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Accounting Cycle (10 steps)
Identify Transactions
Analyze transactions
record transactions in journal
post journals to general ledger
prepare unadjusted trial balance
record adjusting journal entries to general ledger
prepare adjusted trial balance
prepare f/s
record closing entries
prepare post closing trial balance
Adjusting Journal Entries, need to know how to calculate and record
Depreciation Expense
Deferred Revenue
Accrued Expense
Debits increase…
Assets
Losses
Expenses
Credits increase…
Liabilities
Equity
Gains
Revenue
Depreciation AJE
DR: Depreciation expense
CR: Accumulated Depreciation
Deferred/Unearned Revenue AJE
Original entry:
DR: Cash 20,000
CR: Deferred Revenue 20,000
25% of services provided have now been provided
DR: Deferred revenue 5,000
CR: Revenue 5,000
Accrued Expenses AJE Example
Accrued Expenses:
DR: Expense
CR: Accounts payable
Closing temporary accounts
Revenue/gain: credit retained earnings
Expense/loss: debit retained earnings
GAAP vs IFRS difference: stmt of cash flows
GAAP:
Interest expense → operating section
Dividends paid → financing section
interest/dividends received → operating section
IFRS:
Interest expense → operating or financing
Dividends paid → operating or financing
Interest/dividends received → operating or investing
GAAP vs IFRS difference: balance sheet
GAAP:
DTA-NOL ----- $
Valuation allowance ----- ($)
=DTA-NOL
IFRS: DTA-NOL, net $
Basic EPS
(net income-preferred dividends)/weighted average common shares outstanding
Preferred dividend calculation
(Par Value per share * outstanding shares)* dividend rate
Cost capitalization
-Start-up costs and R&D are all expensed→ can’t be capitalized
-”costs incurred to bring asset to its intended use”
-interest and property taxes can be capitalized until “placed in service”
Permanent Differences
Municipal Bond Interest→ decreases taxable income
Meals and Entertainment→ increases taxable income
Fines/Penalties→ increases taxable income
Dividends received deduction → decreases taxable income
Temporary Differences
Transactions treated differently between book and tax that’ll reverse over time.
Bad debt expense(ADA vs Write off)→ deferred tax asset
Depreciation Expense(Straight-line vs MACRS) → deferred tax liability
Unearned Revenue(Liability vs. Cash) → deferred tax asset
Formula for calculating debit to income tax expense
(Net Income before Tax(NIBT) +/- permanent differences)*Tax Rate= dr. income tax expense
Formula for calculating DTA or DTL
Temporary differences * Tax rate
if tax value>book value → DTA
if book value>tax value →DTL
Formula for calculating credit to income tax payable
NIBT, after PDs +/- temporary differences=taxable income * TR= cr. income tax payable
Effective tax rate
ITE/NIBT
NOL rule
carry forward indefinitely, subject to 80% limitation
NOL example-($100,000) tax loss in 2021 and $80,000 taxable income in 2022. Journal entries for 2021 and 2022 at 21% tax rate.
2021 JEs
dr. DTA-NOL→$21,000(100,000*.21)
cr. Income Tax Expense→$21,000
2022 JEs
dr. Income tax expense→$16,800(80,000*.21)
cr. DTA→$13,440((80,000*.8)*.21)
cr. Income tax payable→$3,360((80,000**.2)**.21)
NOL example 2-($1,000,000) tax loss in 2021, 10% DTA is questionable. $500,000 taxable income in 2022 and we can use all of the DTA. What are the journal entries for 2021 and 2022 at 21% tax rate
2021 JEs
dr. DTA-NOL→ $210,000(1,000,000*.21)
cr. ITE→ 210,000
To account for the questionable DTA:
dr. ITE → $21,000 (210,000 * 10%)
cr. Valuation allowance → $21,000
2022 JEs
To reverse the questionable DTA:
dr. Valuation allowance → $21,000
cr. ITE → $21,000
dr. ITE → $105,000(500,000 * .21)
cr. DTA → $84,000 (500,000*.80)*.21
cr. ITP → $21,000 (100,000 * .21)
*126,000 left of DTA for year 3 and onwards
A/R balance sheet approach
A/R balance or A/R aging→ balance in ADA
A/R Income statement approach
credit sales * %→ dr. BDE cr. ADA
What would a debit in ADA mean(ADA is a credit account)
More accounts have been written off then had been estimated
Direct Write-off method (Tax)
dr. BDE
cr. A/R
write-off of ADA journal entry (GAAP)
dr. ADA
cr. A/R
recovery(or reinstatement) of write-off journal entry
1.)
dr. A/R
cr. ADA
2.)
dr. Cash
cr. A/R
Notes Payable with weird dates (i.e period starting 2/1)
1.) Amortization table
2.) Journal Entries
a. record borrowing
dr. cash
cr. note payable
b. record interest payable(11/12 if 2/1)
dr. interest expense
cr. interest payable
c. record payment
dr. interest payable, interest expense, n/p
cr. cash
Notes payable with normal dates (i.e period starting 1/1)
1.) Amortization table
2.) Journal entries→ NO INTEREST PAYABLE
a.) record borrowing
dr. cash
cr. note payable
b.) record payment
dr. interest expense
dr. note payable
cr. cash
Notes payable--difference between normal and not normal payments
normal dates→ no interest payable
weird dates → record interest payable
Imputed Interest Problem
Interest based on the implicit (fair value) interest rate.
Amortization table at standard rate
Amortization table at market rate
Journal entries
Journal Entries for Imputed Interest--review imputed interest problem
1/1
dr. equipment
dr. discount on note payable
cr. note payable
12/31
dr. note payable→ always comes from stated rate table
dr. interest expense→ must come from market rate table
cr. cash
cr. discount on np
12/31-don’t have if borrowing cash
dr. depreciation expense
cr. accumulated depreciation
Lease classification criteria
If one or more criteria are met→ finance lease
if none of the criteria are met→ operating lease
ownership of the asset transfers to the lessee→ have to be told
bargain purchase option→ have to be told
lease term is for major part (greater than or equal to 75%) of the life of the asset→ calculate
PV of lease payments greater than or equal to 90% of the fair value of the asset→ calculate
specialized nature→ have to be told
Amortization of leases
Finance lease:
ROU asset amortizes straight line over…
Lease term (3,4)
Useful life (1,2,5)
Operating lease:
ROU asset amortizes by principal reduction
Lease Amortization Table
Beginning Balance (FMV/PV of the lease)
Annual Payment → usually have to calculate with calc.
Interest expense → BB * Interest rate but if lease begins not on 1/1 than no interest in the first year
Principle reduction → Annual payment-Interest expense
Ending/Amortized balance → BB-Principal reduction
Finance Lease PP: Company leased equipment with a FMV of $113,649 on February 1st, 2021 and the first payment of $25,000 is due on the day the lease is signed. Interest rate is 5% and it is a 5 year lease term with a 6 year life. There is no ownership transfer at the end of the lease. What kind of lease is this? and what are the journal entries for 2021?
Financing Lease (meets criteria 3,4)
2/1/2021 JEs
dr. ROU asset---$113,649
cr. Lease payable $113,649
dr. lease payable $25,000
cr. cash $25,000
12/31/2021 JEs
dr. interest expense $4,063 (4432 * 11/12)
cr. interest payable $4,063 (4432 * 11/12)
dr. amortization of ROU asset $20,836 (113,649/5(lease term)*11/12)
cr. ROU asset $20,836 (113,649/5(lease term)*11/12)
dr. Lease payable LT $20,568 (reclassification)
cr. Lease payable ST $20,568 (reclassification)
OCI/AOCI
OCI (income statement account) closes to AOCI (b/s account)
OCI examples
fair value adjustments to AFS investments
prior service cost amortization
Total pension expense
Service cost+ interest cost (BY PBO * Discount rate) - return on assets (BY plan asset * ROR + Contributions made during the year * ROR prorated) + amortization of prior service cost (PSC/life)
Problem on exam wont be in year 1 so we wont have to amortize prior service cost
Plan Assets
BY Plan asset
+ Contributions
+ Return on assets (ROR * BY plant assets + ROR * Contributions)
- Benefits paid
= EY Plan asset
Plan Benefit Obligation
BY PBO
+Service costs
+Interest costs
-Benefits paid
=EY PBO
Determining if a pension plan is over or under funded
EY plan asset - EY PBO
if positive → funded → pension asset
if negative → underfunded → pension liability
Pension JEs
dr. Pension expense
dr. Pension asset → if funded
cr. Pension liability → if underfunded
cr. OCI (amort. of prior service cost) --wont need bc wont be in yr 1
cr. Cash (contributions)
Determining value of pension asset/liability when its not in the first year
1.) Determine if plan was funded or underfunded in the previous year and by what amount (ex. underfunded by 60k)
2.) Determine the difference in the changes to this pension asset and PBO for this year (ex. PA=129k and PBO=120k)
3.) If PA>PBO for this year but the plan is still underfunded → dr. pension liability of the difference
4.) If PA<PBO for this year the plan is still underfunded → cr. pension liability the difference
operating activities--indirect method
Start with net income (bottom of income stmt)
Add back non-cash expenses (depreciation and amortization)
Adjust for non operating gains and losses (- gains + losses)
Subtract increase in current assets (A/R net of ADA)
Add decrease in current assets
Add increase in current liabilities and shareholders equity
Subtract decrease in current liabilities and shareholders equity
operating activities--direct method
Revenue + change in A/R (not including ADA)
(COGS) + change in inventory and A/P
(S+A/Operating expenses)+ change in prepaids + change in accrued liabilities + depreciation expense + BDE
(Interest expense) + change in interest payable
(Income tax expense) + change in income taxes payable
Where to put the different kinds of debt investments on the SCF?
Trading investments →operating
AFS bonds →investing
HTM → investing
Journal Entry to reclassify OCI for AFS investment sold
dr. OCI-AFS $Balance
cr. Fair Value of adjustment $Balance
Equity Methods JEs (Use when own 20-50% of company)
To record purchase of investment
dr. Investment (price paid)
cr. Cash (price paid)
To record proportionate share of investments net income/loss
dr. Investment (% ownership NI (total income-dividends) * price paid
cr. Investment Income (% ownership NI (total income-dividends) * price paid
To record receipt of dividends
dr. cash
cr. investment
Equity Method JE when excess that isn’t goodwill is paid
calculate: excess/useful life (of whatever caused you to purchase at a premium)
dr. Investment income
cr. Investment
Retained Earnings Calculation
Beginning RE
+Net Income
-Dividends
Ending RE
Note
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