Intermediate ACC I ( chap 5-7)
Simple Interest
= Initial Investment x Interest Rate x Period of time note: includes only interest earned on the initial investment
Rev recognize for Gift Cards
= redeemed $ + remaining cars past date money
Recording Rev /formula
= transaction price - (payment to advertisement - fair value)
How to determine unknown Interest rate (through example bc best way to explain lol)
A person borrows $500 today and promises to repay B person $605 in 2 years. Annual interest rate? PV= $500 FV=$605- PV $ factor= ? PV=FV*PV$ factor $500=$605= PV $ Factor 0.82645= PV $ Factor look at row 4 and column 10% and you'll find it crossing there, ergo the Annual interest rate is 10%
Determine the transaction price
If its a single performance there is no allocation needed, If its a multi-performance than it allocates a portion to each performance
To report on the balances of WIP and progress billings be shown sates prior to the completion of a long-term contract ?
Net bal , as current asset (D), and Current Liability (C)
Receivables Turnover Ratio
Net sales/ (avg AR)
How to record merchandise buying
COGS::D Inventory:: C
To record cash collections
Cash :: D AR :: C
How to record receiving cash at the times of sales
Cash/AR:: D Sales rev:: C
Special issue for : Consignment Arrangements
Consignor: - physically transfers the goods to the consignee - retains legal title Consignee: - if a buyer is found, remits the selling price less commission - if a buyer is not found, return the goods to the consignor Rev is recognize when sale to a third part occurs
Diff of Ordinary Annuity v.s. Annuity Due
Ordinary Annuity - cash flow occur at the END of each period Annuity Due - Cash flows occur at the BEGINNING of each period
Key words to know if a problem is for PV or FV? (normal, A, and DA)
PV for valueing a NP note: for doing PV and u are only given something like 3% chart but u were given 6% semianmual, then double it from instead of 4 years to 8 years
Long-Term Contract Losses
Periodic Loss: -a project that is projected to be profitable overall Overall Loss: - to occur for the entire project sellers must update their estimates and recognize losses as necessary
Seller can be a Principal or Agent ( Determine the Transaction Price)
Principal: -deliver goods or service -recording revenue with sales price rev, COGS Agent: -facilitate transactions between a principal and a customer -records revenue by commission
measuring and Reporting AR
Recognition: recognized at the point of delivery Initial Valuation: recorded at the amount of consideration the seller is entitled to receive. is affected by discounts and considerations (discounts and returns) Subsequent Valuation: initial valuation reduced by allowance for uncollectible accounts, so AR are shown at the amount of cash the seller expects to recieve Classification: almost always classified as a CA
end 5/ beg 6 A
Revenue Recognition and Profitability Analysis
End 6 A/ Start 6B
Revenue Recognition and profitability analysis
When fining PV and FV factors
Row is the year or "period", row is the % of interest compounding
3 issues with AR
Sales Discount Sales Return Bad Debt: the money we may not get from our sales each are recorded based on which period they occur
Special issues for : Identify the Contract
Contract can be explicit, implicit, oral, or written contracts only exist if: - commercial substance -approved by bother parties -specific payment terms -probable that seller will collect its entitled amount contract no exists when: - neither party has performed any obligation listed -both parties can terminate the contract without penalty
Record Rev Recognized over time
Cost of event:: D rev from long-term contracts:: C WIP :: C rev from long-term contracts formula= cumulative of last year's costs/ cumulative of this year's cost= % (fixed amount * %)- rev recognized last perido= answer
Control
Customer has direct influence over the use of the good or service and obtains its benefits
How to calculate Revenue Recognized this period
( tot estimated rev * % completed to date)- rev recognized in prior periods Cumulative rev to be recognized to date = tot estimated rev * % completed to date over time according to the progress towards completion
What to pay in an investment in a specific situation? (through example)
You pay $10,000 end of each year for 10 years, returns a maturity value of $50,000 after 10 years? Assume interest rate is 6%. PVA+PV= Price to Pay PVA=$10,000* 7.36009= $73,600.9 (n=10,i=6%, PV for Ordinary Annuity) PV= $50,000* 0.55839= 27,919.5 (n=10,i=6%, Present value) terms: PVA: Present Value of Ordinary Annuity PV= lump sum of a present value
Bad Debt: Balance Sheet
company reports there is already a 24,000 uncollectible and they need a 25,000 (25,000 was found when combining amount of estimate uncollectible accounts)the so their bad debt will be 1,000 Bad debt Exp::D, 1,000 allowance for uncollectible accounts::C, 1,000
Formulas with contract
contract price / 50% = Actual cost + profit recognized contract price = (actual cost + profit recognized)/50%
Special issue for : Franchises
in a franchise arrangement, a franchisor grants the franchisee the right to sell the franchisor's products and use its name - include license to intellectual property and goods and services transferred Initial fees recognized when goods and services are transferred, continuing recognized over time
Identify the performance obligations
is it a single performance or a multi-performance?
Identify the Contract
legal rights and customer established
Special issues for : Identify performance Obligation
not performance obligation: -payments - quality - assurance warranties - the right of return Performance obligation - extended warranties - options (material right to receive goods or services at no cost or at a discount)
Record sale return occurring and inventory returning
sales returns occurring Refund Liability ::D Cash/AR :: C Inventory returning Inventory ::D Inventory-est returns:: C
Recording Sales returns
sales returns of n amount, cost of return is (n*%) sales returns::D, n Cash/AR:: C, n Inventory:: D, (n*%) COGS:: C , (n*%)
Calculate net sales rev for new sales made during the month
sales- (sales*% estimated return)
2 things to recognize when estimating progress toward completion
seller needs to estimate progress towards completion Output-based : measured as the proportion of goods or service transferred to date Input-based : measured as the proportion of effort expended relative to the total expected effort expected
Annuity
series of cash flows of the same amount received or paid for each period ex: a loan on which periodic interest is paid in equal amounts
Cash Equivalents
short term, highly liquid, maturity is no more than 3 months, ex: money market funds, treasury bills, commercial papers
Recognize revenue when each performance obligation is satisfied
single performance can be recognized as a point in time or being over a period of time Multi-performance is whatever time is appropriate for each performance obligation
Ex of Net Method
sold 30,000 with 2/10,n/30, Payment on 20,000 june 8 and remaining is 10,000 and gained on june 25. With Net method entry for june 25 should have: Cash:: D, 10,000 AR:: C, 9,800 Sales Discount Forfeited:: C, 200 math: discount forfeited= 10,000*2%=200 AR=10,000-200
Special issue for : Recognize Revenue when PO is satisfied
some common arrangements can have complicated revenue recognition timing -licenses -franchises -bill and hold arrangements -consignment arrangements -gift cards
How is revenue recognized over a period of time?
the customer... - consumes the benefits - controls the asset as it is created - asset that has no alterative use
Bad Debt
we use the allowance method, we estimate and record it same period as rev sales- collections= leaving bal Bad debt expense= leaving bal - expects to collect in AR/Cash
When is revenue recognized?
when a good or service is transferred to a customer in equal value as the monetary value agreed upon
What is true about Net and/or Gross methods
* gross method records sales discounts taken when payment happens in the discount period * net method records sales discounts not taken as sales discounts forfeited * Net sales rev is the same for both methods
Special issue for : Gift Cards
*sales of gift cards recognized as deferred rev *Gift car rev is recognized when a gift card is redeemed or likelihood of redemption is remote.
Special issues for : Determine the Transaction Price
- estimating variable consideration; -See if the seller is acting as a - Time value of money - accounting for payments by the seller to the customer
Seller purchases good/ services from customer ( Determine the Transaction Price)
- the fair value the seller accounts for that purchase as a separate transaction - pays more than the fair value, excess payments are subtracted from the transaction price of the sale to the customer
Customer more likely to control if the customer:
- the obligation to pay the seller - legal title to the asset - physical possession of the asset - assumed the risks and rewards of ownership - accepted the asset
5 steps to Revenue Recognition :
1. Identify the Contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when each performance obligation is satisfied
Special issues
1. specific requirements for contract existence 2. Prepayments, warranties, customer options 3. Variable consideration, right of return, principal versus agent, time value of money, payments by seller 4. Various approaches to estimating stand-alone selling prices 5. Licenses, franchises , bill and hold arrangements, consignment arrangements, gift cards
Calculate and record total estimated returns
1.) Tot estimated returns= sales* estimated % return 2.) Estimated returns to accrue (a)= tot esti. returns - experienced returns 3.) Estimated coat of returns to accrue (b)= esti. return to accrue *cost of FDS% record: Sales return:: D, a Refund Liability:: C, a Inventory (estimated returns):: D, b COGS ::C, b
Average Collection Period
365/ Receivables turnover ratio
Bad Debt: Income Statement
sales * % that are proved to be uncollectible BD exp::D Allow. Uncollectible :: C
Record progress billings
AR :: D Billings to event contract :: C
Record ending up collecting some money that was presumed to be uncollectible
AR:: D Allowance for uncollectible accounts::C
Time Value of money ( Determine the Transaction Price)
Account for money if a contract includes a significant financing component in this case, the contract contains: 1. a delivery component, equal to the cash price of the good or service 2. a financing component, which is interest considered paid to the customer or to the seller
% of completion formula
Actual cost to date / total cost
Record NOT collecting on AR/Cash
Allowance for uncollectible accounts::D AR/Cash:: C
Bad Debt recording
Bad Debt Exp :: D Allowance for uncollectible accounts:: C
record finishing a job and removing them from your balance sheet
Billings on event contract :: D Work in progress :: C
Find annual (or whatever period) installment payment
Bought stuff with $8,600 and agreed to pay it in 5 annual year installments, interest is 8% 8600/PVA PVA for this= n=,i=8
Key relation Equations (should learn these hard)
End AR= Beg AR+ credit sales-cash collection- write off End Allowance for uncollectible= Beg allowance for uncollectible+ bad debt exp - write off + collection of previous write off BD Exp ::D Allowance for Uncollectible accounts::C
Difference between FV and PV on interest
FV entails addition of interest, PV entails removal of interest
Starting Formulas to know
FV of a single amount: =PV * FV $ factor PV of a single amount: =FV * PV $ factor FV of a equal cash flow: =Ann * FV ann factor PV of equal cash flows =Ann * PV ann factor
Value of an amount today will grow in the future is referred to as the...->
FV of single Amount
The formula for AR in the balance sheet for Construction accounts
Find GP, then GP= recognized rev - incurred CA for CIP =gp + incurred (for the period look at not net) AR in CIP= CA - progress billings
Compound Interest
Has interest of principal and interest accumulated in previous periods frequencies can be: semiannually, quarterly, monthly note: results from inc interest amounts of each period of the time of the investment , remains invested from multiple periods in "formula sequence": when compounded annually Year 0> = end bal, $1000 year 1> 10%*$1000= $100=end bal, $1,100 year 2> 10%* $1100=$110= end bal, $1210
2 approaches to Estimate Bad Debt
Income Statement: * 1 step * find bad debt expense using net credit sales* bad debt % Balance Sheet: * 2 step * End AR, estimate AR not collected, then make allowance of uncollectible, * Compare beg Bal and end Bal, the change is the bad debt expense recorded
Dont recognize revenue in a contract until?
It's completed
Special issue for : Allocate the Transaction price to POs
Various approaches available to estimate stand-alone selling prices: -adjusted market assessment approach - expected cost + margin approach - Residual Approach (unknown stand-alone selling price = total price -known stand-alone selling price
Right of Return ( Determine the Transaction Price)
a type of variable consideration - reduce revenue by the estimated returns: * record Refund Liability if cash has been received * reduce AR if cash has not been received
To record costs of an event
an event in progress :: D Cash, materials, etc :: C
Formula to find Revenue recognized in a period
cost incurred in base period/ (incurred in base period + estimated additional cost to complete)= % complete fixed price * %= tot rev to date for the period after? (cost incurred in last period + cost incurred base period)/ (incurred in base period + Cost incurred last period + estimated additional cost to complete)= % complete fixed price * %= tot rev to date Current tot rev to date - (last periods tot rev to date + other periods tot rec to date combined) = rev recognized in the base period more... tot cost of contract= incurred cost + estimated addition find % completion if recognized N amount then N= (20%* contract price) -cost incurred
Cash Collection during the year
costs incurred during the year + costs incurred prior years+ estimated costs to complete end year
Cash
currency, coins, balances in checking accounts
Sales Discount
customers paying in a discount period, they are given a 2/10 (2%) discount if paid within n/30,(10) days otherwise full payment within 30 days Gross method: record all sales and AR in gross Net Method: all sales, rev, AR recorded in Net amount (after discount)
Special issue for : bill and hold sales
customers purchase goods but requests that the seller not ship the product until a later date Rev is recognized when actual delivery occurs
Recognize Revenue for Current Assets
find % completed: (actual/(actual+ estimated remaining)=% find revenue currently recognized in total: Fixed cost * %= net rev current find rev of current assets: money earned from this period =Net rev current - progress billing and do n = progress billings - cash collected current assets rev recognized= money earned from this period + n
Record Allowance for uncollectible Accounts
outstanding AR- Anticipated collections= uncollectible Bad Debt Expense:: D Allowance for Uncollectible Accounts:: C
Variable Consideration ( Determine the Transaction Price)
part of the transaction price depends on the outcome of some future event Method of estimate: - expected value -Most likely amount ex: entertainment and media -royalties Health care - reimbursements Manufacturing - volume discounts, product returns Construction - Incentive payments Telecommunications - rebates
ex 2 of Gross and Net Method
payment is 2/10, n/30, Company purchases $20,000. They have a remaining bal of $6,000 pre-math: discount=(20,000-6,000)*2% Rev for Net method = 20,000- (20,000*2%) Discount Forfeited= 6,000 *2% Gross method: Rev 20,000 less: discount (280) Add: Discounts forfeited 0 net rev 19,720 Net method: Rev 19,600 less: discount 0 Add: Discounts forfeited 120 net rev 19,720
Ex of recording Gross Method and Net Method
payment is 2/10, n/30, Company purchases $20,000. They have a remaining bal of $6,000 pre-math: from gross, you need to find cash and sales discount, and AR for gross method, you need cash and a sales discount Sales Discount= (20,000-6,000)* 2%=280 Cash= 14,000-280= 13,720 AR= 14,000 (journals made during discount period) journal will record for Gross: Cash:: D, 13,720 Sales Discount :: D , 280 AR:: C, 14,000 Journal will record for Net: Cash :: D, 13,720 AR :: C, 13,720 (journal entries made AFTER discount period with remaining bal 0f 6,000) pre-math: sales discounts forferited=6,000*2% AR= 6,000-120 Gross method: Cash :: D, 6,000 AR:: C, 6,000 Net Method: Cash:: D, 6,000 AR:: C, 5,880 Sales Discount Forfeited:: C, 120 note: sales discount is a contra revenue account
Rev that will be recognized over a period of time
principal + period payment that was arranged arranged: months occurred/ tot months= % %* period payment= period payment that was arranged
Payment recognize rev for a set period formula
principal lump sum * month occurredd/ months set to happen)
Sales Return
recorded in the accounting period in which we record sales, contra rev, don't wait till the actual return happens, make sure sales and sales return are recorded in the same period
Special issue for : Licenses
right of use: rev is recognized at the start of the license period when the right is transferred Right of access: rev is recognized over the period of tome for which access is provided time
