Intermediate Accounting 1 - LECTURE NOTES PDF

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Interm Intermediate ediate acc accounting ounting 1 CASH AND CASH EQUIVALENTS GENERAL TERMS: Cash includes money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit, it must also be UNRESTRICTED in use, that it is readily available in the payment of current obligations and NOT be subject to any restrictions. Cash includes legal tender, bills, coins, checks received but not deposited, and checking and savings account Cash Equivalents are any short-term investment securities that have maturity periods of 90 days or less. This includes bank certificates of deposits, banker’s acceptances, treasury bills, commercial paper and other money market instruments. CASH ITEMS 1. Cash on Hand - undeposited cash collections. 2. Cash in Bank - demand deposit & savings account, unrestricted. 3. Cash Fund - set aside for current operations. TERM Less than 3 months 3 months to 1 year More than 1 year

CLASSIFICATION Cash and Cash Equivalents Current Assets Non-Current Assets

What is not included in cash equivalents? Investments in liquid securities such as stocks and bonds are not included in cash and equivalents. Even though these assets may be easily turned into cash (typically with a three-day settlement period), they are still excluded. These assets are listed as investments on the balance sheet. Bank Reconciliation a bank account is an asset to the company but to the bank your account is a liability because the bank owes the money in your bank account to you. For this reason, in your bank account, deposits are credits and checks and other reductions are debits. The bank sends the company a statement each month. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the company’s balance or the bank’s balance. 1|Page

RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Bank reconciliation is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company’s books. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger. Bank Statement is a record of your bank account transactions, typically for one month, prepared by the bank. Company’s Records (or books) refers to the general ledger posting and can be in the form of cash disbursement journal, cash receipt journal, cash general ledger postings or lists of cash transactions. Reconciling item is anything that doesn’t match or doesn’t exist on both places (company and bank). A reconciling item will be added or subtracted to the bank or book side of the reconciliation. BANK RECONCILIATION BANK Ending Cash Balance per Bank Add: Deposits in Transit Less: Outstanding Checks Add/Less: Error =Adjusted Bank Balance

BOOK Ending Cash Balance per Book Add: Note Collections and Interest Less: Customer’s NSF Checks and Bank Service Fees Add/Less: Error =Adjusted Book Balance

Deposit in transit is typically a day’s cash receipts recorded in the depositor’s books in one period but recorded as a deposit by the bank in the succeeding period. The most common deposit in transit is the cash receipts deposited on the last business day of the month. Outstanding checks are those issued by a depositor but not paid by the bank on which they are drawn. The party receiving the check may not have deposited it immediately. Bank Errors, sometimes banks make errors by depositing or taking money out of your account in error. You will need to contact the bank to correct these errors but will not record any entries in your records because the bank error is unrelated to your records. Deposits, compare the deposits listed on the bank statement with the deposits on the company’s books. To make this comparison, place check marks in the bank statement and in the company’s books by the deposits that agree. Paid checks, if cancelled checks (a company’s checks processed and paid by the bank) are returned with the bank statement, compare them to the statement to be sure both amounts agree. Bank debit and credit memos, verify all debit and credit memos on the bank statement. 2|Page

RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Debit memos reflect deductions for such items as service charges, NSF checks, safe-deposit box rent, and notes paid by the bank for the depositor. Credit memos reflect additions for such items as notes collected for the depositor by the bank and wire transfers of funds from another bank in which the company sends funds to the home office bank. Check the bank debit and credit memos with the depositor’s books to see if they have already been recorded. Make journal entries for any items not already recorded in the company’s books. Book Errors, list any book errors. A common error by depositors is recording a check in the accounting records at an amount that differs from the actual amount. For example, a $47 check may be recorded as $74. Although the check clears the bank at the amount written on the check ($47), the depositor frequently does not catch the error until reviewing the bank statement or cancelled checks.

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

RECEIVABLES Receivables refer to claims against others for money, goods or services arising from sale of merchandise or money lent or the performance of services. For accounting purposes however, the term is employed to mean claims expected to be settled by the receipts of cash. RECOGNITION Receivables are recognized when title to the goods passes to the buyer or when transfer of resources take place. The point at which title passes may vary with the terms of the sales. MEASUREMENT 1. At face value 2. At discounted amount (present value) VALUATION 1. Receivable are valued at their net realizable value or their expected cash value. Determination of NRV requires estimation of uncollectible receivables, as such; an allowance account should be set up for doubtful accounts and for any anticipated adjustments which in the normal course of the business will reduce the amount receivable. Net realizable value - is the estimated amount of cash that will be collected or realized from receivables. 2. Long term note receivables should be valued at an amount representing the present value of the expected future cash receipts. 3. Receivable denominated in foreign currency should be translated to local currency at the exchange rate on balance sheet date. ASSET CURRENT NON-CURRENT Receivables which are expected to be Receivables which are expected to be realized cash within the normal operating realized beyond one year or those cycle or one year, whichever is longer. receivables which are not currently collectible.

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

RECEIVABLES TRADE NON-TRADE Refers to claims arising from credit sale of Represent claims arising from sources merchandise or services in the ordinary other than the sale of merchandise or course of the business. The usual types services in the ordinary course of the of trade receivables are: business. a. Accounts receivable - short term, unsecured and informal credit arrangements (open accounts). b. Notes receivable - evidenced by a formal instrument which is the promissory note. BALANCE SHEET PRESENTATION Receivables whether trade or non-trade which are currently collectible should be presented on the balance sheet as one-line item called Trade and Other receivables. Methods of Receivable Confirmation a. Positive confirmation - used when individual account balances are relatively large. There is a reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities b. Negative confirmation - internal control procedures regarding receivables are considered effective. - a large number of small balances are involved. Trade discounts vs. Cash discounts Trade discounts- this also known as volume discount or quantity discount. It is a means of adjusting the list price for different buyers or varying quantities. Accounts receivables should be recorded net of trade discounts. Cash discounts - this is a reduction from the invoice price by reason or prompt payment. Customer’s credit balances Credit balances in Accounts receivables resulting from overpayments, returns and allowances and advance payments from customer. This account should be classified as current liabilities and must not be offset against the debit balances in other customers’ account. Terms related to freight charges a. FOB Destination - means that ownership to the merchandise is transferred to the buyer only upon reaching the point of destination or upon the buyer’s receipt of merchandise. 5|Page

RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

b. FOB Shipping point - means that ownership to the merchandise is transferred to the buyer upon shipment thereof. c. Freight collect - means that the freight charges on the merchandise shipped is to be paid by the buyer. d. Freight prepaid - means that the freight charges on the merchandise shipped was already paid by the seller. Accounting for bad debts expense a. Allowance method - this requires the recognition of bad debt loss if the accounts are doubtful of collection. b. Direct write off method - this requires the recognition of bad debt loss only when the account proved to be worthless or uncollectible. Methods of estimating bad debts expense a). Percentage of sales (Income statement approach) - bad debts expense is calculated by applying a percentage to credit sales for the period. This process results in an adjusting entry that debits bad debts expense and credits allowance for doubtful accounts without regard to the existing balance in the allowance account. A proper matching of cost and revenue is achieved because bad debt loss is directly related to sales and reported in the year of sales b). Percentage of Receivables (Balance sheet approach) - results in a more accurate valuation of receivables on the balance sheet since this method attempts to value accounts receivables at their future collectible amounts. a.) Composite percentage - a single rate is applied to Accounts receivable at the end of the period to obtain the desired ending balance of the allowance. The amount of bad debts expenses recognized is the difference between the existing balance in the allowance account and the desired ending balance. b.) Aging - accounts receivable is classified by age and a different percentage is applied to each age group. The allowance is then determined by multiplying the total of each classification by the rate or percent of loss depending on the experience of the company for each category. NOTES RECEIVABLES are claims supported by formal promises to pay, which are in the form of notes. Recognition: 1. Short term notes are generally recorded at face value because the interest implicit in the maturity value is immaterial. 2. Long term notes should be recorded at present value.

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

a. Interest bearing notes - the PV of the note is the same as the face amount of the note. b. Non-interest bearing notes - Present Value note exchanged solely for cash equal to the amount of cash proceeds note exchanged for property, goods. Present value is according to the ff. order of priority: 1. FMV of the property, goods or services 2. FMV of the note received 3. Discounted amount of note using appropriate rate of interest. The difference between the face amount of the note and its PV is recorded as discount or premium and amortized to Interest income account over the life of the note using the effective interest method. c. Valuation and reporting 1. Short term notes are reported at their net realizable value. 2. Long term notes are reported at present value. ACCOUNTS AND NOTES RECEIVABLE FINANCING Pledging - receivables are used as collateral or security for a loan and not reflected in the accounts although a disclosure should be made in the financial statements either in a note or parenthetically. Assignment - a more formal borrowing arrangement in which the receivables are used as security. The assignor or borrower transfers its rights in some of its accounts receivables to a lender or assignee in consideration for a loan 1. The loan is at a specified percentage of the face value of the collateral and interest and service fees are charged to the assignor (borrower). 2. The debtors are occasionally notified to make payments to the assignee (lender) but most assignments are not on a notification basis. 3. Assigned accounts are segregated from other accounts. The Notes payable should be deducted from the balance of A/R assigned to determine the equity in assigned accounts receivable. Factoring - it is similar to a sale of receivables because it is generally on a without recourse notification basis. The factor or buyer assumes the risk of collectivity and generally handles the billing and collection function. A gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the receivables factored. Discounting - this is a sale of the note to a third party, usually a bank. The sales is usually on a with recourse basis which means that upon the default of the debtor, the seller of the note becomes liable for its maturity value. Proceeds from discounting is computed as follows: 1. Interest to maturity (Principal x Rate x Time) 7|Page

RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

2. Maturity value (Principal + Interest) 3. Discount (Maturity Value x Discount Rate x Discount Period) 4. Net Proceeds (Maturity Value – Discount) If the face value of the note is > proceeds, the difference is interest expense. If the face value of the note is < proceeds, the difference is interest income.

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

DEBT INVESTMENTS AMORTIZED COST

Classification

Collect contractual cash flows (solely payment for principal and interest)

Initial Recognition

at transaction cost (includes transaction cost that are directly attributable to acquisition)

Premiums or Discount

amortized over the life of the instrument using the effective interest method

Changes in Fair Value

does not recognize

FAIR VALUE FAIR VALUE THROUGH THROUGH OTHER PROFIT OR LOSS COMPREHENSIVE INCOME are held for both for collecting trading; elected to contractual cash avoid accounting flows (solely mismatch payment for principal and interest) and held for trading at purchase price at transaction cost (transaction costs (includes are not included transaction cost that even if it is directly are directly related) attributable to acquisition) does not amortize; both amortize the updates its life of the instrument carrying value using the effective based on fair value interest method and updates its carrying amount based on fair value Recognize and recognize and taken to Profit or taken to Other Loss Comprehensive Income; uses FVAdjustment account for the Gain or Loss on change in fair value

IMPAIRMENT LOSS ON DEBT INVESTMENTS • No impairment loss – recognize 12 month expected credit loss • Significant increase in credit risk – recognize lifetime expected credit loss

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Entry for Loss: Impairment Loss xx Allowance for Impairment in Value of Debt Investments

xx

Entry for Recovery: Debt Investments Impairment Recovery of Debt Investments

xx

xx

Amount of Impairment Loss to be recognized: Carrying Amount (amortized cost of bonds & interest receivable) Less: Present Value of Future Cash Flows [PV of Principal (Principal x PV of 1 using the original yield rate) & PV of periodic interest (Principal x new interest x PV of ordinary annuity of 1 using the original yield rate)] RECLASSIFICATION OF DEBT INVESTMENTS Is made when and only when the entity changes the business model for managing its financial assets, which is rare or infrequent. PROHIBITED: change in management intention, temporary disappearance of market for instruments; transfer of assets between existing models. FROM AC AC FVPL FVP,

TO FVPL FVOCI FVOCI AC

FVOCI

AC

FVOCI

FVPL

ADJUSTMENT Difference: FVPL Difference: FVOCI, interest rate (yield) is not changed Effective interest rate is calculated Effective interest rate is calculated; FV on reclassification date is the initial amortized cost Effective rate not adjusted; unrealized gain or loss on equity is removed to adjust the asset to amortized cost Transfer the cumulative gain or loss to Profit or Loss

FUNDS FOR FUTURE USE Bond Sinking Fund – compute for annual deposit FORMULA: Principal / Future value of cash inflows at effective interest rate (ordinary annuity) CASH SURRENDER VALUE OF LIFE INSURANCE POLICY Is an asset account and is adjusted every year end. Its changes in value are then reflected on another account, Life Insurance Expense. Life Insurance Expense is affected by the following: premiums of Life Insurance, dividends received, and the corresponding increase or decrease in the Cash Surrender Value account. 10 | P a g e

RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

LONG TERM ADVANCES AND DEPOSITS • Measured at Amortized cost using the effective interest method • Initial Recognition: Discounted at Present Value (discount or premium is recognized on Prepaid Compensation Expense or Premium) • Subsequent Recognition: recognizes interest revenue every at the end of the period. Advances to Officers or Security Lease Deposit: increases or decreases together with the interest revenue (effective interest) recognized for the year. Compensation Expense: uses straight-line method

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

INVESTMENTS IN EQUITY SECURITIES Equity Securities are financial instruments that represent ownership in a company. These shares typically carry with them the right to collect dividends and to vote on corporate matters. Owners of equity securities are known as shareholders. A share is the ownership interest or right of a shareholder in an entity. This share is evidenced by an instrument called share certificate. Classification of Equity Securities Less than 20% It is presumed that the investor does not have significant influence over the investee company. 20%-50% It is presumed that the investor has significant influence over the investee company. M...