Lesson 6, cont...
PERIOD
1 2 3 4
Bond interest: Two year semiannual bond w/ par value of $500 and a stated rate of 7% was priced to yield 8%. -Calc the issue price, find the pres value of both lump-sum principle pymt of $500 and the interest stream of $35 per year. - Pres val of principle = $427 - Pres val of interest stream = $64 BEGINNING INTEREST INTEREST ENDING EXPENSE PAYMENT BALANCE BALANCE - Issue price = $491
$491.00 $493.25 $495.50 $497.75
$19.75 $19.75 $19.75 $19.75
$17.50 $17.50 $17.50 $17.50
EFFECTIVE RATE = 4%
$493.25 $495.50 $497.75 $500.00
STATED RATE = 3.5%
Record first semi-annual interest payment Disc on Bonds Pyble Interest Expense Cash bal 9.00 19.75 17.50 2.25 BALANCE SHEET ASSETS = LIABILITIES + EQUITY
Interest Expense Cash Bonds Payable
-19.75
Issue 3000 shares of common stock for $15,000 15,000 Cash 15,000 Common stock Cash 15k
Assets = Liabilities + Equity +15,000 +15,000
Pay $250 for advertising Advertising Expense Cash
Common Stock 15k
Asset Amount Liability Equity Revenue Expense Amount Dividends Amount Totals Total DRs
Assets = Liabilities + Equity +2,000 +2,000
250
Assets = Liabilities + Equity -250 -250
Pay $1,500 in dividends Dividends Cash
Assets = Liabilities + Equity -1,500 -1,500
1,500
2,000
Equipment depreciation of $600 per month Depreciation Expense 600 600 Accumulated Depreciation
Assets = Liabilities + Equity -2,000 +2,000
Cash 2k
Credit
R=revenue E=expense A=asset Net sales = Credit sales - Sales returns & allowances L=liability Net Book Value = Cost - Accumulated Depreciation SE=Stockhld eq
Net income = Revenue - Expenses Retained Earnings = Net Income - Dividends
ITEMS, STATEMENTS, & ACCOUNTS
IS=income statement | RE=retained earnings | BS=balance sheet
-Freedom from Error
Dividends Cash 1.5k 1.5k Unearned SVC Revenue Revenue 2k 2k
Depreciation Accum Assets = Liabilities + Equity Expense Deprec 600 600 -600 -600
STATEMENT ACCOUNT
Retained Earnings Equipment Common Stock Unearned Revenue Sales Rent Expense Inventory
BS, RE BS BS BS IS IS BS
SE A SE L R E A
Aging of Bad debt expense is a plug to force Accounts allowance for bad Receivable debt to the proper balance
Allowance for Bad Debts is calculated based on balance in Accounts Receivable
Depreciation Expense = Asset Cost - Salvage Value Estimated Useful Life
Acquire PP&E +10,000 Year 1 depreciation Year 2 depreciation Year 3 depreciation Balances
2
Increase on the Credit Side Debit Side
Realized
*General Rule Recognition @ time of sale provides a uniform/reasonable test Recognition Principle: Revenue should be recorded when a resource has been earned
Receivable = Asset
D
C
Allowance method | Bad Debt Expense (BDE) Recognize BDE in the period of sale by estimating doubtful accounts -Record estimate in contra-asset acct "Allowance for Doubtful Accts"
-3,000 -3,000 -3,000
+10,000 -9,000 Double Declining Balance
-9,000
Depreciation Expense = Net Book Value * 2 Estimated Useful Life OR Determine by taking the straight-line rate of depreciation and double it. Example: Asset w/ 4-year life = straight-line rate 25%, calc'd by 100%/4years. The straight-line rate doubled = 50%. Asset w/ a 5-year life would = 20% straight-line * 2 = 40%. Doubled rate is then multiplied by Net Book Value: Depreciation Expense = Depreciation rate * Net Book Value -DO NOT REDUCE! cost by = (Straight-line rate *2) * (Cost - Accumulated Depreciation) salvage value -STOP DEPRECIATING when salvage value is reached BALANCE SHEET ASSETS PP& E ACCUM. DEPR
INCOME STATEMENT DEPR. EXPENSE
Acquire PP&E +10,000 Year 1 depreciation Year 2 depreciation Year 3 depreciation
-6,667 -2,222 -111
-6,667 -2,222 -111
Balances
-9,000
-9,000
+10,000
Natural Resources
Net Book Value = $1,000 Intangible Assets
-As extracted the asset is depleted and transferred to inventory -As sold the expense is Xferred to income statement as COGS Exp
-Lack physical existence -Not financial instruments -Normally classified as long-term assets
Percentage of sales method
Estimate results in Bad Debt Expense
Bad debt is estimated as a % of credit sales that occured during the period -Percent is based on historical trends & company policies
-Estimate results in balance of Aging of AR method allowable account Estimate how much of the ending balance of AR is bad debt -Bad Debt Expense is a "plug" -Amount becomes ending balance of Allowance for Bad DebtBALANCE SHEET INCOME STATEMENT -Based on the age of account making up ending bal of AR ASSETS = LIABILITIES + EQUITY REVENUE - EXPENSES = NET INCOME
Allow. for Bad Debt -4,500 Bad Debt Exp
INCOME STATEMENT DEPR. EXPENSE
-3,000 -3,000 -3,000
example
Seller has received cash or will at some point in the future (AR)
Amount the company expects to collect (GAAP Requirement)
EXAMPLES
Lower of Cost or Market When future revenue-producing ability < purch Px the inventory asset write down will reflect loss -Ensures inventory is not overvalued -Accelerates future losses to current Inc Stmt Compare historical cost (balance sheet value) to Market Value. Report the lower of the two. -Market value is cost to replace inventory today
BALANCE SHEET ASSETS PP& E ACCUM. DEPR
DETAILED EXAMPLES
Receivables Net realizable value
=1,000 =500
$10k asset has salvage of $1k, use life is 3 years =(10000 - 1000)/3 = 3000 per year
Ignores revenue recognition & matching principles Not in conformity with GAAP
Goods/services are delivered & related obligs are complete Seller has performed duties under terms of sales agreement- title has passed to buyer w/o right of return or contingencies
=-500
+1,000 +1,000 +500 +1,000 -500
+500
example
DOUBLE-ENTRY ACCOUNTING
Earned
-500
Straight-Line Depreciation
Assets = Liabilities + Equity D C D C D C
Lesson 3 | Revenue & Receivables Revenue recognition recognized/recorded when BOTH
Assets = Liabilities + Equity D C D C D C Balance Sheet Income Stmt Allowance does not Percentage % of current credit sales is matched with necessarily reflect the of credit current sales revenue receivables that are sales as bad debt expense uncollectible
Recognizes economic events when cash has been exchanged
-500
+1,000
1
For info to be relevant, it should have predictive or confirming value, & be material for the reporting entity. Revenues increase Equity Expenses decrease Equity
INCOME STATEMENT REVENUE - EXPENSES = NET INCOME
-500
-Inclusion/omission would influence judgement
Reliability, or faithful representation, is a necessity for individuals who neither have the time nor the expertise to evaluate the factual content of the information.
Recognizes economic events in the period in which they occur
BALANCE SHEET ASSETS = LIABILITIES + EQUITY
Other inventory issues
-Feedback can be used to set expectations
-Contains no errors/omissions -Does not require perfect accuracy
Lesson 2 | Accounting Building Blocks Recording transactions accounting equation Adjusting entries Accrual Cash
Inventory COGS Expense Cash Sales Revenue Totals
-Materiality
-Info cannot be manipulated; free from bias
Advertising Cash Expense 250 250
ACCT for Inventory
-Confirming value
-Includes all info necessary for user to understand
Unearned Revenue 2k
Inventory is valued using Inventory is valued using older lower acquisition Px current (higher) acquisition Px
SHEET
Lesson 5 | Fixed & Intangible Assets Property, Plant, a difference in a decision & Equip -Predictive value
economic situation -Completeness -Neutrality
BALANCE
-Predict outcomes of past, present, & future events
Primary advantage is tax benefit
Current, higher acquisition Px Older, lower acquisition Px mtchd w/ curr, higher sales px matched w/ higher sales Px
STMT
Relevance 1Info capable of making
2InfoReliability strives to faithfully represent the
Total CRs
Accounts Service Receivable Revenue 3.5k 3.5k
4
--Liabilities & Equity-A/P LT Debt Equity Total
LIFO & FIFO
-4,500
EXAMPLES
ITEM
3
Balance Sheet --Assets-Cash Inventory PPE Total
Qualitative characteristics | primary qualities (TWO)
Amount Amount Amount
Balance sheet: Reports a company's resources & claims against @ a given point in time. Income Stmt: Rev & Exp over period. Stmt of RE: Shows RE over period. Stmt of Cash Flows: use of $$ HANDY FORMULAS
Sole proprietors Partnerships Corporations LLC's
Capital market Product market Government Internal users - execs
INCOME
DETAILED EXAMPLES
Assets = Liabilities + Equity +3,500 +3,500
1,500
Beginning Cash Operating Activities Investing Activities Financing Activities Net Change in Cash Ending Cash
Trial Balance Form
Do work and leave an invoice for $3,500 Accounts Receivable 3,500 3,500 Service Revenue
Serviced pre-paid client ($2k) Unearned Revenue 2,000 Service Revenue
2
MY SIDE
=-19.75
Financial stmts Footnotes Auditors's report Mgmt's discussion & analysis (MD&A)
Stmt of Retained Earnings
Stmt of Cash Flows
2,000
250
1
Beginning RE + Net Income Ending Retained Earnings
Debit
+2.25
Receive $2,000 for future services Cash 2,000 Unearned Revenue
Income Statement Revenues -Expenses Net Income
Lesson 4 | Inventory & Payables Inventory costing methods
through
Lesson 1 | Accounting Concepts Purpose of accounting: 1) Provide financial information about 2) Reporting entities Basic financial to 3) Primary users statements (FOUR)
Record bond proceeds Cash 491.00 Bonds Payable 500.00 Disc on Bonds Pyble 9.00
INCOME STATEMENT REVENUE - EXPENSES = NET INCOME
-19.75 -17.50
STUDY GUIDE
Lesson 6
Effective/stated rates -Effective = market rate, or yield -Stated = Specified on the face of the bond.
