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Transcript of Chapter 1-1 Financial Accounting and Accounting Standards Financial Accounting and Accounting...
Chapter 1-1
Financial Accounting and Financial Accounting and Accounting StandardsAccounting Standards
Financial Accounting and Financial Accounting and Accounting StandardsAccounting Standards
Chapter Chapter
11Intermediate Accounting,
12th EditionKieso, Weygandt, and Warfield
Chapter 1-2
Financial reporting should provide information: Financial reporting should provide information: Financial reporting should provide information: Financial reporting should provide information:
(a) that is useful to present and potential investors and (a) that is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.
(a) that is useful to present and potential investors and (a) that is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.
(b) to help present and potential investors and creditors (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.
(b) to help present and potential investors and creditors (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.
(c) about the economic resources of an enterprise, the (c) about the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
(c) about the economic resources of an enterprise, the (c) about the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
Objectives of Financial AccountingObjectives of Financial AccountingObjectives of Financial AccountingObjectives of Financial Accounting
LO 4 List the objectives of financial reporting.LO 4 List the objectives of financial reporting.
Chapter 1-3
Parties Involved in Standard SettingParties Involved in Standard SettingParties Involved in Standard SettingParties Involved in Standard Setting
Four organizations:Four organizations:
• Securities and Exchange Commission (SEC)• American Institute of Certified Public
Accountants (AICPA)• Financial Accounting Standards Board (FASB)• Government Accounting Standards Board
(GASB)
LO 6 Identify the major policy-setting bodies LO 6 Identify the major policy-setting bodies and their role in the standard-setting and their role in the standard-setting process.process.
Chapter 1-4
FASB relies on two basic premises:FASB relies on two basic premises:
(1)(1) Responsive to entire economic communityResponsive to entire economic community
(2) Operate in full view of the public
Due ProcessDue ProcessDue ProcessDue Process
Step 1 = Topic placed on agenda
Step 2 = Research conducted and Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and issues Exposure Draft
Step 5 = Board evaluates responses and issues final Statement of Financial Accounting Standard
LO 6 Identify the major policy-setting bodies LO 6 Identify the major policy-setting bodies and their role in the standard-setting and their role in the standard-setting process.process.
Chapter 1-5
Issued by the FASB:Issued by the FASB:
Types of PronouncementsTypes of PronouncementsTypes of PronouncementsTypes of Pronouncements
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements
LO 6 Identify the major policy-setting bodies LO 6 Identify the major policy-setting bodies and their role in the standard-setting and their role in the standard-setting process.process.
Chapter 1-6
FASB Statements, FASB Statements, Interpretations, and Interpretations, and
Staff PositionsStaff Positions
FASB Statements, FASB Statements, Interpretations, and Interpretations, and
Staff PositionsStaff PositionsAPB OpinionsAPB OpinionsAPB OpinionsAPB Opinions CAP Accounting CAP Accounting
Research BulletinsResearch BulletinsCAP Accounting CAP Accounting
Research BulletinsResearch Bulletins
Category ACategory A (Most Authoritative)(Most Authoritative)
FASB Technical Bulletins
FASB Technical Bulletins
AICPA Industry Audit and Accounting
Guides
AICPA Industry Audit and Accounting
Guides
AICPA Statements of Position
AICPA Statements of Position
Category B
FASB Emerging Issues Task ForceFASB Emerging Issues Task Force AICPA AcSEC Practice BulletinsAICPA AcSEC Practice Bulletins
Category C
AICPA Accounting Interpretations
AICPA Accounting Interpretations
Category D (Least Authoritative)
FASB Implementation Guides
FASB Implementation Guides
Recognized Industry Practices
Recognized Industry Practices
House of GAAPHouse of GAAPHouse of GAAPHouse of GAAP
LO 7LO 7
Chapter 1-7
Concepts UnderlyingConcepts UnderlyingFinancial AccountingFinancial Accounting
Concepts UnderlyingConcepts UnderlyingFinancial AccountingFinancial Accounting
Chapter Chapter
22Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-8
Conceptual Conceptual
FrameworkFramework
Conceptual Conceptual
FrameworkFramework
NeedNeed
DevelopmentDevelopment
First Level: First Level:
Basic Basic
ObjectivesObjectives
First Level: First Level:
Basic Basic
ObjectivesObjectives
Second Level: Second Level: Fundamental Fundamental
ConceptsConcepts
Second Level: Second Level: Fundamental Fundamental
ConceptsConcepts
Third Level: Third Level: Recognition and Recognition and
MeasurementMeasurement
Third Level: Third Level: Recognition and Recognition and
MeasurementMeasurement
Basic Basic assumptionsassumptions
Basic principlesBasic principles
ConstraintsConstraints
Qualitative Qualitative characteristicscharacteristics
Basic elementsBasic elements
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
Chapter 1-9 Objective 2Objective 2
The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises.
The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises.
Development of Conceptual Development of Conceptual FrameworkFramework
Development of Conceptual Development of Conceptual FrameworkFramework
SFAC No.1 -Objectives of Financial Reporting
SFAC No.2 - Qualitative Characteristics of Accounting Information
SFAC No.3 - Elements of Financial Statements (superceded by SFAC No. 6)
SFAC No.4 - Nonbusiness Organizations
SFAC No.5 -Recognition and Measurement in Financial Statements
SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3)
SFAC No.7 -Using Cash Flow Information and Present Value in Accounting Measurements
LO 2 Describe the FASB’s efforts to construct a conceptual LO 2 Describe the FASB’s efforts to construct a conceptual framework.framework.
Chapter 1-10
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. Historical costHistorical cost
2.2. Revenue recognitionRevenue recognition
3.3. MatchingMatching
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
OBJECTIVESOBJECTIVES1. 1. Useful in investment Useful in investment
and credit decisionsand credit decisions2. 2. Useful in assessing Useful in assessing
future cash flowsfuture cash flows3. About enterprise 3. About enterprise
resources, claims to resources, claims to resources, and resources, and changes in themchanges in them
ELEMENTSELEMENTS
Assets, Liabilities, and EquityAssets, Liabilities, and EquityInvestments by ownersInvestments by ownersDistribution to ownersDistribution to ownersComprehensive incomeComprehensive incomeRevenues and ExpensesRevenues and ExpensesGains and LossesGains and Losses
Illustration Illustration 2-62-6 Conceptual Framework for Financial Reporting
First level
Second level
Third level
LO 2 Describe the FASB’s LO 2 Describe the FASB’s efforts to construct a efforts to construct a
conceptual framework.conceptual framework.
QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS
RelevanceRelevance
ReliabilityReliability
ComparabilityComparability
ConsistencyConsistency
Chapter 1-11
Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that: Financial reporting should provide information that:
(a) is useful to present and potential investors and (a) is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.
(a) is useful to present and potential investors and (a) is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.
(b) helps present and potential investors and creditors (b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.
(b) helps present and potential investors and creditors (b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.
(c) portrays the economic resources of an enterprise, the (c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
(c) portrays the economic resources of an enterprise, the (c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.
First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives
LO 3 Understand the objectives of financial LO 3 Understand the objectives of financial reporting.reporting.
Chapter 1-12
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
Second Level: Qualitative Second Level: Qualitative CharacteristicsCharacteristics
LO 4 Identify the qualitative characteristics of accounting LO 4 Identify the qualitative characteristics of accounting information.information.
Illustration 2-2Illustration 2-2 Hierarchy of Accounting Qualities
Chapter 1-13
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. Historical costHistorical cost
2.2. Revenue recognitionRevenue recognition
3.3. MatchingMatching
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
OBJECTIVESOBJECTIVES1. 1. Useful in investment Useful in investment
and credit decisionsand credit decisions2. 2. Useful in assessing Useful in assessing
future cash flowsfuture cash flows3. About enterprise 3. About enterprise
resources, claims to resources, claims to resources, and resources, and changes in themchanges in them
QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS
RelevanceRelevance
ReliabilityReliability
ComparabilityComparability
ConsistencyConsistency
ELEMENTSELEMENTS
Assets, Liabilities, and EquityAssets, Liabilities, and EquityInvestments by ownersInvestments by ownersDistribution to ownersDistribution to ownersComprehensive incomeComprehensive incomeRevenues and ExpensesRevenues and ExpensesGains and LossesGains and Losses
Illustration Illustration 2-62-6 Conceptual Framework for Financial Reporting
First level
Second level
Third levelRelevance and ReliabilityRelevance and ReliabilityRelevance and ReliabilityRelevance and Reliability
LO 4 Identify the LO 4 Identify the qualitative qualitative characteristics of characteristics of accounting accounting information.information.
Chapter 1-14
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. Historical costHistorical cost
2.2. Revenue recognitionRevenue recognition
3.3. MatchingMatching
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
OBJECTIVESOBJECTIVES1. 1. Useful in investment Useful in investment
and credit decisionsand credit decisions2. 2. Useful in assessing Useful in assessing
future cash flowsfuture cash flows3. About enterprise 3. About enterprise
resources, claims to resources, claims to resources, and resources, and changes in themchanges in them
QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS
RelevanceRelevance
ReliabilityReliability
ComparabilityComparability
ConsistencyConsistency
ELEMENTSELEMENTS
Assets, Liabilities, and EquityAssets, Liabilities, and EquityInvestments by ownersInvestments by ownersDistribution to ownersDistribution to ownersComprehensive incomeComprehensive incomeRevenues and ExpensesRevenues and ExpensesGains and LossesGains and Losses
Illustration Illustration 2-62-6 Conceptual Framework for Financial Reporting
First level
Second level
Third level
LO 4 Identify the LO 4 Identify the qualitative qualitative characteristics of characteristics of accounting accounting information.information.
Comparability and ConsistencyComparability and ConsistencyComparability and ConsistencyComparability and Consistency
Chapter 1-15
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. Historical costHistorical cost
2.2. Revenue recognitionRevenue recognition
3.3. MatchingMatching
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
OBJECTIVESOBJECTIVES1. 1. Useful in investment Useful in investment
and credit decisionsand credit decisions2. 2. Useful in assessing Useful in assessing
future cash flowsfuture cash flows3. About enterprise 3. About enterprise
resources, claims to resources, claims to resources, and resources, and changes in themchanges in them
QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS
RelevanceRelevance
ReliabilityReliability
ComparabilityComparability
ConsistencyConsistency
ELEMENTSELEMENTS
Assets, Liabilities, and EquityAssets, Liabilities, and EquityInvestments by ownersInvestments by ownersDistribution to ownersDistribution to ownersComprehensive incomeComprehensive incomeRevenues and ExpensesRevenues and ExpensesGains and LossesGains and Losses
Illustration Illustration 2-62-6 Conceptual Framework for Financial Reporting
First level
Second level
Third levelElementsElementsElementsElements
LO 5 Define the basic LO 5 Define the basic elements of elements of financial financial statements.statements.
Chapter 1-16
Third Level: Recognition and Third Level: Recognition and MeasurementMeasurement
Third Level: Recognition and Third Level: Recognition and MeasurementMeasurement
The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.”
ASSUMPTIONSASSUMPTIONS
1.1. Economic entityEconomic entity
2.2. Going concernGoing concern
3.3. Monetary unitMonetary unit
4.4. PeriodicityPeriodicity
PRINCIPLESPRINCIPLES
1.1. Historical costHistorical cost
2.2. Revenue recognitionRevenue recognition
3.3. MatchingMatching
4.4. Full disclosureFull disclosure
CONSTRAINTSCONSTRAINTS
1.1. Cost-benefitCost-benefit
2.2. MaterialityMateriality
3.3. Industry practiceIndustry practice
4.4. ConservatismConservatism
LO 6 Describe the basic assumptions of accounting.LO 6 Describe the basic assumptions of accounting.
Chapter 1-17
The Accounting Information The Accounting Information SystemSystem The Accounting Information The Accounting Information SystemSystem
Chapter Chapter
33Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-18
Accounting Information Accounting Information
SystemSystem
Accounting Information Accounting Information
SystemSystem
Basic terminologyBasic terminology
Debits and creditsDebits and credits
Basic equationBasic equation
Financial statements and Financial statements and ownership structureownership structure
The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle
Identification and recordingIdentification and recording
JournalizingJournalizing
PostingPosting
Trial balanceTrial balance
Adjusting entriesAdjusting entries
Adjusted trial balanceAdjusted trial balance
Preparing financial Preparing financial statementsstatements
ClosingClosing
Post-closing trial balancePost-closing trial balance
Reversing entriesReversing entries
Financial statements for Financial statements for merchandisersmerchandisers
Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System
Chapter 1-19
The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle
LO 3 Identify steps in the accounting LO 3 Identify steps in the accounting cycle.cycle.
TransactionsTransactions
1. Journalization1. Journalization
6. Financial Statements6. Financial Statements
7. Closing entries7. Closing entries
8. Post-closing trail balance
8. Post-closing trail balance
9. Reversing entries9. Reversing entries
3. Trial balance3. Trial balance
2. Posting2. Posting
5. Adjusted trial balance5. Adjusted trial balance
4. Adjustments4. AdjustmentsWork SheetWork Sheet
Illustration 3-6
Chapter 1-20
Income Statement and Related Income Statement and Related InformationInformation Income Statement and Related Income Statement and Related InformationInformation
Chapter Chapter
44Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-21
Income Income
StatementStatement
UsefulnessUsefulness
LimitationsLimitations
Quality of EarningsQuality of Earnings
Format of the Format of the
Income Income
StatementStatement
Reporting Reporting
Irregular ItemsIrregular Items
Special Special
Reporting Reporting
IssuesIssues
Intraperiod tax Intraperiod tax allocationallocation
Earnings per shareEarnings per share
Retained earnings Retained earnings statementstatement
Comprehensive Comprehensive incomeincome
Discontinued Discontinued operationsoperations
Extraordinary itemsExtraordinary items
Unusual gains and Unusual gains and losseslosses
Changes in Changes in accounting accounting principlesprinciples
Changes in Changes in estimatesestimates
Corrections of Corrections of errorserrors
Income Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related Information
ElementsElements
Single-stepSingle-step
Multiple-stepMultiple-step
Condensed income Condensed income statementsstatements
Chapter 1-22
Elements of the Income StatementElements of the Income StatementElements of the Income StatementElements of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Revenues – Inflows or other enhancements of – Inflows or other enhancements of assets or settlements of its liabilities that assets or settlements of its liabilities that constitute the entity’s ongoing major or central constitute the entity’s ongoing major or central operations.operations.
SalesSales
Fee revenueFee revenue
Interest revenueInterest revenue
Dividend Dividend revenuerevenue
Rent revenueRent revenue
Examples of Revenue Accounts
Chapter 1-23
Elements of the Income StatementElements of the Income StatementElements of the Income StatementElements of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Expenses – Outflows or other using-up of assets – Outflows or other using-up of assets or incurrences of liabilities that constitute the or incurrences of liabilities that constitute the entity’s ongoing major or central operations.entity’s ongoing major or central operations.
Cost of goods soldCost of goods sold
Depreciation Depreciation expenseexpense
Interest expenseInterest expense
Rent expenseRent expense
Salary expenseSalary expense
Examples of Expense Accounts
Chapter 1-24
Elements of the Income StatementElements of the Income StatementElements of the Income StatementElements of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Gains – Increases in equity (net assets) from – Increases in equity (net assets) from peripheral or incidental transactions.peripheral or incidental transactions.
Losses - Decreases in equity (net assets) - Decreases in equity (net assets) from peripheral or incidental transactions.from peripheral or incidental transactions.
Gains and losses can result fromGains and losses can result from
sale of investments or plant assets, sale of investments or plant assets,
settlement of liabilities, settlement of liabilities,
write-offs of assets.write-offs of assets.
Chapter 1-25
Single-Step Income StatementSingle-Step Income StatementSingle-Step Income StatementSingle-Step Income Statement
LO 2 Prepare a single-step income statement.LO 2 Prepare a single-step income statement.
The single-step The single-step statement consists of statement consists of just two groupings:just two groupings:
I ncome Statement (in thousands)
Revenues:
Sales 285,000$ I nterest revenue 17,000
Total revenue 302,000 Expenses:
Cost of goods sold 149,000 Advertising expense 10,000 Depreciation expense 43,000 I nterest expense 21,000 I ncome tax expense 24,000
Total expenses 247,000 Net income 55,000$
Earnings per share 0.75$
RevenuesRevenues
ExpensesExpenses
Net IncomeNet Income
Single- Single- StepStep
Single- Single- StepStep
No distinction between No distinction between OperatingOperating and and Non-Non-operatingoperating categories. categories.
Chapter 1-26
Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
The The presentation presentation divides information divides information into major into major sections. sections.
The The presentation presentation divides information divides information into major into major sections. sections.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Gross profi t 136,000
Operating expenses:
Advertising expense 10,000 Depreciation expense 43,000
Total operating expense 53,000 I ncome from operations 83,000
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 Net income 55,000$
Earnings per share 0.75$
1. Operating 1. Operating SectionSection
1. Operating 1. Operating SectionSection
2. Nonoperating 2. Nonoperating SectionSection
2. Nonoperating 2. Nonoperating SectionSection
3. Income tax3. Income tax 3. Income tax3. Income tax
Chapter 1-27
Irregular items fall into six categories
Discontinued operations.
Extraordinary items.
Unusual gains and losses.
Changes in accounting principle.
Changes in estimates.
Corrections of errors.
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-28
Discontinued Operations occurs when,
(a) company eliminates the
results of operations and
cash flows of a component.
(b) there is no significant continuing involvement in that component.
Amount reported “net of tax.”
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-29
Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Discontinued operations:
Loss from operations, net of tax 315
Loss on disposal, net of tax 189
Total loss on discontinued operations 504
Net income 54,496$
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Discontinued Discontinued
Operations are Operations are reported after “Income reported after “Income
from continuing from continuing operations.”operations.”
Previously labeled as “Net Income”.
Moved to
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-30
Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities.
Extraordinary Item must be both of an
Unusual Nature and Occur Infrequently
Company must consider the environment in which it operates.
Amount reported “net of tax.”
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-31
Not Extraordinary Not Extraordinary Not Extraordinary Not Extraordinary
Write-down or write-off of receivables, inventory, etc.
Gains or losses from exchange or translation of foreign currencies.
Gains or losses on disposal of business segment.
Gains or losses from sale or abandonment of productive assets.
Effects of a strike. Adjustment of accruals on long-term
contracts.
Chapter 1-32
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Extraordinary loss, net of tax 539
Net income 54,461$
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Extraordinary Items Extraordinary Items
are reported after are reported after “Income from “Income from
continuing continuing operations.”operations.”
Previously labeled as “Net Income”.
Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items
Moved to
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-33
Unusual Gains and Losses
Material items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.”
Examples can include:
Write-downs of inventoriesForeign exchange transaction gains and losses
The Board prohibits net-of-tax treatment for these items.
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-34
Changes in Accounting Principles
Retrospective adjustment
Cumulative effect adjustment to beginning retained earnings
Approach preserves comparability
Examples include: change from FIFO to average cost
change for construction contract from the percentage-of-completion to the completed-contract method
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-35
Changes in Estimate
Accounted for in the period of change and future periods
Not handled retrospectively
Not considered errors or extraordinary items
Examples include: Useful lives and salvage values of
depreciable assets Allowance for uncollectible receivables Inventory obsolescence
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-36
Corrections of Errors
Result from: mathematical mistakes mistakes in application of accounting
principles oversight or misuse of facts
Corrections treated as prior period adjustments
Adjustment to the beginning balance of retained earnings
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 1-37
An important business indicator.
Measures the dollars earned by each share of common stock.
Must be disclosed on the the income statement.
Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share
LO 6 LO 6 Identify where to report earnings per share information.Identify where to report earnings per share information.
Net income - Preferred dividends
Weighted average number of shares outstanding
Calculation
Chapter 1-38
All changes in equity during a period except those All changes in equity during a period except those resulting from investments by owners and resulting from investments by owners and distributions to owners.distributions to owners.
Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Gross profi t 136,000
Operating expenses:
Advertising expense 10,000 Depreciation expense 43,000
Total operating expense 53,000 I ncome from operations 83,000
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 Net income 55,000$
Other Comprehensive Other Comprehensive IncomeIncome
Unrealized gains and losses on available-for-sale securities.
Translation gains and losses on foreign currency.
Plus others
+
Reported in Stockholders’ Equity
LO 8 LO 8 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Chapter 1-39
Three approaches to reporting Three approaches to reporting Comprehensive Income (SFAS No. 130, June Comprehensive Income (SFAS No. 130, June 1997):1997):
1.1. A second separate income statement;A second separate income statement;
2.2. A combined income statement of A combined income statement of comprehensive income; orcomprehensive income; or
3.3. As part of the statement of stockholders’ As part of the statement of stockholders’ equityequity
Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
LO 8 LO 8 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Chapter 1-40
Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
LO 8 LO 8 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Statement of Stockholders’ Equity (most common) Illustration 4-20Illustration 4-20
Chapter 1-41
Balance Sheet and Statement of Balance Sheet and Statement of Cash FlowsCash FlowsBalance Sheet and Statement of Balance Sheet and Statement of Cash FlowsCash Flows
Chapter Chapter
55Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-42
Balance Balance
SheetSheetStatement of Statement of
Cash FlowsCash Flows
PurposePurpose
Content and Content and formatformat
PreparationPreparation
UsefulnessUsefulness
Balance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash Flows
UsefulnessUsefulness
LimitationsLimitations
ClassificationClassification
Additional Additional information information reportedreported
Techniques of Techniques of disclosuredisclosure
Chapter 1-43 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
Chapter 1-44
Generally any monies available “on demand.”
Cash equivalents are short-term highly liquid investments that will mature within three months or less.
Any restrictions or commitments must be disclosed.
Cash
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
Illustration 5-3Illustration 5-3
Chapter 1-45
Portfolios
Short-Term Investments
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Type Valuation Classification
Held-to-Maturity
DebtAmortized
CostCurrent or Noncurrent
TradingDebt or Equity
Fair Value Current
Available- for-Sale
Debt or Equity
Fair ValueCurrent or Noncurrent
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
Chapter 1-46
Claims held against customers and others for money, goods, or services.
Accounts receivable – oral promises
Notes receivable – written promises
Major categories of receivables should be shown in the balance sheet or the related notes.
Receivables
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
Chapter 1-47
Company discloses:
basis of valuation (e.g., lower-of-cost-or-market) and
the method of pricing (e.g., FIFO or LIFO).
Inventories
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
Chapter 1-48
Payment of cash, that is recorded as an asset because Payment of cash, that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.
insuranceinsurance
suppliessupplies
advertisingadvertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
rentrent
maintenance on maintenance on equipmentequipment
Prepayments often occur in regard to:Prepayments often occur in regard to:
Prepaid Expenses
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
Chapter 1-49
Generally consists of four types:
SecuritiesSecurities
Fixed assetsFixed assets
Special fundsSpecial funds
Nonconsolidated subsidiariesNonconsolidated subsidiaries or affiliated companies.
Long-Term Investments
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Chapter 1-50
Long-Term Investments
SecuritiesSecurities SecuritiesSecurities I nvestments:
I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836
Total investments 2,696,592 Property, Plant, and Equip.
Building 1,375,778 Land 975,000
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
bonds, stock, and long-term notes
For marketable securities, management’s intent determines current or noncurrent classification.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 1-51
Property, Plant, and Equipment
Total investments 2,696,592 Property, Plant, and Equip.
Building 1,375,778 Land 975,000 Machinery and equipment 234,958 Capital leases 384,650 Leasehold improvements 175,000 Accumulated depreciation (975,000)
Total PP&E 2,170,386 I ntangibles
Goodwill 3,000,000 Patents 177,000 Trademarks 40,000
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Assets of a durable nature used in the regular operations of the business.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 1-52
Intangibles
Accumulated depreciation (975,000) Total PP&E 2,170,386
I ntangibles
Goodwill 2,000,000 Patents 177,000 Trademark 40,000 Franchises 125,000 Copyright 55,000
Total intangibles 2,397,000 Other assets
Prepaid pension costs 133,000 Def erred income tax 40,000
Total other 173,000
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Lack physical substance and are not financial instruments.
Limited life intangibles amortized.
Indefinite-life intangibles tested for impairment.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 1-53
“ Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance SheetBalance SheetBalance SheetBalance Sheet
Current Liabilities
Balance Sheet (in thousands)
Current liabilities
Notes payable 233,450$ Accounts payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 I ncome tax payable 23,400 Current maturities LT debt 121,000
Total current liabilities 569,650 Long- term liabilities
Long-term debt 979,500 Obligations capital lease 345,800 Def erred income taxes 77,909
Total long-term liabilities 2,093,859 Stockholders' equity
Chapter 1-54
“ Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”
All covenants and restrictions must be disclosed.
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance SheetBalance SheetBalance SheetBalance Sheet
Balance Sheet (in thousands)
Current liabilities
Notes payable 233,450$ Accounts payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 I ncome tax payable 23,400 Current maturities LT debt 121,000
Total current liabilities 569,650 Long- term liabilities
Long-term debt 979,500 Obligations capital lease 345,800 Def erred income taxes 77,909
Total long-term liabilities 2,093,859 Stockholders' equity
Long-Term Liabilities
Chapter 1-55
Companies usually divide equity into three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings.
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance SheetBalance SheetBalance SheetBalance Sheet
Owners’ Equity
Illustration 5-15Illustration 5-15
Chapter 1-56
Contributed CapitalContributed CapitalContributed CapitalContributed Capital
Two parts of contributed capital:Two parts of contributed capital:1.1. Capital Stock-Capital Stock- the number of shares x the the number of shares x the
par value.par value.a.a. Preferred stock-Preferred stock- usually paid a fixed annual usually paid a fixed annual
cash dividend and have rights to their cash dividend and have rights to their investment in bankruptcyinvestment in bankruptcy
b.b. Common stock-Common stock- real owners of the real owners of the corporation, have voting power, but are last corporation, have voting power, but are last in line for assets in bankruptcyin line for assets in bankruptcy
2.2. Additional paid-in capital-Additional paid-in capital- investment by investment by shareholders in excess of par value of shareholders in excess of par value of capital stock.capital stock.
Chapter 1-57
Three different activities:
Operating,
Content and Format
The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows
LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.
Investing, Financing
Illustration 5-24Illustration 5-24
Chapter 1-58
Preparation
The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows
LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.
BE 5-12 Midwest Beverage Company reported the following items in the most recent year.
Activity
OperatingFinancingOperatingOperatingInvesting
OperatingFinancing
Required: Prepare a Statement of Cash Flows
Chapter 1-59
PreparationStatement of Cash Flow (in thousands)
Operating activities
Net income 40,000$ I ncrease in accounts receivable (10,000) I ncrease in accounts payable 5,000 Depreciation expense 40,000
Cash flow f rom operations 75,000 I nvesting activities
Purchase of equipment (8,000) Financing activities
Proceeds f rom notes payable 20,000 Dividends paid (5,000)
Cash flow f rom financing 15,000 I ncrease in cash 82,000$
The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows
LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.
Noncash credit to revenues.
Noncash charge to expenses.
Chapter 1-60
Issuance of common stock to purchase assets.Conversion of bonds into common stock.Issuance of debt to purchase assets.Exchanges on long-lived assets.
Additional Information ReportedAdditional Information ReportedAdditional Information ReportedAdditional Information Reported
Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes.
Examples include:
LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.
Chapter 1-61
Understanding Cash and ReceivablesUnderstanding Cash and ReceivablesUnderstanding Cash and ReceivablesUnderstanding Cash and Receivables
ChapteChapter r
77Intermediate Accounting12th Edition
Kieso, Weygandt, and Warfield
Chapter 1-62
Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables
What is cash?What is cash?
Management and Management and control of cashcontrol of cash
Reporting cashReporting cash
Summary of cash-Summary of cash-related itemsrelated items
CashCash ReceivablesReceivables
Recognition of accounts Recognition of accounts receivablereceivable
Valuation of accounts Valuation of accounts receivablereceivable
Recognition of notes Recognition of notes receivablereceivable
Valuation of notes Valuation of notes receivablereceivable
Disposition of accounts Disposition of accounts and notes receivableand notes receivable
Presentation and Presentation and analysisanalysis
Chapter 1-63
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts LO 4 Explain accounting issues related to recognition of accounts receivable.receivable.
Cash DiscountsCash Discounts
Inducements for Inducements for prompt paymentprompt payment
Gross Method vs. Gross Method vs. Net MethodNet Method
Cash DiscountsCash Discounts
Inducements for Inducements for prompt paymentprompt payment
Gross Method vs. Gross Method vs. Net MethodNet Method Payment
terms are 2/10, n/30
Chapter 1-64
Example:Example: On June 3, Benedict Corp. sold to Chester On June 3, Benedict Corp. sold to Chester Inc., merchandise having a sale price of $5,000 with Inc., merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 12, terms of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Chester. Prepare required journal entries assuming Benedict records the sale at Benedict records the sale at netnet..
Sales
4,900
Accounts receivable 4,900June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts LO 4 Explain accounting issues related to recognition of accounts receivable.receivable.
Accounts receivable
4,900
Cash 4,900June 12
Net Method
Chapter 1-65
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Allowance MethodAllowance MethodLosses are Estimated:
Percentage-of-salesPercentage-of-receivables
Methods of Accounting for Uncollectible Accounts
Direct Write-OffDirect Write-OffTheoretically
undesirable:no matchingreceivable not stated at net realizable value
Chapter 1-66
Income Stateme
nt Approach
Income Stateme
nt Approach
Balance Sheet
Approach
Balance Sheet
Approach
Percentage of SalesPercentage of Sales
Matching
Sales --- Bad Debt Expense
Percentage of ReceivablesPercentage of Receivables
Net Realizable Value
Receivables - Allowance for Bad Debt
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Chapter 1-67
Example DataExample Data
Credit salesCredit sales $500,000 $500,000
Estimated % of credit sales not collectedEstimated % of credit sales not collected 1.25%1.25%
Accounts receivable balanceAccounts receivable balance $72,500 $72,500
Estimated % of A/R not collectedEstimated % of A/R not collected 8% 8%
Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:
Case ICase I $150 (credit balance)$150 (credit balance)
Case 2Case 2 $150 (debit balance)$150 (debit balance)
Example DataExample Data
Credit salesCredit sales $500,000 $500,000
Estimated % of credit sales not collectedEstimated % of credit sales not collected 1.25%1.25%
Accounts receivable balanceAccounts receivable balance $72,500 $72,500
Estimated % of A/R not collectedEstimated % of A/R not collected 8% 8%
Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:
Case ICase I $150 (credit balance)$150 (credit balance)
Case 2Case 2 $150 (debit balance)$150 (debit balance)
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Chapter 1-68
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
Accounts receivableAccounts receivable $ 72,500$ 72,500
Estimated percentageEstimated percentage x 8%x 8%
Desired balanceDesired balance $ 5,800$ 5,800
======================================================================================================
What should the ending balance be for the allowance What should the ending balance be for the allowance account? -- account? -- Case 1Case 1 and and Case 2Case 2
Accounts receivableAccounts receivable $ 72,500$ 72,500
Estimated percentageEstimated percentage x 8%x 8%
Desired balanceDesired balance $ 5,800$ 5,800
======================================================================================================
What should the ending balance be for the allowance What should the ending balance be for the allowance account? -- account? -- Case 1Case 1 and and Case 2Case 2
Percentage of Receivables
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Chapter 1-69
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
Actual balance (credit) (150) 150
Desired balance
(5,800) (5,800)
Adjustment (5,650) (5,950)
Journal entry – Case 1:
Allowance for doubtful accounts
5,650
Bad debt expense 5,650
Case 1 Case 2
Percentage of Receivables
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Chapter 1-70
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
Actual balance (credit) (150) 150
Desired balance
(5,800) (5,800)
Adjustment (5,650) (5,950)
Journal entry – Case 2:
Allowance for doubtful accounts
5,950
Bad debt expense 5,950
Case 1 Case 2
Percentage of Receivables
LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts receivable.receivable.
Chapter 1-71 LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes
receivable.receivable.
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
Short-Term Long-Term
Record at Face Value,
less allowance
Record at Present Value
of cash expected to be collected
Interest Rates
Stated rate = Market rate
Stated rate > Market rate
Stated rate < Market rate
Note Issued at
Face Value
Premium
Discount
Chapter 1-72
Amortization ScheduleNon-Interest-Bearing Note
LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes receivable.receivable.
6% CarryingCash Interest Discount Amount
Received Revenue Amortized of NoteDate of issue 74,726$ End of yr. 1 - 4,484$ 4,484$ 79,210 End of yr. 2 - 4,753 4,753 83,962 End of yr. 3 - 5,038 5,038 89,000 End of yr. 4 - 5,340 5,340 94,340 End of yr. 5 - 5,660 5,660 100,000
- 25,274 25,274
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
Chapter 1-73
Journal Entries for Non-Interest-Bearing note
Present value of Principal $74,726
Date Account Title Debit Credit
J an. yr. 1 Notes receivable 100,000
Discount on notes receivable 25,274
Cash 74,726
Dec. yr. 1 Disount on notes receivable 4,484
I nterest revenue 4,484
($74,726 x 6%)
LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes receivable.receivable.
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
Chapter 1-74
Amortization ScheduleInterest-Bearing Note
LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes receivable.receivable.
10% CarryingCash Interest Discount Amount
Received Revenue Amortized of NoteDate of issue 92,418$ End of yr. 1 8,000 9,242$ 1,242$ 93,660 End of yr. 2 8,000 9,366 1,366 95,026 End of yr. 3 8,000 9,503 1,503 96,529 End of yr. 4 8,000 9,653 1,653 98,182 End of yr. 5 8,000 9,818 1,818 100,000
40,000 47,582 7,582
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Chapter 1-75
Journal Entries for Interest-Bearing Note
Date Account Title Debit Credit
J an. yr. 1 Notes receivable 100,000
Discount on notes receivable 7,582
Cash 92,418
Dec. yr. 1 Cash 8,000
Disount on notes receivable 1,242
I nterest revenue 9,242
($92,418 x 10%)
LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes receivable.receivable.
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Chapter 1-76
Factors are finance companies or banks that buy receivables from businesses for a fee.
LO 8 Explain accounting issues related to LO 8 Explain accounting issues related to disposition of accounts and notes disposition of accounts and notes receivable.receivable.
Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables
Illustration 7-16Illustration 7-16
Chapter 1-77
Sale Without Recourse
Purchaser assumes risk of collection
Transfer is outright sale of receivable
Seller records loss on sale
Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances
LO 8 Explain accounting issues related to LO 8 Explain accounting issues related to disposition of accounts and notes disposition of accounts and notes receivable.receivable.
Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables
Sale With Recourse
Seller guarantees payment to purchaser
Financial components approach used to record transfer
Chapter 1-78
The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer. Three conditions must be met:
LO 8 Explain accounting issues related to LO 8 Explain accounting issues related to disposition of accounts and notes disposition of accounts and notes receivable.receivable.
Secured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus Sale
Illustration 7-21Illustration 7-21
Chapter 1-79
Accounting and Reporting for Inventory: Accounting and Reporting for Inventory: The BasicsThe BasicsAccounting and Reporting for Inventory: Accounting and Reporting for Inventory: The BasicsThe Basics
Chapter Chapter
88Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-80
InventoryClassificati
onand Control
Physical Goods
Included inInventory
Costs Included
in Inventory
Cost Flow Assumptio
ns
LIFO: Special Issues
ClassificationClassification
ControlControl
Basic Basic inventory inventory valuation valuation issuesissues
Basis for Selection
Goods in Goods in transittransit
Consigned Consigned goodsgoods
Special sales Special sales agreementsagreements
Inventory Inventory errorserrors
Product costsProduct costs
Period costsPeriod costs
Purchase Purchase discountsdiscounts
Specific Specific identificationidentification
Average costAverage cost
FIFOFIFO
LIFOLIFO
LIFO reserveLIFO reserve
LIFO LIFO liquidationliquidation
Dollar-value Dollar-value LIFOLIFO
Comparison of Comparison of LIFO LIFO approachesapproaches
Advantages of Advantages of LIFOLIFO
Disadvantages Disadvantages of LIFOof LIFO
Summary of Summary of inventory inventory valuation valuation methodsmethods
Valuation of Inventories:Valuation of Inventories:Cost-basis ApproachCost-basis ApproachValuation of Inventories:Valuation of Inventories:Cost-basis ApproachCost-basis Approach
Chapter 1-81
Features:
Inventory Classification and SystemsInventory Classification and SystemsInventory Classification and SystemsInventory Classification and Systems
LO 2 Distinguish between perpetual and periodic inventory LO 2 Distinguish between perpetual and periodic inventory systems.systems.
Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in, purchase returns and allowances, and purchase discounts are recorded in Inventory.
3. Cost of goods sold is debited and Inventory is credited for each sale.
4. Physical count done to verify Inventory balance.The perpetual inventory system provides a
continuous record of Inventory and Cost of Goods Sold.
Chapter 1-82
Features:
Inventory Classification and SystemsInventory Classification and SystemsInventory Classification and SystemsInventory Classification and Systems
LO 2 Distinguish between perpetual and periodic inventory LO 2 Distinguish between perpetual and periodic inventory systems.systems.
Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:Beginning inventory
$ 100,000Purchases, net
800,000Goods available for sale
900,000Ending inventory
125,000Cost of goods sold
$ 775,000
Chapter 1-83
|
1. Beginning inventory (100 units at $7 = 700)|
2. Purchase 900 units at $7: |
|
Inventory 6,300 | Purchases 6,300Accounts payable 6,300 | Accounts payable 6,300
|
3. Sale of 600 untis at $14: |
|
Accounts receivable 8,400 | Accounts receivable 8,400Sales 8,400 | Sales 8,400
Cost of goods sold 4,200 |
Inventory 4,200 |
|
4. Adjusting entries (ending inventory = 400 units @ $7 = $2,800)|
No Entry Necessary | Inventory 2,100| Cost of goods sold 4,200| Purchases 6,300
Inventory Classification and SystemsInventory Classification and SystemsInventory Classification and SystemsInventory Classification and Systems
LO 2 Distinguish between perpetual and periodic inventory LO 2 Distinguish between perpetual and periodic inventory systems.systems.
Perpetual System Periodic System vs.
Chapter 1-84
A company should record purchases when it obtains legal title to the goods.
Physical Goods Included in InventoryPhysical Goods Included in InventoryPhysical Goods Included in InventoryPhysical Goods Included in Inventory
LO 2 Distinguish between perpetual and periodic inventory LO 2 Distinguish between perpetual and periodic inventory systems.systems.
Physical Goods
Special Consideration:
Goods in Transit (FOB shipping point, FOB destination)
Consigned goods
Sales with buyback agreement
Sales with high rates of return
Sales on installment
Inventory errors
Chapter 1-85
Costs Included in InventoryCosts Included in InventoryCosts Included in InventoryCosts Included in Inventory
LO 4 Understand the items to include as inventory cost.LO 4 Understand the items to include as inventory cost.
Product Costs - costs directly connected with bringing the goods to the buyer’s place of business and converting such goods to a salable condition.
Period Costs – generally selling, general, and administrative expenses.
Purchase Discounts – Gross vs. Net Method
Chapter 1-86
|
Purchase cost $20,000, terms 2/10, net 30:|
Purchases 20,000 | Purchases 19,600Accounts payable 20,000 | Accounts payable 19,600
|
Invoices of $15,000 are paid within discount period:|
Accounts payable 15,000 | Accounts payable 14,700Purchase discounts 300 | Cash 14,700Cash 14,700 |
|
Invoices of $5,000 are paid after discount period:|
Accounts payable 5,000 | Accounts payable 4,900Cash 5,000 | Purchase discount lost 100
| Cash 5,000
Treatment of Purchase DiscountsTreatment of Purchase DiscountsTreatment of Purchase DiscountsTreatment of Purchase Discounts
Gross Method Net Method vs.
LO 4 Understand the items to include as inventory cost.LO 4 Understand the items to include as inventory cost.
Chapter 1-87
Answer: Method adopted should be one that most clearly reflects periodic income.
Cost Flow Assumption Adopted
Physical Movement of Goods
does not need to equal
FIFO
What Cost Flow Assumption to Adopt?What Cost Flow Assumption to Adopt?What Cost Flow Assumption to Adopt?What Cost Flow Assumption to Adopt?
LIFO
Average Cost
Specific Identification
LO 5 Describe and compare the cost flow LO 5 Describe and compare the cost flow assumptions used to account for assumptions used to account for inventories.inventories.
Chapter 1-88
Cost Flow AssumptionsCost Flow AssumptionsCost Flow AssumptionsCost Flow Assumptions
LO 5 Describe and compare the cost flow LO 5 Describe and compare the cost flow assumptions used to account for assumptions used to account for inventories.inventories.
FIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Total
Jun 1 300 300
Jun 10 (200) (200)
Jun 11 800 800
Jun 15 (500) (100) (400)
Jun 20 500 500
Jun 27 (300) (300)
- 100 500 600
Cost 10$ 12$ 13$
600 -$ 1,200$ 6,500$ 7,700$
Calculation of Cost of Goods Sold: Units Dollars
Beg. inventory 300 3,000$
Purchases 1,300 16,100
Goods available 1,600 19,100
Ending inventory (600) (7,700)
COGS 1,000 11,400$
Perpetual Perpetual InventoryInventoryPerpetual Perpetual InventoryInventory
FIFO MethodFIFO MethodFIFO MethodFIFO Method
+
Chapter 1-89
Cost Flow AssumptionsCost Flow AssumptionsCost Flow AssumptionsCost Flow Assumptions
LO 5 Describe and compare the cost flow LO 5 Describe and compare the cost flow assumptions used to account for assumptions used to account for inventories.inventories.
FIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Total
Jun 1 300
Jun 10 (200)
Jun 11 800 100
Jun 15 (500)
Jun 20 500 500
Jun 27 (300)
- 100 500 600
Cost 10$ 12$ 13$
600 -$ 1,200$ 6,500$ 7,700$
Calculation of Cost of Goods Sold: Units Dollars
Beg. inventory 300 3,000$
Purchases 1,300 16,100
Goods available 1,600 19,100
Ending inventory (600) (7,700)
COGS 1,000 11,400$
Periodic Periodic InventoryInventoryPeriodic Periodic
InventoryInventory
FIFO MethodFIFO MethodFIFO MethodFIFO Method
+
Chapter 1-90
Transactions: Calculation of Cost of Goods Sold:Date Units Cost Total Units DollarsJun 1 300 10.00$ 3,000$ Beg. inventory 300 3,000$ Jun 10 - Purchases 1,300 16,100 Jun 11 800 12.00 9,600 Goods available 1,600 19,100 Jun 15 - Ending inventory (600) (7,163) Jun 20 500 13.00 6,500 COGS 1,000 11,938$
Jun 27 - 1600 19,100
Divided by units available 1,600 Average cost per unit 11.94 Unit on hand 600 Ending inventory 7,163$
Cost Flow AssumptionsCost Flow AssumptionsCost Flow AssumptionsCost Flow Assumptions
LO 5 Describe and compare the cost flow LO 5 Describe and compare the cost flow assumptions used to account for assumptions used to account for inventories.inventories.
Periodic InventoryPeriodic InventoryPeriodic InventoryPeriodic Inventory Weighted AverageWeighted AverageWeighted AverageWeighted Average+
Chapter 1-91
Inventories: Valuation and Inventories: Valuation and Estimation ConceptsEstimation ConceptsInventories: Valuation and Inventories: Valuation and Estimation ConceptsEstimation Concepts
Chapter Chapter
99Intermediate Accounting
12th EditionKieso, Weygandt, and Warfield
Chapter 1-92
Inventories: Additional Valuation IssuesInventories: Additional Valuation IssuesInventories: Additional Valuation IssuesInventories: Additional Valuation Issues
Net realizable Net realizable valuevalue
Relative sales Relative sales valuevalue
Purchase Purchase commitmentscommitments
Lower-of-Lower-of-
Cost-or-Cost-or-
MarketMarket
Valuation Valuation
BasesBasesGross Profit Gross Profit
MethodMethod
Retail Retail
Inventory Inventory
MethodMethod
Presentation Presentation
and Analysisand Analysis
Ceiling and Ceiling and floorfloor
How LCM How LCM worksworks
Application of Application of LCMLCM
“ “Market”Market”
Evaluation of Evaluation of rulerule
Gross profit Gross profit percentagepercentage
Evaluation of Evaluation of methodmethod
ConceptsConcepts
Conventional Conventional methodmethod
Special itemsSpecial items
Evaluation of Evaluation of methodmethod
PresentationPresentation
AnalysisAnalysis
Chapter 1-93
NotNot<<
CostCost MarketMarket
Ceiling = NRVCeiling = NRV
ReplacementCost
ReplacementCost
Floor =NRV less Normal
Profit Margin
Floor =NRV less Normal
Profit MarginGAAPLCM
GAAPLCM
What is the rationale for theWhat is the rationale for the CeilingCeiling andand FloorFloor limitations?limitations?
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.LO 1 Describe and apply the lower-of-cost-or-market rule.
NotNot>>
Illustration 9-3Illustration 9-3
Chapter 1-94
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.LO 1 Describe and apply the lower-of-cost-or-market rule.
How LCM Works (Individual Items)
Illustration 9-5Illustration 9-5
Chapter 1-95
NotNot<<
Cost = 960Cost = 960 Market = 1,000Market = 1,000
Ceiling = 1,070(1,200 – 130)(1,200 – 130)
Ceiling = 1,070(1,200 – 130)(1,200 – 130)
ReplacementCost = 1,000ReplacementCost = 1,000
Floor = 830(1,070-(1,200 x 20%))(1,070-(1,200 x 20%))
Floor = 830(1,070-(1,200 x 20%))(1,070-(1,200 x 20%))
LCM = 960LCM = 960
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.LO 1 Describe and apply the lower-of-cost-or-market rule.
NotNot>>
Finished Desks D
I nventory cost 960$ Est. cost to manufacture 1,000 Commissions and disposal costs 130 Catalog selling price 1,200
Chapter 1-96
Relies on Three Assumptions:
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit LO 5 Determine ending inventory by applying the gross profit method.method.
Substitute Measure to Approximate Inventory
(1) Beginning inventory plus purchases equal total goods to be accounted for.
(2) Goods not sold must be on hand.
(3) The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equal ending inventory.
Chapter 1-97
E9-12 (Gross Profit Method - Solution)
(a) Inventory, May 1 (at cost) $ 160,000
Purchases (gross) (at cost) 640,000
Purchase discounts (12,000)
Freight- in 30,000
Goods available (at cost) 818,000
Sales (at selling price) $ 1,000,000
Sales returns (at selling price) (70,000)
Net sales (at selling price) 930,000
Less gross profit (30% of $930,000) 279,000
Sales (at cost) 651,000
Approximate inventory, May 31 (at cost) $ 167,000
(a) Compute the estimated inventory assuming gross profit is 30% of sales.
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit LO 5 Determine ending inventory by applying the gross profit method.method.
Chapter 1-98
(a) Inventory, May 1 (at cost) $ 160,000
Purchases (gross) (at cost) 640,000
Purchase discounts (12,000)
Freight- in 30,000
Goods available (at cost) 818,000
Sales (at selling price) $ 1,000,000
Sales returns (at selling price) (70,000)
Net sales (at selling price) 930,000
Less gross profit (23.08% of $930,000) 214,644
Sales (at cost) 715,356
Approximate inventory, May 31 (at cost) $ 102,644
E9-12 (Gross Profit Method - Solution)(b) Compute the estimated inventory assuming gross profit is 30% of cost.
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit LO 5 Determine ending inventory by applying the gross profit method.method.
30%100% + 30%
= 23.08% of sales
Chapter 1-99
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail LO 6 Determine ending inventory by applying the retail inventory method.inventory method.
A method used by retailers, to value inventory without a physical count, by converting retail prices to cost.
(1) the total cost and retail value of goods purchased,
(2) the total cost and retail value of the goods available for sale, and
(3) the sales for the period.
Requires retailers to keep:
Chapter 1-100
P9-8 (Retail Inventory Method) Jared Jones Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2008.
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
COST RETAILBeg. inventory, Oct. 1 52,000$ 78,000$ Purchases 262,000 423,000 Freight in 16,600 Purchase returns 5,600 8,000 Additional markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage 10,000 Sales 380,000
Instructions:
Prepare a schedule computing estimate retail inventory using the following methods:
(1) Cost
(2) LCM
(3) LIFO (appendix)
LO 6 Determine ending inventory by applying the retail LO 6 Determine ending inventory by applying the retail inventory method.inventory method.
Chapter 1-101
Retail Inventory - Cost MethodRetail Inventory - Cost MethodRetail Inventory - Cost MethodRetail Inventory - Cost Method
LO 6 Determine ending inventory by applying the retail LO 6 Determine ending inventory by applying the retail inventory method.inventory method.
P9-8 Solution - Cost Method Cost toCOST RETAIL Retail %
Beg. inventory 52,000$ 78,000$ Purchases 262,000 423,000 Freight in 16,600 Purchase returns (5,600) (8,000) Markdowns, net (3,600) Markups, net 7,000
Current year additions 273,000 418,400 Goods available for sale 325,000 496,400 65.47% Normal spoilage (10,000) Sales (380,000) Ending inventory at retail 106,400$
Ending inventory at Cost:106,400$ x 65.47% = 69,660$
==//
Chapter 1-102
Retail Inventory - LCM MethodRetail Inventory - LCM MethodRetail Inventory - LCM MethodRetail Inventory - LCM Method
LO 6 Determine ending inventory by applying the retail LO 6 Determine ending inventory by applying the retail inventory method.inventory method.
P9-8 Solution - LCM (CONVENTIONAL) Method:Cost to
COST RETAIL Retail %Beg. inventory 52,000$ 78,000$ Purchases 262,000 423,000 Freight in 16,600 Purchase returns (5,600) (8,000) Markups, net 7,000
Current year additions 273,000 422,000 Goods available for sale 325,000 500,000 65.00% Markdowns, net (3,600)
Normal spoilage (10,000) Sales (380,000) Ending inventory at retail 106,400$
Ending inventory at Cost:106,400$ x 65.00% = 69,160$
==//
Chapter 1-103
Property, Plant, and Equipment: Property, Plant, and Equipment: Acquisition and DispositionAcquisition and DispositionProperty, Plant, and Equipment: Property, Plant, and Equipment: Acquisition and DispositionAcquisition and Disposition
ChapteChapter r
1010Intermediate Accounting12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
Chapter 1-104
Acquisition and Disposition of Property, Plant, Acquisition and Disposition of Property, Plant, and Equipmentand EquipmentAcquisition and Disposition of Property, Plant, Acquisition and Disposition of Property, Plant, and Equipmentand Equipment
AcquisitionAcquisition
Acquisition costs: Acquisition costs: Land, buildings, Land, buildings, equipmentequipment
Self-constructed Self-constructed assetsassets
Interest costsInterest costs
ObservationsObservations
ValuationValuationCost Cost
Subsequent to Subsequent to AcquisitionAcquisition
DispositionsDispositions
Cash discountsCash discounts
Deferred Deferred contractscontracts
Lump-sum Lump-sum purchasespurchases
Stock issuanceStock issuance
Nonmonetary Nonmonetary exchangesexchanges
ContributionsContributions
Other valuation Other valuation methodsmethods
SaleSale
Involuntary Involuntary conversionconversion
Miscellaneous Miscellaneous problemsproblems
AdditionsAdditions
Improvements Improvements and and replacementsreplacements
Rearrangement Rearrangement and reinstallationand reinstallation
RepairsRepairs
SummarySummary
Chapter 1-105
At acquisition, cost reflects fair value.
Historical cost is reliable.
Companies should not anticipate gains and losses but should recognize gains and losses only when the asset is sold.
Valued at Historical Cost, reasons include:
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 2 Identify the costs to include in initial LO 2 Identify the costs to include in initial valuation of property, plant, and valuation of property, plant, and equipment.equipment.
APB Opinion No. 6 states, “property, plant, and
equipment should not be written up to reflect appraisal, market, or
current values which are above cost.”
APB Opinion No. 6 states, “property, plant, and
equipment should not be written up to reflect appraisal, market, or
current values which are above cost.”
Chapter 1-106
Three approaches have been suggested to account for the interest incurred in financing the construction.
Interest Costs During Construction
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Capitalize no Capitalize no interest interest during during
constructionconstruction
Capitalize actual Capitalize actual costs incurred costs incurred
during construction during construction (with modification)(with modification)
Capitalize Capitalize all costs all costs of fundsof funds
GAAPGAAP
$ 0$ 0 $ ?$ ?Increase to Cost of AssetIncrease to Cost of Asset
Illustration 10-1
Chapter 1-107
Interest Capitalization Illustration: Delmar Corporation borrowed $200,000 at 12% interest from State Bank on Jan. 1, 2005, for specific purposes of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on Jan. 1, 2005, and the following expenditures were made prior to the project’s completion on Dec. 31, 2005:
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Actual Expenditures:
J anuary 1, 2005 $100,000
April 30, 2005 150,000
November 1, 2005 300,000
December 31, 2005 100,000
Total expenditures $650,000
Other general debt existing on Jan. 1, 2005:
$500,000, 14%, 10-year bonds payable
$300,000, 10%, 5-year note payable
Chapter 1-108
Step 1 - Determine which assets qualify for capitalization of interest.
Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations.
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Step 2 - Determine the capitalization period.
The capitalization period is from Jan. 1, 2005 through Dec. 31, 2005, because expenditures are being made and interest costs are being incurred during this period while construction is taking place.
Chapter 1-109
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
WeightedAverage
Actual Capitalization Accumulated Date Expenditures Period Expenditures
J an. 1 100,000$ 12/ 12 100,000$ Apr. 30 150,000 8/ 12 100,000 Nov. 1 300,000 2/ 12 50,000 Dec. 31 100,000 0/ 12 -
650,000$ 250,000$
Step 3 - Compute weighted-average accumulated expenditures.
A company weights the construction expenditures by the amount of time (fraction of a year or accounting period) that it can incur interest cost on the expenditure.
Chapter 1-110
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Step 4 - Compute the Actual and Avoidable Interest. Selecting Appropriate Interest Rate:
1. For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.
2. For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.
Chapter 1-111
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Accumulated I nterest Avoidable
Expenditures Rate I nterest
200,000$ 12% 24,000$
50,000 12.5% 6,250
250,000$ 30,250$
Step 4 - Compute the Actual and Avoidable Interest.
Avoidable Avoidable InterestInterest
I nterest Actual
Debt Rate I nterest
Specific Debt 200,000$ 12% 24,000$
General Debt 500,000 14% 70,000
300,000 10% 30,000
1,000,000$ 124,000$
Weighted-average interest rate on general
debt
Actual InterestActual Interest
$100,000 $800,000
= 12.5%
Chapter 1-112
Step 5 – Capitalize the lesser of Avoidable interest or Actual interest.
Acquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&EAcquisition and Valuation of PP&E
LO 4 Describe the accounting problems associated with interest LO 4 Describe the accounting problems associated with interest capitalization.capitalization.
Avoidable interest 30,250$
Actual interest 124,000
Journal entry to Capitalize Interest:
Equipment (capitalized interest) 30,250
Interest expense 93,750
Cash 124,000
Chapter 1-113
Fair Value
Book Value
LossRecord Entire
Loss
Gain
W/ Commercial Substance
Record Entire Gain
W/O Commercial Substance
Receive no Cash
Defer Gain
Receive Cash
<25%
25% Record Entire Gain
Record Partial Gain
Exchanges of Nonmonetary AssetsExchanges of Nonmonetary Assets
Chapter 1-114
Lacks Commercial Substance
ValuationValuationValuationValuation
LO 5 Understand accounting issues related to acquiring and valuing LO 5 Understand accounting issues related to acquiring and valuing plant assets.plant assets.
Cash ReceivedCash Received
Cash Received + FMV of Assets Cash Received + FMV of Assets ReceivedReceived
xx Total Total GainGain
== Recognized Recognized GainGain
$3,000$3,000
$3,000 + $12,500$3,000 + $12,500xx $6,500$6,500 == $1,258$1,258
Deferred gain = $6,500 – 1,258 = Deferred gain = $6,500 – 1,258 = $5,242$5,242
When a company receives cash (sometimes referred to as “boot”) in an exchange that lacks commercial substance, it may immediately recognize a portion
of the gain.
Chapter 1-115
A:Equipment 7,258Cash
3,000Accumulated depreciation 19,000
Equipment28,000
Gain on exchange1,258
Value of new equipment: Market value – Deferred gain
(12,500 – 5,242) or
(12,500 – (6,500 – 1,258))
ValuationValuationValuationValuation
Lacks Commercial Substance