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← Unit 2: Accounting for Assets

BAT4M · Unit 2 test review

Accounting for Assets: Test Review

Everything for the Unit 2 test on one page: the key facts from all 9 lessons, the mistakes that cost the most marks, and a practice test that points you back to the lessons you need.

Key facts

Credit Terms, Card Sales and Receivables

  • Terms 2/10, n/30: a 2% discount if paid within 10 days of the invoice date; otherwise the full amount is due in 30 days. The discount is calculated on the goods, not the HST.
  • Early payment: debit Cash and Sales Discounts, credit Accounts Receivable for the full invoice. Sales Discounts is a contra-revenue account.
  • Credit card sale: debit Cash (net) and Credit Card Expense (fee), credit Sales and HST Payable. It is not a receivable.
  • Debit card sale: debit Cash (net) and Bank Charges (fee), credit Sales and HST Payable.
  • HST Payable is always 13% of the selling price, whatever fee the processor charges.
  • The total of the accounts receivable subsidiary ledger must equal the Accounts Receivable control account.

Estimating Bad Debts: The Allowance Method

  • Year-end estimate: debit Bad Debts Expense, credit Allowance for Doubtful Accounts (a contra-asset with a normal credit balance).
  • Percentage of sales: expense = rate × credit sales. Ignore the existing allowance balance.
  • Aging or percentage of receivables: the estimate is the TARGET allowance balance. Adjustment = target − existing credit balance, or target + existing debit balance.
  • Write-off: debit Allowance, credit Accounts Receivable. No expense, and NRV does not change.
  • Recovery: reinstate (debit A/R, credit Allowance), then collect (debit Cash, credit A/R).
  • Net realizable value = Accounts Receivable − Allowance for Doubtful Accounts.

Notes Receivable and Interest

  • Interest = Principal × Rate × Days/365. The rate is always annual.
  • Maturity value = Principal + Interest for the full term.
  • To find the maturity date, skip the issue day, count the maturity day, and work month by month.
  • Converting an account: debit Notes Receivable, credit Accounts Receivable. No revenue.
  • Year-end accrual: debit Interest Receivable, credit Interest Revenue for the days held so far.
  • Dishonoured note: debit Accounts Receivable for the full maturity value; credit Notes Receivable, Interest Receivable and Interest Revenue.

Inventory Costing Methods

  • Cost of goods available for sale = Beginning inventory + Purchases = Cost of goods sold + Ending inventory.
  • FIFO: oldest costs go to cost of goods sold; ending inventory is at the newest costs. Perpetual and periodic FIFO always agree.
  • Weighted average (periodic) = total cost available ÷ total units available. Moving average (perpetual) recomputes after each purchase.
  • LIFO (newest costs out first) is NOT permitted under IFRS or ASPE. Canadian companies use specific identification, FIFO or weighted average.
  • Rising costs: FIFO gives the lowest COGS and highest net income and ending inventory. Falling costs: the reverse.
  • Lower of cost and NRV: write inventory down to selling price minus selling costs when that is below cost; apply the method consistently.

Inventory Errors, Technology and Internal Control

  • COGS = Beginning inventory + Purchases − Ending inventory, so an ending inventory error moves COGS the opposite way.
  • Ending inventory overstated: COGS understated, net income overstated, assets and equity overstated this year.
  • Next year the error reverses through beginning inventory; two-year total net income and the year-2 balance sheet are correct (self-correcting).
  • Reorder point = daily usage × lead time + safety stock. Shrinkage = perpetual record − physical count.
  • Key internal controls: separation of duties, authorization, prenumbered documents and a paper trail, physical counts, physical safeguards.

Capital Expenditures and the Cost of Capital Assets

  • Capital expenditure: benefits more than one period (new asset, longer life, more capacity or efficiency), so debit an asset. Revenue expenditure: benefits only this period, so debit an expense.
  • The matching principle is the reason: a long-lived asset's cost is expensed over the periods it helps earn revenue.
  • Cost of a capital asset = all costs necessary to acquire it and get it ready for its intended use (price, freight, transit insurance, installation, testing, legal fees, site preparation).
  • Land is not amortized; land improvements (paving, fencing, lighting) are a separate, amortized asset. Demolition of an old building on purchased land is part of Land.
  • Basket purchase: cost of each asset
  • Recoverable HST paid by a registrant is an input tax credit, not part of the asset's cost.

Amortization Methods

  • Depreciable amount ; Book value
  • Straight-line: every year.
  • Declining-balance: ; residual is ignored until the final charge, which stops book value exactly at residual.
  • Units-of-output:
  • Partial year: full-year amount , to the nearest month (on or before the 15th counts the month).
  • Entry for every method: debit Amortization Expense, credit Accumulated Amortization (a contra asset).

Revisions, Disposals and Depletion

  • Revised amortization earlier years are never restated.
  • Disposal step 1: record amortization up to the disposal date (nearest month).
  • Disposal step 2: debit Accumulated Amortization (full balance), credit the asset (full cost).
  • Gain if proceeds > book value (credit); loss if proceeds < book value (debit).
  • Exchange: new asset cost = fair value of old asset given up + cash paid.
  • Depletion per unit depletion for the year = rate × units extracted.

Intangible Assets and Goodwill

  • Intangible assets have no physical form but give legal or contractual rights; purchased ones are recorded at cost (price plus legal and registration fees).
  • Finite-life intangibles: straight-line, no residual, over the shorter of remaining legal life and useful life. This course credits Accumulated Amortization.
  • Indefinite-life intangibles and goodwill are not amortized; they are tested for impairment.
  • Goodwill recorded only when a business is purchased.
  • Internally generated goodwill is never recorded; research costs are always expensed.

Where marks get lost

  • Recording a bank credit card sale as Accounts Receivable. The bank pays the store, so the debit is Cash (less the fee), not a receivable from the customer. (Credit Terms, Card Sales and Receivables)
  • Calculating the 2% discount on the full invoice including HST. In this course the discount is on the goods only: 2% of $2,000, not 2% of $2,260. (Credit Terms, Card Sales and Receivables)
  • Crediting Accounts Receivable for only the cash received when a discount is taken. The customer's whole invoice is settled, so credit the full amount and debit Sales Discounts for the difference. (Credit Terms, Card Sales and Receivables)
  • Reducing HST Payable by the card fee. The customer paid full price plus full HST; the fee is a separate expense of the store. (Credit Terms, Card Sales and Receivables)
  • Forgetting the Cost of Goods Sold entry in a perpetual system. Every sale has two entries: one at selling price, one at cost. (Credit Terms, Card Sales and Receivables)
  • Using the aging total as the journal entry amount. With the balance sheet approach, the total is the target balance; adjust for what is already in the allowance. (Estimating Bad Debts: The Allowance Method)
  • Subtracting a debit balance instead of adding it. A debit balance must be cleared first, so it is added to the target. (Estimating Bad Debts: The Allowance Method)
  • Adjusting for the existing balance under percentage of sales. That approach computes the expense directly; the existing balance is ignored. (Estimating Bad Debts: The Allowance Method)
  • Debiting Bad Debts Expense when an account is written off under the allowance method. The expense was recorded with the estimate; the write-off is debit Allowance, credit A/R. (Estimating Bad Debts: The Allowance Method)
  • Thinking a write-off lowers net receivables. It lowers A/R and the allowance by the same amount, so NRV is unchanged. (Estimating Bad Debts: The Allowance Method)
  • Using the annual rate without scaling it for time: $6,000 × 6% is a year's interest, not 90 days' interest. (Notes Receivable and Interest)
  • Counting the date of the note as day 1, which makes the maturity date one day early. (Notes Receivable and Interest)
  • Crediting Interest Revenue for the full term at maturity when part of it was already accrued last year. Credit Interest Receivable for the accrued part and Interest Revenue only for the current year's days. (Notes Receivable and Interest)
  • Writing off a dishonoured note immediately as a bad debt. A dishonoured note goes back to Accounts Receivable at its maturity value; it is written off only if collection later fails. (Notes Receivable and Interest)
  • Recording Sales or another revenue when an overdue account is converted to a note. Nothing new was sold; the debt just changes form. (Notes Receivable and Interest)
  • Forgetting that units sold are taken from the OLDEST layers under FIFO when building ending inventory: ending inventory is the newest costs, not the oldest. (Inventory Costing Methods)
  • Computing a simple average of the unit costs ($20, $22, $25 averages to $22.33) instead of a weighted average ($11,400 ÷ 500 = $22.80). The number of units at each cost matters. (Inventory Costing Methods)
  • Using one average for the whole period in a perpetual system. Moving average must be recomputed after every purchase. (Inventory Costing Methods)
  • Saying LIFO is an acceptable choice for a Canadian company. It is not permitted under IFRS or ASPE. (Inventory Costing Methods)
  • Not checking that cost of goods sold plus ending inventory equals cost of goods available. This one check catches most arithmetic errors. (Inventory Costing Methods)
  • Saying an overstated ending inventory overstates COGS. Ending inventory is subtracted, so COGS moves the OPPOSITE way and net income moves the SAME way. (Inventory Errors, Technology and Internal Control)
  • Concluding that a self-correcting error does not matter. Each year's statements are wrong, and the trend between years is distorted. (Inventory Errors, Technology and Internal Control)
  • Forgetting the balance sheet: in the year of the error, assets AND equity are misstated by the same amount. (Inventory Errors, Technology and Internal Control)
  • Believing a perpetual system makes physical counts unnecessary. The records show what should be on hand; only a count reveals shrinkage. (Inventory Errors, Technology and Internal Control)
  • Describing separation of duties as "two people doing the same job". It means different people handle custody of the goods, recording, and authorization. (Inventory Errors, Technology and Internal Control)
  • Deciding by the word on the invoice: calling something a "repair" and expensing it, even though it extends the asset's life and is really a capital expenditure. (Capital Expenditures and the Cost of Capital Assets)
  • Adding recoverable HST to the cost of equipment, which overstates the asset and every year's amortization. (Capital Expenditures and the Cost of Capital Assets)
  • Putting paving, fencing or lighting into Land. Land is never amortized, so the cost of those improvements would never be expensed. (Capital Expenditures and the Cost of Capital Assets)
  • Allocating a basket purchase by the appraised values themselves instead of applying the percentages to the price actually paid, so the debits no longer equal the cash and mortgage credited. (Capital Expenditures and the Cost of Capital Assets)
  • Including costs that were not necessary to get the asset ready, such as accidental damage during installation or insurance after the asset is in use. (Capital Expenditures and the Cost of Capital Assets)
  • Subtracting residual value before applying the declining-balance rate. Declining-balance uses the full book value; residual matters only as the floor. (Amortization Methods)
  • Letting declining-balance book value drop below residual in the final year instead of limiting the last charge. (Amortization Methods)
  • Using cost instead of opening book value for declining-balance in year 2 and later, which turns it into a straight-line method at a high rate. (Amortization Methods)
  • Forgetting to pro-rate the first year when an asset is bought partway through the year, or pro-rating the second year of declining-balance as well. (Amortization Methods)
  • Crediting the asset account (Vehicles) for amortization. The credit goes to Accumulated Amortization so the original cost stays visible. (Amortization Methods)
  • Selling an asset partway through the year without first recording amortization up to the sale date, which understates expense and distorts the gain or loss. (Revisions, Disposals and Depletion)
  • Removing only the book value from the accounts (crediting the asset for book value) instead of removing the full cost and the full accumulated amortization. (Revisions, Disposals and Depletion)
  • Going back to restate earlier years when an estimate changes. Revisions are prospective: use the current book value and the remaining life. (Revisions, Disposals and Depletion)
  • Recording a traded-in asset's replacement at the dealer's list price instead of at fair value given up plus cash paid. (Revisions, Disposals and Depletion)
  • Expensing all depletion for the year even though some of the extracted resource is still unsold in inventory. (Revisions, Disposals and Depletion)
  • Amortizing a patent over its full 20-year legal life when its useful life is shorter. Use the shorter of the two. (Intangible Assets and Goodwill)
  • Amortizing goodwill. Goodwill is not amortized; it is tested for impairment. (Intangible Assets and Goodwill)
  • Recording goodwill for a business's own reputation. Goodwill is recorded only when a business is purchased. (Intangible Assets and Goodwill)
  • Calculating goodwill with the seller's book values instead of the fair values of the identifiable assets and liabilities. (Intangible Assets and Goodwill)
  • Recording research costs as an asset because they might lead to a valuable product. Research is always expensed. (Intangible Assets and Goodwill)

Practice test

27 questions from across the unit. Each one shows the lesson it comes from.

  1. Credit Terms, Card Sales and Receivables
    1
    An invoice dated June 2 shows goods of $4,500 plus 13% HST, terms 2/10, n/30. The customer pays on June 11. How much cash does the seller receive? Answer to the nearest cent.
    $
  2. Credit Terms, Card Sales and Receivables
    2
    Name the contra-revenue account debited when a customer takes an early-payment discount.
  3. Credit Terms, Card Sales and Receivables
    3
    The schedule of accounts receivable lists balances of $2,034, $791, $4,520 and $1,130. What should the Accounts Receivable control account show? Answer in whole dollars.
    $
  4. Estimating Bad Debts: The Allowance Method
    4
    An aging schedule estimates uncollectible accounts of $8,200. The allowance has a $1,750 credit balance before adjustment. What is the adjusting entry amount? Answer in whole dollars.
    $
  5. Estimating Bad Debts: The Allowance Method
    5
    Which method best follows the matching idea?
  6. Estimating Bad Debts: The Allowance Method
    6
    What type of account is Allowance for Doubtful Accounts?
  7. Notes Receivable and Interest
    7
    What is the interest on a $12,000, 90-day, 8% note? Use a 365-day year and answer to the nearest cent.
    $
  8. Notes Receivable and Interest
    8
    A customer's overdue $3,000 account is converted to a 60-day note. What is the entry?
  9. Notes Receivable and Interest
    9
    What do you call a note whose maker pays the maturity value on time?
  10. Inventory Costing Methods
    10
    Beginning inventory 50 units @ $10; purchases 100 @ $12 and then 50 @ $14. 160 units were sold. Using FIFO, what is the cost of ending inventory? Answer in whole dollars.
    $
  11. Inventory Costing Methods
    11
    A business buys 300 units @ $10, then 100 units @ $14. Which is the weighted average unit cost?
  12. Inventory Costing Methods
    12
    Which accounting principle says a business should use the same inventory cost formula from one period to the next?
  13. Inventory Errors, Technology and Internal Control
    13
    A company reported 2026 net income of $50,000. Later it finds 2026 ending inventory was understated by $4,000. What was the correct 2026 net income? Answer in whole dollars.
    $
  14. Inventory Errors, Technology and Internal Control
    14
    Perpetual records show 860 units at $12 each; the physical count finds 835. What is the shrinkage in dollars? Answer in whole dollars.
    $
  15. Inventory Errors, Technology and Internal Control
    15
    What technology uses tags that can be read by radio waves without a direct line of sight?
  16. Capital Expenditures and the Cost of Capital Assets
    16
    Which of these is a capital expenditure?
  17. Capital Expenditures and the Cost of Capital Assets
    17
    Match each cost to the account it should be debited to.
    Paving a customer parking lot
    Demolishing an old building on newly bought land
    Architect's fees for a new warehouse
    Installing and testing a new press
  18. Capital Expenditures and the Cost of Capital Assets
    18
    An HST-registered business pays HST on a new delivery van. How is that HST treated?
  19. Amortization Methods
    19
    Equipment costs $45,000, has a residual value of $5,000 and an 8-year useful life. What is annual straight-line amortization, to the nearest dollar?
    $
  20. Amortization Methods
    20
    Under declining-balance at 40%, an asset with a $6,000 residual value begins its final year with a book value of $7,776. What is that year's amortization?
  21. Amortization Methods
    21
    Put the steps for one year of declining-balance amortization in order.
    1. 1Record Amortization Expense and Accumulated Amortization
    2. 2Check that the new book value does not fall below residual value
    3. 3Pro-rate by months used if it is the first, partial year
    4. 4Start with the book value at the beginning of the year
    5. 5Multiply by the fixed rate
  22. Revisions, Disposals and Depletion
    22
    Equipment cost $80,000 with an $8,000 residual value and a 12-year life (straight-line). After 4 years, management revises the remaining life to 5 years and the residual to $6,000. What is the revised annual amortization, to the nearest dollar?
    $
  23. Revisions, Disposals and Depletion
    23
    A fully amortized computer (cost $9,600, no residual value) is thrown away. What is the entry?
  24. Revisions, Disposals and Depletion
    24
    What is the name for allocating the cost of a natural resource such as a mine or timber stand?
  25. Intangible Assets and Goodwill
    25
    A business is bought for $600,000. The fair value of its identifiable assets is $710,000 and its liabilities are $170,000. How much goodwill is recorded, to the nearest dollar?
    $
  26. Intangible Assets and Goodwill
    26
    A company spends $40,000 on research into whether a new material could be used in its products. How is this recorded?
  27. Intangible Assets and Goodwill
    27
    Put the steps for recording the purchase of a business in order.
    1. 1Check that total debits equal total credits
    2. 2Debit the assets and Goodwill, credit the liabilities and Cash
    3. 3Subtract the net identifiable assets from the purchase price to find goodwill
    4. 4Find the fair value of each identifiable asset acquired
    5. 5Subtract the fair value of the liabilities assumed

Endless drill

Fresh numbers every time, for the calculation questions in this unit.

Endless drillnew numbers every time

Generating a problem…

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