F3 Flashcards
Factoring
selling A/R
Factoring with recourse
factor (buyer) may return the account to the company if it subsequently requires a credit loss adjustment; liability & risk of loss remains with company
Factoring with recourse JE
Two treatments:
1. sale (if seller’s obligation for uncollectible accounts can be estimated, surrenders control of future benefits, seller isn’t req. to repurchase but may replace A/R)
2. borrowing (with receivables as collateral)
Factoring without recourse
factor (buyer) assumes the risk of loss if the account requires a credit loss adjustment (write-off)
Factoring without recourse JE
Dr. cash, due from factor (factor’s margin), loss on sale of receivable, accounts receivable)
Cr. Accounts receivable
Discounting
selling N/R
At what value should non-interest bearing promissory notes be recorded?
At PV of future payments required, discounted at the market interest rate
discounting N/P with recourse
holder remains contingently liable
discounting w/o recourse
holder assumes no further liability after discounting
tx for N/R with recourse
reported on BS with corresponding contra-account (N/R discounted) OR removed from BS with contingent liability disclosed in footnotes
tx for N/R without recourse
removed from BS
Cash recon items for book balance
B- bank collections +
I- interest income+
N- NSF -
S- service charges -
(&errors) +/-
Cash recon for bank balance
D- deposits in transit +
O- outstanding checks -
Cash rec procedure
Adj. book (true balance), adj. bank to match
Restricted cash
set aside for a specific use or purpose (ST or LT); disclosed in footnotes
Check dating
checks date past but not mailed = add back
checks postdated = not included
Pledging A/R & tx
use A/R as collateral; no JE, footnote disclosure
How is notes receivable recorded?
present value = fv - unearned interest
Trade discounts vs. sales discounts
trade = quantity
sales = prompt payment w/in terms
Trade discounts
offered for bulk buying
stated as percentage
applied one at a time
recorded using net method (not gross method)
Shipping terms and when title is transferred
FOB destination: seller retains inventory until goods are received
FOB shipping point: buyer gets title when goods are given to a common carrier
Goods and materials to be included in inventory
Goods in transit: depends on shipping terms
Wrong goods: seller’s inventory (breach of contract)
Consignment: included in conignor’s inventory (title passes directly from consignor to 3rd party)
Public warehouse: included in inventory (warehouse receipt)
Sales with mandatory buyback: included in seller’s inventory
Installment sale: if bad debt est. = include buyer’s inventory; if bad debt can’t be est. = include in seller’s inventory
Valuation of inventory
generally at cost (including freight-in less discounts)
Departures from cost basis for inventory
precious metals and farm products = NRV (selling price - cost to sell)
Lower of cost and NRV
used for FIFO and weighted average
NRV = selling price - cost to sell
Lower of cost or market
inventory methods and procedure
LIFO or retail inventory
market = middle value of market ceiling, floor, and replacement cost
market ceiling = NRV
market floor = NRV - normal profit margin
replacement cost = cost to repurchase/reproduce
Journal entry to write-down inventory and reporting
Dr. inventory loss; Cr. inventory
booked immediately (lg = disclosed; sm = increase COGS)
cannot be reversed; must also disclose change in measurement method
Inventory systems
periodic inventory JE
Purchases: Dr. Purchases, Cr. cash or A/P
Sales: Dr. Cash or A/R, Cr. Sales
Inventory systems
perpetual inventory JE
Purchases: Dr. Inventory, Cr. cash or A/P
Sales: Dr. Cash or A/R, Cr. Sales; Dr. COGS, Cr. Inventory
Inventory cost flow assumptions
FIFO, LIFO, specific identification, weighted average, moving average, dollar value LIFO
FIFO
- sell old, inventory new
- EI/COG = same in perpetual or periodic system
- use lower of cost or NRV for valuation
Weighted average
- periodic only
- avg. cost per unit = total inventory costs available / total # units available
- homogeneous units
Moving average
- perpetual
- compute weighted average after each purchase
LIFO
- sell new, inventory old
- conformity rule: if used for taxes must also be used for books
- better at matching rev & exp
- different EI and COGS for periodic and perpetual
- use lower of cost or market for valuation
Dollar-value LIFO
price index = ending inventory @ current year cost / ending inventory @ base year cost
The gross profit method is used for
interim FS as part of periodic inventory system (valued @ retail)
Firm purchase commitments
used to try to combat rising future prices; if market value drops, loss must be recognized if it is probable and reasonably estimable
Dr, estimated losses on purchase commitment; cr. estimated liability on purchase commitment
During a period of rising prices, effect of LIFO vs. FIFO
ending inventory and net income will be lower with LIFO & rising prices
(LIFO = LOWEST)
JE for donated PP&E
Dr. fixed asset (@FMV)
Cr. gain
gain goes on income statement
Land purchased for building construction include all costs up to
excavation (purchase price, legal fees, drain swamp, site development, removing old business etc.)
Subtract proceeds from resources sold from land
digging foundation (start of building–> capitalized
Basket purchase
allocate cost between land & building based on the ratio of appraised values
separated because the building will be depreciated but the land will not
PP&E: AIR = Capitalized
additions
improvements
replacement
Tx for replacements if old asset’s carrying value is known vs. unknown
KNOWN: remove old carrying value and recognize G/L
UNKNOWN: debit AD for for improvement, credit cash or A/P
How are debt issuance costs presented on the BS?
Debt issuance costs are presented on the balance sheet as a direct reduction to the carrying amount of the bond and should not be included in the cost of the land.
How to value assets that are purchased requiring fixed payments extending beyond one year
the assets should be valued at the present value of all future payments.
Amount of capitalized interest on a construction project is the lower of:
actual interest cost incurred or computer capitalized interest (avoidable interest)
avoidable interest calculation
weighted average accumulated expenditures mult. by interest rate on borrowings (excess costs are multiplied by weighted average interest rate for other company debt)
Valuation of intangibles
finite life: cost - amortization - impairment
indefinite life: cost - impairment
crypto: fair value each reporting period (with G/L in current NI)
Impairment test and amount for finite life intangible assets/reporting
determining impairment: use undiscounted future net cash flows
amount of impairment: use fair value
reported as loss in income from cont. op. (unless related to disc. op.)
impairment test for indefinite life intagible assets
Fair value - net carrying value
because future cash flows cannot be estimated
Purchased software
recorded as intangible asset at cost; amortized over shorter of legal or economic life
Cloud computing arrangement
- prelim project phase: expense
- application development phase: expense (training, maintenance, support); capitalize (software, coding, testing fees)
- post implementation phase: expense
–> test for impairment using two-step process for finite life intangibles
Franchise accounting
initial fee: capitalize and amortize
continuing fees: expense
present value of a liability
face value/future value-present value of future cash flows(discount: contra-liability)
Composite life
total depreciable cost/annual depreciation
Three required conditions that must be present for an entity to begin capitalizing interest.
- Interest cost is being incurred.
- All necessary permits (licenses) have been filed to prepare the asset for its intended use.
- Expenditures for a qualifying asset have been made.
