (Give numerical examples) (1 Mark)
Bad debts expenses can be estimated using Percent of sales method and Accounts receivable methods (Percent of Accounts Receivable Method and Aging of Accounts Receivable Method) (Wild, 2013). Percent of sales method is used by multiplying predetermined bad debt percentage by current period sales. The predetermined debt percentage is based on economic trends and past history
Percent of Sales Method
Example:
TY Merchandise made credit sales of $500,000 in 2019. The company estimates that based on past history, 2 percent of the debts will be uncollectible. The debt expense will be:
Current Period Sales ($500,000) x Bad Debt % (2%) = Estimated Bad Debt Expense ($10,000)
$500,000 x 2% = $10,000
Percent of Accounts Receivable method arrives at a bad expense by getting estimated adjusted balance in allowance for doubtful accounts and subtracting unadjusted year-end balance in allowance for doubtful accounts (Wild, 2013). The latter is computed by taking Year-end Account Receivable and multiplying by bad debt percentage while the latter is the allowance for doubtful debts existing in the company accounts.
Extending the previous examples, let’s assume TY Merchandise had accounts receivable worth $800,000 and had a balance of Allowance for Doubtful Accounts worth $15,000 with the past trend showing that 5% of the receivables will not be fulfilled. The bad debts for the year ending 2019 will be computed as:
Estimated adjusted balance in allowance for doubtful accounts =
$800,000 x 5% = $40,000
Unadjusted year-end balance in the allowance for doubtful accounts = $15,000
Bad Debts Expense = $40,000 – $15,000
= $25,000
The aging method estimates bad debt expense by grouping each receivable based on how long it has gone past the due date. Each group is then multiplied by corresponding bad debts expense. Finally, the estimated bad debts for each group are summed (Wild, 2013).
TY Merchandise account receivables have been grouped based on the number of months and percentage of uncollectible assigned based on past experiences.
Accounts Receivable not yet due is $500,000 with 2 percent bad debt.
Accounts receivable past due date by 30 days is 150,000, with 3 percent bad debt.
Accounts receivable past due date by three months is 100,000 with 5 percent bad debt.
Accounts receivable past due date by six months is $30,000 with 7 percent bad debt.
Accounts receivable past due date by over six months is $20,000 with 10 percent bad debt. Allowance for Doubtful Accounts had a balance of $15,000
$500,000 x 2% = $10,000
$150,000 x 3% = $4,500
$100,000 x 5% = $5,000
$30,000 x 7% = $2,100
$20,000 x 10% = $2,000
Total = $23,600
Less: $15,000
Debt expense = $8,600
b.) Differentiate between Accounts receivable and Notes receivable. (1 Mark)
Accounts receivable arises when the company sells goods to the customer on credit (Franklin, Graybeal, & Cooper, 2019). This leads to debts that should be paid by the customer at a later date; hence, resulting in the creation of accounts receivable. When credit sales are made, the account receivable arises, as shown below:
Accounts Receivable XXX
Sales XXX
Notes receivable, on the other hand, is a promise by the maker or debtor to pay the specific or the owed amount at a given future data (Franklin, Graybeal, & Cooper, 2019). The notes consist of the principal amount, interest rate, as well as the due date (Wild, 2013).
c) On October 1 2019, XYZ Inc. has sold an equipment for $ 25,000 to ABC Ltd.by issuing an 8% note receivable for 90 days. Calculate the interest on the note and on what would be the maturity date. Pass Journal entry in the books of the company to record these transactions. (2 Marks)
Interest = Principal of the note x Annual interest rate x Time in years
$25,000 x 8% x (90/360) = $500
Maturity Date:
October 31 days less 1 day of the note = 30 days
November = 30 days
December = 30 days
Total = 90 days
Note Maturity date
December 30, 2019
October 1 Notes Receivable(DR) $25,000
Sales(CR) $25,000
Goods sold to ABC Ltd in exchange for note
December 30 Cash(DR) $25,500
Interest Revenue (CR) $500
Notes Receivable (CR) $25,000
To record note collected plus interests
Q2. On 1st April 2008 Abdulla installs a new machinery costing SAR 312,000 with a five year life and estimated salvage value of SAR28000. Management estimates that the machine will produce 1136000 units of the product during its lifetime. Actual units of production were as follows:
1st year 245600 units,
2nd year 230400 units,
3rd year 227000 units,
4th year 232600 units &
5th year 200400 units.
Compute depreciation Expenses under Straight-line method, Double declining balance method and Units of production Method method the machine must not be depreciated below its estimated salvage value. (6 Marks)
Q3 On Dec 31, 2019, XYZ Company sells a machine that originally cost $150,000 for $90,000 cash. The machine was placed in service on January 1, 2015. It was depreciated using the straight-line method with an estimated salvage value of $25,000 and a useful life of 10 years. Determine the profit or loss made on disposal of the machine and pass Journal Entry. (5 Marks)
b. Depletion and Amortization are the processes of allocating the cost of a of different asset to expense in the accounting periods benefiting from its use. Explain the assets applicable for such processes. (2 Marks)
Q4. Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities.
Illustrate your answer with journal entries as examples. (3 Marks)
References
Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of Accounting, Volume 1: Financial Accounting. OpenStax. Retrieved from https://openstax.org/details/books/principles-financial-accounting
Kraynak, J. (2014). Accounting All-in-One For Dummies. For Dummies.
Piper, M. (2017). Accounting Made Simple: Accounting Explained in 100 Pages Or Less. Simple Subjects, LLC.
Prudham, W. S., & Lonergan, S. (2013). Natural Resource Accounting (1): A Review of Existing Frameworks. Canadian Journal of Regional Science, XVI(3), 363-386.
Wild, J. J. (2013). Financial Accounting: Information for Decisions – 6th edition. Pennsylvania: The McGraw-Hill Companies, Inc.
Wyatt, A., & Abernethy, M. A. (2013). Framework for Measurement and Reporting on Intangible Assets. Melbourne: Research Institute of Australia.