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Accounting Complete Review for Final Exam

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Wilfrid Laurier University
Keith Whelan

Cash and Receivables Restricted Cash – not available for use, but bank can use these funds - if material, must be segregated from cash Receivables can be ‘trade receivables’ (A/R or N/R) or ‘non-trade receivables’ (government/dividend/interest receivables) NRV of AR = Gross AR - AFDA - Allowance for Sales Returns and Allowances AFDA: Bad Debt Expense AFSRA: Sales R+A AFDA Allowance for Sales R + A Given $10,000 in sales with terms (2/10, n/30): Gross Method Net Method AR 10,000 AR 9,800 Sales 10,000 Sales 9,800 Pays within 10 days: Pays after 10 days: Cash 9,800 Cash 10,000 Sales Discounts 200 Sales Discounts Forfeited 200 AR 10,000 AR 9,800 Estimating Uncollectible Accounts a) Allowance Procedure Only - AFDA is estimated and adjusted - can use % of receivables OR aged receivables methods b) Mix of Procedures - % of sales and adjust AFDA Mix of Procedures Sales = 400,000 Bad Debt Exp = 400,000 x 2% = 8,000 Bad Debt Expense 8,000 AFDA 8,000 At year end, 9,900 won’t be collected and the balance of the allowance is $7,500 Bad Debt Expense 2,400 (9,900 – 7,500 = $2,400) AFDA 2,400 Calculating AFDA (good + , bad -) AFDA Opening balance 37,000 Recovery of AR written off last year 18,000 Customer Accounts Written off this year (36,000) Bad Debt Expense 144,000 AFDA, Dec 31 163,000 Write off AR 1. Allowance Method 2. Direct Write-Off Method (no AFDA) AFDA 500 Bad Debt Expense 500 AR 500 AR 500 - used if uncollectible amounts are immaterial If payment is later received: AR 200 AFDA 200 Cash 200 AR 200 Notes Receivable  contain interest  a) stated rate of intereb) zero interest bearing Interest Bearing ST N/R Non-Interest Bearing ST N/R - interest earned each year is at coupon rat- $5,000 9-month note is issued, 8% is implied int. Rate bus N/R is discounted at market rate N/R 1,000 N/R 4,717 5,000____ A/R 1,000 Cash 4,717 1 + 0.08(9/12) Cash 1,030 Cash 5,000 N/R 1,000 N/R 4,717 Interest Income 30 Interest Income 283 If stated interest rate < market rate Discount (sells @ < face value) If stated interest rate > market rate Premium Long Term Loans Receivable  recognized at fair value Microsoft issues a $10,000, 10% 3-year note, market rate is 12% - annual interest payments are $1,000 ($10,000 x 10%) Face Annuity (10,000 x 0.71178) + (1,000 x 2.40183) = 9,520 ** use 12% market rate for tables the 10% is used only to get the $1,000 Notes Receivable 9,520 Cash 9,520 - at issue date, company has a discount of $480 (to be amortized over 3 years) First 1,000 Received: Book Value x Market Rate Cash 1,000 = 9,520 x 12% Notes Receivable 142 - excess over 1k is N/R Interest Income 1,142 Book value of Receivable is now 9,662 10,000 – (480 – 142) = 9,662 (or 9,520 + 142) Second 1,000 Received: Cash 1,000 $9,662 x 12% Discount on N/R 159 Interest Income 1,159 Under the straight line method: $480 / 3 years = $160/year interest income IFRS requires effective interest method, PE GAAP doesn’t specify Transfers of Receivables  Continuing Involvement by Seller 1. Reduce receivables 2. Recognize component assets + liabilities 3. Record gain/loss AR Turnover = Net Sales _ (or net rev.) Cash Avg. Trade Rec. (net) Due from Factor Days Sales Uncollected = 365 _ Loss on Sale of Receivables A/R Turnover A/R Recourse Liability Servicing Component Without recourse  purchaser is fully responsible for collection of receivables Inventory Most inventory is valued at “lower of cost and net realizable value” Perpetual  continuous record of inventory changes When inventory is sold: COGS 500 Inventory 500 Periodic  COGS and inventory not kept up to date  determined @ end of period In perpetual, cost of freight, purchase R+A, and discounts are all recorded in ‘Inventory’ account In periodic, cost of freight, purchase R+A, and discounts are all recorded in separate accounts Sale of 600 units at $12 under Perpetual Sale of 600 Units at $12 under Periodic AR 7,200 AR 7,200 Sales 7,200 Sales 7,200 COGS 3,600 Inventory 3,600 Purchase 900 Units at $6 under Perpetual Purchase 900 units at $6 under Periodic Inventory 5,400 Purchases 5,400 AP 5,400 AP 5,400 Periodic Year-End Adjusting Entry (not required in perpetual systems) COGS Inventory (ending) Purchases are recorded as: Purchases Returns/Discounts Purchases 500 Purchases (gross) A/P 500 Freight-In Inventory (beginning) Cost Formulas 1. Specific Identification - each item purchased/sold is individually identified 2. FIFO 3. Weighted Average Cost - also can use Moving-Average cost formula With Moving-Average, a new average unit cost is determined with every new purchase Net Realizable Value (NRV) = Estimated Selling Price – Estimated Costs to Sell/Complete Comparison of cost and NRV should be done on an item-by-item basis: Direct Method Indirect Method (Allowance Method) - loss becomes part of COGS in I/S - allowance account on B/S, loss recorded on I/S Perpetual: COGS 12,000 Loss Due to Decline in NRV 12,000 Inventory 12,000 Allowance to Reduce Inv. 12,000 COGS Beginning Inventory Sales Add: Net purchases COGS Add: Freight-In Gross Profit COGAFS Operating Expenses Less: Ending Inventory Net Income (before taxes) COGS Gross Profit Method of Estimating Inventory Ending Inventory = COGAFS – COGS If: Beginning Inventory (at cost) = $60,000 Purchases (at cost) = $200,000 Sales (at selling price) = $280,000 Gross Profit Percentage on Sales = 30% COGS = Sales x (1-0.3) = Sales x 0.7 = 280,000(0.7) = $196,000 Ending Inventory = Beg Inv. + Purchases – COGS = 60,000 + 200,000 – 196,000 = 64,000 Markups COGS = Sales__ if markup on cost is 25% 1.25 Inventory Turnover = COGS _ Average Days to Sell Inv = 365___ 1.25 Inv. Turnover - # times on average inventory was sold during the period Cost to Retail Ratios Net Goods Available (at retail) $37,500 At Cost At Retail Less: Net Sales 25,000 Goods available 20,500 36,000 Ending Inventory (at retail) 12,500 Add: Net Markups 2,000 Less: Markdowns (2,500) Ending Inventory (at cost) = 12,500 x 54.7% Markdown cancellations 2,000 = $6,837.50 Goods Available 20,500 37,500 Ending Inventory (at cost) = Ending Inventory at Retail x Cost to Retail Ratio Investments Models of Accounting for Investments a) Cost / Amortized Cost Model b) FV-NI (or FV-TPL) c) FV-OCI a) Cost Model (equity) b) Amortized Cost Model (debt) - for investments in shares of another entity - for investments in debt securities of another entity - recognized cost of inventory at FV - recognize cost of inventory at FV - report at cost (unless impaired) - report at amortized cost (unless impaired) - recognized dividend income - recognize interest income - amortize any discount/premium by adjusting - at disposal, derecognize and report a gain/loss carrying amount on disposal in net income - at disposal, bring accrued interest and discount/premium amort. Up to date, derecognize Gain/Loss = Selling Price – Carrying Amount investment, and report a gain/loss on disposal in NI At sale, new carrying amount = amortized cost balance + discount (or – premium) Impairment 1. Incurred Loss Model 2. Expected Loss Model 3. Full Fair Value Model Incurred Loss Model / Expected Loss Model Fair Value Loss Model Impairment Loss = Carrying Amount – Revised PVFCF Imp. Loss = Carrying Amount – FV IFRS ASPE Determined using the - discount @ original/historical - discount @ current discounted cash flow model effective rate on loan market rate (same as ASPE ) Significant Influence: 20-50% ownership - representation on BoD, participate in policy making - material intercompany transactions, exchange of management personnel IFRS  investments in associates (significant influence)  Equity Method PE GAAP  significant influence investments  Equity Method OR Cost Method Equity Method Purchases Shares of XYZ (20%) Market Price of Shares Rise XYZ Pays Dividend of 100k Investment in XYZ Investment in XYZ Cash 20k Cash Investment Income Investment in XYZ 20k Investments with significant influence are assessed at end of each reporting period to determine if there is any indication of impairment. If Carrying amount of investment in associate > recoverable amount INVESTMENT IS IMPAIRED Impairment Loss = Carrying Amount – Recoverable Amount Higher of: 1. Value in use (PVFCF) 2. FV less costs to sell Investments in Subsidiaries (>50%) - 2 corporations are reported as a single business entity - under PE GAAP, parent company can: 1. Consolidate all subsidiaries 2. Account for all subsidiaries under either Equity or Cost Model 0-20% 20-50% 50% + Little influence Significant, associate Control, subsidiary FV-NI, FV-OCI Equity Method Consolidation Debt or equity Equity inv. NOT held for ST trading Cost/Amortized Cost Model FV – NI FV – OCI ASPE Yes Yes (required) No IFRS Only amortized cost model Yes (optional) Only FV-OCI without recycling AOCI goes to RE w/ Recycling, AOCI goes to NI and closed out back to RE Interest is required to be disclosed separately under cost/amortized cost and ASPE FV-NI. Interest is optional to be recorded separately under IFRS FV-NI. Property, Plant and Equipment Costs incurred after acquisition are: - added to the assets cost if they increase future service potential (capitalized) - expensed, if they don’t add to the asset’s original service potential Borrowing Costs: - IFRS – must be capitalized - PE GAAP – capitalize or expense Non-Monetary Exchanges - valued at the FV of the asset given up or received (which ever is more reliably measured) - gain/loss is recognized in income If the transaction lacks commercial substance, or the FVs are not determinable: New Asset = Book Value of Assets given up  no gain recognized (but losses are recognized) Contribution of Assets - sometimes there is a transfer of assets where nothing is given up in exchange (charities, gov’t grants) - asset’s FV (market) is used as cost of asset Two approaches: 1) Capital Approach 2) Income Approach Credit donated capital Credit represents income (for non-owner contributions) - used for shareholder contributions only a) Cost Reduction Method - Credit asset account (benefit thru reduced dep. exp) b) Deferral Method - Credit Deferred Revenue Land: Permanent Improvements (landscaping) - Land Account Limited-life Improvements (fences, driveways) - Land Improvement Account If land is purchased with an old building, any demolition costs less salvage value are charged to Land Leasehold Improvements - if lessee makes improvements to leased building, the costs are recorded in ‘Leasehold Improvements’ - these are depreciated over the lesser of the remaining lease life and the useful life Property may be purchased as an investment to appreciate in value. If it is not used for ordinary business purposes, it can be classified as ‘Investment Property’ Measurement after Acquisition 1. Cost Model (CM) 2. Revaluation Model (RM) 3. Fair Value Model (FVM) Rearrangement / Reinstallation 1. Original Installation Cost is known  record as a replacement 2. Original Installation Cost isn’t known  cost is expensed 3. Original Installation Cost isn’t known, and amount is material  capitalize cost (PE GAAP only) PE GAAP  must use CM IFRS  Investment Property Assets  CM or FVM  Other PP&E Assets  CM or RM Revaluation Model - PP&E carried @ FV less accum. dep / impairment losses When carrying value of asset: increases decreases credit Revaluation Surplus (OCI) debit Revaluation Surplus (OCI) NI can’t go up from revaluation surplus so revaluation surplus transfers into RE each period/at disposal Depreciation, Impairment and Disposition Depreciable Amount = Original Asset Cost - Estimated Residual Value (or salvage value) IFRS - only use residual value (should be reviewed at least annually) Depreciation Methods 1) Activity Method 2) Decreasing Charge Method if DDB, 2 / useful life (book value x rate) 3) Straight-Line Method 4) Increasing Charge Method Activity Method = Cost – Residual__ Total estimated hours Depletion Rate = __Total Cost – Residual Value___ Total Estimated Units Available Changes in depreciation do not affect prior periods. Revised depreciation is applied prospectively to the remaining life of the asset. Impairment - occurs when carrying amount > future economic benefit - if there is an indicator of possible impairment, asset must be tested for impairment - assets should regularly be evaluated for indicators of impairment Two approaches: a) Cost Recovery Impairment Model b) Rational Entity Impairment Model Cost Recovering Impairment Model - asset is impaired if carrying amount > undiscounted future cash flows Impairment Loss = Carrying Amount – Fair Value (market price) Rational Entity Impairment Model Recoverable Amount is greater of 1. Value in use (PV of future cash flows) 2. FV less costs to sell Asset is impaired if carrying amount > recoverable amount Impairment Loss = Carrying Amount – Recoverable Amount ASPE IFRS Accounting Model Cost Model Cost Model Revaluation Model Impairment Model Cost Recovery Model Rational Entity Rational Entity Impairment Model Impairment Model Impairment Test If carrying amount > If carrying amount > If carrying amount > undiscounted FCF, then recoverable amount, recoverable amount, impaired then impaired then impaired Calculation of If impaired, then If impaired, then If impaired, then Impairment Loss Impairment Loss = Impairment Loss = Impairment Loss = Carrying Value - FV Carrying Amount – Carrying Amount – Recoverable Amount Recoverable Amount Recording of Impairment Loss Impairment Loss Treated as revaluation Impairment Loss Accum. Imp. Loss Accum. Imp. Loss decrease. Dr: Reval. Surplus (OCI) Subsequent Recovery Not Permitted Permitted only up to Permitted, and of Impairment, if lesser of recoverable accounted for as a Indicators of Recovery amount and what the revaluation increase Exist asset’s carrying amount would have been, net of depreciation if the original impairment loss was never recognized Total Asset Turnover = Net Revenue _ - efficiency in using assets to generate revenues Average Total Assets Profit Margin = Net Income _ - net income earned from cash sales dollar Net Revenue Return on Assets = Asset Turnover x Profit Margin = Net Income _ - effect long-lived assets have on profitability Average Total Assets Many assets don’t generate cash flows independently, so impairment can’t be done at the level of the individual asset. These assets are identified with an asset group or CGU (cash generating unit) - Both cost recovery and rational entity impairment models are applied to the group of assets, instead of the individual assets. Held for Sale  reported separately on B/S, not depreciated, measured at the lower of carrying amount Derecognition  if asset is voluntarily retired or disposed, depreciation is recorded up to the date of disposal before determining gain or less (which go into “other” section on I/S) CCA – Capital Cost Allowance - CCA is the tax equivalent of depreciation - may be used as a method of amortization, particularly by smaller companies - uses rates (the CCA rate) prescribed by the Canada Revenue Agency (CRA) - assets are grouped into classes - each class has a CCA rate prescribed by the CRA - in the year of acquisition, the half-year rule applies - half-year rule is applied to each class on net additions - CCA may be claimed even if it results in a Undepreciated Capital Cost (UCC) that is < est. residual value - not required to take the maximum rate of CCA in a given year When an asset is disposed, the lower of its original cost or the proceeds from disposition is deducted from its CCA class. If not assets remain in a particular class: - any remaining undepreciated balance is deducted from taxable income (terminal loss) - if a credit (negative) balance results, that credit is added to taxable income (recapture of CCA) Tax Depreciation (CCA) = CCA Rate x UCC (undepreciated capital cost) Intangible Assets / Goodwill Intangible Assets – identifiable, lack of physical substance, non-monetary Intangible assets may be purchased, acquired as part of a business acquisition, or developed internally. Process of generating Intangible Assets is broken down into 2 phases: a) Research Activities - search for new knowledge b) Development Activities - translation of research findings, improvement to existing products Phase 1: Research Phase - all costs are expensed Phase 2: Development Phase - capitalize all costs only once all 6 criteria are met - expense all costs up until this condition is met - must prove it is actually an asset with future economic benefit Development Costs: - materials/services consumed - interest and borrowing costs - salaries - amortization of other intangibles - fees needed to register a legal right needed to generate the asset Measurement after Acquisition 1) Cost Model (CM) - required under PE GAAP 2) Revaluation Model (RM) - intangible assets required to have fair value determined in an active market Limited Life Intangibles Indefinite Life Intangibles - amortized over its useful life - not amortized, impairment test carried out regularly Types of Intangibles: 1. Marketing-related - trademarks, domain names 2. Customer-related - customer lists 3. Artistic-related - copyrights 4. Contract-based - franchises 5. Technology-based - patents Goodwill = FV of Consideration Transferred - FV of all identifiable assets acquired and liabs. assumed - can be acquired and sold only when a business combination occurs - internally generated goodwill cannot be capitalized Impairment Models 1. Cost Recovery Model - PE GAAP 2. Rational Entity Model - IFRS Bargain Purchase – “negative goodwill”  FV of assets > consideration transferred - should be recognized as a gain to net income after a thorough assessment Valuation After Acquisition 1. Charge immediately to expense 2. Amortize over useful life 3. Carry at cost indefinitely, unless value is impaired Goodwill Impairment - goodwill isn’t identifiable and doesn’t generate its own cash flows so it is assigned to a CGU (cash generating unit) in order to be tested for impairment. PE GAAP IFRS - impairment test whenever events indicate - impairment test done annually and also possible impairment whenever there is indication that CGU may be impaired Loss if Carrying Amount of Unit including Goodwill Loss if Carrying Amount of Unit including Goodwill > FV of reporting unit > Recoverable amount of unit Goodwill impairment losses cannot be reversed Limited Life Indefinite Life (other than Goodwill) Goodwill ASPE IFRS ASPE IFRS ASPE IFRS Impairment Cost Recovery Rational Entity Cost Recovery Rational Entity Cost Recovery Rational Entity Model Model Model Model Model Model Model Impairment Carrying amount Potential Carrying amount CA and Carrying amount CGU carrying Assessed is indicated that it impairment is indicated that it recoverable is indicated that it amount and CGU may not be indicators are may not be amount compared may not be recoverable recoverable assessed at end of recoverable whether or not re
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