Adjusting Entries Fixed Assets
Type of Adjustment I.E. Entry During Period Adjusting Entry HC = Historical cost RV = Residual value
Deferred revenue Unearned rev. Dr Cash Dr Unearned rev. BV = Book value (HC – Accumulated Depreciation)
Cr Unearned revenue Cr Revenue A = Useful life N = # of months asset was available for use
Deferred expense Amortization Dr Asset Dr Expense Depreciation
Prepaid expense Cr Cash or A/P Cr Asset
Accrued revenue Interest receivable No entry Dr Asset Straight line and units of production do not depreciate beyond its useful life.
Cr Revenue Diminishing balance cannot depreciate beyond estimated residual value.
Accrued expense Payables No entry Dr Expense Once an asset is fully depreciated, BV should equal RV
Round all depreciation to the nearest half month.
Closing Entries Straight line depreciation: (HC – RV) * 1/a * n/12
1. Close revenue to income summary [C1] Units of production depreciation: (HC – RV) / Total Units * Units used
2. Close expense to income summary [C2] Diminishing balance depreciation: BV * 1/a * n/12
3. Subtotal income summary, and record taxes to income tax expense and payable[C3]
4. Close income tax expenses to income summary [C4]
Sales, Retirement and Trade-in
5. Close income summary to retained earnings [C5] 1. Depreciate asset to point of sale, retirement, or trade-in
6. (Skip 3 and 4 if there is a net loss) 2. Calculate asset’s BV at point-of-sale, retirement or trade-in
Bank Reconciliation 3. Compare BV with cash received or allowance granted. If BV > cash received, record a
loss as an expense. Otherwise, record a gain as a contra-expense.
Opening balance taken from last adjusted balance on bank reconciliation 4. Record the effect on cash or credit (list price – trade in allowance)
Add cash receipts AND less cash disbursements
Adjust balance for any items the bank added or subtracted we did not know about 5. Remove the old asset from records (historical cost and accumulated depreciation)
o Receivables / Notes collected for company by bank 6. Record gain or loss (cash received – book value)
o Service charges and NSF cheques (cheques are good for 6 months) 7. In the case of a trade-in, add new asset.
Impairment: If carrying amount exceeds recoverable amount (fair value – selling cost)
o Automatic payments for loans, interest, payroll, etc. Dr Impairment loss (Expense) Cr Accumulated depreciation
Add or subtract from balance to get new adjusted balance.
Inventory for Merchandising Companies Intangible Assets
Record at cost
Purchase of inventory: Dr Inventory Cr Accounts payable or Cash If finite life (patent, copyright, research and development cost), cost is allocated over its
If payment is made in time for discount: Dr Accounts payable Cr Inventory Cr Cash
For return / allowance: Dr Accounts payable / Cash Cr Inventory useful life (shorter of useful or legal life)
Ignore net cost and post the entire amount of the purchase initially Amortization amount is amortized equally over useful life for the asset.
Only deduct discount after the liability is paid within the discount period. If impairment is evident, write it down to recoverable amount
Inventory for Manufacturing Companies
Purchase, Duty, Freight, Discount(-), Return(-), Return duty(-) Return freight, Return discount Raw Material (Refer to table of merchandising inventory accounts)
Beginning Inventory Value ending inventory using one of the three cost methods
Purchases COGAFS CORMAFU; COGS CORMU (debit to WIP)
Purchase Discount Work in Progress (WIP)
Freight-in Include all product costs (raw materials, direct labour, or factory overhead)
Purchase Returns and Allowances Calculating E/B of WIP
o E/B WIP = pRM (given) + pDL (given) + pFOH
Cost of goods available for sale o pFOH = (Partial proxy / Total Proxy) x Total FOH
Cost of goods sold
Ending Inventory o Proxy must be:
Measurable in the partially completed units
1. Check case exhibit to see how purchases and payments take place Considered to be a cost driver
2. Handle each purchase individually and in sequence of when ownership took place. Spread evenly throughout the production process
3. Keep track of units purchased and calculate unit cost of the purchase (3 decimal place) Processing costs (DL, FOH)
4. Determine the cost of goods available for sale (COGAFS) Raw Materials Inventory (CORMU)
5. Determine the units available for sale (UAFS)
6. Calculate value of ending inventory Cost of work-in-progress (T/B)
Specific identification: Used to value items that cannot be interchanged easily Cost of finished goods manufactured
FIFO: Oldest inventory is sold first and E/B is valued at most recent price Ending balance
Weighted average cost: (COGAFS / UAFS) x E/B in Units
7. Determine COGS. Finished Goods (E/B calculated using weighted average cost)
Lower of Cost and Net Realizable Value (LCNRV) T/B consists only of O/B and WIP plug.
1. Determine cost of inventory and cost of NRV of inventory.
E/B is calculated using average cost (UAFS = E/B – # sold; COGAFS = Calculated)
2. Record inventory at whichever value is lower. SPECIFICS FOR EXAM 2
Accounts Receivables Accounts Payable
Purchase on credit: Dr Accounts receivables Cr Sales revenue Previous year: Dr A/P Cr expense
Write-off entry: Dr Allowance for Doubtful accounts Cr Accounts receivable
Current year: Dr expense Cr A/P
Recovering from write-off Utilities Expense
1. Dr Accounts receivable Cr A4DA Dr utilities expense Cr WIP FOH
2. Dr Cash Cr Accounts receivable Ratio: Value in exhibit 2 / (Value in exhibit 1 + exhibit 2)
Summary of bad debt expense (Periodic)
1. Calculate trial balance of A4DA Comprehensive case
1. Read the case
2. Calculate ending balance of A4DA (E/B A4DA = E/B of A/R x estimated %) 2. Post opening balances to T-accounts using last year’s balance sheet
3. Calculate bad debt expense (Bad debt expense = T/B A4DA – E/B A4DA) 3. Post cash disbursements and cash receipts to appropriate T-accounts
4. Dr Bad Debt Expense Cr A4DA 4. Go through case paragraph by paragraph in the order presented an