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Intermediate Accounting I

by: Morris Beer II

Intermediate Accounting I ACCT 3304

Marketplace > Texas Tech University > Accounting > ACCT 3304 > Intermediate Accounting I
Morris Beer II
GPA 3.94

Robin Romanus

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Robin Romanus
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This 23 page Class Notes was uploaded by Morris Beer II on Thursday October 22, 2015. The Class Notes belongs to ACCT 3304 at Texas Tech University taught by Robin Romanus in Fall. Since its upload, it has received 33 views. For similar materials see /class/226431/acct-3304-texas-tech-university in Accounting at Texas Tech University.

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Date Created: 10/22/15
Review Sheet for Intermediate Exam 1 0 Material to be covered 0 Chapter 2 The Conceptual Framework 3 questions 0 Chapter 3 The Accounting Information System 9 questions I Look at Grounds by Jo and Platteville Company 0 Chapter 4 Income Statement and Related Information Ch 45 28 questions I MultiStep Income Statement 0 Chapter 5 Balance Sheet and Statement of Cash Flows Ch 45 28 questions 0 Difference between the IFRS iGAAP and the USGAAP o IFRs do not allow extraordinary gains or losses to be recorded 0 Operating assets may be reported at historical cost or fair value 0 Stock 0 Authorized maximum number of shares slide 37 I Number of shares issued Number of shared unissued 0 Outstanding shares actually in the hands of stockholders 0 Issued number of shares sold or transferred to stockholders do not mean these are outstanding 0 Treasury shares that have been issued out by the corporation and then repurchased count as shares issued but NOT as shares outstanding I Number of shares issued Number of shares outtanding 0 Matching Principle 0 Dictates that efforts expenses be matched with accomplishments revenues whenever it is reasonable and practical to do so Expenses are recognized the work service or product actually make its contribution to revenue thereby quotmatchingquot expenses to revenues they help create in the appropriate period 0 Correction Entry Chapter 3 0 Example Prepaid Insurance I Assume on August 1 2009 we prepaid a 3000 12month insurance month 0 Regular entry August 1 2009 0 Debit Prepaid Insurance 3000 0 Credit Cash 3000 I But instead of making the above journal entry we made a mistake and expensed the insurance with the following entry 0 Debit Insurance Expense 3000 0 Credit Cash 3000 I We have to make a correction entry at the end of the year and establish a Prepaid Insurance account and correct the balance in the Insurance Expense Account I So how much insurance did we use up It has been five months so we used up five months of insurance 0 3000 x 512 1250 amount used 0 Need to have this balance in the Insurance Expense account and subtract this from the Prepaid Insurance account 0 We can conclude that the Prepaid Insurance account should have 1750 if we subtract 1250 from 3000 0 Therefore the correction entry should be as follows 0 Debit Prepaid Insurance 1750 0 Credit Insurance Expense 1750 Two statements to find dividends paid for the period on statement of Retained Earnings and Statement of Cash Flows o Dividends distributions of assets to shareholders decreases Retained Earnings Two statements to find Accumulated OCI to date Statement of Stockholder s Equity and balance sheet Earnings per share net income preferred dividends weighted average shares outstanding OR net income shares of common stock outstanding Statement of Cash Flows three types of activities investing operating and financing 0 Investing investments of property plant amp equipment and loans I Outflow purchases of investments PPE loans to others principal only I Inflow sale of investments PPE receipt of principal from loans to others 0 Financing borrowing and any stockholder s transactions I Outflow repurchase of stock treasury stock retirement of bonds repayment of notes principal only payment of dividends I Inflow borrowing principal only issuing notes issuing bonds issuing stock 0 Operating indirect method I Add Depreciation Amortization and Bad Debt I Subtract Gains I Add Losses I changes in current assets 0 Adjustments for changes in current assets are in the opposite direction of the change I changes in current losses 0 Adjustments for changes in current liabilities are in the same direction of the change 0 MultiStep Income Single Step Income Statement 0 MultiStep Income Net Sales Cost of Goods Sold Gross Profit Selling Expenses Administration Expenses Income from Operations other revenues and expenses realized gains and losses Income before taxes tax expense Income from continuing operations discontinued operations extraordinary gains and loses Net Income Foreign Currency Translation Adjustment Minimum Pension Liability Adjustment Unrealized Gains Losses Comprehensive Income Ratios I Review Grounds By Jo Platteville Company and Ford Company Group Assignments Gross Profit Margin Gross Profit Net Sales Profit Margin Net Income Net Sales Current Ration Current Assets Current Liabilities Acid Test Ratio S Quick Assets Current Liabilities Debt Equity Ratio S Total LiabilitiesTotal Equity Times Interest Earned Net Income Interest Expense Income Tax Expense Interest Expense Single Step Just add all the revenues to get Total Revenues and add all the expenses to get Total Expenses I The difference between the revenues and expenses should be the Net Income or Net loss 0 Revenues gt Expenses Net Income 0 Expenses gt Revenues Net Loss Total Other Comprehensive Income OR Accumulated OCI add three adjustments Comprehensive Income for the Period net income the three OCI adjustments 0 Comprehensive Income includes all changes in equity during a period except those 000000 0 resulting from investments by owners and distribution to owners Balance Sheet 0 General Current Assets Non Current Assets Total Assets Current Liabilities Non Current Liabilities Total Liabilities Common Stock PIC in Excess of Par Retained Earnings Accumulated Other Comprehensive Income Treasury Stock Total Equity Total Liabilities and Equity Equity residual interest in the assets of an entity that remains after deducting its liabilities often referred to as ownership interest claims held by owners divided into two main catergories 0 Equity increases with Contributed Capital and Retained Earnings I Contributed Capital amounts invested in corporation by owners I Retained Earnings income earned from operations Define Retained Earnings o All years prior earnings accumulated Statement of Retained Earnings Beginning balance of Retained Earnings Net Income Dividends Ending balance of Retained Earnings Current Assets Cash Investments Accounts Receivable Allowance for Doubtful Accounts Shortterm Notes Receivable Marketable Securities Inventory Prepaid Accounts NonCurrent Assets Goodwill Patents Trademark Franchises Copyrights PPELand Buildings etc Longterm Investments Current Liabilities Accounts Payable Notes Payable Accrued LiabilitiesWP UP IP Current Maturities of LongTerms Debt Unearned Revenue NonCurrent Liabilities Bonds Payable Pension Payable Capital Leases Deferred Income Tax Eguiy Common Stock APICanything paid over par value of stock Retained Earnings Accumulated OCI Treasury Stock Adjusting Entry Depreciation Expense XXX Accumulated Depreciation XXX Intermediate Test Review Chapters 78 and 9 Chapter 7 14 questions 0 Recording sales using the Gross Method 0 9899 of companies uses the Gross Method 0 Gross method records AR at the gross amount of sale and records discounts when taken 0 Terms of invoice incentive to pay in a given period to receive the discount 0 Example 215 net 45 I This means that a 2 discount will be on the portion of the bill that is paid within 15 days or if you choose not to take the discount the whole bill is due in 45 days 0 To record the sales using the gross method 0 Journal entry Accounts Receivable XXX Sales Revenue XXX 0 To pay the balance and receive a discount 0 Sales discount is a contrarevenue account that decreases the sales with a debit 0 Sales returns and allowances is also a contrarevenue account that decreases the sales with a debit I Journal entry Cash XXX Sales Discount XXX Accounts Receivable XXX I Note Sales Revenue Sales Discount Sales Returns amp Allowances Net Sales 0 Formulas for Net Realizable Value of Accounts 39 39 Doubtful Accounts NRV of AR o Allowance for Doubtful Accounts 0 Shows the matching principle review chapter 1 o Decreases the Net Realizable Value of Accounts Receivable because they are netted together to give you Net Accounts Receivable o The ADA account is actually an allowance reserve that reduces the Accounts Receivable balance and is used when a customer s account is to be written off I Adjustingjournal entry Bad Debt Expense dr Allowance for Doubtful Accounts cr 0 To write off a customer s account the journal entry is o Allowance for Doubtful Accounts dr 0 Accounts Receivablecr I Writing off a customer s account does not affect the balance sheet because the entry requires both accounts to decrease in the writeoff in turn making the NRV the same as it was before the writeoff I Writing off a customer s account does not affect the Income Statement because a writeoff journal entry does not contain an expense account Bad Debt Expense 0 To record a customer payment whose account has been previously written off requires two separate journal entries If we have written them off we must reinstate their account and journalize the receipt of their payment Notice that the first entry is to reverse the entry to the writeoff of the account and the second is the standard entry to record the receipt of cash on the account The first one is Accounts Receivable dr Allowance for Doubtful Accounts cr Accounts for II All The second journal entry is Cash dr Accounts Receivable cr I Balance Sheet Approach Percentage of Receivables 0 When this percentage of uncollectibles is calculated it is the target balance of the Allowance for Doubtful Account balance Therefore the adjusting entry to reach the target balance is equal to the Bad Debt Expense BALANCE SHEET APPROACH I Income Statement Approach Percentage of Sales 0 When this percentage of uncollectibles is calculated it is the balance in the Bad Debt Expense account I Selling Accounts Receivable with and without Recourse 0 Without Recourse INCOME STATEMENT Has nothing to do with bad debt without recourse means that the selling company takes the burden of bad debt expense of the Accounts Receivables Example ME Co is selling 700000 of Accounts Receivable to Deb Inc Deb Inc also institutes a 3 fee of face value of receivables and a retainer fee of 5 of accounts receivables to give to ME Co at a later date Cash Loss on Sale of AR Due loss factor asset AR AR Financing revenue cr 700000 X 03 Due to ME Inc 700000 X 05 Cash o Factoring With Recourse 0 When factoring llwith recourse the selling companies set aside a liability account called llRecourse Liabilityquot which is the total amount that the receiving company can come back for uncollectibles or bad debt 0 The selling company has to recognize it as a loss on Accounts Receivable Cash Loss of sales of AR Due from factor Accounts Receivable Recourse Liability The selling company recognize a loss as nancing revenue for the receiving company An asset for the selling company is recognized as a liability for the receiving company If the receiving company was to come back for any amount of money for the selling company the journal entry would be as follows 0 Recourse Liability dr 0 Cash cr NonInterest Bearing amp Interest Bearing Notes Receivable o NonInterest Bearing Notes Receivable I Example Sold a truck for 25000 accepted a 6month notes receivable 6 rate due on June 1 2010 1212009 Notes Receivable 25000 Sales Revenue 25000 Adjusting Entry The interest calculation is PRT with the principal being 25000 the rate is 6 and the time that has elapsed is one month of a 12 month interest rate therefore you divide the time by 12 Interest Receivable 125 Interest Revenue 125 0 Date of Maturity of the Note plus the interest 0 To calculate the interest for the rest of the note you have to take the principal amount of 25000 multiplied by the number of months that you have not collected interest for already time remaining on the term of the notemultiplied by the interest rate of 6 25000 x 512 x 06 625 o This number is the interest revenue that will come in You have already received 125 of the interest so this is the interest receivable The principal balance is the amount of the initial note The following is a journal entry to recognize the maturity of the note and interest Cash 25 750 Notes Receivable 25000 Interest Receivable 125 Interest Revenue 625 NOTE Cash should be the last thing filled in since it is the accumulation of the other accounts o NonInterest Bearing Notes Receivable 0 Think of a noninterest bearing notes receivable as a discount not interest free I Example You want a 9500 note and you have to pay back 10000 12months later 0 The difference between what you are paying back and the principal amount is called the effective interest rate So the affective interest rate is 500 the difference between your principal amount and what you are paying back divided by the principal amount I Example We lend a 50000 noninterest bearing note to a key employee on January 1 2008 The implied rate in the market is 8 The note is a 2 year note receivable 0 Step 1 Take the Present Value of 50000 at 8 which is 85734 42 867 The difference between the amount expected and what we receive is the quotdiscountquot This is the date of acceptance of the note The journal entry is as follows Notes Receivable 50000 Cash 42 867 Discount on Notes Receivable 7 133 0 Step 2 Using the Effective Interest Method 0 This is a discount that is given to the cash amount that is a part of the notes receivable o Takes the cash we receive and applies the implied rate in the market to see the interest earned each year I Year 1 42867x 08 3429 interest earned in year 1 I Year 2 42867 3429 08 3704 I The journal entry to represent the discount for year 1 is as follows Discount on Notes Receivable 3429 Interest Revenue 3429 I The journal entry to represent the discount for year 2 would be as follows December 31 2009 Discount on Notes Receivable 3704 Interest Revenue 3704 Since we are looking for a discount for year 2 we use the second journal entry The new carrying value of the note is 46 296 because we reduce the discount on the Notes Receivable by the interest of the first year Date Account Title Debit Credit Jan yr39 1 Notes receivable 5000000 Di5count on notes receivable 4286700 Cash 713300 Dec yr39 1 Discount on notes receivable 342900 Interest revenue 342900 42867 x 8 Chapter 8 Valuation of Inventories 0 Shipping Terms 0 FOB Shipping Point transferred title to buyer on the buyer s inventory 0 FOB Destination inventory still belongs to the seller until it reaches its destination 0 Types of inventory systems 0 Weighted Average Method uses the average to calculate the ending inventory balance Always falls between the perpetual and the Periodic inventory systems 0 Perpetual inventory system directly reducing inventory after each sale or time of transaction provides a continuous record of inventory and cost of goods sold 0 The journal entry would be COGS dr and Inventory Account cr I Manager can go in at any time and see the profit This is very expensive and not practical 0 Examples of industries in which this would not be affective grain industry lumber and whole sale businesses 0 Periodic Inventory system uses Purchases Account instead of Inventory account when purchasing inventory Ending inventory is calculated by a physical count and there is a formula for calculation of cost of goods sold 0 The journal entry would be Purchases dr and Accounts Payable cr Calcuation of Cost ofGoods Sold Beginning Inventory Net Purchases ltPurchase Discountsgt ltPurchase Returns and Allowancesgt Cost of Goods Available for Sale ltEnding Inventorygt Cost of Goods Sold 0 An adjustment needs to be made to inventory and cost of goods sold since we do not update them after every sale 0 Purchases and Purchases Returns and Allowances need to be quotzeroedoutquot leaving them with a 0 balance I Purchases is an expense account so it needs to be credited I Purchases Returns and Allowances is a contraexpense account so it needs to I be debited 0 Comparison of Perpetual and Periodic Method and their respective journal entries Perpetual is on the left and Periodic is on the right l Beginning inventory 100 units at 7 700 l 2 Purchase 900 units at 7 l Inventory 6300 Purchases 6300 Accounts payable 6300 Accounts payable 6300 l 3 Sale of 600 untis at 14 l Accounts receivable 8400 Accounts receivable 8400 Sales 8400 ales 8400 Cost of goods sold 4200 Inventory 4200 l 4 Adjusting entries ending inventory 400 units 7 2800 I No Entry Necessary Inventory 2100 Cost of goods sold 4200 l Purchases 6300 0 When using the Weighted Average method the weighted average is calculated by doing the Cost of Goods Available for Sale in dollars divided by Cost of Goods Available for Sale in Units o SUMMARZIATION OF EACH Periodic LIFO Cost of Goods Sold is bigger relative to the other alternatives Gives you a smaller pretaxed income Bigger companies uses if for a lower tax assessment and it is not allowed under the IFRS Periodic FIFO Cost of Goods Sold is smaller relative to the other alternatives Gives you a larger pretaxes income Periodic Weighted Average Industry with fluctuations during the year uses this method to even out the highs and lows This is so financial statements are not so drastic throughout the months 0 O O 0 During inflation Most use LIFO that is subject to the LIFO Conformity rule which requires that the 0 same inventory cost flow be used on the financial statements as is used on the Income 0 But if you use FIFO for tax purposes you may use LIFO for Financial Reporting purposes 0 During deflation 0 Will use FIFO 0 Advantages and Disadvantages of LIF assuming inflation 0 Advantages Get better matching of current costs to current revenues on the income statement Get better tax benefits lower pretax income Get higher cash flow when compared to other methods because less cash goes out the door tax savings Minimize chance of having to write down inventory to lower of cost or market Ending inventory would already represent the lower of cost or market if inflation is taking place 0 Disadvantages Earnings are lower on the reported financial statement It may distort inventory balances of the Balance Sheet leaving lower earlier costs to account for ending inventory LIFO liquidation when inventory is not being purchased and replaced regularly strange results may occur matching old costs to current revenue When a company is experiencing this tax problems may occur In such a situation high taxes are imposed on a company that can least afford to pay taxes The can t afford to replenish inventory so they sure can t afford to pay more taxes Using LIFO cost encourages poor buying habits to manipulate net income andor to avoid LIFO liquidation 0 Dollar Value Life 0 Step 1 Take the end of the year prices divided by the price index to get the base year prices 0 Step 2 Find the difference between the base year prices of the current year and previous year 0 Step 3 Layer up each of the base year prices given the price index 0 Step 4 The amount in Dollar Value LIFO Ending Inventory is the layers added together Dollar value LIFO reduces the risk of lifo liquidation Dollar value LIFO accounts for everything in a group instead of individually o Overstatment and Understatement of Ending Inventory Beginning Inventory Net Sales Purchases ltCost of Goods Sodgt ltPurchase Rtn amp Aowancesgt Gross Profit Freight in ltSeing amp Administrative Expsgt Cost of Goods Available for Sale Pre Tax Income ltEnding lnventorygt Tax Expense Cost of Goods Sold Net Income I Note Okay Under Over Under0kayUnder OkayOver Under 0ver0kayUnder Chapter 9 Valuation of Inventories Additional Issues I Lower of Cost or Market LCM A company abandons the historical cost principle when the future utility revenueproducing ability of the asset drops below its original cost 0 See below Diagram lt Replacement Not Floor K RID V Ipeic klnnm39n l I Explanation of Diagram 0 Replacement Cost cannot be gt the Net Realizable Value NRV because the NRV is the ceiling I NRV Selling pricedisposal costs 0 Replacement cost can never be lt the Net Realizable Value Profit Margin NRVPM because this is the floor value I NRVPM Net Realizable Value Normal Costs 0 NOTE Always remember to use the middle number between the three I Allowance Method If Cost gt MR 0 If price falls below market value we recognize it as a lost The journal entry is as follows Loss on decline of Inventory Market Value dr Allowance to reduce Inventory to Market cr I Once the journal entry is posted then the balance sheet would like the following BALANCE SHEET Inventory XXXX Allowance for Decline in Inventory MIQREEIEE liming Estimated Cost of Goods Sold Net Realizable Value of Inventory To recover a prior period lost as a gain we would reduce the allowance for decline in inventory account The journal entry would be as follows Allowance to reduce Inventory to Market dr Gain on recovery of Inventory Market Value cr NOTEM A gain can only be recognize up to the cost of the inventory and never above Gross Profit Method Looks at prior period Gross Profit Margin and estimates ending inventory 0 0 Not accepted by the SEC 0 It s a general overall estimation that is seen as a weakness 0 Uses historical records to current period 0 Great for auditor managers and insurance companies Formula needed for Gross Profit Margin Beginning Inventory Purchases ltPurchase Returns and Allowancesgt Transportation In Cost of Goods Available for Sale lt39Cost of Goods Soldgt Ending Inventory Sales lt39Cost of Goods Soldgt Gross Profit Gross Margin NOTEM Gross Profit will be given as a percentage of Sales to calculate the Cost of Goods Sold For example If Sales are 300000 and Gross Profit is 55 of sales then Gross Profit is 165000 If Gross Profit is given as a percentage of cost then a converter formula is used to convert if from a percentage of cost to a percentage of sales It is Gross Profit as of Cost 1 Gross Profit as of Cost Once Cost of Goods if found then it is subtracted from Cost of Goods Available for Sale to find Ending Inventory Retail Method Conventional Retail LCM Method 0 O o LIFO Retail Method 0 Dollar Retail Method Conventional Retail Method LCM Method 0 Divides ending inventory into two accounts Cost and Retail Imam a m2 5quot 1 W Climax a to my 395 il j l 1133 94633 I NOTEM The Conventional Method adds beginning inventory to the Goods Available for Sale for both the retail and costs LIFO Retail Method 0 Does not add beginning inventory to the Cost of Goods Available for Sale Instead if finds the prior year cost to retail ratio by taking the beginning inventory on the cost side and dividing it by the beginning inventory on the retail side o It still finds the Cost of Goods Available for Sale ratio after they are calculated for the both the cost and retail side mm C 7 I 9 i 11 7279th 3913 J I NoteThe prior year is multiplied with the 100000 because that is how much was in retail as beginning inventory The rest is the current year additions I DollarValue Retail Method 0 Same as LIFO Retail Method up to Ending Inventory Retail o It accounts for the account increasing and decreasing with the effects of inflation o The price index will have to be given I Ending Inventory Retail is divided by the current year price index For example if we use the above problem with ending inventory at retail is equaled to 141300 and use the current year price index of 107 then the Ending Retail in the base year will be 132056 COST RETAIL Retail Beg inventory 58000 100000 5800 Purchases 122000 200000 Freight in 3000 Purchase returns 5000 7000 Markdowns net 26000 Markups net 10500 Cost of Goods available for sale wlo Bl 120000 177500 6800 Cost of Goods available for sale wl Bl 178000 277500 Normal spoilage 3200 Sales 133000 Ending inventory at retail 132056 lt 1413001107 Estimated Ending inventory at Cost PY1 100000 x 5800 Ans 100 58000 CY1 32056 x 6800 Ans 107 23324 132056 81324 Estimated COGS 96676 It is still layered like above instead with the corresponding price index year and given the Ending Inventory Cost NOTEIf in a next year they decided at El Retail is 152000 current year cost to retail ratio is 62 and the current price index is 109What would be the Ending Inventory at Cost for the year 0 You will divide El Retail is 152000 with the price index of 109 139450 0 You would layer the still use the layers before and then just add the current year layer by taking the difference between ending inventory cost from before and subtracting it from the ending inventory retail from this current year to give you the amount that has been added I 139450 132056 from previous 7394 Multiple this amount by current year cost to retail ratio and it gives you the Ending Inventory for that particular price index Add the all together to get Ending Inventory Cost for this year Intermediate Test Review Chapters 10 11 and 12 Chapter 10 Capital versus Revenue Expenditures 0 Capital expenditures cash outflows for goods and services that will provide future economic benefits beyond the current period I Purchase of equipment land or building 0 Journal Entry dr Asset cr Cash 0 Revenue Expenditures cash outflows for goods and services beneficial only to the current period I Ordinary Repair and Maintenance 0 Journal Entry dr Expense cr Cash 0 Costs to be Capitalized 0 General Rule The initial cost ofan operational tangible asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use I Example remodeling old space interest expenses incurred as a result of financing the construction of the asset etc Equipment net purchase price taxes transportation costs installation costs modification to building necessary to install equipment and testing and trial runs Land not depreciable purchase price real estate commissions attorney s fees title search title transfer fees title insurance premiums removing old buildings and material costs of improvements that are not permanent in nature Land Improvements unlimited lives driveways parking lots fencing and private roads Buildings purchase price architectural fees cost of permits excavation costs digging holes to make basement of the building and construction costs Example 0 Building Costs turquoise Land Costs green Land Improvements yellow 000 O o LumpSum Purchases 0 Not held for resale Expected lives are longterm Must have physical substance Used to generate revenue Definition acquisition of two or more assets for one price Example Purchased Land building and equipment for 500000 Real Estate appraiser gives the market value Building 380000 Land 180000 E ui ment 250 000 Total 810000 0 Take each as a percent of the total 380000 810000 47 180000810000 22 250000810000 31 Make sure the percent add up to 100 0 Next Allocate the 500000 using each percent 47 x 500000 235000 22 x 500000 110000 31 x 500000 155000 Make sure the total is the amount the assets were purchased for Journal Entry Building 235000 Land 110000 Equipment 155000 Cash 500000 0 Issued stock for Payment of Assets 0 Example exchange 1000 shares of stock trading at 26 per share for equipment The stock has a par value of 10 per share I Journal Entry 0 Equipment 26000 0 Common Stock 10000 0 PIC in Excess 16000 0 Example 1000 shares sold at par for 1 and sold for 16 per share I Journal Entry 0 Cash 16000 0 Common Stock par value x of shares 10000 0 Additional Paid in Cap 15000 0 NOTEAlways report asset at fair value of time of purchase 0 nterestCapitalization 0 Step 1 Calculate the weight average of accumulated expenditures outstanding Step 2a determine the rate on specific construction Step 2b determine the weighted average rate on nonspecific borrowings Step 3 Calculate the avoidable interest Step 4 Calculate the actual interest costs Step 5 Choose the lower of the 2 amounts avoidable vs actual costs to capitalize to the constructed asset Actual interest costs beyond avoidable interest costs will be 0000 expensed as incurred o NOTEmoney is paid in drawdowns Step 1 multiply each amount by the of months that it was actually in the company hands to get the amount that was outstanding called WAEO Jan 1 550000 x 1212 550000 Mar 1 700000 x 1012 583000 May 1 850000 x 812 566667 Nov 1 900 000x 2 12 150 000 WEIGHTED AVERAGE EXPENDITURES OUTSTANDING 1850000 actually in the hands of the company the full 12 months The months used are the months that that specific draw down was in the hands of the company For example the January drawdown was in the hands of the company for the full 12 months while the May drawdown was only in the hand of the company for 8 of the 12 months of the year Assume the debt outstanding is as follows Construction loan 8 1500000 Bonds Outstanding 12 2000000 LongTerm Notes Outstanding 10 3000000 Step 2a determine the rate on specific construction borrowings look for construction 8 Step 2b determine the weighted avg on nonspecific borrowings 9 Bonds Outstanding 2000000 x 12 240000 Lon Term Notes 3 000 000 x 10 300 000 Total 5000000 540000 NOTE The bolded numbers are the actual interest Take the actual annual interest divided by the total to get the weighted average rate 540000 5000000 108 Step 3 calculate avoidable interest Weighted Average of Accumulated Expenditures Outstanding 1850000 Specific Construction Borrowings 1 500 000 x 8 120 000 Difference 350000 NOTEtake the difference and multiply it by the weighted average rate the speci c construction borrowing amount Avoidable Interest 350000 x 108 37 500 120000 157 500 9 Avoidable Interest This amount is the interest that could have been avoid had we not financed the construction project Step 4 Calculate the actual interest 1500000 x 8 120000 2000000 x 12 240000 3000000 x 10 300 000 Actual Interest Costs 9660000 Actual 660600 Avoidable lt157 800gt 502200 Journal Entries Expense Construction dr building 3000000 cr cash 3000000 Interest dr building 157800 lesser of actual vs avoidable dr interest expense 502000 Cash 660000 0 Disposition of Assets 0 O O OPTION 1 Step 1 cost Book Value OPTION 2 Step 1 cost AD Book Value OPTION 3 Step 1 cost AD Book Value Definition selling assets for cash Steps I First find book value of asset sold I Second find gain or loss on asset sold I Third prepare a journal entry to record the sale Example Purchased asset equipment in 2005 Acquisition cost of asset was 100000 Sold asset of September 1 2009 and the Accumulated Depreciation through the date of the sale was 36000 Prepare a journal entry assuming the asset is sold for 1 70000 2 60000 3 64000 I NOTE gainsrevenues 100000 Step 2 FV 70000 Step 3 cash 70000 w W A D 36000 64000 gain on sale 6000 equipment 100000 Gain on Sale of Asset 6000 100000 Step 2 FV 60000 Step 3 cash 70000 w W A D 36000 64000 loss on sale 4000 Loss on Sale 4000 Equipment 100000 100000 Step 2 FV 64000 Step 3 cash 64000 w W A D 36000 64000 brea keven 0 equipment 100000 0 Exchange of NonMonetary Assets 0 Commercial Substance I Definition commercial substance means that the assets are so dissimilar that the cash flow is expected to change Companies should recognize immediately any gains or losses on the exchange when the transaction has commercial substance Companies usually records the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the fairvalue ofthe asset given up and immediately recognizes a gain Accounting Guidance Recognize gains and losses immediately Type of Exchange Exchange has commercial substance Exchange lacks commercial Defer gains recognize losses substance no cash received immediately Exchange lacks commercial Recognize partial gain recognize losses immediately substance cash received NOTEM Defer the entire gain if cash is given by reducing the new asset amount NOTEM cash is credited if the company paid cash cash is debited if the company received cash NOTEM if the company paid cash then the entire gain is deferred from the new asset by that amount NOTEifthe company is receiving cash and the cash in exchange is lt25 of FV of exchange we recognize a of the gain and defer the rest If the ratio is gt25 we must deferthe entire gain A EXAMPLE rna Bontemps Cost 96000 110000 Accumulated Depreciation 45000 52000 Fair Value of Asset 60000 75000 Cash Paid 15000 15000 Cash Received 1 Prepare ajournal entry for Arna in which it has commercial substance 2 Prepare ajournal entry for Bontemps in which it has commercial substance 3 Prepare a journal entry for Arna in which it lacks no gainloss commercial substance 4 Prepare a journal entry for Bontemps in which it lacks commercial substance 0 Difference between IFRS and USGAAP 0 Under IFRS operational assets may be recorded at historical or fair value cost Under US GAAP operational assets are recorded at fair value CHAPTER 11 o Commonly Used for Financial Reporting StraightLine Depreciation and Units of Production Activity Method 0 Lower depreciation expense 0 Higher Book Value 0 Higher Tax Expense o Commonly Used for Tax Purposes DoubleDeclining and Sum of Years Digits accelerated approaches 0 Higher depreciation in earlier years 0 Lower Book Value 0 Lower Pretax Income 0 Partial Periods 0 Make sure that you pay attention to the year in which the asset was brought 0 Asset should never be depreciated past the costsalvage value StraightLine Units of Production and Sum of Years Digits 0 Asset should never be depreciated past costsalvage value which should be the balance in the Accumulated Depreciation account Might have to make changes to the last year to avoid and overage o Formulas to check to make sure you don t depreciate too much I Cost ltADgt BV or SV in the last year of life I Cost ltSVgt AD 0 Journal Entry to record Depreciation Expense 0 dr Depreciation Expense cr Accumulated Depreciation o Depreciation Methods 0 Straightline Depreciation I costsalvage valuelife depreciable baselife 0 Units of Production Method I costsalvage value x units in current periodtotal expected units of life 0 Double Declining Method I costaccumulated depreciationx 2useful life costaccumulated depreciation x dd rate 0 Sum of Years Digits I costsalvage value x sum of yrs digits x months of years ratio 0 To get the sum of years digit you add the numbers together Example 7 years7654321 28 0 Change in Accounting Estimates 0 Step 1 determine the book value of asset at the date of change Step 2 Add capitalize costs to cost basis at the date of change if any Step 3 Determine the new salvage value if any Step 4 Determine years of life that remain Use all of new amounts above to calculate depreciation expense for current and future years 0 Impairments 0 FIRST STEP Recoverability Test I if expected future cash flows undiscounted are less than book value 9 then there is an impairment 0 SECOND STEP Measurement of Loss I FV of asset ltBV of assetgt impairment loss 0 JOURNAL ENTRY I dr loss on equipment XXX cr Accumulated Depreciation cr equipment XXX 0 The credit can be to the original asset or accumulated depreciation O O O O o IFRS vs USGAAP o In international standards the loss may be recovered from prior periods Under USGAAP the loss is permanent Chapter 12 o Differentiate between Tangibles and Intangibles o Tangibles Property Plant Equipment and Natural Resources 0 Intangibles No physical substance legal rights 0 Intangible Assets O O O 0 Two features of Intangible Assets They lack physical existence They are not financial instruments 0 Examples include trademarks copyrights patents franchise agreements and Goodwill Purchased Intangibles Intangibles purchased from another party are recorded at cost and all other cost to make the intangible asset ready for its intended use Internally Created Intangibles Intangibles created internally are generally expensed as incurred the only internal costs capitalized to intangible asset are direct cost such as legal cost and fees research and development costs are not capitalized if intangibles are made within a company Sta rt Up Costs All startup and organizational costs incurred in organizing a new entity should be expensed as incurred 0 Difference between IFRS and USGAAP Under IFRS companies may capitalize development costs and have to expense research costs Under USGAAP Research and Development Costs are not intangible assets Any R amp D costs incurred in the development of intangibles such as copyrights patents or trademarks must be expensed when incurred 0 Types of Intangibles Trademarks marketing related intangible O O O 0 Definition a word phrase or symbol that identifies a particular company or product Indefinite number of renewals for periods of 10 years each inde nite life Not amortized 0 Examples are domain names double T characters associated with Walt Disney Copyrights artistic related intangibles Definition federally granted rights to artistic creations with a life of the creator plus 70 years Are not renewable Amortized over the lesser of the useful life or the life of the creator usually the useful life Legal costs or fees incurred during the life of a copyright for the purpose of defending the copyright may be capitalized to the cost of the asset and amortized over its remaining life if court case was successful Examples songs paintings books etc Patent technology related intangibles Definition gives the holder the right to use manufacture and sell a product or process for a period of 20 years without interference or infringement by others Original patent is not renewable but small changes may lead to a new patent extending the life another 20 years pharmaceutical companies often change the color the pill to do this 2 types of patents 0 Product patent HP Printer O O 0 Process patent ingredients of CocaCola I Amortized over its legal life 20 years or its useful lifewhichever is shorter I Legal costs or fees incurred during the life of a copyright for the purpose of defending the copyright may be capitalized to the cost of the asset and amortized over its remaining life if court case was successful Franchisecontract related intangible I Definition a contract under which the franchisor grants the franchisee the right sell certain products or services and use certain trademarks usually with a specific geographic area I May have a de nite or indefinite life 0 If the agreement has a limited or definite life it should be amortized over the life of the asset taking on the all the assets liabilities reputation etc Goodwillquotthe most intangible of the intangibles I Definition the difference between FMV of the Net Identifiable Asset and the Purchase Price of the business I Goodwill has a inde nite life and SHOULD NOT be amortized I If the Purchase Price is lt the FMV of Net Identifiable Assets then there is negative goodwill Negative Goodwill is reported as a gain credit 0 Amortization of a Patent or Copyright 0 O 0 Original cost additional cost legal fees useful life expense NOTE make sure you pay attention to partial years Journal entry dr amortization expense XXX cr amortization XXX 0 Changing the life of patent O O O 0 Step 1 amortize the patent regularly by taking the purchase price and dividing it by its useful life and depreciate it for the number of years Step 2 Take the original cost and subtract the accumulated amortization to get the carrying value Add the court cost to get the new cost basis Step 3 Take the new cost basis and divide it by the number of years remaining of its life to get the amortization expense for the year Step 4 Record the journal entry I dr amortization expense XXX cr Accumulated Amortization o Impairment of Goodwill O 0 Step 1 Determine the book value of all Net assets all assets and liabilities including Goodwill Step 2 If the fair value of business is ltthe book value of Net Assets then there is an impairment Step 3 Fair Value of business ltFV of Net Assets excluding goodwigt implied value of goodwill Step 4 Book Value of goodwill ltimpied value of goodwigt impairment loss on goodwill Step 5 Prepare a journal entry to record the loss I dr loss on impairment of goodwill cr goodwill DIFFERENCE BETWEEN IFRS AND USGAAP I In USGAAP the impairment loss cannot be recovered Its permanent In IFRS the loss are recoverable


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