2257 Summary

Returns and Allowances: Making a sale: DR Cash/DR AR, CR Sales Revenue Create 2 contra-revenue accounts: Sales Discounts, Sales Returns and Allowances Discount: DR Cash, DR Sales Discounts, CR AR Allowance: DR Sales Returns and Allowances, CR AR/CR Cash Accounts Receivable and Notes Receivable: Write Off: CR AR, DR Allowance for Doubtful Accounts Recovery: CR Allowance for Doubtful Accounts, DR AR. CR AR, DR Cash Calculating Bad Debt Expense (% of Credit Sales Method): CR Bad Debt Expense, DR Allowance for Doubtful Accounts Adjusting and Closing Entries: Type of Adjustment Example(s) Deferred Revenue Unearned Revenue Deferred Expense Accrued Revenue Accrued Expense Amortization Prepaid Expenses Interest Receivable Interest Payable Wages Payable Taxes Payable

Entry During the Period DR Cash CR Unearned Revenue DR Asset CR Cash or A/P No Entry No Entry

Adjusting Entry DR Unearned Revenue CR Revenue DR Expense CR Asset DR Asset CR Revenue DR Expense CR Liability

Closing Entries: establish a balance of zero in each of the temporary accounts Closing Entry Steps: 1. Close Revenues to Income Summary 2. Close Expenses to Income Summary 3. Subtotal Income Summary, calculate and record taxes 4. Close Income Tax Expense to Income Summary 5. Close Income Summary to Retained Earnings Income Summary Revenue Accounts Accounts Total Subtotal Net Income Net Income After Tax (Closed to Retained Earnings)

Expense Total Subtotal Net Loss Income Taxes

Bank Reconciliations: Opening Balance taken from E/B on Bank Statement Adjust Banks Balance for any items that the bank didnt know about: Add Outstanding Deposits/Deposits in Transit

Subtract Outstanding Cheques Any Bank Errors (rare but possible)

Balance per Depositors Records: Opening Balance (last periods adjusted balance bank rec. OR last periods balance sheet) Add cash receipts less cash disbursements Adjust our balance for any items the bank added or subtracted which we did not know about: o Receivables/notes collected for company by bank o Service charges and NSF cheques o Automatic payments (loans, interest, payroll, etc.) o Add or subtract from balance accordingly to get new adjusted balance o Check for errors in recording transactions Once balances are reconciled record necessary correcting entries on the companys books Bonds: Face value: Principle of the Bondwhat the issuer must pay to the bondholder at the maturity date Always $1,000 in 2257 Contract Rate (Coupon Rate): Fixed interest rate paid on the bond Market Rate: annual rate of return than could be earned by purchasing other bonds with a similar risk Issuance of Bonds Payable: DR Cash, CR Bonds Payable Bonds with a Premium: DR Cash, CR Bond Payable, CR Premium on Bonds Payable Bonds with a Discount: DR Cash, DR Discount on Bonds Payable, CR Bonds Payable *CR to Bonds Payable should always equal the Face Value of the Bond Bond Pricing (Using the Present Value Tables): n(periods) = number of remaining interest payment dates i = market interest rate (adjusted to reflect semi-annual payments 2 ) Interest Payment: DR Interest Expense, CR Cash At Fiscal Year End or Recall/Conversion: Straight Line:

Effective Interest Method:

Note: Book Value = Face Value + Unamortized Premium OR Face Value Unamortized Discount Calculate interest on bonds payable*: DR Bond Interest Expense, CR Bond Interest Payable *(interest owing on bonds up to year end must be accrued) Amortize Premium: DR Bond Premium, CR Bond Discount Amortize Discount: DR Bond Interest Expense, CR Bond Discount

Retirement of Bonds Payable: 1. Calculate interest owed to Bond Holders: DR Bond Interest Expense, CR Cash 2. Amortize Bond Discount (FY Beginning-Date of Retirement): DR Bond Int Exp, CR Bond Discount 3. Calculate Gain/Loss:

If the Carrying Value is less than the Cash Paid record a Loss: DR: Bond Payable (FV), DR Loss on Retirement, CR Bond Discount, CR Cash Conversions of Bonds to Common Stock: 1. Calculate and record interest from last interest payment date 2. Amortize the premium or discount up to the conversion date 3. Record the conversion* *the carrying value of the bonds (FV Premiums/Discounts) is used as the value for the common stock conversion DR Bonds Payable (FV), DR Premium on Bonds Payable, CR Common Stock Bond Yield: Interest is calculated on the Face Value of the Bond

Extraordinary Repairs: A non-regular major overhaul of a fixed asset that will extend the life of the asset beyond its original estimate. 1. 2. 3. 4. Amortize the asset up to the point of the repair: DR A/A, CR Amortization Expense* Account for the Repair: DR Accumulated Amortization or the Asset itself, CR Cash or A/P Calculate that assets New Historical Cost and New Useful Life Amortize the asset for the rest of the period using the calculated data**: DR Amortization Expense, CR A/A

*if the asset is related to production WIP would be debited instead of Amortization Expense **use NHC and NUL in Amortization Calculations

Betterments: Capital investment that does not increase useful life but rather increases operating efficiency or productive capacity of the capital asset. Treated as an extraordinary repair however there is no addition to useful life Fixed Assets: Amortization: DR Amortization Expense, CR

Straight-Line Amortization: HC: Historical Cost SV: Salvage Value a: Years of Useful Life n: Months Asset was in use during present accounting period Units of Production/Output/Activity:

Declining Balance:

BV: Book Value a: Years of Useful Life n: Months asset was in use during present accounting period Double-Declining Balance:

BV: Book Value a: Years of Useful Life n: Months asset was in use during present accounting period Sales, Retirements, and Trade-ins: 1. Amortize the asset up to the point of the sale, retirement, or trade-in 2. Calculate the assets book value with the cash received or the trade-in allowance granted 3. Compare the BV with the cash received or trade-in allowance granted If BV > Cash Received, Record a loss (EXPENSE) If BV < Cash Received, Record a Gain (REVENUE) 4. Record the entry: Sale: DR Cash, CR Asset (Historical Cost), CR Accumulated Amortization o CR Gain on Trade (Revenue) OR DR Loss on Trade (Expense) Trade in: DR New Asset, CR Cash (List Price of new Asset Trade-in Allowance), CR Old Asset (HC), CR A/A, o CR Gain on Trade (Revenue) OR DR Loss on Trade (Expense) FOB (Free on Board): Shipping Terms: determine responsibility and ownership of goods in transit Refers to the point where the Supplier transfers responsibility and ownership to the BUYER FOB Shipping Point: Buyer Pays Freight FOB Destination: Supplier Pays Freight Inventory Procedure: Buyer: Purchase Discounts, Purchase Returns and Allowances, Credit Inventory Account Directly

Purchasing Inventory: DR Inventory, CR A/P Discount: DR A/P, CR Inventory OR CR Cash Return/Allowance: DR A/P OR Cash, CR Inventory

ASSETS
Inventory Beginning Inventory Purchase Discounts Purchases Purchase Returns and Taxes and Duties Allowances Transportation In Cost of Goods Available for Sale (COGAFS) Cost of Goods Sold (COGS) Ending Inventory

EXPENSES
Cost of Goods Sold Expense Cost of Goods Sold (COGS)

Transportation Charges (Seller): CR Cash, DR Delivery Expense Introduction to the T-Account: Assets Expenses Increase Decrease Liabilities Equity Revenue Decrease Increase

Title Debit Credit

awkward

Types of Accounts Impact of a DEBIT Impact of a CREDIT

+ - - + + - - +

BALANCE SHEET ACCOUNTS

Assets Expenses

Liabilities & Shareholders Equity Revenues

INCOME STATEMENT ACCOUNTS Marketable Securities: Listed on Balance Sheet as a Current or Long-Term Asset Stocks: Purchasing M/S Stocks: DR M/S Stocks, CR Cash Receiving Dividends: DR Cash, CR Dividend Revenue At Fiscal Year End: Adjust M/S Stock Account to market value Gain: DR M/S Stock Unrealized Gains/Losses (Equity), CR M/S Stock Valuation Allowance (Contra Asset) Loss: DR M/S Stock Valuation Allowance, CR M/S Stock Unrealized Gains & Losses Bonds: Purchase M/S Bonds (excluding accrued interest): DR M/S Bonds, CR Cash Cost of Accrued Interest: DR Interest Receivable, CR Cash At Fiscal Year End: Adjust M/S Bond Account to market value: Asset Valuation (Contra Asset), Unrealized Gains and Losses (Shareholders Equity) If BV > Market Value: DR Unrealized Loss If BV < Market Value: CR Unrealized Gain Interest: DR Cash, CR Bond Interest Revenue At Fiscal Year End: DR Bond Interest Receivable, CR Bond Interest Revenue First Interest Payment (remove accrued interest paid upon acquisition): DR Cash, CR Bond Interest Receivable Sale of Bond/Stock: (Bond) Calculate accrued interest until date of sale: DR Cash, CR Bond Interest Revenue Calculate Price (less fees): DR Cash, CR Marketable Bond (Bond) Calculate Gain or Loss on Sale (compare HC to amount received less accrued interest): DR/CR Loss/Gain Take Valuation Allowance off the books Removing an unrealized loss: DR Valuation Allowance, CR Unrealized Gains & Losses Removing an unrealized gain: DR Unrealized Gains & Losses, CR Valuation Allowance Manufacturing Activities: Inventory Accounts: Raw Materials, Work-In-Process, Finished Goods

WIP: includes all PRODUCT costs (raw materials, direct labour, factory overhead) After ending balance in WIP is calculated, Cost of Finished Goods Manufactured (COFGM) can be calculated Work-in-Process Inventory Beginning Inventory Processing Costs (Direct Labour, Factory Overhead) Cost of Raw Materials Used (CORMU) Cost of Work-inProcess (COWIP) Cost of Finished Goods Manufactured (COFGM) Ending Inventory E/B = pRM+pDL=pFOH Raw Materials Inventory Beginning Inventory Purchases Returns and Allowances Transportation In Discounts Duties/Taxes Cost of Raw Materials Available for Use (CORMAFU) Cost of Raw Materials Used (CORMU) Ending Inventory Valuing the Ending Balance in WIP: E/B WIP = pRM+pDL+pFOH Calculating pFOH: Factory Overhead Allocation Method: OR OR

Finished Goods Inventory Beginning Inventory Cost of Finished Goods Manufactured Cost of Goods Available for Sale (COGAFS) Cost of Goods Sold (COGS) Ending Inventory (Weighted-average cost) Finished Goods Ending Inventory Valuation:

Cost of Goods Sold Expense Cost of Goods Sold

Flow Through of Manufacturing: Determine CORMAFU and E/B in RM, Calculate CORMU and transfer this amount to WIP Determine COWIP and E/B in WIP, Calculate COFGM and transfer this amount to Finished Goods Determine COGAFS and E/B in Finished Goods, Calculate COGS and transfer this amount to the COGS Expense Account Petty Cash: Establish Petty Cash Account (Asset): DR Petty Cash, CR Cash End of Period Adjustment: DR Various Expenses, CR Cash Retail Inventories Checklist: Purchase, Freight, Duty, Tax, Discount, Return, Return Freight (Cost/Refund), Return Duty, Return Tax, Return Discount. Stocks: Setting up a Corporation (Organization Costs): DR Organization Costs, CR Cash Issuance of Stock: DR Cash/Asset, CR Common/Preferred Stock Donated Capital: DR Cash/Asset, CR Donated Capital Preferred to Common Share Conversion: DR Preferred Stock, CR Common Stock Cash Dividends: Date of Declaration: DR Retained Earnings, CR Dividends Payable Record Date: No entry required Date of Payment: DR Dividends Payable, CR Cash Stock Dividends: # of Common Shares x %Dividend = # of Shares being Issued # Shares being Issued x Market Price on Date of Declaration = Value of Dividend Date of Declaration: DR Retained Earnings, CR Stock Dividends to be Distributed Date of Record: no entry required Date of Distribution: DR Stock Dividend to be Distributed, DR Common Stock

Update number of outstanding shares on corporations ledger

Stock Splits: No T-Account Entry, Update Outstanding Shares Ledger Stock Repurchase: If Purchase Price < BV: DR Common Shares, CR Contributed Surplus, CR Cash If Purchase Price > BV: DR Common Shares, DR Retained Earnings/Contributed Surplus, CR Cash Retail Inventories: Retail Inventory Checklist: Purchase, Freight, Duty, Tax, Discount, Return, Return Freight, Return Duty, Return Tax. When the value of inventory is lower than its cost the inventory should be written down to its market value: CR Inventory, DR Loss on Inventory. Method: 1. Highlight important items from case (FOB, Credit, Taxes, Duties) 2. Analyse Exhibits 3. Handle Each Purchase Individually in sequence of when ownership took place Break out all relevant costs individually Keep track of the net units per purchase in its own T-Account Calculate the unit cost of the purchase 4. Determine the Cost of Goods Available for Sale (COGAFS) and Units Available for Sale (UAFS) 5. Calculate the value of Ending Inventory using one of: FIFO Weighted Average Cost Specific Identification 6. Determine the Cost of Goods Sold (COGS) Purchasing Inventory: DR Inventory, CR Cash OR A/P Sale of Inventory: DR Cash OR A/R, CR Inventory Transaction Analysis & Accounts Payable: Evaluating Cases When Given Cash Receipts & Disbursements: 1. Read Case 2. Post Opening Balances (Last Years Balance Sheet) 3. Post Cash Disbursements to appropriate T-Accounts 4. Post Cash Receipts to appropriate T-Accounts 5. Go through Case recording transactions and/or making adjustments when necessary (SDD) 6. Adjust last years payable accountremove cash paid this year for expenses incurred last year 7. Record this years payable accountadd all expenses incurred this year that havent been paid 8. Record end-of period adjusting entries and closing entries 9. Prepare Financial Statements ONLY IF ASKED