Intermediate Accounting > Exam #2 > Flashcards

Exam #2 Flashcards

Ch. 5, 6 and 17 (54 cards)

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1
Q

The Nature of Interest

A

payment for the use of money

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2
Q

Simple Interest

A

Interest computed on the principle only

Ex: borrow $10,000 for 3 years at simple interest rate of 8%

Interest = 10,000 * 0.08 * 1

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3
Q

Compound Interest

A

Principe and interest earned that has not been paid or withdrawn (typical for businesses)

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4
Q

5 Steps of Revenue Recognition

A
  1. Identify Contract with the Customer
  2. Identify the Performance Obligation(s) in the Contract
  3. Determine the Transaction Price
  4. Allocating Transaction Price to Performance Obligation(s)
  5. Recognize Revenue as Performance Obligation(s) are Satisfied
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5
Q

Revenue Recognition

A

Recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services

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6
Q
  1. Identify Contract with the Customer
A

No contract = No Revenue Recognized

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7
Q

A Contract Exists When:

A

a. Parties have approved the contract

b. Rights and obligations of parties are established

c. The contract has commercial substance

d. Payment terms are established

e. Collection is probable

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8
Q
  1. Identify the Performance Obligation(s) in the Contract
A

What are we selling?

Performance Obligation and Separate Performance Obligation

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9
Q

Performance Obligation

A

a promise to transfer goods or services to a customer

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10
Q

Separate Performance Obligation

A

a. Capable of being distinct (can be sold on its own)
AND
b. Distinct within the contract (customer can obtain the benefit on its own or with other readily available resources)

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11
Q
  1. Determine the Transaction Price
A

Transaction price = the amount of consideration a company expects to receive from the customer

a. Time Value of Money
b. Variable Consideration
c. Non-Cash Consideration
d. Discount

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12
Q

Time Value of Money

A

Financing a purchase for more than a year.

Revenue is present value of future payments discounted at reasonable rate of interest.

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13
Q

Variable Consideration

A

Amount to be received depends on some future event.

Must determine amount to be collected.
–probability weighted approach
OR
–most likely approach (>50% chance)

*can only include variable consideration in revenue to the extranet it is probable that a significant reversal will not happen in the future

Ex: Construction bonuses staggered, deadline is August 1st, but if finished by July 1st $200 extra.

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14
Q

Non-Cash Consideration

A

Record based on the fair value of what is received

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15
Q

Discounts

A

Record revenue net of discounts

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16
Q
  1. Allocating Transaction Price to Performance Obligation(s)
A

Generally allocate based on relative stand-alone prices or fair value of performance obligation(s)

If there is no stand-alone value:
a. Market Assessment Approach
b. Cost + Margin
c. Residual Approach
*(must be in order)

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17
Q

Example of Separate Performance Obligations (warranties)

A

1) Quality Assurance Warranty (automatically comes with the product and customer does nor pay extra for it) = NOT a separate performance obligation

2) Extended Warranty (customer pays extra for it) = IS a separate performance obligation

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18
Q
  1. Recognize Revenue as Performance Obligation(s) is/are Satisfied
A

Performance obligation is satisfied when the customer obtains CONTROL of product/service.

Control = the customer has direct influence over the use of good/service and obtains the benefit

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19
Q

5 Guidelines for when Control has Passed to the Customer

A
  1. Customer is obligated to pay the seller
  2. Legal title/ownership has passed to customer
  3. Customer has physical possession of good
  4. Customer has assumed risks and rewards of ownership
  5. Customer accepted the good/service

*(don’t need all, only need enough to be sure)

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20
Q

Method of Allocating Sales Price between Performance Obligations (E17-10)

A

Stand alone value:
Windows = 2,000
Installation = 600
Total = 2,600

Divide 2,000/2,600 to get percentage of cost for windows = 77% and 600/2,600 installation = 23%

Multiply by transaction price of 2,400

Transaction price:
Windows = 1,848
Installation = 552

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21
Q

(E17-10) Continued (Journal Entries)

A

July 1st (entering into contract) - nothing

Sept 1st (windows are delivered):

Dr. Cash 2,000
Dr. A/R 400
Cr. Revenue 1,848
Cr. Unearned Revenue 552
Dr. COGS 1,100
Cr. Inventory 1,100

Oct 15th (installation completed):

Dr. Cash 400
Dr. Unearned Rev. 552
Cr. Revenue 552
Cr. A/R 400

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22
Q

(E17.11) (same problem as E17.10 but) –> Cost + Margin

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A

Standalone selling price is based on cost of $400 + margin of 20% on cost

Windows = 2,000
Installation = 400 + (400 * 20%) = 480
Total = 2,480

Percentages: (2000/2480) and (480/2480)
Windows = 81%
Installation = 19%

Multiplied by transaction price of 2,400

Windows = 1,944
Installation = 456

23
Q

E17.11 - Residual Approach

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A

Since Windows stand alone price = 2,000 and the transaction price is 2,400, we allocate the rest of the price to the installation since we do not know the standalone price so…

Installation = 400

24
Q

Rebates (Recognizing Revenue)

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A

Since Nolan sold up to 40,000 units in the prior quarter. They will most likely hit the 30,000 unit so get a rebate of 6%. So,

Sales price = 110,000

110,000 * 0.06 = 6,600
110,000 - 6,600 = 103,400

Dr. A/R 103,400
Cr. Revenue 103,400

OR

Dr. A/R 110,000
Cr. Revenue 103,400
Cr. Rebate Liability 6,600

25
Right of Return (Revenue Recognition)
Sales Revenue = 700,000 (cost = 560,000) and Normal Return rate of 15%. Granted credit already of 78,000. July 10 (sold 700,000 of CDs): Dr. A/R 700,000 Cr. Revenue 700,000 Dr. COGS 560,000 Cr. Inventory 560,000 Oct 11 (returned CDs and granted 78,000) (ACTUAL RETURNS) Dr. Sales Returns & Allowances 78,000 Cr. A/R 78,000 Dr. Inventory 62,400 Cr. COGS. 62,400 *(560,000/700,000 = 80% to find cost allocated. So, 78,000 * 80% =62,400 cost) Oct 31 (Financial Statements preparation) (ESTIMATED RETURNS) Dr. Sales Returns & Allowances 27,000 Cr. Allowance for Sales Returns 27,000 Dr. Estimated Inventory Returns 21,600 Cr. COGS 21,600 *(700,000 * 15% = 105,000 - 78,000 = 27,000 returns) and (27,000 * 80% =21,600 cost)
26
Principal Agent (Revenue Recognition)
Cruise package price = 70,000, Travel Inc. received 6% commission of total price. Travel Inc. remits 65,800 to ShipAway. (70,000 * 0.06 = $4,200 commission) Collection of 70,000: Dr. Cash 70,000 Cr. A/R 70,000 Remit $ to ShipAway: Dr. A/R 70,000 Cr. Commission Rev 4,200 Cr. Cash 65,800
27
Consignment (Revenue Recognition)
Jansen shipped 20,000 of merchandise to Grouch. Jansen paid freight of 2,000. Grouch paid 500 for advertising which is reimbursable from Jansen. 60% of merchandise had been sold for 21,500. Grouch retained 10% commission. Jansens Entries: Upon Shipment to Grouch: Dr. Freight Expense 2,000 Cr. Cash 2,000 Upon Collection from Grouch: Dr. Cash 18,850 Dr. Commission Exp 2,150 Dr. Advertising Exp 500 Cr. Revenue from Consignment Sales 21,500 Dr. COGS 12,000 Cr. Inventory 12,000 *(20,000 * 60% = 12,000 inventory sold) and (21,500 cash - 2,150 commission - 500 reimbursement = 18,850)
28
3 Criteria for Recognizing Revenue OVERTIME on Long-Term Projects (*only need at least 1)
1. Customer consumes benefit of sellers work as it is performed 2. Customer controls the asset as it is being created 3. Seller is creating an asset with no alternative use and either a) another company would not have to substantially re-perform work done OR b) seller has right to payment for progress to date
29
Percentage of Completion on COST-TO-COST basis
Year 1 Year 2 Year 3 Contract Price Costs Incurred to Date Estimated Cost to Complete Total Estimated Cost -(Costs incurred + Est. Cost) Total Estimated Profit -(Contract Price - Total Est. Cost) % Complete -(Costs Incurred to Data / Total Est. Cost) Revenue Recognized to Date -(Contract Price * % Complete) Less Revenue Recognized in Previous Years Revenue Recognized in Current Year -(Revenue recognized to date - less revenue recognized in previous years) Cost Recognized in Current Year -(Costs incurred to date) Gross Profit in Current Year -(Revenue recognized in current year - Cost recognized in current year)
30
Reminder about Costs incurred to date vs. Costs per year
Costs incurred to date = cumulative Costs per year = actual cost
31
JOURNAL ENTRIES (percentage of completion cost to cost basis)
To Record Construction Cost: Dr. Construction in Progress (A) Cr. Supplies/Cash/Payables To Record Progress Billings: Dr. Accounts Payable Cr. Billings on Construction in Progress (L) To Record Collections on A/R: Dr. Cash Cr. Accounts Receivable To Record Revenues, Expenses and Profit Dr. Construction Expenses Dr. Construction in Progress Cr. Revenue To Close Out Completed Project: *(only for last year of project) Dr. Billings on Construction in Progress (L) Cr. Construction in Progress
32
T-Accounts (Construction in Progress AND Billings on Construction in Progress)
These two accounts NET against each other either as a net asset or net liability depending on which one is greater -If COSTS are GREATER then "Costs in Excess of Billings (A)" -If BILLINGS are GREATER then "Billings in Excess of Costs (L)"
33
Completed-Contract Method
have to wait to recognize revenue until the end of the project
34
Completed-Contract (Journal Entries)
To Record Construction Cost: Dr. Construction in Progress (A) Cr. Supplies/Cash/Payables To Record Progress Billings: Dr. Accounts Payable Cr. Billings on Construction in Progress (L) To Record Collections on A/R: Dr. Cash Cr. Accounts Receivable ____ Completed Project: *only for final year* Dr. Construction Expenses Dr. Construction in Progress Cr. Revenue
35
Percentage of Completion (Contracts with LOSSES)
*Accelerate recognition of loss in the year 2 - the year that loss is realized* *Go OVER*
36
Cash Equivalent
Short-term, highly liquid investment with original maturity of 3 months or less
37
Restricted Cash
Designated for a specific use --Must be reported separately from other cash --Can be current or non-current --Must disclose restriction
38
Compensating Balances
Cash set aside (by contract) to service debt --Must be reported separately and disclosed
39
Bank Reconciliation (Balance Per BOOKS)
Balance Per Books - Bank Fees +/- Adjustments - NSF Checks = Correct Balance Per Books
40
Bank Reconciliation (Balance Per BANK)
Balance Per Bank - Outstanding Checks + Deposits in Transit = Correct Balance Per Books *may need to adjust for bank error but very rare (Books and Bank should equal)
41
Journal Entries for Bank Reconciliation
For Bank Service Charge: Dr. Bank Fees Cr. Cash For Note Collected by Bank: Dr. Cash Cr. Notes Receivable Cr. Interest Income For Collection Fee: Dr. Bank Fees Cr. Cash For NSF Check: Dr. Accounts Receivable Cr. Cash For Deposit Error: Dr. Cash Cr. Accounts Receivable
42
Allowance for Returns (with Discounts, Gross and Net) (Journal Entries) IF CUSTOMER GETS DISCOUNT
*If customer pays within Discount time period* Estimate Gross (full amount): Dr. Accounts Receivable Cr. Revenue Dr. Cash Dr. Sales Discounts Cr. Accounts Receivable Estimate Net (with discount): Dr. Accounts Receivable Cr. Revenue Dr. Cash Cr. Revenue
43
Allowance for Returns (with Discounts, Gross and Net) (Journal Entries) IF CUSTOMER PAYS FULL AMOUNT
*If customer does not get discount and has to pay full amount* Estimate Gross (full amount): Dr. Accounts Receivable Cr. Revenue Dr. Cash Cr. Accounts Receivable Estimate Net (with discount): Dr. Accounts Receivable Cr. Revenue Dr. Cash Cr. Accounts Receivable Cr. Discount Forfeit (R)
44
Journal Entries ACTUAL RETURNS
Dr. Sales Returns and Allowances (XR) Cr. Accounts Receivable Dr. Inventory Cr. Cost of Goods Sold
45
Journal Entries ESTIMATE RETURNS
Dr. Sales Returns and Allowances (XR) Cr. Allowance for Sales Returns Dr. Estimated Inventory Returns (XA) Cr. Cost of Goods Sold
46
Journal Entry ESTIMATED UNCOLLECTIBLE ACCOUNTS
Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts
47
journal Entry COLLECTION ON ACCOUNT PREVIOUSLY WRITTEN-OFF
Dr. Accounts Receivable Cr. Allowance for Doubtful Accounts Dr. Cash Cr. Accounts Receivable
48
Journal Entry WRITE-OFF KNOWN UNCOLLECTIBLE ACCOUNTS
Dr. Allowance for Doubtful Accounts Cr. Accounts Receivable
49
Allowance for Doubtful Accounts (T-Account)
Debits: 1) Write-off known uncollectible Credits: Beginning Balance 2) Collection of Accounts Written-Off 4) Estimated Uncollectible Entry ______________________ 3) Calculated Uncollectible Accounts
50
Notes Receivable (Calculation)
Ex: Interest Rate 3%, Reasonable Rate 12%, Face Amount 400,000, Term 8 years, Interest Payable Annually Payment = 400,000*0.03 =12,000 N = 8 I% = 12 PV = ? PMT = 12,000 FV = 400,000 PV = 221,164
51
Notes Receivable (Journal Entry)
400,000 - 221,164 =178,836 *So, there is a discount since 221,164 is less than the principal of 400,000* Dr. Notes Receivable 400,000 Cr. Discount on Note Receivable (XA) 178,836 Cr. Service Revenue 221,164
52
Bank OVERDRAFTS
Negative cash balance per books Reported as Current Liability on balance sheet
53
Noncash consideration should be:
recognized on the basis of fair value of what is received
54
Why is allowance method preferred over the direct write-off method of accounting for bad debts?
improved matching of bad debt expense with revenue
Intermediate Accounting
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