acct101 assign 2

College of Administrative and Financial SciencesAssignment 2
Deadline: 12/11/2022@ 23:59
Course Name: Principles of
Accounting
Student’s Name: Turky Almansoor
Course Code: ACCT 101
Student’s ID Number: 210038184
Semester: 1
CRN: 14409
Academic Year: 1444/1445 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: / 15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented; marks may be
reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
• Submissions without this cover page will NOT be accepted.
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Assignment Question(s):
(Marks15)
Q1. Compare the different depreciation methods. Give an example of how companies depreciate
their plant assets under each method.
(Marks5)
ANSWER
There are three main methods used by companies to determine depreciation and they are declining
balance depreciation, sum-of-the-years’ depreciation and straight-line depreciation.
Straight-line depreciation
This is the simplest and most common method most businesses use to determine depreciation. This method is
used to estimate an asset’s useful life and the scrap value at the end. Depreciation is then expensed each year of
the lifespan of that asset. This method of calculating depreciation is common for people who own small
businesses and do not want to use complicated methods (Kirli, 2018).
Formula
Depreciation: (cost of asset – salvage value)/useful life
Example
Cost of the asset: SAR 200,000.
Cost of the asset – Estimated salvage value: SAR 200,000 – SAR 50,000 = SAR 150,000 (total
depreciable cost).
Useful life of the asset: 10 years. Divide total depreciable cost by useful life: SAR 150,000 / 10
years = SAR 15,000 annual depreciation amount.
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Units-of-production depreciation method
Under this method, the depreciation of an asset is calculated annually based on the amount used for
the assets. Depreciation is high when the asset is used more and less when it is not used often.
Example
If company X bought machines worth SAR 200,000 on 1st January,2020. The useful life is 10 years
and estimated residual value is SAR 20,000. The machine produces 15,000 units in its useful life.
If it produces 2000 units in years 2021, depreciation will be
Depreciation costs per unit = ((asset value – residual value) / total units of production
Step one: Find depreciation per unit = (200,000 – 20,000) / 15,000 = SAR 12 per unit
Step two: multiply depreciation per unit by number of units produced in 2021
2021 Depreciation = depreciation per unit* number of units produced
12*2,000 = SAR 24,000
sum-of-the-years’ digits depreciation
Depreciation is calculated by the number of years of the asset’s useful life. If an asset loses value
fast, then this method is used.
Formula
Depreciation: (remaining lifespan/SYD) x (asset cost – salvage value)
Example
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A company X purchases an asset worth SAR 10,000 with an estimated residual value of SAR 1000 and a
useful life of 3 years
n (n + 1) / 2, where,
n = estimated useful life of asset
In the given question:
n = 3,
therefore, the total of digits = [3 (3 + 1)] / 2 = 6
Cost of asset = SAR 10,000
Scrap value = SAR 1,000
For the first-year depreciation will be:
Depreciation = (3/6) * Rs. (10,000 – 1000)
Depreciation = SAR 4,500
Double-declining-balance method
Under this method, depreciation is calculated from the net book value of an asset. The depreciation
premium is calculated from the value of depreciation.
Formula
Step 1: 100% / useful life (straight line depreciation rate)
Step 2: 2*straight line depreciation rate (double declining balance rate)
Step 3: double declining balance rate * beginning period book value (depreciation expense
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EXAMPLE,
A company bought a machine worth SAR 100,000 in the beginning of January 2010. The machine
had a useful life of 10 years. The salvage value of the machine after the useful life is SAR 50,000.
What will be the depreciation expense for 2010,2011 and 2012?
Step 1: Depreciation using straight line will be
100% /useful life
100/10 =10%
Step 2: double declining balance rate = 2 * straight line rate
2*10 = 20%
Step 3: Depreciation expense = double declining balance rate * beginning period book value
20% *100,000 = SAR 20,000
Depreciation expense 2019 = 20* 100,000 = SAR 20,000
Depreciation expense 2020= 20* (100,000- 20,000) = SAR 16,000
Depreciation expense 2021 = 20* (100,000- 20,000-16,000) = SAR 12,800
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Q2. Why is it important for companies to implement good internal control? What are the
principles of internal control? Explain your answer.
(Marks5)
ANSWER
Internal control is an important aspect in a company because it ensures that regulations are followed
during management of financial data. Internal controls are responsible for ensuring there is efficiency
and operations run smoothly in the organization. They are also used to improve accuracy of data when
internal and external audits are done. They also establish order when operating businesses. Internal
controls regulate how a company is supposed to handle management tasks and financial data.
Employees are also made aware of the changes happening in the organization and how they adapt to
them. Internal control stipulates that changes made are to be communicated to the employees openly.
Employees adapt to these changes to reduce the chances of making mistakes. Compliance with these
chances increases productivity in the company. Internal controls have a significant impact on the
overall performance of the company. Monitoring helps identify the strengths and weaknesses of the
company and decisions are made on how to improve on the weaknesses (Sumaryati, 2020).
The principles of internal control are:
•
Maintaining adequate records: Companies maintain records to ensure that the activities of
the company are closely monitored. This also helps the company to prevent theft or loss of its
property or assets. The financial statements are also checked to ensure that the details entered
are accurate. Receipt tampering and forgery is also prevented using this principle.
•
Ensure assets and bond key players: The parties involved with dealing with large liquidity
are needed to sign and receive when large deposits are made. This prevents the deposits from
falling into the wrong hands.
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•
Putting recording keeping separate from custody of assets: The individual assigned to be a
custodian of assets should not be the same person keeping the records. This will reduce the
chances of malicious activities taking place.
•
Establishing responsibilities: The tasks within the company should be separate and distinct.
Each employee should be assigned his or her responsibilities to make it easier for the
management to track down an employee who engages in an unethical conduct.
•
Performing regular and independent reviews: Auditing is very important in a company
because it helps determine if the financial statements of the company reflect the current status.
Auditing will also help to identify errors or omissions in the financial records that may affect
the company.
•
Applying technological controls: The use of biometrics and surveillance cameras in the
company will help secure the financial records and the assets of the company. Monitoring the
activities on the workstations of the employees helps the company to detect malicious activities
in the company’s servers.
•
Dividing responsibilities of related transactions: The same task with a similar transaction is
assigned to different employees. An employee can notice mistakes made by another employee
and raise alarm about the same.
Q3. A company wants to use the allowance method to account for bad debts. You are assigned
to explain to the company the different ways it can use to estimate bad debts.
(Marks5)
ANSWER
Bad debts are written off on individual or business returns. There are three main methods which are
used to estimate bad debts in companies or businesses that is percentage sales method, accounts
receivable aging method and Percentage of Total Accounts Receivable Method.
(Carswell, 2021).
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Percentage sales method
This method is in form of an income statement approach, and it is used to record bad debts. The bad
debts expenses are calculated as a percentage of credit sales. The percentage used for credit sales
depends on past experience and credit policy. The balance in the allowed doubtful debts is ignored.
Formula
Bad Debts Expense = current period sales * bad debt %
An adjusting entry is made to recognize bad debts expense after the bad debts are estimated. The debit
side has the bad debts expense, and the credit side contains a credit allowance for doubtful debts.
Example
Company X has credit sales worth SAR 400,000. The company estimated that 5% of the sales will be
uncollected. The bad debts expense will be:
Bad Debts Expense
= 5% × 400,000
= SAR 20,000
Date
Debit
Credit
31st December
Bad debts expense
20,000
Allowance for doubtful accounts
20,000
20,000
20,000
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The accounts receivable aging method
When using this method, the receivables are recorded according to the outstanding time of the invoice.
This method determines the reliability and financial health of a customer. When the receivables are
collected slowly, the business is also moving slowly or giving too much credit.
Example of the accounts receivable aging method
A company X records $ 500,000 in accounts receivable that are past due in 60 days and $100,000 that
are past due in more than 90 days. According to past experience, 5 % of the amount will be
uncollectible for accounts receivable past due less than 60 days and 10% for those uncollectible with
a due date of at least 90 days. The allowable unadjusted is $ 10,000.
Days past due
Accounts receivable Uncollectible
Estimated
balance
percentage
uncollectible amount
1-60
$ 500,000
5%
$ 25,000
91 and above
$ 100,000
10 %
$ 10,000
Total
$ 600,000
$ 35 ,000
The estimated debts will be calculated as follows:
35,000 – 10,000 = $ 25,000
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Journal entry
Date
Debit
Credit
31st December
Bad debts expense
25,000
Allowance for doubtful accounts
25,000
25,000
25,000
Percentage of Total Accounts Receivable Method
Bad debts using this method are calculated as follows:
1.
2.
3.
4.
Adding up all amounts owed by customers
Finding the average
Calculating net credit sales
Dividing net credit sales by the average accounts receivable
Formula
% Allowance for doubtful accounts = Year-end accounts receivable * bad debts – estimated bad debts
expense = adjusted balance in allowance for doubtful accounts – unadjusted year end balance in
allowance for doubtful accounts
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Example
If a company has a total of SAR 100,000 in the accounts receivable and 5% of the accounts receivable
are uncollectible, the allowance of bad debts is adjusted to have a credit balance of
5/100*100,000 = SAR 5,000
Date
Debit
Credit
31st December
Bad debts expense
5,000 Allowance for doubtful accounts
5,000
5,000
5,000
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References:
Carswell, G., De Neve, G., & Ponnarasu, S. (2021). Good debts, bad debts: Microcredit and managing
debt in. Journal of Agrarian Change, 21(1), 122-142.
Kirli, M. (2018). Comparison of Depreciation Methods in” International Accounting Standard 16
Property, Plant and Equipment” and an application. Annals of the University Dunarea de Jos of Galati:
Fascicle: I, Economics & Applied Informatics, 24(3).
Sumaryati, A., PRAPTIKA NOVITASARI, E., & Machmuddah, Z. (2020). Accounting Information
System, Internal Control System, Human Resource Competency and Quality of Local Government
Financial Statements in Indonesia. The Journal of Asian Finance, Economics and Business, 7(10),
795-802.
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