Accounting Exam 2

After estimations, the ending balance in the allowance for doubtful accounts should be $3760 In this example, the allowance account had balance of $500 before the year-end adjustment, thus

(3760-500) = 3,260 decreases allowance for doubtful accounts and decreases retained earnings

Accounting for credit card sales Recognition of revenue and expense on credit card sales ATS accepts a credit card payment for $1000 of services renders

$1000, yet credit card company charges 5% handling fee (1000 x 0.05) = 950 revenue=$1000 expense=$50 net income=$950 increase of 950 to accounts receivable and increase of 950 to retained earnings

Financial Statements

***Income statement +sales revenue -cost of goods sold =gross margin -warranty expense =net income ***Balance sheet Assets (cash, inventory) Liabilities (warranties payable) Stockholder's equity (C.stock, RE) Total liability and Stock. Equity ***Statement of Cash Flows Operating Activities (inflow from customers, outflows for warranty) Investing activités Financing activités Beginning cash balance Ending cash balance

Current versus concurrent liabilities

-Current liabilities are due within one year or an operating cycle, whichever is longer. Current liabilities, also called short-term liabilities, includes: Accounts Payable Short-Term Notes Payable Wages Payable Taxes Payable Interest Payable

Current versus concurrent assets

-current assets are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer EX of current assets: cash marketable securities accounts receivable short-term notes receivable interest receivable inventory supplies pre-paid items

Line of Credit example

-each borrowing is an asset SOURCE transaction (cash and liability increase) -each repayment is an asset use transaction (cash and line of credit liability decrease)

Regulation

-few laws govern the operations of proprietorships and partnerships -Corporations are subject to regulations *Large, publicly traded corporationsare much more heavily regulated thansmaller closely held corporations. ---SEC Acts of 1933 and 1934 ---Sarbanes-Oxley Act of 2002 ---Exchange listing requirements.

Installment Notes Payable

-long term installment notes are liabilities that usually have terms from two to five years principal(amount borrowed) loans that require payments of principle and interest at regular intervals are amortizing loans ---represented by installment notes As payments are made, the amount allocated to interest gets smaller and to principal gets larger

Accounting for Sales Tax

-most states require retail companies to collect sales tax on items sold to their customers. Sales tax is a liability to retailer until paid to the state. HSC sells merchandise to a customer for $2,000 cash in a state where the sales tax rate is 6%. **affects 3 accounts -revenue/net income differ from cash flow (OA)

Bonds issued at a premium

-when bonds are sold for more than their face value, the difference between the amount received and face value is called a bond premium Mason Company issues bonds on January 1, 2012. Principal = $100,000 Issued at 105 instead of face, ...............cash proceeds of $105,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = 5 years -bond premium of $5,000 (105-100) will reduce total amount of interest expense -premium is recorded in a separate liability account called premium on bonds payable.

Accounting for Notes Payable

09/01/12 Borrowing On September 1, 2012 Herrera Supply Company (HSC) borrowed $90,000 from the National Bank. HSC issued a note payable due in one year with an annual interest rate of 9%.

Paying principal and interest at maturity date

1. 8/31/13 recognition of interest expense $90,000 x 0.09% x 4/12 months = $5400 interest expense 2. Now record payment of principle and interest payable --deduct interest --deduct principle

Accounting for installment notes payable

1. issuing the note payable of 100,000 (increases cash and notes payable) 2. first cash payment on Dec 2012 --affects expense (9000) --affects cash flow; two events OA 9000 FA 16709

Accrual of Interest Expense

12/31/12 Recognition of Interest Expense At the end of 2012, HSC must accrue interest on its note payable. $90,000 x 0.09% x 4/12 months = $2700 interest expense

Recognizing uncollectible accounts expense Allen's tutoring services recognized uncollectible accounts expense for accounts expected to be uncollectible in the future

14,000 - 12,500 = 1,500 end year balance in accounts receivable estimated $75 of the receivables is uncollectible ---uncollectible accounts expense increase (decrease) in allowance for doubtful account and decrease in retained earnings

Financial statements

2012 (150/0) 2013 (750/900) Total (900/900)

Corporate management structure

3 tiers of management 1. stockholders (owners/voters) 2. board of directors--elected by shareholders 3. professional executives appointed by directors

Pamlico Inc. began operations on January 1, 2013. During 2013, it earned $400,000 of revenue on account. The company collected $370,000 of accounts receivable. At the end of the year, Pamlico estimates uncollectible accounts expense will be 1 percent of sales. Based on this information alone, what is the net realizable value of accounts receivable as of December 31, 2013?

Accounts receivable at year end are $30,000 ($400,000 sales on account − $370,000 collection of receivables). The amount in the allowance for doubtful accounts would be $4,000 ($400,000 credit sales × 0.01). The net realizable value of accounts receivable is therefore $26,000 ($30,000 − $4,000).

EX: installment notes payable On January 1, 2012, Blair Company issued a $100,000 face value installment note to National Bank. The note had a 9 percent annual interest rate and a five year term. The loan agreement called for five equal payments of $25,709 to be made on December 31 of each year. Prepare an amortization table for Blair's note.

Annual payments are constant ****with each payment, the amount applied to the principal increases and the amount applied to interest decrease -cash payment reduced cash -amount applied to interest decrease retained earnings -amount applied to principal decreases notes payable

Installment notes payable continued

Applying payments to principal and interest 1. identify the unpaid principal balance 2. amount applied to interest=unpaid principal balance (#1) x interest rate 3. amount applied to principal = cash payment less the amount applied to interest (#2) 4. new unpaid principal balance = unpaid principal balance(#1) less the amount applied to principal (#3)

treasury stock-

Assume Nelson resells 30 shares of its treasurystock at a price of $25 per share. 30 x $25 = $750 (cash) Treasury stock 30 x $20 = $600 PIC = 750-600=150 **no gain or loss is recognized on sale of treasury stock

Issuing stock with no par value

Assume that Nelson issues 100 shares of nopar common stock at a price of $22 per share. 2200 increase in cash and common stock

Treasury stock example

Assume that Nelson paid $20 per share to buyback 50 shares of the $10 par value stock thatit originally issued at a price of $22 per share. 50 shares x $20 = $1000 decrease in cash and treasury stock

Authorized, issued, and outstanding capital stock

Authorized shares: maximum number of shares of capital stock that can be sold to the public Issued shares: authorized shares of stock that have been sold Unissued shares: authorized shares of stock that have never been sold

Warranty Obligations event 2

Event 2 Recognition of Warranty ExpenseHSC estimates that warranty expense associated with the current sale will be $100. *estimation of warranty increases warranty payable and decrease retained earning (accounted as an expense)

Warranty Obligations event 3

Event 3 Settlement of Warranty ObligationHSC pays $40 cash to repair defective merchandise returned by a customer. *cash is decreased (paid via cash) and warranty payable is decrease

Bonds issued at face value event 3&4

Event 3: revenue recognition (12,000 cash revenue from renting property) --increase cash and RE (OA) Event 4: expense recognition (cash payment of interest expense 100,000 x 9% = 9000) --decease in cash and RE (OA) **on each yearly interest payment date, company will pay $9000 in interest (for 5 years) ----bond interest payments

Bonds issued at face value event 5&6

Event 5: sale of investment in land (selling the land for cash equal to its $100,000 book value is an asset exchange transaction) -increase cash and decrease land (IA) Event 6: payoff of bond liability -decrease in cash and bonds payable (FA) **on Dec, 31, 2016 Company will return the $100,000 principal amount to the investors ---bond principal at maturity date (shown in event 6)

accounts receivable

Expected future cash receipt arising from permitting a customer to buy now and pay later; typically a relatively small balance due within a short time period.

bonds issued at a premium example

Expense Recognition for Bond issued at 105 Mason's cash payment is $9,000 ($100,000 x 0.09) Amortization of the premium of $5,000 over 5 years is $1,000 per year. Interest expense recognized is $9,000 less $1,000 = $8,000 **net income and cash flow differ

Bonds issued at a discount ex

Expense Recognition for Bond issued at 95 Mason's cash payment is $9,000 ($100,000 x 0.09) ***decrease cash Amortization of the discount of $5,000 (100,000-95,000) over 5 years is $1,000 per year. ****increase carrying value of bond liability Interest expense recognized is $9,000 plus $1,000 = $10,000 ****decreases retained earnings -actual rate of interest company must pay is called the effective interest rate

Preferred stock dividends

In addition to common stock, Dillion, Incorporatedhas the following stock outstanding: Preferred stock, 4%, $10 par, 10,000 shares Common stock, $10 par, 20,000 shares Dividends have not been paid in two years. In the current year, the board of directors declared dividends of $22,000. How much will each class of stock receive? It depends on whether the preferred stock is cumulative.

financial statements for allowances of doubtful accounts

Income statement +service revenue (10000) -uncollectible accounts (135) =net income Balance sheet Assets +Cash +Accounts receivable -Allowance =Net realizable value Total assets Stockholder's equity Retained Earnings Statement of Cash Flow Operating Activities (inflow from customers) Investing activités Financing Activities Net change in cash +plus beginning cash balance = ending cash balance

Amortization Schedule for Bond Discount

Interest recognition under the effective interest method is accomplished as follows: 1. Determine the cash payment for interest by multiplying the stated rate of interest times the face value of the bonds. 2. Determine the amount of interest expense by multiplying the effective rate of interest times the carrying value of the bond liability. 3. Determine the amount of the amortization of the bond discount by subtracting the cash payment from the interest expense. 4. Update the carrying value of the liability by adding the amount of the discount amortization to the amount of the carrying value at the beginning of the accounting period.

Bonds issued at a discount

Issued bonds 1/1/12 Principal: $100,000 Issued at 95 instead of face; cash proceeds of $95,000 Stated interest rate: 9% Interest date; 12/31 Maturity date: 12/31/16 (5 years) $95,000 = carrying value **Company accepts $95,000 for bonds, will repay the full face $100,000 at maturity date. $5000 difference is called a bond discount

Line of Credit

Lines of credit are pre-approved financing plans that allow companies to borrow and repay funds as needed up to the maximum credit line, set by the creditor -lines of credit are normally used for relatively short-term borrowing to finance seasonal business needs

Features of promissory notes

Maker: person responsible for making payment Payee: person whom the note is made payable Principle: amount of money loaned by payee Interest: economic benefit earned by payee for loaning $$/principle Maturity date: date on which the make must repay the principle to the payee Collateral: assets belonging to the maker are assigned as security to ensure that the principle and interest are paid

Bonds issued at a discount --using effective interest rate method

Mason Company issues bonds on January 1, 2012. Principal = $100,000 Issued at 95--$95,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = (5 years) The effective interest rate is determined by the price that the buyer of a bond is willing to pay on the issue date. Since the effective interest rate is based on the market price of the bonds on the day of issue, it is sometimes called the market rate of interest. This method results in: --varying amount of interest expense --related and varying addition to the carrying value of the bonds each year.

cash dividends - date of record

NO ENTRY REQUIRED

stock dividends -

Nelson's Board of Directors decided to issue a 10 percent stock dividend on the 150 outstanding shares of its $20 par value, Class B common stock. Market value at the time of the stock dividend was $30 per share. **an amount from retained earnings is moved to other equity accounts 0.10 × 150 shares × $20 par = $300 (increase in common stock) 0.10 × 150 shares × $30 per share = $450 (decrease in retained earnings) PIC excess (450-300)=150 increase

stock splits -

Nelson's Board of Directors declared a 2-for-1 stock split on the 165 outstanding shares of its $20 par value, Class B common stock.

Issuing stock, $10 par value

Nelson, Incorporated issued 100 shares of$10 par value stock for $22 per share. Cash: 100 shares x $22 = $2200 Common stock: 100shares x $10=$1000 PIC excess: 2200-1000 = 1200 Cash Flow = 2200 FA

Notes receivable

Notes that evidence rights to receive cash in the future from the maker of a promissory note; usually specify the maturity date, interest rate, and other credit terms.

Maher Company had beginning balances in Accounts Receivable and Allowance for Doubtful Accounts of $24,200 and $2,000, respectively. During the accounting period Maher earned $230,000 of revenue on account and collected $232,500 of cash from receivables. The company also wrote off $1,950 of uncollectible accounts during the period. Maher estimates uncollectible accounts expense will be 1 percent of credit sales. Based on this information, what is the net realizable value of receivables at the end of the period?

The balance in the Accounts Receivable account is $19,750 ($24,200 + $230,000 − $232,500 − $1,950). The amount of uncollectible accounts expense for the period is $2,300 ($230,000 × 0.01). The balance in the Allowance for Doubtful Accounts is $2,350 ($2,000 − $1,950 + $2,300). The net realizable value of receivables is therefore $17,400 ($19,750 − $2,350).

Warranty Obligations

To attract customers, many companies guarantee their products or services. Within the warranty period, the seller promises to replace or repair defective products without charge. Event 1: Sale of Merchandise sells $7000 of merchandise for cash. Merchandise had cost $4000.

Matching revenues and expenses VS asset management

both approaches provide acceptable results

Adjusted for recognition of uncollectible accounts expense Using the percent or revenue method, Allen's tutoring services recognized uncollectible accounts expense for 2013

estimated 1.35% uncollectible accounts expense of service revenue (10,000 x .0135) = 1.35 increases (decreases) allowance for doubtful accounts and decreases retained earnings

Allen's tutoring services recognized $14,000 service revenue earned on account during 2012

increase accounts receivable and increased retained earnings asset source transaction

Recovery of an uncollectible account: reinstate receivable Allen's tutoring services recovered a receivable that it had previously written off

increase in accounts receivable and increase (decrease) in allowance reinstate: account receivable by reversing the previous write off

Revenue recognition Allen's tutoring services provided $10,000 of tutoring services on account during 2013

increase in accounts receivable and increase in retained earnings

recovery of an uncollectible account: collection of receivable Allen's tutoring services recorded collection of the reinstated receivable

increase in cash and decrease in accounts collectible

Collection of accounts receivable allen's tutoring services collected $8430 cash from accounts receivable

increase in cash and decrease in accounts receivable

Collection of receivables Allen's tutoring services collected 12,500 cash from accounts receivable

increase in cash and decrease in accounts receivable asset exchange transaction

contra asset account

instead of decreasing the receivables account directly, the asset reduction is recorded in the contra asset account --allowance for doubtful accounts

Accrual of interest

loaned $15,000 at 6% interest (annual) 0.06x15,000=$900 Total of 15,900 Accrued interest: lenders earn interest continually even though they do not collect cash payment for it every day Loan issued November 1, balance sheet adjusted on December 31 15,000 x 0.06 x 2/12 = $150 for 2 months of interest Interest revenue is recognized in 2012, even though the cash will not be collected until 2013 Increases interest receivable and increases retained earnings

Allowance method of accounting for uncollectible accounts

most companies do not expect full amount of their accounts receivable--thus account for estimated losses

Collection of credit card receivables the collection of receivables due from the credit card company is recorded like any other receivable collection

net amount of receivables is 950 (1000-credit card handling fee 5%-50) decrease in accounts receivable and increase in cash 950 operating activity

Estimating uncollectible accounts expense using the percent of receivable method

percent of revenue method: focuses on estimating the expense of uncollectible accounts Percent of receivable method: focuses on estimating the most accurate amount for the balance sheet--allowance for doubtful accounts using an aging of accounts receivable

Accounting for notes receivable

promissory note: credit agreements where the terms are legally documents

net realizable value

represents amount of receivables a company estimates it will actually collect accounts receivable -allowance of doubtful accounts =net realizable value *estimated value

Allowance for doubtful accounts

represents company's estimate of the amount of uncollectible receivables *estimated value

No-par stock

some states do not require a par value to be stated in the charter

Inventory Cost Flow Methods

specification identification: cost of goods sold would be $100 if the first item purchased were sold or $110 if the second item purchased were sold

Aging of accounts receivable

the longer an account receivable remains outstanding, the less likely it is to be collected. Use method to determine age of their accounts as a part of estimating the allowance for doubtful accounts

Cash dividends -

three important dates 1. declaration date (record liability for dividend) 2. date of record (no entry required) 3. payment date (record payment of cash to stockholders)

Appropriation of retained earnings

A corporation's directors can voluntarily limit dividends because of a special need for cash. Assume that Nelson's Board of Directors appropriated $1,000 of retained earnings for future expansion.

Preferred stock dividends

Cumulative: dividends in arrears must be paid before dividends may be paid on common stock Non-cumulative: undeclared dividends from current and prior years do not have to be paid in future years **most preferred stock is cumulative

Issued shares

Can either be outstanding shares or treasury shares -outstanding shares: issued shares that are owned by the stockholders -treasury shares: issued shares that have been reacquired by the corporation

Treasury stock - why would a company buy its own stock?

Common reasons include: Employee stock option plans. Preparation for a merger. To increase earnings per share. Supporting the stock price. To avoid a hostile takeover (voters-warren buffet)

Common stock

Common stockholders have the rights to: - Buy and sell stock. - Share in the distribution of profits. - Share in the distribution of assets in the case of liquidation. - Vote on significant matters that affect the corporate charter. - Participate in the election of directors.

Bonds issued at face value

Company issued bonds On 1/1/12 Principal: $100,000 Interest Rate: 9% Interest date: 12/31/12 Maturity date: 12/31/16 (5 years) -companies borrow money directly from public by selling bond certificates--issuing bonds *bond certificates describe a company's obligation to pay interest and repay principal

Comparing corporations with proprietorships and partnerships

Corporate Advantages --Separate legal Entity --Limited liability of stockholders --Continuous life --Management Structure --Easily transferable ownershiprights --Ability to raise capital Corporate Disadvantages --Governmental regulation --Corporate double taxation

Stock dividends

Dividends are not always paid in cash--companies sometimes distribute additional shares of stock to stockholders -no change in total stockholder's equity -no change in par values -all stockholders retain same %% of ownership

Bonds Issued at face value event 1&2

Event 1: issue bonds for cash increase in cash and increase in bonds payable (FA) Event 2: investment in land -100,000 decrease in cash and increase in land (IA)

cash dividends - payment date

On October 15, 2013, Nelson's Board of Directors declared a cash dividend on the 100 outstanding shares of 7 percent, $10 par preferred stock. The dividend will be paid on December 15 to stockholders of record on November 15. *record payment of cash to stockholders -decrease in cash and dividends payable (cash flow--FA)

Cash dividends - declaration date

On October 15, 2013, Nelson's Board of Directors declared a cash dividend on the 100 outstanding shares of 7 percent, $10 par preferred stock. The dividend will be paid on December 15 to stockholders of record on November 15. **record liability for dividend affects dividends payable and retained earnings

effective interest rate method to amortize the premium

On the balance sheet assets decrease, liabilities decrease, and retained earnings decrease. On the income statement expenses increase and net income decreases. There is a cash outflow in the operating activities of the statement of cash flows. Cash of $10,000 is paid for interest. Interest expense of $8,639(OA) is recognized and $1,361 (FA) is subtracted from the carrying value of the bond liability

Characteristics of Capital Stock

Par value multiplied by the number of shares of stock issued represents the minimum amount of assets that must be retained in the company as protection for creditors. This amount is known as legal capital. To minimize the amount of assets that owners must maintain in the business, many corporations issue stock with very low par values, often $1 or less.

Preferred stock

Preferred stock: separate class of stock, typically having priority over common shares in... -dividend distributions -distribution of assets in case of liquidation --usually have a stated dividend rate --normally have no voting rights

Stock splits

Stock splits replace existing shares with a greater number of new shares. Companies use stock splits to reduce market price per share of their outstanding stock. The number of outstanding shares increase and par value is decreased proportionately. Retained earnings is not affected.

Accounting for Sales Tax 2

Remitting the tax (paying cash to the state tax authority) is an asset use transaction -decrease in cash and sales tax payable

Forms of business organization

Sole proprietorship: owned by a single individual Partnership: owned by two or more individuals-partnerships required clear agreements about authority, risks, and the sharing of profits and losses Corporation: separate legal entity created by the authority of a state government-each state has separate laws governing establishing corporations

On October 1, 2012, Mei Company accepted a promissory note for a loan it made to the Asia Pacific Company. The note had a $24,000 principal amount, a four-month term, and an annual interest rate of 4 percent. Determine the amount of interest revenue and the cash inflow from operating activities Mei will report in its 2012 and 2013 financial statements.

The computation of accrued interest revenue is shown below. The interest rate is stated in annual terms even though the term of the note is only four months. Interest rates are commonly expressed as an annual percentage regardless of the term of the note. The time outstanding in the following formulas is therefore expressed as a fraction of a year. Mei charged annual interest of 4 percent, but the note was outstanding for only 3/12 of a year in 2012 and 1/12 of a year in 2013. In 2012, Mei's cash inflow from interest will be zero. In 2013, Mei will report a $320 ($240 + $80) cash inflow from operating activities for interest.

Appearance of capital structure in financial statements

The ownership equity is composed of: -owner/investor contributions -retained earnings

Characteristics of Capital Stock

The price an investor must pay to purchase a share of stock is the market value. Par value is not equal to market value since it is an arbitrary amount assigned to each share of stock when it is authorized.

preferred stock dividends - cumulative

Total dividend declared: $22,000 1st year (100,000x $10x 4%) =$4000 2nd year(100,000x $10x 4%) =$4000 Current yr(100,000x$10x4%) =$4000 Total cumulative stock: $12,000 22,000-12,000=$10,000 remainder dividend for common stockholders

preferred stock dividends - noncumulative

Total dividend declared: $22,000 1st year = $0 2nd year = $0 Current yr(100,000x$10x4%) =$4000 Total cumulative stock: $4,000 22,000-12,000=$18,000 remainder dividend for common stockholders

Collection of principal and interest on the maturity date

Total receivable in 2013 in 15,900 --however, in 2012, accounted for 150 of interest revenue, thus 15,000 x 0.06 x 10/12 = $750 interest revenue in 2013 increases interest receivables and increases retained earnings

Treasury stock

When a company buys its own stock, the stock purchased is called treasury stock. Treasury shares are issued shares that have been reacquired by the corporation. When stock is reacquired, the corporation records the treasury stock at cost. Treasury stock has no voting or dividend rights and is a contra equity account.

Reporting contingent liabilities

contingent liabilities: a potential obligation arising from a past event -require that companies classify contingent liabilities into 3 categories--depending on the likelihood of their becoming actual liabilities 1. probable and estimable (recognize) 2. reasonable (disclose in footnotes) 3. remote (NO recognize or disclose) EX: warranties Warranties are guarantees from companies that their products or services will perform as advertised. They take many forms and generally extend for a specified period of time. There are three events that are associated with warranties 1. the sale of goods under warranty; 2. the recognition of warranty obligations to customers who purchase the goods; 3. the settlement of warranty claims. It is only event 3 which includes the transfer of cash relating to the warranty. --warranty only appears on statement of cash flows when there is a settlement of warranty claims

Cash dividends

corporations are not required to pay dividends, but once declared, dividends are legal obligations

Stockholders benefit in two ways when a company generates earnings

dividends increase in market price per share

Write off of uncollectible accounts receivable Allen's tutoring services wrote off $70 of uncollectible accounts receivable

decrease in accounts receivable and decrease in allowance of doubtful accounts asset exchange transaction *net realizable value of receivables remains unchanged

How accountings for notes receivable affects financial statements Loan of money

decrease in cash and increase in notes receivable Investing activités

Collecting total 15,900 of accrued interest and loaned money

decrease of 15,000 in notes payable and decrease of 900 in interest receivable increase of 15,900 in cash Statement of cash flows 15,000 IA 900 OA