Lesson 6,

cont...

PERIOD

1
2
3
4

Bond interest: Two year semiannual bond w/ par value of $500 and
a stated rate of 7% was priced to yield 8%.
-Calc the issue price, find the pres value of both lump-sum principle pymt of $500
and the interest stream of $35 per year. - Pres val of principle = $427
- Pres val of interest stream = $64
BEGINNING
INTEREST
INTEREST
ENDING
EXPENSE
PAYMENT
BALANCE
BALANCE
- Issue price = $491

$491.00
$493.25
$495.50
$497.75

$19.75
$19.75
$19.75
$19.75

$17.50
$17.50
$17.50
$17.50

EFFECTIVE
RATE = 4%

$493.25
$495.50
$497.75
$500.00

STATED
RATE = 3.5%

Record first semi-annual interest payment

Disc on Bonds Pyble Interest Expense
Cash
bal 9.00
19.75
17.50
2.25
BALANCE SHEET
ASSETS = LIABILITIES + EQUITY

Interest Expense
Cash
Bonds Payable

-19.75

Issue 3000 shares of common stock for $15,000

15,000
Cash
15,000
Common stock
Cash
15k

Assets = Liabilities + Equity

+15,000
+15,000

Pay $250 for advertising

Advertising Expense
Cash

Common
Stock
15k

Asset
Amount
Liability
Equity
Revenue
Expense
Amount
Dividends Amount
Totals
Total DRs

Assets = Liabilities + Equity

+2,000 +2,000

250

Assets = Liabilities + Equity

-250
-250

Pay $1,500 in dividends

Dividends
Cash

Assets = Liabilities + Equity

-1,500
-1,500

1,500

2,000

Equipment depreciation of $600 per month

Depreciation Expense 600
600
Accumulated Depreciation

Assets = Liabilities + Equity

-2,000 +2,000

Cash
2k

Credit

R=revenue
E=expense
A=asset
Net sales = Credit sales - Sales returns & allowances L=liability
Net Book Value = Cost - Accumulated Depreciation SE=Stockhld eq

Net income = Revenue - Expenses

Retained Earnings = Net Income - Dividends

ITEMS, STATEMENTS, & ACCOUNTS

IS=income statement | RE=retained earnings | BS=balance sheet

-Freedom from Error

Dividends
Cash
1.5k 1.5k
Unearned SVC
Revenue Revenue
2k
2k

Depreciation Accum
Assets = Liabilities + Equity
Expense Deprec
600
600
-600
-600

STATEMENT ACCOUNT

Retained Earnings
Equipment
Common Stock
Unearned Revenue
Sales
Rent Expense
Inventory

BS, RE
BS
BS
BS
IS
IS
BS

SE
A
SE
L
R
E
A

Aging of Bad debt expense is a

plug to force
Accounts allowance for bad
Receivable debt to the proper
balance

Allowance for Bad

Debts is calculated
based on balance in
Accounts Receivable

Depreciation Expense = Asset Cost - Salvage Value

Estimated Useful Life

Acquire PP&E
+10,000
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Balances

Increase on the
Credit Side
Debit Side

Realized

*General Rule
Recognition @ time of sale provides
a uniform/reasonable test
Recognition Principle: Revenue should be
recorded when a resource has been earned

Receivable = Asset

Allowance method | Bad Debt Expense (BDE)

Recognize BDE in the period of sale by estimating doubtful accounts
-Record estimate in contra-asset acct "Allowance for Doubtful Accts"

-3,000
-3,000
-3,000

+10,000
-9,000
Double Declining Balance

-9,000

Depreciation Expense = Net Book Value * 2

Estimated Useful Life
OR
Determine by taking the straight-line rate of depreciation and
double it. Example: Asset w/ 4-year life = straight-line rate 25%,
calc'd by 100%/4years. The straight-line rate doubled = 50%.
Asset w/ a 5-year life would = 20% straight-line * 2 = 40%.
Doubled rate is then multiplied by Net Book Value:
Depreciation Expense = Depreciation rate * Net Book Value
-DO NOT REDUCE! cost by = (Straight-line rate *2)
* (Cost - Accumulated Depreciation)
salvage value
-STOP DEPRECIATING
when salvage value is reached
BALANCE SHEET ASSETS
PP& E
ACCUM. DEPR

INCOME STATEMENT
DEPR. EXPENSE

Acquire PP&E
+10,000
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation

-6,667
-2,222
-111

-6,667
-2,222
-111

Balances

-9,000

-9,000

+10,000

Natural Resources

Net Book Value = $1,000

Intangible Assets

-As extracted the asset is depleted

and transferred to inventory
-As sold the expense is Xferred to
income statement as COGS Exp

-Lack physical existence

-Not financial instruments
-Normally classified as long-term
assets

Percentage of sales method

Estimate results in
Bad Debt Expense

Bad debt is estimated as a % of credit sales that

occured during the period
-Percent is based on historical trends
& company policies

-Estimate results in balance of

Aging of AR method
allowable account
Estimate how much of the ending balance of AR is bad debt
-Bad Debt Expense is a "plug"
-Amount becomes ending balance of Allowance for Bad DebtBALANCE SHEET
INCOME STATEMENT
-Based on the age of account making up ending bal of AR ASSETS = LIABILITIES + EQUITY
REVENUE - EXPENSES = NET INCOME

Allow. for Bad Debt -4,500

Bad Debt Exp

INCOME STATEMENT
DEPR. EXPENSE

-3,000
-3,000
-3,000

example

Seller has received cash or will at

some point in the future (AR)

Amount the company expects to collect (GAAP Requirement)

EXAMPLES

Lower of Cost or Market

When future revenue-producing ability < purch Px
the inventory asset write down will reflect loss
-Ensures inventory is not overvalued
-Accelerates future losses to current Inc Stmt
Compare historical cost (balance sheet value)
to Market Value. Report the lower of the two.
-Market value is cost to replace inventory today

BALANCE SHEET ASSETS

PP& E
ACCUM. DEPR

DETAILED EXAMPLES

Receivables
Net realizable value

=1,000
=500

$10k asset has salvage of $1k, use life is 3 years

=(10000 - 1000)/3 = 3000 per year

Ignores revenue recognition & matching principles

Not in conformity with GAAP

Goods/services are delivered & related obligs

are complete
Seller has performed duties under terms of
sales agreement- title has passed to buyer
w/o right of return or contingencies

=-500

+1,000 +1,000
+500 +1,000 -500

+500

example

DOUBLE-ENTRY ACCOUNTING

Earned

-500

Straight-Line Depreciation

Assets = Liabilities + Equity

D
C D
C D
C

Lesson 3 | Revenue & Receivables

Revenue recognition recognized/recorded when BOTH

Assets = Liabilities + Equity

D
C D
C D
C
Balance Sheet
Income Stmt
Allowance does not
Percentage % of current credit
sales is matched with necessarily reflect the
of credit current sales revenue receivables that are
sales as bad debt expense
uncollectible

Recognizes economic
events when cash has
been exchanged

-500

+1,000

For info to be relevant, it

should have predictive or
confirming value, & be
material for the
reporting entity.
Revenues increase Equity
Expenses decrease Equity

INCOME STATEMENT
REVENUE - EXPENSES = NET INCOME

-500

-Inclusion/omission would
influence judgement

Reliability, or faithful representation, is a

necessity for individuals who neither have
the time nor the expertise to evaluate
the factual content of the information.

Recognizes economic
events in the period
in which they occur

BALANCE SHEET
ASSETS = LIABILITIES + EQUITY

Other inventory issues

-Feedback can be used

to set expectations

-Contains no errors/omissions
-Does not require perfect accuracy

Lesson 2 | Accounting Building Blocks

Recording transactions accounting equation
Adjusting entries
Accrual
Cash

Inventory
COGS Expense
Cash
Sales Revenue
Totals

-Materiality

-Info cannot be manipulated; free from bias

Advertising
Cash
Expense
250 250

ACCT for Inventory

-Confirming value

-Includes all info necessary for user to understand

Unearned
Revenue
2k

Inventory is valued using Inventory is valued using

older lower acquisition Px current (higher) acquisition Px

SHEET

Lesson 5 | Fixed
& Intangible Assets
Property, Plant,
a difference in a decision
& Equip
-Predictive value

economic situation
-Completeness
-Neutrality

BALANCE

-Predict outcomes of past,

present, & future events

Primary advantage
is tax benefit

Current, higher acquisition Px Older, lower acquisition Px

mtchd w/ curr, higher sales px matched w/ higher sales Px

STMT

Relevance
1Info
capable of making

2InfoReliability
strives to faithfully represent the

Total CRs

Accounts Service
Receivable Revenue
3.5k
3.5k

--Liabilities & Equity-A/P

LT Debt
Equity
Total

LIFO & FIFO

-4,500

EXAMPLES

ITEM

Balance Sheet
--Assets-Cash
Inventory
PPE
Total

Qualitative characteristics | primary qualities (TWO)

Amount
Amount
Amount

Balance sheet: Reports a company's resources & claims against @ a given point in time.
Income Stmt: Rev & Exp over period. Stmt of RE: Shows RE over period. Stmt of Cash Flows: use of $$
HANDY FORMULAS

Sole proprietors
Partnerships
Corporations
LLC's

Capital market
Product market
Government
Internal users - execs

INCOME

DETAILED EXAMPLES

Assets = Liabilities + Equity

+3,500
+3,500

1,500

Beginning Cash
Operating Activities
Investing Activities
Financing Activities
Net Change in Cash
Ending Cash

Trial Balance Form

Do work and leave an invoice for $3,500

Accounts Receivable 3,500
3,500
Service Revenue

Serviced pre-paid client ($2k)

Unearned Revenue
2,000
Service Revenue

MY SIDE

=-19.75

Financial stmts
Footnotes
Auditors's report
Mgmt's discussion
& analysis (MD&A)

Stmt of Retained Earnings

Stmt of Cash Flows

2,000

250

Beginning RE
+ Net Income
Ending Retained Earnings

Debit

+2.25

Receive $2,000 for future services

Cash
2,000
Unearned Revenue

Income Statement
Revenues
-Expenses
Net Income

Lesson 4 | Inventory & Payables

Inventory costing methods

through

Lesson 1 | Accounting Concepts

Purpose of accounting: 1) Provide financial information
about 2) Reporting entities
Basic financial
to 3) Primary users
statements (FOUR)

Record bond proceeds

Cash
491.00
Bonds Payable
500.00
Disc on Bonds Pyble
9.00

INCOME STATEMENT
REVENUE - EXPENSES = NET INCOME

-19.75
-17.50

STUDY GUIDE

Lesson 6

Effective/stated rates
-Effective = market rate, or yield
-Stated = Specified on the face of
the bond.