ACCT 110 Lecture Notes - Lecture 12: Santa Barbara City College, Retained Earnings
Document Summary
Get access
Related Documents
Related Questions
Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the company’s current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.
Table:
| Subject | U.S. GAAP | IFRSs |
|---|---|---|
| Concept/objective | realized or realizable and earned. | According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized. |
| Definition of revenue | Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations." | Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants." |
| Sale of goods or products | SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP. | Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably." |
| Rendering services | >Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date. | Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable." |
| Software arrangements | ASC 985-605 provides guidance on recognizing revenue in a software arrangement. | There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate. |
| Construction-type contracts | ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized. | IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized. |
| Milestone method | ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements. | There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements. |
| Multiple-element arrangements | ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605). | Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole." |
| Bill-and-hold arrangements | The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances. | Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same. |
| Gross versus net | ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent). | Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent. |
| Customer loyalty programs | Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model. | IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement. |
| Rebates, discounts, incentives, and other consideration | ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received. | Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers. |
| Specific industry and other guidance | Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions. | IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions. |
| Hello...I am in need of help with the adjusting entries please 100000 | Bank Account |
| 110100 | Accounts Receivable (Direct Posting Account) |
| 110150 | Allowance for Bad Debts |
| 110200 | Interest Receivable |
| 200600 | Inventory-Operating Supplies |
| 200900 | Inventory-Raw Materials (Direct Post) |
| 200910 | Inventory-Finished Goods (Direct Post) |
| 200920 | Inventory-Trading Goods (Direct Post) |
| 200930 | Inventory-Semi-finished Goods (Direct Post) |
| 210000 | Prepaid Insurance |
| 211000 | Prepaid Supplies |
| 212000 | Prepaid Advertising |
| 215000 | Prepaid Rent |
| 216000 | Deposits on Purchases |
| 220000 | Notes Receivable |
| 220110 | Land (Direct Post) |
| 220210 | Production Machinery, Equip & Fixtures (Dir.Post) |
| 220310 | Accumulated Depreciation-Machinery (Direct Post) |
| 220400 | Office Furniture |
| 220500 | Accumulated Depreciation-Office Furniture |
| 220600 | Office Equipment and Computers |
| 220700 | Accumulated Depreciation - Office Equipment |
| 300100 | Payables-Income Taxes |
| 300200 | Accounts Payable (Direct Posting Account) |
| 300300 | Payables-Interest |
| 300400 | Payables-Short-Term Notes |
| 300500 | Payables-Long-Term Notes |
| 300600 | Payables-Commissions |
| 300700 | Payables-Salaries and Wages |
| 300800 | Accrued Expenses |
| 310000 | Goods Receipt / Invoice Receipt Account |
| 320000 | Accrued Tax – Output |
| 321000 | Accrued Tax- Input |
| 322000 | Unearned Revenues |
| 329000 | Common Stock |
| 329100 | Additional Paid-in-Capital |
| 330010 | Retained Earnings (Direct Post) |
| 600000 | Sales Revenue |
| 610000 | Sales Discount |
| 620000 | Miscellaneous Revenue |
| 630000 | Revenue Deductions |
| 640000 | Gain or Loss on Sale of Assets |
| 650000 | Customer Service Revenue |
| 650100 | Customer Service Revenue Settlement |
| 700000 | Labor |
| 720000 | Raw Material Consumption Expense |
| 720100 | Finished Product Consumption Expense |
| 720200 | Trading Good Consumption Expense |
| 720300 | Semi-Finished Consumption Expense |
| 740000 | Supplies Expense |
| 740100 | Telephone and Internet Expense |
| 740200 | Legal and Professional Expense |
| 740300 | Rent Expense |
| 740400 | Insurance Expense |
| 740500 | Payroll Expense-Office |
| 740600 | Payroll Expense-Administrative |
| 740700 | Sales Expense |
| 740800 | Tax Expense - Property |
| 740900 | Tax Expense- Income |
| 741000 | Miscellaneous Expense |
| 741200 | Bad Debt Expense |
| 741300 | Information Technology Expense Account |
| 741400 | Production Order Variance Expense Account |
| 741500 | Utilities (electricity & phone) Expense |
| 741600 | Manufacturing Output settlement |
| 741700 | Manufacturing Output Settlement Variance |
| 741800 | Depreciation Expense |
| 741900 | Advertising Expense |
| 742000 | Vendor Discounts Missed |
| 742100 | Shipping Expense |
| 760000 | Purchase Price Difference |
| 760100 | Production Variance |
| 770000 | Research and Development |
| 780000 | Cost of Goods Sold |
Detailed Assignment Requirements
The next few pages show the balances in GBI accounts as of December 31st and then the descriptions of events occurring during January for which you are to make general journal entries in a manual accounting system. Your manual accounting system needs to include a general journal, Pivot Tables (that acts as a General Ledger), and a trial balance, all of which will be generated in Excel, (see the sample problem for the format).
After you have created your entries in your manual system, you will enter all the data into the SAP ERP system. When you enter your data into the SAP system the resulting financial information from the manual system and the SAP system should match exactly.
Assignment Steps
Record the daily transactions if appropriate, (some events may not involve journal entries), as general journal entries into Excel. Summarize the effects of the journal entries in a Pivot Table summary. Link the Pivot Table into your Excel worksheet as a trial balance. You should create links between your spreadsheets to expedite this process and minimize the risk of an error in data entry. Looking over the answer to the sample problem may be helpful in reviewing your Excel skills.
The next step is to record the adjusting entries into the general journal and then summarize them into a Pivot Table and then the trial balance.
Record closing entries in your trial balance as if this were a year-end close. (Do not enter the closing entries in your General Journal).
Prepare the SAP ERP system for data entry.
Now use the SAP ERP system to make all above entries using the general ledger system in SAP. This should be done in a series of steps as follows:
Examine the GLXX chart of accounts where XX is your assigned SAP student login ID#. (Whenever you see XX in the instructions, substitute your SAP login ID#.)
Record beginning account balances in the SAP general ledger. This should be done as one composite journal entry (the first journal entry). Use January 1, as the journal entry date for the beginning account balances. Be sure to compare this to your Excel spreadsheet to make sure the entries are correct.
Display the trial balance (you should compare this to your manual entries). If the trial balance does not match your manual entries, research the errors and make necessary corrections.
Record the daily transactions for January in the SAP general ledger (do each journal entry as a separate entry, not as one giant composite entry, be sure to use appropriate dates – this allows for a good audit trail).
Display the trial balance (you should compare this to your manual entries).
Record the adjusting entries.
Display the trial balance (you should compare this to your manual entries).
Simulate closing the books as of January 31 using the SAP utility. (Do not enter closing entries into the general ledger. These entries would be done automatically through the SAP month-end closing function.)
Instructions for using the SAP ERP system start on page 13 of this document.
Account Balances as of December 31st
| Debit Balance | Credit Balance | |||||
| 100000 | Bank Account | $300,318 | ||||
| 110100 | Accounts Receivable (Direct Posting Account) | 94,670 | ||||
| 110150 | Allowance for Bad Debts | 2,600 | ||||
| 200600 | Inventory-Operating Supplies | 8,832 | ||||
| 200900 | Inventory-Raw Materials (Direct Post) | 52,000 | ||||
| 200910 | Inventory-Finished Goods (Direct Post) | 281,298 | ||||
| 200920 | Inventory-Trading Goods (Direct Post) | 66,474 | ||||
| 210000 | Prepaid Insurance | 3,000 | ||||
| 212000 | Prepaid Advertising | 2,400 | ||||
| 220110 | Land (Direct Post) | 528,000 | ||||
| 220210 | Production Machinery, Equip & Fixtures (Dir.Post) | 915,000 | ||||
| 220310 | Accumulated Depreciation-Machinery (Direct Post) | 408,000 | ||||
| 300200 | Accounts Payable (Direct Posting Account) | 48,000 | ||||
| 300700 | Payables-Salaries and Wages | 94,313 | ||||
| 300800 | Accrued Expenses | 2,200 | ||||
| 320000 | Accrued Tax – Output | 4,000 | ||||
| 329000 | Common Stock | 1,010,000 | ||||
| 329100 | Additional Paid-in-Capital | 52,870 | ||||
| 330010 | Retained Earnings (Direct Posting) | 630,009 | ||||
Events During January
Event Date Description of Event
| 1 | January 3 | Employees are paid monthly on the first business day of the month for work done in the previous month. (Ignore payroll taxes for this assignment.) Accounting wrote and distributed the paychecks. |
| 2 | GBI received $60,000 in safety product inventory and $40,000 in raw materials from Dallas Bike Basics. This inventory was ordered on December 28. The payment terms for the invoice total of $100,000 are net 10 days. GBI paid the CWX shipping company $1500 with a manual check for the shipment of the goods base on the weight. The bill of lading showed that the safety product inventory arrived in 5 boxes with an average weight of 40 lbs per box. and the raw materials came on a pallet and weighed 300 lbs. | |
| 3 | Windy City Bikes in Chicago, IL ordered $22,500 of bicycle accessories from GBI. The cost of the accessories (to GBI) is $15,000. The goods were shipped to Windy City immediately via UPS using Windy City’s UPS shipping number. The terms of payment for Windy City’s order are 3/10 net 30 days. | |
| 4 | January 7 | GBI received payment of $24,000 from Northwest Bikes in Seattle, WA for the balance due on their account. |
| 5 | January 10 | GBI’s account on the utility company website is updated at the end of each month when the meter is read. GBI uses this data to accrue the expenses at the end of each month (in this case on December 31st.) This allows recognition of the expense in the correct period. Expenses are usually accrued at the end of the month as “Accrued Expenses”. GBI paid the December utility bill via the company’s automatic electronic bill pay program. |
| 6 | GBI’s advertisement in the English language edition of Italian Cycling Journal was published today. This ad was prepaid at the end of August for six months of advertising, September through February, (Four months of advertising have already been used.) | |
| 7 | January 11 | The office manager in San Diego ordered $380 of office (operating) supplies from Staples. While on the way back from a delivery, one of the warehouse staff picked up the Staples order and brought it to GBI’s office. GBI has an account with Staples and payment terms are net 10. Operating supplies expense is figured at the end of the month determined by the amount of supplies used during the month. |
| 8 | GBI ordered $75000 in raw materials from Space Bike Composites in Houston, TX. Terms of payment to Space Bikes are net 30. | |
| 9 | GBI received payment from Windy City Bikes for their order from January 3. Windy City paid the invoice amount less the discount for paying within 10 days. | |
| 10 | January 12 | GBI paid for the inventory order (via bank transfer) that they received from Dallas Bike Basics back on January 3. |
| 11 | January 13 | In order to better track inventory, GBI ordered a bar-coding and tracking system which will be installed and tested by Computer Specialists, Inc. (CSI). The system will allow employees to track inventory using mobile devices and special software which will link into their new computerized accounting system. The barcode system costs $7,500 (including sales tax) and CSI will charge GBI $1,300 for the installation and tests. GBI paid a deposit of $2,000 on the system and the remainder is due and payable when the system is installed. GBI will classify the bar-coding system as “Production Machinery, Equipment and Fixtures”. |
| 12 | January 17 | GBI paid an invoice from Lightbulb Accessory Kits for ordered goods that were received on December 20. The amount of the invoice from Lightbulb is $15,890 due net 30. |
| 13 | The city of Denver will be hosting a decathlon at the end of February. The event is expected to create demand for high quality bikes. Rocky Mountain Bikes in Denver, CO placed an order with GBI for $128,000 worth of bicycles to be delivered immediately. Rocky Mountain will pay the shipping. The bikes cost GBI $78,000. GBI shipped the order immediately so that Rocky Mountain can start promoting the bikes. Because Rocky Mountain is a good customer, GBI is giving them special terms of net 45 days on this order. | |
| 14 | GBI received raw materials inventory ordered from Space Bike Composites January 11. Shipping charges of $600 were included in the invoice from Space Bike. | |
| 15 | GBI received notice that Bunky’s Bicycle Emporium had declared section 13 bankruptcy which meant GBI would not be able to collect the $4,200 that Bunky’s owed them. | |
| 16 | January 18 | GBI received a $90,000 funds transfer from Silicon Valley Bikes in Palo Alto for the balance due on their account. |
| 17 | January 19 | GBI paid Staples for the office supplies they received January 11. |
| 18 | SoCal Bikes in Irvine, CA placed an order for $2,750 in bicycle helmets for a special event in February. The merchandise cost GBI $1,300. SoCal sent a truck to the GBI distribution center in San Diego, CA and picked up the merchandise directly from GBI’s warehouse. Terms of payment are net 30. (Don’t forget to charge sales tax of 7.75% for this order.) | |
| 19 | January 24 | Beantown Bikes in Boston, MA placed an order with GBI for $27,000 in bicycles. The cost of the bicycles is $17,000. Beantown Bikes is a new customer. Its buyers saw GBI’s booth at a trade show. Because Beantown is a new customer, they must either wait until their credit can be approved or pay for the order before GBI will ship the bikes to them. |
| 20 | January 25 | GBI has been offered the opportunity to advertise in the Bicycle Times online magazine for a reduced price if they pay for three months in advance. In light of the upcoming Tour de France, the advertising is a great opportunity for GBI to get additional recognition. The advertising will start in February. GBI wrote a check for $9,000 for three months of advertising. |
| 21 | January 26 | GBI received notification from their bank that Beantown Binkes had transferred funds into their account for their prior order, so GBI’s warehouse personnel shipped Beantown’s order. Beantown will be responsible for paying Fed-X $400 for shipping the order. |
| 22 | January 27 | The county approved GBI’s building plans for their new warehouse. Estimated building costs are $1,300,000 which will be funded via a mortgage from Bank of America. GBI plans to break ground on the new building April 18th of this year. |
| 23 | GBI sent a $32,000 check to Night Rider Aluminum Products for an order of bicycle parts GBI received December 30th. | |
| 24 | Big Apple Bikes in New York City is expanding to another location in New York and needs to stock the new location. GBI received a phone order from Big Apple for $250,000 in bicycles and $108,500 in bicycle accessories and safety gear at special discount prices. The cost of the bicycles in this order is $185,000 and the cost of the accessories is $65,000. Big Apple will have a contract trucking company pick up the order when it is ready. The order is sent to GBI’s warehouse for picking and packing, which may take a couple days. Payment terms to Big Apple for this order are net 30. | |
| 25 | January 31 | GBI pays sales tax once a quarter via the state’s electronic filing and payment system. GBI filed its return and paid its sales tax for the quarter ending December 31. |
| 26 | GBI paid February’s rent of $4,000 for the office and warehouse space in San Diego. | |
| 27 | CSI installed and tested the new barcode system. The warehouse manager approved the installation and commented that she thinks it works great. GBI wrote a check to CSI for the balance owed and gave it to the installer. | |
| 28 | Big Apple’s truck arrived at GBI’s warehouse and picked up the order from January 27th. |
Adjustment information as of January 31, not already given in the original transaction(s):
1.Based on prior experience, GBI estimates that approximately 1.5 % of the credit sales from each month will become bad debt. GBI writes off bad debts as they occur and recognizes bad debt expense based on percentage of credit sales as an adjusting entry each month.
2. As a control measure, physical inventories are taken on a periodic basis alternating between the raw materials inventory, finished goods inventory and trading goods inventory. Physical inventory of the finished goods inventory was taken at the end of January. It was determined that the value of the finished goods merchandise on hand was $1,200.
3. GBI counted the office (operating) supplies on hand after the close of business on the last day of the month and determined the cost of the unused office supplies to be $1000.
4. Production Machinery, Equipment and Fixtures were placed in service on January 1, 2013, with no salvage value. The bar-code system has a 5-year life and no salvage value. GBI depreciates fixed assets on a straight-line basis and those assets placed in service in the first half of the months are depreciated for the entire month, while fixed assets placed in service during the last half of the month are not depreciated until the second month. Depreciation is rounded to the nearest dollar and assets are depreciated on a monthly basis (i.e. number of days in the month is not of consequence).
5. GBI used the Internet to review the monthly charges for utilities the business consumed during January. Based on the Internet report, the amount to be billed by the utilities company for January usage is the same as was billed for December.
6. Liability insurance for the six-month period ending on January 31 was paid last August on the first of the month. Liability insurance is assumed to be utilized uniformly over the six-month policy period.
7. GBI needs to recognize the wages expense for the month. Since all employees are paid salaries and no changes have been made, this amount is the same as the previous month salaries. (For purposes of this assignment, ignore manufacturing, office, and administrative payrolls and assume all wages expense is towards labor expense.)
****Hello, there was a comment that said "Lack of information on year". For this case study you can use 2018 for all the January transactions and 2017 for anything refering to December. All adjustments need to be dated January 31, 2018. Thank you
