1 Chapter 8 Accounting for Receivable Type of receivable: Receivable refers to amounts due from individuals and companies. o Account receivable: Amount customer owe on account, result from sales of goods and services. o Note receivable: a written promise for amount to be received, often called trade receivable. o Other receivable : such as, interest receivable, loans to company officers (This do not generally result from the operations of the business) 1.) Account receivable Three accounting issues associated with account receivable 1. Recognizing Relatively straight forward (Merchandise record) A service organization records a receivable when it provides service on account. 2. Valuing Receivables are recorded at net realizable value Current asset and valuation (net realizable value). Methods of Accounting for Uncollectible Accounts Direct Write-Off [Theoretically undesirable]: when company determines a particular account to be uncollectible Allowance Method : accounting for bad debt involves estimating uncollectible accounts at the end of each period.
2 Example: Illustration: Hampson Furniture has credit sales of 1,200,000 in 2014, of which 200,000 remains uncollected at December 31. The credit manager estimates that 12,000 of these sales will prove uncollectible. Dec. 31 Bad debt expense 12,000 Allowance for doubtful accounts 12, Recording Write-Off of an Uncollectible Account 3. Recovery of an Uncollectible Account Estimating the Allowance Percentage of sale = management estimates what percentage of credit sales will be uncollectible. This percentage based on past experience and anticipated credit policy. Percentage of Receivable = *** under percentage-of-receivable basis, management estimates what percentage of receivables will be result in losses from uncollectible accounts. 2) Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Determining the Maturity Date Note expressed in terms of Months Days
3 Computing Interest 1.) Recognizing Notes Receivable = to illustrate the basic entry for notes receivable 2.) Valuing Notes Receivable = same as valuing account receivable. ** 3.) Disposing of Notes Receivable = honor note and dishonor note
4 Chapter 9 Fixed Assets 1. Computation of total cost of plant and equipment a. Land Total cost of Land = Purchase price + Costs of survey, tax, legal fees, land fill, clearing, commission + cost of old building (meant for demolition) + cost of demolition of old building (excavation of old building) cost received on sale of scarp of old building + accrued real estate tax paid on purchase of Land b. Total cost of land improvement = Cost of streets, side walks + cost of fence, walls + drainage, sewers + cost of plants + parking lots + drive ways, etc. c. Total cost of building = Contract price + Architect fees + Insurance premium paid on construction + Interest paid on money borrowed for construction + cost of excavation for new building + any other expense on building d. Total cost of machinery, equipment, etc. = purchase price + sales tax + Testing fees + Installation cost + Transportation cost under FOB shipping point + repairing cost on purchase (before using the asset) + any other expense on purchase + cost of painting and lettering + Insurance during shipping transit Note 1. If the transportation cost is FOB destination, it should not be added to the cost of asset. 2. Insurance we pay every year is prepaid insurance and real estate/land tax we pay every year is tax expense. Ex : 1 Cost of Land $15,000 Cost of old building $5,000 Legal fees on purchase for land $800 Cost of excavation old building $200 Sale of the scarp old building $400 Answer Total cost of Land = $20,600 Total cost of building = $0 2. Disposal of an asset Points to remember: 1. On the date of disposal the book value of the asset must be computed. So the total accumulated depreciation is up to the date of disposal. (Compute depreciation on the date of disposal) 2. On disposal, cancel asset account by crediting asset account and cancel accumulated depreciation a/c by debiting accumulated depreciation account Methods of disposal I Discard (Retirement) II Sell III Exchange I. (Retirement) Abandon the asset; so BV is loss Accumulated depreciation Loss on disposal (BV) Asset (Total) II. Sale Journal entry Accumulated depreciation Asset (full value)
5 Note 1. Any loss debit loss on disposal Any gain credit gain on disposal 2. Loss/gain = selling price book value (If selling price is more than BV, then gain) III. Exchange. Getting a similar asset by exchanging the old asset Journal entry Accumulated depreciation - (old asset) Asset (new) Loss on disposal Asset (old) Gain on disposal Notes: gain loss on exchange = Fair market value book value (If market value is more than BV, then gain) a. Cost of new asset = Fair market value + cash paid b. Fair market value = Cost of new asset paid c. paid = Cost (list price) of new asset Fair market value 3. Natural resources: ex. Coal mine, Iron ore mine, Oil fields etc. (What we get from the earth) Lose of value is depletion expense: (follow unit of activity method to compute) Journal entry Depletion expense Accumulated depletion (Asset name) 4. Intangible asset. These are assets without any physical existence (invisible) Ex : Patent, copyright etc. If life of intangible asset is given, then it should be amortized. Lose of value is Amortization expense (Follow straight line method to compute) Amortization expense Asset Ex. July 5, 2006 purchased a coal mine for $40,000 and a patent for $10,000. The mine contains 100,000 tons of coal and salvage value $5,000. Useful life of patent 10 years and no salvage value show journal entries on July 5 and Dec. 31, 2006 (5,000 tons of coal were extracted in 2006) July 5, Coal Mine 40,000 Patent... 10, ,000 Dec. 31, Depletion expense Coal mine 1,750 Accumulated depletion Coal mine... 1,750 Dec. 31, Amortization expense - Patent 500 Patent P9-6A Yount Co. has equipment that cost $50,000 and that has been depreciated $22,000.
6 Instructions Record the disposal under the following assumptions. (a) It was scrapped as having no value. Accumulated Depreciation Equipment... 22,000 Loss on Disposal of Plant Assets... 28,000 Equipment... 50,000 (b) It was sold for $25, ,000 Accumulated Depreciation Equipment... 22,000 Loss on Disposal of Plant Assets... 3,000 Equipment... 50,000 (c) It was sold for $31, ,000 Accumulated Depreciation Equipment... 22,000 Gain on Disposal of Plant Assets... 3,000 Equipment... 50,000 *E9-17 Presented below are two independent transactions. Both transactions have commercial substance. 1. Global Co. exchanged old trucks (cost 64,000 less 22,000 accumulated depreciation) plus cash of 17,000 for new trucks. The old trucks had a fair value of 38,000. (a) Equipment (new)... 55,000 Accumulated Depreciation Equipment (old)... 22,000 Loss on Disposal of Plant Assets... 4,000 Equipment (old)... 64, ,000 Cost of old trucks 64,000 Less: Accumulated depreciation 22,000 Book value 42,000 Fair value of old trucks 38,000 Loss on disposal 4,000 Fair value of old trucks 38,000 paid 17,000 Cost of new trucks 55,000
7 2. Rijo Inc. trades its used machine (cost 12,000 less 4,000 accumulated depreciation) for a new machine. In addition to exchanging the old machine (which had a fair value of 9,000), Rijo also paid cash of 2,700. (b) Equipment (new)... 11,700 Accumulated Depreciation Equipment (old)... 4,000 Gain on Disposal of Plant Assets... 1,000 Equipment (old)... 12, ,700 Cost of old machine 12,000 Less: Accumulated depreciation 4,000 Book value 8,000 Fair value of old machine 9,000 Gain on disposal 1,000 Fair value of old machine 9,000 paid 2,700 Cost of new machine 11,700
8 Chapter 10 Bonds Payable A company (Corporation) cannot collect cash by issuing stock beyond its authorized limit of issue. If it needs more fund of cash for its operations,it can issue bonds to get it cash. Issue of bonds is a method of borrowing cash from the public. The Co. must repay such borrowing after few years. So bonds payable is the longterm liability of the Co. Interest on Bonds payable must be paid on the face value at interest dates as agreed until the repayment(retirement) of the bonds payable. So it is an interest expense of the company. 1.Issue of bonds on interest date. a. at face value b. at premium (gain) c. at discount (loss) For issuing at face value,at premium or at discount Bonds payable For payment of interest on interest date Bond interest expense To record accrued interest at the end of an accounting period (from last interest date until Dec31) Bond interest expense Bond interest payable Payment of cash for interest after the date of accrued interest Bond interest payable Bond interest expense
9 If Jan1 (Payment of interest) Bond interest payable Issue of bond at discount (below face value) Bond payable Discount on Bond payable increases interest expense. So to amortize discount and to pay interest the following journal entry is used: Bond Interest expense Bond payable Call bond or Redeem(Retire) bonds Pay back the cash we borrowed 3 steps 1. Pay interest 2. Amortize premium or discount 3. Cancel bonds payable and pay cash Journal entry to cancel bonds payable Bonds payable(balance)
10 Example Formosa Electric sold $400000, 9%, 10 year bonds on January1, The bonds were dated January 1 and paid interest on January 1 and July1. The bonds were sold at 105. a. Prepare the journal entry to record the issuance of the bonds on January1, 2014 b. At December 31, 2014, the amount of unamortized bond premium is $18000 Show the statement of financial position presentation of accrued interest and the bond liability at December 31,2014 c. On January1, 2016, when the caring value of the bonds was the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid (a) 2014 Jan. 1 ($400,000 X 1.05) ,000 Bonds Payable ,000 (b) Non-current Liabilities Bonds payable, due $418,000 Current Liabilities Interest payable ($400,000 X 9% X 1/2)... $ 18,000 (c) 2016 Jan. 1 Bonds Payable ,000** Loss on Bond Redemption... 4,000* ($400,000 X 1.05) ,000 *($420,000 $416,000)
11 Chapter11 Corporation Corporations collect capital by issuing shares. Those who buy shares are called shareholders. In fact, shareholders are the owners of a corporation. The management of the corporation is in the hands of the board of directors which is elected from the shareholders. Shareholders get dividend according to the number of share held by each shareholder. Shares are easily transferable. The fixed price of share, printed on the share certificate is called face value, Stocks can be issued above face value. Any gain received through share transaction is termed as premium A corporation can issue two types of shares 1. Ordinary shares 2. Preference shares There are 6 journal entries 1.Issue shares for cash or another asset or expense Example : Issued 1000 shares of ordinary shares to buy a machine worth $ Par value of OS $10 each. Machine Share capital ordinary Share premium- ordinary Co. report net income or loss(closing entry) If net income Income summary. Retained earning. If net loss Retained earning. Income summary.
12 3. Dividends 3.1 Date of declaration of dividend dvidends Dividend payable Pay cash as dividend Dividend payable.. 4. Share Dividend( Pay shares as dividend to shareholders. They get additional shares free) Computation of share dividend in numbers No. of outstanding shares x rate(%) Declare share dividend Share dividend (No. of shares x market value). OS dividend distributable Share Premium ordinary Prepare list of shareholders No entry 4.3 Distribute share dividend OS dividend distributable Share capital ordinary.
13 5. Treasury shares. These are shares of the Co. reacquired or purchased by the Co, 5.1 Require or purchase share Treasury share 5.2 Sale of treasury shares Treasury share 6. Close cash dividend and share dividend / transfer to retained earning Retained earning dividend Share dividend
14 Example The equity accounts of Terrell Corporation on January 1,2014, were as follows. Share Capital Preference (9%,$50 par,cumulative,10000 shares authorized) Share Capital Ordinary($1 stated value, shares authorized) Share Premium Preference Share Premium-Ordinary Retained earnings Treasury Shares-Ordinary(20000 shares) During 2014, the corporation had the following transactions and events pertaining to its equity. Feb1 Issued ordinary shares for $ Apr14 Sold 9000 treasury shares-ordinary for $46000 Sept3 Issued 7000 ordinary shares for a patent valued at $42000 Nov10 Purchased 1000 ordinary shares for the treasury at a cost of $6000 Dec31 Determined that net income for the year was $ No dividends were declared during the year a)journalize the transactions and the closing entry for net income Feb Share Capital-ordinary Share Premium-ordinary Apr Treasury shares Share premium-treasury 23500
15 Sept3 Patent Share capital-ordinary 7000 Share premium-ordinary Nov10 Treasury shares Dec31 Income Summary Retained earning
16 Chapter 12 : Investment Corporate investment is the area of investment dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
17 Accounting for Debt Investment Securities are classified in three categories. Debt securities that management has a positive intent and ability to hold to maturity are classified as Held to Maturity or HTM and are recorded at amortized cost. Debt and equity securities bought and held principally for the purpose of selling in the near term are classified as Trading securities and are measured at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as Held to Maturity or Trading with readily determinable fair values are classified as Available for Sale or AFS and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at its fair values determinations.
18 Accounting for Share Investment Stockholder of Record. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the stockholder of record with respect to those shares, and the Notice or these proxy materials are being sent directly to you. As the stockholder of record, you have the right to grant your voting proxy directly to us, to vote electronically or to vote in person at the Annual Meeting. If you have requested printed proxy materials, we have enclosed a proxy card for you to use. Beneficial Owner. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and the Notice or these proxy materials are being forwarded to you by your broker, bank or nominee who is considered the stockholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker, bank or nominee on how to vote and are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote
19 Categories of Securities 1. Trading Securities: is a category of securities that includes both debt and equity securities, and which an entity intends to sell in the short term for a profit that it expects to generate from increases in the price of the securities. 2. Held for Collection Securities: are debt securities that investors have the intent and ability to hold 3. Non- Trading Securities: are held on purpose other than trading.