Intermediate Accounting II Study Guide
Intermediate Accounting II Study Guide Acc 302
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This 21 page Study Guide was uploaded by Lauren95 on Wednesday May 4, 2016. The Study Guide belongs to Acc 302 at Pace University taught by Reisig in Spring 2016. Since its upload, it has received 18 views. For similar materials see Intermediate Accounting II in Accounting at Pace University.
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Date Created: 05/04/16
Chapter 18 – Revenue Realization When to record revenue and how much. Rule: o 1. Earning process must be virtually complete. o 2. An exchange has taken place between buyer/seller. o Both had to be met before you could record sales. A business signs a contract with another business: New GAAP o 1. Identify the contract – understand the agreement between parties. o 2. Identify separate performance obligations. Promises and provisions in the contract. o 3. Determine contract/transaction price. o 4. Allocate contract price to separate performance obligations. o 5. Recognize revenues when each separate performance obligation is satisfied. Complications: o 1. Contract modifications Treat change as a new contract if goods/services are distinct and if the company has the right to receive the money at a standalone price. If not, treat as a modification. Prospective-approach – account for change in contract in the year it happened and future years. Don’t change prior years. Company A seller 1,000 units of Product X to Company B @$50/unit. Company A sells 800 units to B Contract is modified Add 500 more units for total $20,000 ($40/unit) NOT STANDALONE PRICE Original 200 @$50 10,000 New 500 @$40 20,000 700 30,000 / 700 units Revenue per unit $42.86 Sell 300 units A/R 12,858 (300*42.86) Sales 12,858 o 2. Variable consideration – Not sure what the price is going to be. Use most likely amount in order to recognize revenue. o 3. Long term contracts – money has a time value attached. Record at present value of the money. o 4. Non-cash consideration Something other than cash is exchanged. FMV of what is received. o 5. Relative FMV to allocate sales price. Single contract with 2 different performance obligations Sell 100 of A Sell 200 of B Contract Price $10,000 A standalone $40 @ 100 4,000 B standalone $42.50 @ 200 8,500 12,500 4,000/12,500*10,000 3,200 8,500/12,500*10,000 6800 The revenue realization principles are good for most companies. Some companies can’t use these principles because they could mislead financial statements. Make sure statements are fair. Adopt own principles o Ex: Construction Company Building 3 years to complete Revenue $1,000,000 Cost $900,000 1/3 of the work each year 1 2 3 Sales -0- -0- 1,000,000 Expense 300,000 300,000 300,000 Net Income (300,000) (300,000) 700,000 Certain industries don’t follow GAAP: Construction companies Financial statements should be fair and reliable. o For certain industries, using revenue realization has the opposite affect sometimes. Construction projects usually have long term contracts (greater than 1 year) o Two methods: Percentage of completion method – Preferred method Completed contract method Percentage of Completion Method Do not wait to record till the project is virtually complete; record percentages. Cannot be based upon time or physical construction of project based on cost o Formula: cost so far/total cost of project Do calculation every year based on cost There are three question you can be asked: o How much revenue to record each year? o How much gross profit (income) to record each year?(Gross Profit –> income – expenses) o Journal Entries for 1 or more years Examples: Percentage of Completed Method: Revenue? (Cost to date) / (Total estimated cost) x total revenue Income? (Cost to date) / (Total estimated cost) x (revenue – expenses) Total Price $1,000,000 Est Cost $800,000 1 2 3 Cost Incur to date 400,000 600,000 800,000 Total est cost to complete project 400,000 200,000 -0- Billings to date 300,000 600,000 1,000,000 Collections to date 250,000 550,000 1,000,000 *The numbers are cumulative Revenue? Year 1: (400,000 / 800,000) x 1,000,000 = 500,000 Year 2: (600,000 / 800,000) x 1,000,000 = 750,000 (500,000) 250,000 Year 3: (800,000 / 800,000) x 1,000,000 = 1,000,000 (750,000) 250,000 Income? Year 1: (400,000 / 800,000) x (1,000,000-800,000) = 100,000 Year 2: (600,000 / 800,000) x (1,000,000-800,000) = 150,000 (100,000) 50,000 Year 3: (800,000 / 800,000) x 200,000 = 200,000 (150,000) 50,000 Journal Entries? Year 1: C/I/P 400,000 (Inventory account – Construction in Progress) Cash 400,000 *Entry shows “Cost” __________________________________________________________________________________________________ A/R 300,000 *Entry shows “Billing” Prog. Billings 300,000 (Unearned revenue account; avoid double billing) __________________________________________________________________________________________________ Cash 250,000 *Entry shows “Collecting” A/R 250,000 C/I/P 100,000 (Some of the project is done so some should be recorded) Inc-LT Cont 100,000 *Entry shows “Income” __________________________________________________________________________________________________ Prog. Billings ---- (Only use when project is finished) C/I/P ----- (Completion) Year 2: C/I/P 200,000 Cash 200,000 __________________________________________________________________________________________________ A/R 300,000 Prog. Billings 300,000 __________________________________________________________________________________________________ Cash 300,000 A/R 300,000 C/I/P 500,000 Inc-LT Cont 500,000 __________________________________________________________________________________________________ Prog. Billings ---- (Only use when project is finished) C/I/P ----- Year 3: C/I/P 200,000 Cash 200,000 __________________________________________________________________________________________________ A/R 400,000 Prog. Billings 400,000 __________________________________________________________________________________________________ Cash 450,000 A/R 450,000 C/I/P 50,000 Inc-LT Cont 50,000 __________________________________________________________________________________________________ Prog. Billings 1,000,000 C/I/P 1,000,000 Completed Contract Method: Only entry that changes is the Income Entry: 1 2 3 C/I/P -- -- 200,000 Inc – LT Cont -- -- 200,000 Complications happen when revenue or costs change: 1 2 3 Cost Incur to date 400,000 600,000 820,000 Total est cost to complete project 400,000 220,000 -0- Billings to date 300,000 600,000 1,000,000 Collections to date 250,000 550,000 1,000,000 Revenue? % of Completion Method Year 1: (400,000 / 800,000) x 1,000,000 = 500,000 Year 2: (600,000 / 820,000) x 1,000,000 = 731,707 (500,000) 231,707 Year 3: (820,000 / 820,000) x 1,000,000 = 1,000,000 (750,000) 268,293 Income? Year 1: (400,000 / 800,000) x (1,000,000-800,000) = 100,000 Year 2: (600,000 / 820,000) x (180,000) = 131,707 (100,000) 31,707 Year 3: (820,000 / 820,000) x 180,000 = 180,000 (131,707) 48,293 1 2 3 Cost Incur to date 400,000 600,000 950,000 Total est cost to complete project 400,000 350,000 -0- Billings to date 300,000 600,000 1,000,000 Collections to date 250,000 550,000 1,000,000 % of Completion Method Year 1: (400,000 / 800,000) x 200,000 = 100,000 Year 2: (600,000 / 950,000) x 50,000 = 31,579 (100,000) 5,842 Year 3: (950,000 / 950,000) x 50,000 = 50,000 (31,579) 18,421 1 2 3 Cost Incur to date 400,000 600,000 1,050,000 Total est cost to complete project 400,000 450,000 -0- Billings to date 300,000 600,000 1,000,000 Collections to date 250,000 550,000 1,000,000 Year 1: 400,000 / 800,000 x 200,000 = 1,050,000 Year 2: 600,000 / 1,050,000 x ______ = (50,000) (100,000) (150,000) When a loss incurs the journal entry would be: Inc-LT Cont 150,000 C/I/P 150,000 Chapter 20 – Pensions Becoming out of date. Defined Benefit Plan o $X for retirement o Expensive for company because people live longer now. o Employee knows what they are going to get Defined benefit o Cheaper way to do that Defined contribution plan Stated up front o 401K or RIA for employees o Every year; Once contributed it’s up to the employee what they do with it o Between employee and the bank. Pensions Expense Cash Calculate pension expense – Complicated calculation o Predict what happens in the future. o 5 components Account for separately o Employer and pension plan o 2 entities Employees own pension plan but responsibility of employer Continue to pay Pension plan is not the same as cash. Pension Obligation o (1) Vested Benefit Only Owned by employee Have to work X amount of years to get the money in the plan. (Percentage by year) Doesn’t belong to them immediately. Vested benefits only. o (2) Accumulated Benefit Obligation – ABO Current salary levels Smaller amounts because it is based on salary levels. Vested and non-vested benefits. o (3) Projected Benefit Obligation - PBO Based on future salary levels, Liability Vested and non-vested benefits Plan asset – under pension books (entity 1) Plan liability – under pension expense on company books and pension liability on company books (entity 2) Pension Expense o Up to 5 components o (1) Service Cost – expense we have because employees worked for us this year. Increase in PBO Todays value of employees work Always exists (given number) o (2) Interest Pension Liability – money that is owed Settlement rate interest rate x Opening liability Always exists (calculate) o (3) Return on Plan Assets – invest in market Ex: Interest, bonds etc Reduce pension expense (-) Always exists (Given number in $ or %) o (4) Amortization of Past Service Cost (Prior Service Cost) First year of the plan or future when changes occur, recognize prior service recognize employees. Amortize over time in future, Ex: Implement a pension plan this year. Have to pay employees who have been there a while. They need to pay them from prior years Amortize that number. o (5) Gains/Losses Plan assets changes when markets change. Company groups gain/losses together Unrecognized gains/losses Accumulated into one number Recognize some of the unrecognized gain/losses Amortized – not always only when number is too long. Pension Expense (Above) Cash (Company Sends out) Pension Liability (Difference) Not recognized on our financials: o Plan assets o PBO o Unrecognized gain/losses SE Other comp income (OCI) o Service Cost After RE section Based upon years of service method Gains/Losses o Hire actuaries; calculate how long people live – project culture o There could be differences o Unexpected gains/losses 8% 6% 2% Recorded in unrecognized gain/losses OCI account Changes in actuarial predictions result in potential unrecognized gains/losses OCI account As long as number stays below a certain number you leave it, if not amortize. Corridor Approach – 10% of larger of beginning balance in PBO o More than 10% - amortize Chapter 21 – Leases (Major Chapter on the Final exam) Leases are when one company rent something (asset) from another It is referred to as a rental transaction – they sign a rental agreement also known as a lease. The person or company that owns the asset and collects rent on that asset is known as the lessor. The person or company that is doing the purchasing is known as the lessee. Operating Leases: Lessee : Lessor: Rent Expense Cash Cash Rent Revenue(income) OR OR Prepaid Rent Pay rent early Cash Cash Unearned rent When you receive: Unearned Rent Rent income(revenue) Capital Leases: Lessee: o If the purpose of your transaction is to get the future benefit without owning it Capital Lease o Treat it as if you own asset even if you legally don’t o Ignore rent – don’t treat asset as if you are renting it o Should show up in Property, Plant, and Equipment side of the balance sheet. o 4 Criteria for capital leases: *Use in order* o Only need to meet the requirements of one. (1) Transfer of Ownership Transfer of title Ownership of asset at end of lease (2) Bargain Purchase Option Lessee can purchase at a bargain price from lessor for significantly less. Leads to lessee owning the asset in the end. (3) If lease term is 75% or more than life of asset Lessee will get most of the benefits of owning the asset (4) Present value (todays worth) of minimum lease payments if 90% or more of FMV of assets. Treat as if we bought the asset o Like we bought today – Use PV tables o Have to figure out PV and minimum lease. Leased Equipment Obligations – C/L We depreciate the equipment: When we borrow we pay interest: Dep exp Obligation – C/L A/Dep Int Exp Cash In capital lease there is no rent expense. Act like you own the asset. Ordinary Annuity vs Annuity Due o Ordinary annuity is when the payment occurs at the end of the period. o Annuity due is when the payment occurs at the beginning of the year. Use the incremental borrowing rate unless you know the lessor interest rate and it is lower, then use the lessor interest rate. Criteria for Depreciation: o If you met criteria 1+2 above – Use life of asset o If you did not meet criteria 1+2 above – life of lease Example: Read through lease and this is what was discovered: (1) --------- Transfer (2) --------- Bargain (3) 5 year lease, 5 year life (4) FMV = 100,000 -Payments are due at the beginning of each year. (After reading this you can conclude that you need to use they annuity due table. ) -Payments $25,981. 82 each year -Includes insurance on assets of $2,000 year executory costs -Incremental bargaining rate = 11% / year -Lessors implicit rate 10% Gross payments – Executive costs = 25,981.82 – 2,000 = 23,981.82 *Only do this because insurance costs was included in the gross payment (4) PV of an annuity due: Payment 23,981.82 x 4.16986 (Get from table) PV min payment 100,000 FMV Asset 100,000 *PV is 100% of FMV asset = capital lease contract 1/1/16 Leased Equipment 100,000 Obligation – C/L 100,000 1/1/16 Date Payment Int Principle Obligation 1/1/16 ----- ------ -------- 100,000 1/1/16 23981.62 0 23981.62 76018 1/1/17 23981.62 7602 16380 59638 1/1/18 23981.62 5964 18018 59638 1/1/19 23981.62 4162 19820 21800 1/1/20 23981.62 2180 21800 0 1/1/16 Obligation – C/L 23928 Insur exp 2,000 Cash 25982 12/31/2016 Interest exp 7602 Interest Pay 7602 12/31/16 Depreciation Exp 20,000 (100,000-0)/5 = (Cost – Salv)/Life A/Dep 20,000 1/1/17 Obligation – C/L 16380 Int Pay 7602 Insurance 2000 Cash 25982 12/31/17 Interest exp 5964 Int Pay 5964 12/31/17 Depreciation Exp 20,000 (100,000-0)/5 = (Cost – Salv)/Life A/Dep 20,000 Bargain Purch Option – lessee will take advantage o Minimum payment will be different $5000 bargain purch 23981.62 5,000 We will pay this 5 times x 4.16986 x .62092 We will pay this only once 100,000 3105 $103,105 *Amortization table starts at $103105 also add an extra line for the onetime payment (the extra line is below) Date Payment Int Principle Obligation 12/31/20 5000 X X X Guarantee Residual Value (salvage value) o The asset will be $X at the end of the lease. Still has some value to it. It’s a guarantee, treat as if it’s a bargain purchase agreement. Add into minimum lease payments. o Exclude unguaranteed residual values – not included *problems will tell you o Any residual value it is in the depreciation equation: Cost – Salv = Cost – guarantee residual Life Life Lessor: o Act as if they are selling or sold the asset. o Record “Interest income” Off balance sheet financing: o Companies had a lot of liabilities o This led to misleading statements, so they had to find a way to record these rental assets. o Decided to reduce those liabilities. In order to do that they created leases. The leases were to ensure the assets they were renting were showing up on the asset side of the balance sheet. Lessor does exactly the opposite of the lessee. o Act as if they sell it. o Record “interest income” Has a choice between leases: o Operating – the lease has not been transferred o Capital – the lease is being transferred Treat as you sold the asset. But you haven’t collected money yet – “lease receivable” Interest is also included – “interest income” Capital Lease Criteria: (1) Transfer of Ownership Transfer of tite Ownership of asset at end of lease (2) Bargain Purchase Option Lessee can purchase at a bargain price from lessor for significantly less. Leads to lessee owning the asset in the end. (3) If lease term is 75% or more than life of asset Lessee will get most of the benefits of owning the asset (4) Present value (todays worth) of minimum lease payments if 90% or more of FMV of assets. Treat as if we bought the asset o Like we bought today – Use PV tables o Have to figure out PV and minimum lease. There is additional criteria: (1) Collectability Certain o Confident they will collect all money. o Reasonably assured (2) No further costs to be incurred by lessor o Have to be finished with asset o Both of these criteria have to be met o Completely ignore the incremental late because you only know the lessor rate. Always use the lessor rate More than one Capital Lease: o Direct Finance Lease No dealer profit Ex: Equipment – company doesn’t want to do anything but sells it. Bank goes to the factory and pay the price. No profit. 1 type of income o Sales Type Lease There is a dealers profit Ex: Car leases – profit involved Two types of income Include profit in journal entry o Dealers profit = FMV vs. Cost FMV $100,000 Pay $25,981.62 S/L method Cost $100,000 Insurance $2,000 Lessors rate 10% 5 years term Pay at the beginning 5 years life 1/1/16 Date Pay Int (10%) Recovery Net Investment 1/1/16 100,000 1/1/16 23,982 --- 23,982 76018 1/1/17 23,982 7602 16,380 59,638 1/1/18 23,982 5964 18,018 41,620 1/1/19 23,982 4162 19,820 21,800 1/1/20 23,982 2180 21800 0 119,908 119,908 100,000 1/1/16 Cash 25,982 Lease Rec 23,982 (1/5 Lease Rec) Insurance Exp 2,000 12/31/16 Unearned int 7602 Int Inc 7602 Sales Type Lease: FMV $100,000 Cost $85,000 *Treat like you sold the asset COGS 85,000 (Inventory (asset) – COGS when sold) Lease Rec 119,908 Sales 100,000 (FMV) Equip 85000 (@ Cost) Unearned Int 19,908 *Record deal or profit Complications: Bargain Purchase – add to PV minimum payment Guarantee Residual Value – Include to PV Unguaranteed Residual Value - Include to PV o Getting asset back either way so you have to include that in PV calculation. Chapter 22 – Accounting Change and Error Analysis Accounting Changes o (1) Change in Principal Go from one generally accepted accounting principal to another generally accepted accounting principal. Ex: Going from Lifo to Fifo 3 Approaches A) Report Changes Currently o This can lead to misstatement B) Report Change Retrospectively o Looking backwards (prepare prior years) C) Report Change Prospectively o Looking forward Ignore what happened in the past, move forward Report the change retrospectively is the most accepted approach. Recast/re-prepare financial statements using new principles last year and use the new one this year. Not being presented (one year statement) – Show cumulative effect Show on the statement of retained earnings as the opening balance If company is presenting year by year statements, then redo all the years with the new principle. o (2) Change in Estimate Accounting is full of estimates Ex: Bad Debt Normal part of financial statements By nature, estimates change Change in estimate – there is no looking back. Start using new estimate/new percentage. Use prospective (looking forward) o (3) Change in Reporting Entity A switch from one type of reporting entity to another. Ex: Consolidating financial statements Reporting method has changed o Cost Equity or Equity Cost Change all prior years being reported to new reporting entity. Change in principle that is inseparable from change in estimate – account for it as change in estimate. Depreciation 15 16 15 16 S/L S/L S/L S/L 0 0 0 0 10 yrs 5 yrs 2 yrs 1 yr Start using 5 years going forward Capitalize; not really an asset Change in estimate/principle – Change in estimate None of the above are “errors” Errors are for example using non-GAAP to GAAP or GAAP to non-GAAP Something worse than accounting changes. Errors o Errors in accounting o Correction on errors from prior years – Statement of R/E Change the R/E number Ex: Math mistake, mis-classification, oversight (forgot to record) Prior year adjustment o Happen this year – fix this year’s statements/entries as long as the year has not ended o *Tip: What happens to end inventory happens to income Example: 2015 2016 Sales 40 40 Beg Inv 10 10 Purch 15 15 Avail 25 25 End Inv (10) (12) COGS 15 13 G/P 25 27 Offsetting inventory – corrects itself over a period of time. o Ex: 2 years – End Inventory, the following year becomes beginning inventory. o Because it offsets you still need to account for change because the following year will have the wrong beginning inventory. Chapter 23: Statement of Cash Flows Four basic statements o (1) Balance Sheet o (2) Income Statement o (3) Income Statement o (4) Statement of Cash Flows Those four statements are required. Cash Flows o Covers a period of time that coincides with the income statements. o More information of statement of cash flows about the movement of money. Provides information about cash going in and out of the company. o Based on cash more so than the accrual of accounting Everyone gets the concept of cash. o Two Methods: (1) Direct Method (2) Indirect Method Direct Method o Lists all sources of cash and how it came into the company o Collection from sales o Cash from bank loan o Then show how cash was spent Cash spent in repaying a loan. o Specific information o Almost like keeping two books o Preferred method Indirect Method o Companies can use this method. Most companies do use this method even though the direct method is recommended. o Both GAAP o This method is easier to do than the other method. o 90% of companies use the indirect method. o Shows how cash changed from beginning to the end of the year. Three Major Sections: o (1) Cash from Operations o (2) Cash from Investing Activities o (3) Cash from Finance Activities Shows net change in cash Reconcile to balance sheet number. o Bridge from one statement to another. Cash from Operations: o Three types of adjustments: (1) Non cash revenue and expenses Ex: Depreciation, patents, discount on bonds, premium on bonds. Add non-cash expenses to net income Subtract non-cash revenue from net income Depreciation Expense – Did not cost us cash o Non-Cash Expense (+) Amortization Expense o Non-Cash Expense (+) Amortization Disc – B/P o Non-Cash Expense (+) Amortization Premium – B/P o Non-Cash Income (-) (2) Change in Current Asset/Current Lability Accounts (year to year) Add or subtract to/from net income Increase in Current Asset (-) Decrease in Current Asset (+) Increase in Current Liability (+) Decrease in Current Liability (-) o A/P; Interest Payable; Salaries Payable etc. A/R is an example A/R 20,000 Sales 20,000 Cash 15000 A/R 15000 *Subtract 5000 from net income. (20,000-15000) (3) Gains and Losses on Sales of assets (non-operating) Adjustments to net income Sale of assets Gains are in both income and investing sections. (Adjust net income) Gain on Sale (-) Loss on Sale (+) Investing: (Long term assets) o Example: Land o Changes in noncurrent assets o In terms of either purchasing or selling o Purchase (-) o Sold (+) Financing Activities: (Long term liabilities or stock equity) o Changes in long term liability and stock holders’ equity. o People give us cash for bonds o Dividends Equity o Issuing B/P (+) o Repaying L/T N/P (-) o Issue C/S (+) o Purchase T/S (-) o Pay Dividends (-) Don’t compare gross accounts receivable only compare after allowance is taken out. Cash X A/R 10,000 Allowance (2000) 8000 Non Cash Exchange: Land 100 N/P 100 o Report on statement of cash flows o Report by having (1) a foot note or (2) showing both halves of the equation Cash 100 *Finance Section N/P 100 Land 100 *Investing Section Cash 100 Name of Company Statement of Cash Flows Year Ended 12/31/2105 Operations: Net Income XX Adjustments: Non-Cash Rev/Exp (+)(-) Changes in Current Assets or Current Liabilities (+)(-) Gains/Losses (+)(-) Total Non-Cash Adjustments Investing: Changes in Non-Current Assets Total Non-Current Assets Finance: Changes in Long Term Liabilities and St Equity Total Long Term Liabilites Net Increase(Decrease) in Cash XX Cash bal, 1/1 X Cash bal. 12/31 XX *Rest of the statement results in the total “Net Increase (Decrease) in Cash *Cash bal 1/1 – Last year’s balance
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