Financial Accounting For The Service Industries
Financial Accounting For The Service Industries HTM 14100
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This 18 page Class Notes was uploaded by Jaquan Cronin on Saturday September 19, 2015. The Class Notes belongs to HTM 14100 at Purdue University taught by David Wood in Fall. Since its upload, it has received 47 views. For similar materials see /class/207912/htm-14100-purdue-university in Hospitality at Purdue University.
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Date Created: 09/19/15
From Chapter 3 record the adjusting entries for Supplies Salaries Depreciation Accrued Revenue and Advanced Deposits 1 Never Cash because there are internal situation 2 Always debit expense or credit revenue 3 NEVER BOTH o Adjusting entries consist of two major classi cations deferrals and accruals o Deferrals adjustments for amounts previously recorded in accounts 0 Accruals adjustments for which no data have been previously recorded in the accounts Pre a ments deferrals Accruals 1 Prepaid Expense 1 Accrued Expenses 2 Advanced Deposits 2 Accrued Revenue Money changes hands Expense Revenue occurs Before expenserevenue occurs we get the money later Supplies in beginning of year is 500 and in the end it is 100 I Supplies Expense I 400 I I I Supplies I I 400 I Prepaid Insurance policy bought on Novemberl 2013 Policy used for 2 months 200 of it has been used up I Insurance Expense I 200 I I I Prepaid Insurance I I 200 I Example Michaels Motel paid a oneyear fire insurance premium of 12000 on J an 1 20X2 The payment was initially recorded in the Prepaid Insurance account asset account since the benefit from the insurance payment lies in the future Cash another asset was reduced by the amount of payment At the end of the J an 20X2 an adjusting entry must be prepared to recognize the expiration of the asset Prepaid Insurance and to recognize Insurance Expense I Insurance Expense I 1000 I I Prepaid Insurance I 1000 I There are 11 months left and 11000 left so 1000 per month The insurance expense account re ects the amount of insurance expense for Jan which is 1 12 of the annual insurance premium of 12000 Depreciation o Depreciable assets are property and equipment such as buildings fumiture vehicles and equipment that have lives in excess of one year and are used in the business to generate revenues 1 Cost ofthe asset 2 Estimated useful life 3 Estimated Salvage Value Example Michaels Motel was purchased on January 1St 20X2 at a cost if 3500000 We will assume the building motel has a useful life of 25 years We estimate the motel will be worth 500000 at the end of 25 years Depreciation Expense Depreciable asset COST Salvage Value Life Monthly Depreciation Expense 3500000 500 000 300 months 10000 Depreciation expense for Jan 20X2 is recorded with the adjusting entry of I Depreciation Expense I 10000 I Accumulated Depreciation Building I I 10000 I Depreciation expense will be reported on the income statement while the Accumulated Depreciation Building will be shown on the balance sheet as a deduction from the Building account Book Value 3500000 Accumulated Depreciation 10000 Book Value 3490000 Accrued revenue Michaels Motel invests 50000 in a certificate of deposit on Jan 16 20X2 The sixmonth certificate will generates 2000 in interest at an annual interest rate of 8 The Michael Motel will receive the investment of 50000 plus the interest of 2000 on July 15th 20X2 Even thought Michaels Motel received no interest at the end of J an 20X2 it has earned interest and records it with an adjusting entry Interest Principal Rate Time 50000 08 15365 16438 The adjusting entry would record the interest income in the following way I Accrued Interest Receivable I 16438 I Interest Income I I 16438 I Accrued Interest Receivable is reported on the balance sheet as an asset While Interest Income is shown on the income statement as revenue Salaries Assume Michaels Motel pays its employees every two weeks and the last payday in Janis J an 24th Therefore wages for the period of J an 25th 31St must be accrued All employees wages total 10000 every 14 days Since the Jan 2531 period covers seven days the accrual should be 5000 10000 714 5000 Adjustments would be recorded as I Wages Expense I 5000 I I I Accrued Wages Payable I I 5000 I From Chapter 4 record the closing entries for a service business 0 Accountants separate revenue and eXpense accounts to get more detailed information for use in preparing the statements One the financial statements are prepared the accountants close the revenue and eXpense accounts clearing the accounts to zero by transferring the balance to the owners equity capital account The accountant closes these accounts with closing entries that must be recorded in the general journal and then posted to the general ledger accounts Income Summary Clearing Account 1 Close revenue to Income Summary 2 Close eXpense account to Income Summary must credit each account Close Income Summary to Owners Capital account U 4 Close Owners Drawing to Capital Rooms Sales 2000000 I Income Summary I I 2000000 I Room Sales Salary Expense Adv Expense 2000000 2000000 10000004 1000000 10000 10000 Depr Expense Income Summary Supplies Expense 15000 15000 2000000 2000 2000 Add all expenses All but Room Sales Income Advance Income IT 973 IT Capital 100000 IT Drawing 100000 Add all expenses and debit the total Subtract Room Revenue 1St Income Summary From Chapter 5 calculate cost of food available cost of food used cost of food sold and gross pro t Gross pro t is Food Sales minus cost of food sold Cost of Food S01d Transfer from Bar Beginning Food Inventory Cost of Food Available Food Purchase Ending Food Inventog Cost of Food Used Transfer to bar Employee Meals Promotional Meals Cost of Food Sold Gross Pro t Food Sales Cost of Food Sole Restaurant Income Statement Revenue Cost of Food Sold Gross Pro t Expense Net Income Food Inventory Beginning 5000 Food Purchases 20000 Food Inventory end 6000 Cost of Employees 300 Cost of Promotional Meals 200 Food Transfer to Beverage Dept 50 Purchase 20000 Food Inventory Beginning 5000 Food Available 25000 Food Inventory End 6000 Cost of Food Used 19000 Cost of Employee 300 Cost of Promotional Means 200 Food Transfer to Beverage Dept 50 Cost of Food Sold 18450 Journal Entry to record the cost of food sales and the ending inventory Cost of Food Sole 19000 Food Inventory 1000 Food Purchases 20000 M Food inventory beginning was 5000 and Food Inventory end was 6000 Debit 1000 to increase the food inventory of 6000 since 1000 the food inventory account of 5000 Journal entry to record the cost of employee meals promotional meals and transfers to the beverage department Employee Meals 300 Promotional Meals 200 Transfer to Beverage Dept 50 Cost of Food Sold 550 From Chapter 9 transactions involving the Allowance Method for Bad Debts Aging Accounts Receivable only This would include writing off an account as uncollectible and collecting from a customer whose account was previously written off Allowance Method for Bad Debt 0 Use Contraaccount Allowance for Doubtful Account 0 Estimate bad debt expense at the END of each account period Example Hospitality firm with 30000 in accounts receivable on Dec 3 1 maybe unable at that time to identify which receivables will prove uncollectable in the future From experience however it can estimate the dollar amount of the receivables that will be written off Once the estimation is made the following journal entry is entered on the books Once estimated the joumal entry is entered I Provision for Doubtful Accounts I XXX I Allowance for Doubtful Accounts I I XXX If the hospitality firm had cash of18500 accounts receivable of 30000 and a balance in the Allowance for Doubtful Accounts account of 3000 the Current Assets section of the balance sheet would be as follows Current Assets Cash amp Equivalents 18500 Accounts Receivable 30000 Less Allowance for Doubtful Accts 3000 27000 Once specific account is determined to be uncollectable as in the following example involving a 300 receivable the account is written off against the Allowance Account as I Allowance for Doubtful Accounts I 300 I I Accounts Receivables I I 300 I Aging of Accounts Receivable Method 0 Schedule is complied to predict bad debt based off of past experience 0 Once the columns of aging schedule are totaled to determine the balance in the allowance account If the Estimated Uncollectable Account is 74100 If allowance account shows a CREDIT balance of 34 the entry is I Provision for Doubtful Accounts I 707 I Allowance for Doubtful Accounts I 707 I Allowance for Doubtful accounts 3 4 M alance 741 If allowance account has a DEBIT balance of 32 before adjusting the journal entry would be I Provision for Doubtful Accounts I 775 I I I Allowance for Doubtful Accounts I I 775 I Allowance for Doubtful accounts 3 4 775 alance 741 From Chapter 10 Inventory Valuation Methods FIFO LIFO and Weighted Average Find ending inventory cost of goods sold and gross pro t using each method INFORMATION GIVEN Number of Units Cost Per Unit Total Cost Beginning 25 1000 25000 Inventory Feb 15th Purchase 30 1100 33000 May 6th Purchase 20 1300 26000 August 22nd 3 5 14 00 49000 Purchase Oct 10th 40 1500 60000 Purchase Dec 2nd Purchase 25 1600 40000 Avail for Sale 175 23 3000 Units Sold 145 Ending Inv 30 Remaining First in First Out FIFO 0 Valuing the inventory where first units into the inventory are sold rst 0 The ending inventory therefore consists of the latest purchases while the cost of goods sold consists of the earliest purchases The 30 units of ending inventory would be valued under FIFO as 25 units from Dec 2 purchase 2 1600 40000 5 units from Oct 10th purchase 1500 7500 Ending Inventory value of 30 units FIFO 47500 The 30 units of inventory under FIFO are valued at 47500 whereas under the weighted average method they were valued at 399 Cost of Food Sold Cost of Food Avail 233000 Remaining Inventory 47500 Cost of Food Sold 185500 Gross Profit Sales 6000 Cost of Food Sold 1855 Gross Pro t 4145 Last in First Out LIFO o Valuing inventories assumes that the first units in are the last units out of the inventory and that the ending inventory consists of the earliest purchase The value of ending inventory would be calculated under LIFO as 25 units of beginning inventory 1000 25000 5 units from February 15 purchase 1100 5500 Ending Inventory value of 30 units LIFO 30500 Cost ofFood Sold Cost of Food Available 23 30 Ending Inventory 305 Cost of Food Sold 2025 Gross Profit Sales 6000 Cost ofFood Sold 2025 Gross Pro t 3975 Weighted Average 0 Total number of units available for sale is DIVIDED into the total cost of units available for sale Cost of units available for sale 2 30000 13314 Units Available 175 Under this method the ending inventory would be valued at 39942 calculated as follows 30 Units 13314 39942 or 399 rounded Cost ofFood Sold Cost of Food Avail 2330 Ending Inventory 3 99 Cost of Food Sold 1931 Gross Profit Sales 6000 Cost of Food Sold 1931 Gross Profit 4069 From Chapter 11 nd depreciation expense and book value using sum of theyears digits and declining balance depreciation methods Also transactions that involve the sale and exchange of property and equipment 0 The process by which property or equipment is expensed over its life is called depreciation o Depreciation is non cash expense not a fund of a cash set aside by a company 0 Depreciation saves cash by providing a tax shelter since it reduces taxable income 0 Total amount of depreciation Cost of the asst Salvage Value 0 Book Value Cost Accumulated Depreciation o Accumulated Depreciation Contra account with credit balance StraightLine o Simplest method 0 Same amount of depreciation is taken on the asset each year 0 Take the cost of the asset less its salvage value and divides the gure by estimated life Example Delivery truck cost firm of 34000 has salvage value of 4000 and life of 5 years Annual Depreciation 34 000 4 000 6000 d 5 Years Depreciation Accumulated Book Value Expense Depreciation 1 6000 6000 28000 2 6000 12000 22000 3 6000 18000 16000 4 6000 24000 10000 5 6000 30000 4000 Cost Year Cost salvagelife Depreciation Accumulated Stays the same Expense Depreciation Unit Of Production 0 Depreciation taken is based on the usage of the asset Example Truck cost firm 34000 with a salvage value of 4000 Annual Depreciation rate Cost Salvage Rate 340004000 3 mi T651 Est lr roduction 100000 Year Miles Driven Depreciation Accumulated Book Value Expense Depreciation 1 12000 3600 3600 2 17000 5100 8700 3 20000 6000 14700 4 23000 6900 21600 5 25000 7500 29100 Given Miles Driven Cost Depreciation Accumulated Depreciation Expense Depreciation Rate Accumulate Deprecation above Sumof theyear o The year of the assets life are added together 0 Resulting total becomes the denominator in fraction used to calculate each years depreciation Example 5years5432115years OR nn12 15 Rate year over sum Cost of the truck 34000 Salvage Rate 4000 Depreciation Cost 30000 Year Rate Depreciation Annual Cost Depreciation 1 515 30000 10000 2 415 30000 8000 3 315 30000 6000 4 215 30000 4000 5 115 30000 2000 sum of years Cost Salvage Depreciation then start highest cost Rate at year 1 Double Declining 0 Does not use salvage rate Example 34000 truck 5 years 4000 salvage Year Rate Declining Annual Balance Depreciation 1 40 34000 13 600 2 40 20400 8160 3 40 1 2240 4896 4 40 7344 293 8 5 40 44064 406 1 00year 2 Annual Declining Depreciation Balance Rate Declining Balance Exchange or selling of Property and Equipment 0 Occasionally firms will take Property amp Equipment asset off the books because the asset is being scraped sold or traded in o If asset is scrapped and fully depreciated it is necessary to remove both asset and accumulated depreciation from the books Assume truck of 34000 and 0 salvage was fully depreciated I Accumulated Depreciation Truck Truck 34000 34000 If asset was scrapped before fully deprecation with the truck being 34000 and depreciated for 28000 Accumulated Depreciation Truck 28000 Loss of Disposal of Asset 6000 Truck 34000 Disposed through sale that results in lossgain Book Value of 6000 based on a 34000 and accumulated deprecation balance of 28000 The truck sold for 8000 Cash 8000 Accumulated Depreciation Truck 28000 Truck 34000 Gain on Disposal 2000 Disposed through sale that results in lossgain Book Value of 6000 based on a 34000 and accumulated deprecation balance of 28000 The truck sold for 4000 Cash Loss Exchange of a Truck A 34000 truck is exchanged along with 36000 for a new truck with a price of 38000 The old truck is 34000 with an Accumulated Depreciation of 28000 and a book value of 6000 The firm is getting 2000 on the trade in there is a loss of Truck New Accumulated Old Truck Loss on A 34000 truck is exchanged along with 31000 for a new truck with a price of 38000 The old truck is 34000 with an Accumulated Depreciation of 28000 and a book value of 6000 The firm is getting 7000 Truck New 37000 Accumulated Depreciation Old Truck 28000 Cash 3 1000 Truck Old 34000 From Chapter 12 record the three payroll transactions necessary GIVEN Total Earnings 30000 Federal Income Tax Withheld 6000 State Income Tax Withheld 2000 FICA Tax 2400 Health Insurance Premiums 1000 Federal Unemployment 08 008 State Unemployment 54 054 Dec 5th Salaries Expense 30000 Federal Income Tax Pay 6000 State Income Tax Pay 2000 FICA Tax Pay 2400 Health Insurance Premium Pay 1000 Salary Pay 18600 Salary Payable Salaries Expense Federal Income State Income FICA Health Insurance On the date the payroll was actually paid to the employees and the amount of net pay transferred into the payroll imprest fund the joumal entry would be I Dec 5 I Salaries Pay I 18600 I I Cash 18600 Dec 5 Tax 400 240 l From Chapter 14 sale of common stock cash dividends and treasury stock transactions Sale of Common Stock Shares of stock must have either par value or a state value Par Value represents the legal capital of the corporation Par Value has no relation to the market value of the stock Companies will set the par value of a stock very low Lets assume that a certain corporation decided to issue 20000 shares of par value stock that have a par value of 2 a share for 10 a share The journal entry would be Cash 20000 C S 40000 Additional PaidIn Capital in Excess of Par 160000 Cash Dividends Dividends are paid out of the companies accumulated earning and are available to stockholders only when the board of directors declares dividends Four important dividend dates relating to cash dividends 1 Date of Declaration Date the board of directors announces a future dividend At this time the board of directors will state when the payment date will be and what the amount of the dividend will be Date of Record This is the date on which a list of the holders of the shares of stock is compiled so that the dividend checks can be mailed to them Exdividend date Stock sells without the dividend that is even though a dividend will be pad soon on the stock the new purchaser will not receive the dividend The exdividend date normally precedes the date of record by three days The purpose of setting an ex dividend date is to allow the paperwork on exchanges of ownership of shares of stock to be cleared up before the date of record 4 Date of payment Date with actual dividend is paid N DJ Examples Assume company declares a 30 dividend on 50000 shares of outstanding stock The journal entry to record the declaration of the dividend would be I Retained Earnings I 15000 I I Dividends Payable I I 15000 I Once the board of directors declares a dividend the company must pay the dividend On the dividend payment date the following entry would be made in the case of the 30 dividends I Dividends Payable I 15000 I Cash 15000 Sold 1000 shares of 10 par value C S for 15share Cash 15000 C S 10000 PIC on C S 5000 Declare a 10 stock dividend MK Value 16share Nov 17 Retained Earnings 16000 C S Divided Distributable 10000 PIC on C S 240 Jan 15Th CS Dividends Distributable 10000 C S 1 0000 Treasury Stock Transactions When a corporation repurchases their own stock Debit Balance A company that has treasury stock will show a difference between the number of shares of stock issued and the number of shares outstanding since the treasury stock is not currently outstanding even though it has been issued Treasury stock is not an asset Treasury Stock shows up in the Stockholders Equity section of the balance sheet as a reduction to Total Stockholders Equity Not outstanding no dividends are paid on it Pristine Hotel reacquires 5000 shares of its own stock at a market price of 30 per share Recording this purchase at cost the journal entry would be I Treasury Stock I 150000 I I Cash 150000 If later on that treasury stock were sold at cost the company would merely reverse the preceding entry However if 3000 shares of treasury stock that had been purchased at 30 per share were later sold back to the public at 40 per share the following entry would be Cash 120000 Treasury Stock 120000 Additional Paidin Capital from Treasury Stock 30000 If following that resale 1000 shares of treasury stock were resold to the public at 20 pre share the following entry would have made Cash 20000 Additional Paidin Capital from Treasury Stock 10000 Treasury Stock 30000 Notice that no gains or losses are recorded on the sale of treasury stock In the second case in which the treasury stock was resold at a price below its cost the difference between cost and selling price is debited to the Additional PaidIn Capital a debit balance accountant would have debited Retained Earnings for 10000 Example Buys 300 shares of TS at 20share June 21 Treasury Stock 6000 Cash 6000 Aug 3 Cash 2500 T S 2000 PIC on T S 5000 Sept 5 Cash 1800 PIC T S 200 T S 2000 Sept 19 Cash 1500 PIC on T S 300 Retained Earnings 200 T S 2000 Assume that Hercules Properties Corporation has 200000 shares of 5 par value stock authorized and 150000 shares issues and outstanding Hercules declares a 5 stock diVidend when the market price of the stock is 20 per share This journal entry to record this declaration of the stock diVined is Retained Earnings 150000 Stock DiVidend to be Distributed 37500 Additional PaidIn Capital Stock DiVidend 1 12500 Retained earnings to 150000 shares 5 20share Stock dividend to be distributed 37500 7500 5share PIC 112500 20 5 15 7500 Later when the stock diVidend was actually distributed the journal entry would be I Stocks DiVidend to be Distributed I CS 37500 37500
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