SS Intermediate ACC III
SS Intermediate ACC III ACC 4953
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This 11 page Class Notes was uploaded by Rocio West on Thursday October 29, 2015. The Class Notes belongs to ACC 4953 at University of Texas at San Antonio taught by Jeffery Boone in Fall. Since its upload, it has received 23 views. For similar materials see /class/231439/acc-4953-university-of-texas-at-san-antonio in Accounting at University of Texas at San Antonio.
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Date Created: 10/29/15
18 61 Obtain the 2007 annual report of Lennar Corporation at httpwwwsecgov A 39 39 J J r 20760000119312508014540d10khtm Read the company overview found on page 1 of the annual report the discussion of revenue recognition found on page 62 of the annual report and the detail of Other Liabilities found on page 82 footnote 10 Then evaluate the company s revenue recognition policy in light of the textbook discussion on pages 921922 Speculate on the source of the Deferred Income reported as a component of Other Liabilities REAL ESTATE SALES In real estate sales a company may sell land or a building or both The land may be developed or undeveloped and the seller may be responsible for making improvements The building may be completed or in the process of construction and may be for commercial use such as a factory or office building or residential use such as a house or apartment building Accounting for real estate sales is defined by FASB Statement No 66 We discuss only the basic rules here because of their relevance to an understanding of revenue recognition alternatives Real Estate Sales For real estate sales a selling company recognizes revenue and related expenses on the accrual basis in the normal manner in the period of the sale if all of the following conditions are met 1 A sale occurs 2 The buyer s initial and continuing investments show a commitment to pay for the proper 3 The seller s receivable is not subject to having its liquidation rights reduced 4 The seller has transferred to the buyer the usual risks and rewards of ownership and does not have a continuing involvement with the pro e It is important to understand that these criteria address the conceptual issues we discussed earlier in the chapter namely the economic substance of the transaction the transfer of the risks and benefits of ownershi and the collectibilit realizabilit receivable 39 of the Mr H u an rmrr mm A When a company has earned revenue and the related receivable is rea rzed or realizable the company recognizes revenue in full using the accrual method When the earning process is not complete or realization has not occurred the company uses an alternative method RETAIL LAND SALES In retail land sales a company may acquire a large tract of unimproved land that it divides into lots It then sells these lots to widely dispersed retail customers individuals through intensive marketing programs Generally part of the marketing program involves an agreement by the company to improve the lots by installing roads utilities and related amenities such as golf courses lakes and recreational centers These improvements will require large future capital outlays by the company The company may agree to be continually involved in the operations of the recreational centers and to provide ongoing maintenance The sales contract often has a low down payment no or limited credit investigation of the buyer periodic payments by the buyer that extend over several years and the ability of the buyer to cancel the contract and obtain a refund Within a specified period Several factors involved inretail land sales may affect the timing of revenue recognition by the company These include the collectibility of the receivables the financial ability of the company to fulfill its obligations the length of the refund period the accumulation of collections and the ongoing completion of the project For retail land sales the selling company recognizes revenue and the related expenses in the period of the sale on the accrual basis if all of the following conditions are met 1 The buyer has made the down payment and each required subsequent payment until the period of cancellation with refund has expired 2 The cumulative payments of principal and interest equal or exceed 10 of the contract sales price 3 Collection experience for the project indicates that at least 90 of the contracts will be collected in full a down payment of 20 is an acceptable indication of collectibility 4 The receivable from the sale is not subject to subordination to new loans on property 5 The seller is not obligated to complete improvements of lots sold or to construct amenities or other facilities applicable to lots so As with real estate sales the intent of these rules is to be consistent with the conce tual 39 r issues related to revenue reco n1tion m l Item 1 Business Overview of Lennar Corporation We are one of the nation s largest homebuilders and a provider of financial services Our homebuilding operations include the construction and sale of singlefamily attached and detached homes and to a lesser extent multilevel residential buildings as well as the purchase development and sale of re sidential land dire ctly and through unc onsolidated entities in which we hav e inv estm ents Revenue Recognition Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowner the new hom eowner s initial and continuing investment is adequate to demonstrate a commitment to pay for the home the new hom eowner s receivable is not subject to future subordination and the Company does not have a substantial continuing involvement with the new home in accordance with SFAS No 66 Accoun ngfar Sales afReal Estate SFAS 66 Revenues from sales of land are 19 11 ABC Co began operations on 112008 It engaged in the following transactions during 2008 Date Description 112008 Issued 10000 shares of 1 common stock at 50 per share 112008 Bought widget manufacturing machine for 100000 For GAAP purposes machine is depreciated under straightline method over a 5 year useful life 0 salvage value 112008 Hired 3 employees 212008 Invested 10000 in a corporate bond 11200812312008 Manufactured 2000000 widgets at a cost of 200 each 11200812312008 Sold 1750000 widgets at a price of 600 each cash sales 11200812312008 Sold 150000 widgets at a price of 600 each credit sales 11200812312008 Paid 5000000 in salaries and other operating expenses 11200812312008 Received 1000 interest in cash on the corporate bond 12312008 Amount uncollected on credit sales 180000 12312008 Amount of operating expenses due but unpaid 250000 For tax purposes 1 revenues and operating expenses are reported on the cash basis rather than the accrual basis and 2 the cost of the widget machine is expensed in full in the year of acquisition Based on these facts prepare the 2008 income statement and the 12312008 classi ed balance sheet using GAAP ignore income tax expense Then prepare corresponding income statements and balance sheets under tax accounting principles Finally prepare a schedule that reconciles GAAP income to taxable income Topic 19 2 Interperiod Allocations Readings 1 Textbook pages 949962 Activities 19 21 Part 1 Using the facts for the problem in 1911 prepare the GAAP 2008 income statement and the 12312008 balance sheet after preparing the appropriate adjustment to re ect current and deferred taxes Assume that current and future tax rates are 30 and the company is expected to be pro table in all future years Assume the bonds are classified as heldtomaturity For tax purposes 1 revenues and operating expenses are reported on the cash basis rather than the accrual basis and 2 the cost of the widget machine is expensed in full in the year of acquisition Cash Accounts receivable Inventory Total current assets Property plant and equipment Accumulted depreciation Net PPE Investment in held to maturity bonds Total assets Accounts payable Common stock Paidin capital in excess of par Retained earnings Total assets and liabilities Sales reve nue Cost of goods sold Gross profit Operating expenses Depreciation expense interest reven ue Net income Reconciliation GAAP pretax excess tax over book depreciation conversion to cash basis Taxable income GAAP 2611000 180000 200000 2991000 100000 20000 80000 10000 3081000 250000 10000 490000 2331000 3081000 11400000 3800000 7 600000 5250000 20000 1000 2331000 2331000 80000 70000 2321000 Tax adjustments 180000 a 20000 b 250000 c 180000 a 250000 c 20000 b 100000 d 100000 d Tax 2611000 0 200000 2811000 100000 100000 0 10000 2821000 0 10000 490000 2321000 2821000 1 1220000 3800000 7420000 5000000 100000 1 000 2321000 Bookl Tax Difference in AampL 0 180000 GAAP BV gtTax BV 0 80000 GAAP BV gtTax BV 0 250000 GAAP BV gtTax BV 0 0 GAAP BVgtTAX BV GAAP BVltTAX BV Asset Taxable TD Deductible TD Liability Deductible TD Taxable TD Taxable TD gt Deferred tax liability Deductible TD gt Deferred tax asset Comparison of GAAP and TAX book values of A amp L to identify BookTax GAAP Tax Difference Cash 2611000 2611000 Accounts receivable 180000 0 180000 GAAP BV gtTax BV implies taxable temporary difference Inventory 200000 200000 0 Total current assets 2991000 2811000 Property plant and equipment 100000 100000 Accumulted depreciation 20000 100000 Net PPE 80000 0 80000 GAAP BV gtTax BV implies taxable temporary difference Investment in held to maturity bonds 10000 10000 0 Total assets 3081000 2821 000 Accounts payable 250000 0 250000 GAAP BV gtTax BV implies deductible temporary difference Common stock 10000 10000 0 Paidin capital in excess of par 490000 490000 0 Retained earnings 2331000 2321000 Total assets and liabilities 3081000 2821000 Pool of temporary differences at 123108 Deductible Taxable Accounts receivable 180000 Net PPE 80000 Accounts payable 250000 Deferred tax liabilities Taxable TD Tax rate Deferred tax liability Accounts receivable 180000 3000 54 000 Net PPE 80000 3000 24000 Deferred tax asset Deductible TD Tax rate Deferred tax asset Accounts payable 250000 3000 75000 Classification of deferred tax balance sheet accounts Deferred tax items arising from taxbook difference in current assetsliabilities Amount Accounts receivable 54000 DTL Accounts payable 75000 DTA net 21000 net DTA Deferred tax items arising from taxbook difference in noncurrent assetsliabilities Amount net PPE 24000 DTL AJE Deferred tax asset current 21000 Deferred tax liability noncurrent 24 000 Income tax expense deferred 3000 entry to record deferred taxes Income tax expense current 696300 Income tax payable 696300 Cash Accounts receivable lnvento Deferred tax asset Total current assets Property plant and equipment Accumulted depreciation Net PPE Investment in held to maturity bonds Total assets Accounts payable lncome taxes payable Total current liabilities Deferred tax liability Common stock Paidin capital in excess of par Retained earnings Total assets and liabilities Sales revenue Cost of goods sold Gross profit Operating expenses Depreciation expense interest revenue Income tax expense current Income tax expense deferred Net income 19 21 Part II Unadjusted GAAP 2611000 180000 200000 2991000 100000 20000 80000 10000 3081000 250000 250000 10000 490000 2331000 3081000 11400000 3800000 7600000 5250000 20000 1000 2331000 AJ ES DR 21000 696300 3000 CR 696300 24000 Adjusted GAAP 2611000 180000 200000 21000 3012000 100000 20000 80000 10000 3102000 250000 696300 946300 24000 10000 490000 1631700 3102000 11400000 3800000 7600000 5250000 20000 1000 696300 3000 1631700 Assume that in 2009 ABC Inc reported p the following Sales of 12350000 Cost of goods sold of 5700000 Operating expenses of 3970000 Depreciation expense 20000 Accounts receivable at 12312009 of 250000 Accounts payable at 12312009 of 270000 Interest revenue on corporate bond of 1000 Based on these facts prepare the bottom portion of the 2009 income statement starting with the line PretaX earnings Also determine the amount and classi cation of deferred taX balance sheet accounts at 12312009 Pretax 2661000 excess book over tax depreciation 20000 convert to cash 12312009 12312008 Change increase in AR 70000 AR 250000 180000 70000 increase in AP 20000 AP 270000 250000 20000 Taxable income 2631000 30000 tax rate income tax expense current 789300 GAAP BV Tax BV Taxable TD Deductible TD Tax rate DT asset DT liab Net PPE 60000 0 60000 03 18000 noncurrent Accounts receivable 250000 0 250000 03 75000 current Accounts payable 270000 0 270000 03 81000 current net current DT asset of 81000750006000 net noncurrent DT liab of 18000 unadjusted adjusted required 12312009 12312009 AJE net current DT asset 21000 6000 15000 net noncurrent DT liab 24000 18000 6000 balances from end of last year AJE income tax expense deferred 9000 net current DT asset 15000 net noncurrent DT liab 6000 20 21 Redo 2011 with the following modi cations Modi cation the postretirement bene t plan is NOT a pension plan but is a health bene t plan The company promises to provide health insurance at no charge to any retired employee who provides at least 20 years of employment with the company The company forecasts that it will cost 5000 annually per employee to purchase health insurance for each of the 3 employees during their retirement years assuming a constant 5000 per employee is an obvious simpli cation All 3 employees will be eligible to retire with full health bene ts on 1128 which is the 20th anniversary of their employment On that date Emeka will celebrate his 53rdbi1thday Allison her 48th birthday and Jose his 40th birthday The company expects that each of the 3 employees will retire at age 65 The company s actuary predicts that someone who lives to age 65 can expect to live another 20 years on average Consistent with industry practice the health bene t plan is unfunded ie there is no trust fund to which the company contributes cash The present value ofthe obligation to pay future health care costs as of 12312008 is 2212805 determined as follows A B C AXBXC Age Date Yrs PVADin PVSSin Annual Present at Turn Until i06 i06 Insurance Value Birthdate 12l31l2008 Age 65 Retirement n20 nyrs until retirement Premium 12l31l2008 Jose 111988 21 112053 44 121581 00770091 500000 468142 Allison 111980 29 112045 36 121581 0122741 500000 746149 Emeka 111975 34 112040 31 121581 0164255 500000 998514 2212805 In the vernacular of Chapter 20 the 2212805 is called the expected postretirement bene t obligation EPBO The portion of the EPBO that is attributed to the employee s service rendered to date is called the accumulated postretirement bene t obligation APBO The APBO is calculated by multiplying the EPBO by the ratio of service years todateattribution period The attribution period is the number of years between the time the employee is hired and the date the employee rst becomes eligible to receive postretirement health care bene ts In our case all 3 employees become eligible to receive postretirement health care bene ts on 112028 which is the 20Lh anniversary of their employment Thus the attribution period is 112008 12312027 which of course is 20 years So the APBO at 12312008 is calculated by multiplying the EPBO at 12312008 2212805 times 120 1106 The difference between the APBO and MV of trust fund assets if any is the funded status of the plan and this is the amount that must be reported on the balance sheet as either prepaid postretirement bene ts if overfunded or postretirement bene t obligation if underfunded Since the plan is unfunded no trust fund created the plan is underfunded by APBOMV 11060 1106 This is the amount we want to show as on the 123 1 2008 balance sheet as a postretirement bene t obligation Postretirement bene t expense is calculated exactly the same as pension expense Speci cally postretirement bene t expense service cost interest cost 7 expected return on plan assets amortization of prior service cost amortization of net gainslosses Just as we did for pensions we ll examine the activity in the APBO during the year to identify the components of Postretirement bene t expense APBO12312008 APBO112008 service cost interest cost 7 health care bene ts paid 110601106070 There is no interest cost because the APBO at 112008 was zero Also no retirees so no health care bene ts paid So postretirement bene t expense for 2008 is simply 1106 AJE at 12312008 Postretirement bene t expense 1106 Postretirement bene t obligation 1106 Now lets roll forward another year and do the analysis for 12312009 The present value ofthe obligation to pay future health care costs as of 12312009 is 2345571 determined as follows A B C AXBXC Age Date Yrs PVADin PVSSin Annual Present at Turn Until i06 i06 Insurance Value Birthdate 12312009 Age 65 Retirement n20 nyrs until retirement Premium 12312008 Jose 111988 22 112053 43 121581 0081629624 500000 496231 Allison 111980 30 112045 35 121581 0130105218 500000 790916 Emeka 111975 35 112040 30 121581 0174110131 500000 1058424 2345571 The APBO at 12312009 is calculated by multiplying the EPBO at 12312009 2345571 times 220 2346 APBO12312009 APBO12312008 service cost interest cost 7 health care bene ts paid 23451106 service cost interest cost 7 health care bene ts paid Interest cost APBO12312008 x 06 66 Service cost 1173 postretirement bene t expense for 2009 1173 66 1239 AJE at 12312009 Postretirement bene t expense 1239 Postretirement bene t obligation 1239 Finally except for the fact that service and interest cost arises from the APBO rather than the PBO as in the case of pensions everything else you learned in quot for pensions applies to the 39 for postretirement health care bene ts
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