Intermediate Accounting 2022 - Valix Reviewer PDF

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INTERMEDIATE ACCOUNTING 1REVIEWERBY: CRIZZALYN M. BOTORCASH AND CASH EQUIVALENT Cash not just include currency and coins but also those that are acceptable by bank for deposit or immediate encashment such as checks, bank drafts and money orders. Cash is measured is face value. Cash in foreign curren...

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INTERMEDIATE ACCOUNTING 1 REVIEWER BY: CRIZZALYN M. BOTOR CASH AND CASH EQUIVALENT Cash not just include currency and coins but also those that are acceptable by bank for deposit or immediate encashment such as checks, bank drafts and money orders. Cash is measured is face value. Cash in foreign currency is measured at current exchange rate If the financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than face value. Excess cash should be invested in revenue-earning investment. - Deposits in foreign investment which are subject to foreign exchange restriction, if material, should be classified separately among non-current assets and restriction clearly indicated. Details comprising cash and cash equivalents should be

disclosed in the notes to financial statements. - The credit balance in the cash in back account results from the issuance of checks in excess of the deposits-overdraft. Overdraft is not permitted in the Philippines. - If entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with debit balance in order to show, cash, net of bank overdraft. - An overdraft can also be offset against the other bank account if the amount is immaterial. - If the deposits is legally restricted because of a formal compensating balance agreement, the compensating balance is classified seperately as " cash held as compensating balance” under current assets if the related loan is short term otherwise, it is classified as noncurrent investment. - In banking practice, checks become stale if not encashed within 6 months from the time of issuance

- If stale check is immaterial, it is simply accounted for as miscellaneous income. Cash

xx Miscellaneous Income

xx - If material and liability is expected to continue cash is restored and liability is again set up Cash short/over

xx Cash

xx Due from cashier xx Cash short/over xx Loss from cash shortage xx Cash short/over xx - Cash short/over account is a temporary account. When we already know the cause of such shortage or overage, we then cancel cash short/over account and replace it with the "real cause". - Imprest system * system of control of cash which requires tall all cash receipts should be deposited intact and all cash disbursement should be made by means of check. - In imprest system, payment of expenses requires no formal

entries. Petty cashier generally requires a signed petty cash voucher fpr such payments and prepares memo entry in the petty cash journal. - Petty cash disbursement should be replenished only by means of check and from undeposited collection. If not replenished, the entry is to state the correct cash fund is: Expenses xx Petty Cash Fund xx - Under fluctuating fund system, checks drawn to replenish the fund do not necessarily equal the petty cash disbursement. Expenses are immediately recorded and PCF fluctuates from to time. BANK RECONCILIATION - 3 kinds of bank deposits namely demand, savings and time deposits. - Demand deposits * is the current account or checking account or commercial deposait where4 deposits are covered by deposits slips and where funds are withdrawals on demand by drawing checks against the bank. 1

Saving deposits * interest bearing. - Time deposits * is evidenced, however by a formal agreement, embodied in an instrument called certificate of deposit. - Bank Reconciliation * is a statement, which brings into agreement the cash balance per book and cash balance per bank. - Usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month. - Reconciling items : 1. Book reconciling items a. Credit memos b. Debit memos c. Errors 2. Bank reconciling items a. Deposits in transits b. Outstanding checks c. Errors PROOF OF CASH - The bank re4conciliation is so-called “two date” because it literally involves two dates. - Proof of cash * is an expanded reconciliation in that it includes proof of receipts and disbursement. - 3 forms of proof of cash, namely :

a. Adjusted balance method b. Book to bank method c. Bank to book method

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Bala nce per book Note colle cted

Jan uar y 31 50, 000

15, 000

Janu ary Febr uary NSF Chec k

Re cei pts

Disbu rsem ent

Feb ruar y 28

200 ,00 0

180,0 00

70, 000

(15, 000 ) 20,0 00

20,0 00

Febr uary Adju sted book bala nces Bala nce per bank Dep osits in tran sits

59, 000

205 ,00 0

184,0 00

80, 000

84, 000

170 ,00 0

130,0 00

124 ,00 0

40, 000

(40, 000 )

(5,0 00)

(5,000) 10,000 10,0 00

(1,0 00)

(1,000)

Febr uary Outs tand ing chec ks Janu ary

75,0 00

75,0 00

Janu ary

Janu ary Febr uary Servi ce char ge

uary Adju sted bank bala nces

Janu ary

(65, 000 )

(65,00 0) 119,00 0

119, 000

59, 00 0

205 ,00 0

184,0 00

80, 000

ACCOUNTS RECEIVABLE - Accounts receivable is an open account not supported by a promissory note. Also known as trade debtors. - Advances to affiliates are usually treated as a longterm investment - Creditors’ accounts with debt balances are classified as a current assets. - Special deposits on contract bids normally are classified as other noncurrent assets. - Financial assets shall be recognized initially at fair value plus transaction cost that are directly attributable to the acquisition. Fair value is usually the transaction price, fair value of the consideration given. - AR is subsequently measured at net realizable value or estimated recoverable amount.

Febr 2

Assets shall not be carried at above their recoverable amount - Freight collect means freight charge on the goods shipped is not yet paid. Buyer pays for it - Freight prepaid is already paid by the seller. - AR xx Freight- out xx Sales xx Allow for freight charge xx Cash xx Sales discount xx Allowance for freight charge xx Accounts receivable xx - Sales return xx Allowance for sales return xx - Net method9beyond the discount period) Cash xx AR xx Sales discount forfeited (income) xx - Allowance method conforms to matching principle. AR is properly measured at NRV - Reversal; in Direct writeoff: AR xx

Bad Debts

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xx Cash

xx AR

xx Or if discovered in subsequent year: Cash xx Miscellaneous Income xx - Correction of excessive allowance: Allowance for DA xx Doubtful accounts xx Miscellaneous Income xx - If granting of credit and collection of accounts are under the charge of sales manager, doubtful accounts shall be considered as distribution cost. If under an offer, it is administrative expense. In the absence to the contrary it is admin expense. ESTIMATION OF DOUBTFUL ACCOUNTS - Aging of accounts receivable * involves an analysis where the accounts are classified into not due or past due. a. Not due b..1-30 days past due

c. 31-60 days past due d. 61-90 days past due e. 91-120 days past due f. 121-180 days past due g. 181-365 days past due h. More than 1 year past due Percent of accounts * a certain rate is multiplied by the open accounts at the end of the period in order to get the required allowance balance. NOTES RECEIVABLE - Notes receivable * are claims supported by formal promises to pay usually in the forms of notes. - When a promissory note matures and is not paid, it is said to be dishonored. - Conceptually, notes receivable shall be measured initially at present value. - Short-term notes receivable shall be measured at face amount. - The initial measurement of long term notes depends on whether the notes are interest bearing or noninterest bearing. - Computation : Present value of note 300,500

Cash

received

100,000 Sale

price

400,500 C/A of equipment (350,000) Gain on sale of equipment 50,500 LOAN RECEIVABLE - Transaction costs that are directly attributable to the loan receivable include direct origination cost. - Direct origination cost is an origination fee not chargeable against the borrower. - Loan Receivable xx Cash xx Cash yy Unearned Interest yy Unearned Interest zz Cash zz Principal amount xx Origination fee received (yy) Direct origination cost incurred zz TOTAL ** THE DISCOUNT ON LOAN RECEIVABLE IOS XX 3

TO BE AMORTIZED USING EFFECTIVE INTEREST METHOD.

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RECEIVABLE FINANCING Financial flexibility or capability of an entity to raise money out of its receivables. Assignment of accounts receivable is transferring some the ri8ghts in AR to lender called the assignee in consideration for a loan. It is formal, evidenced by a financing agreement and a promissory note both of whi8ch the assignor assigns. Pledging is general because all AR serve as collateral for the loan. In Notification basis, customers are not informed that their accounts have been assigned. As a result, they continue to make payments to the assignor, who in turn remits collection to the assignee. In notifications basis, customers are notified to make their payments directly to assignee. Assignee lends only a certain percentage of the face value of the accounts assigned because the

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assigned accounts may not be fully realized by reason of such factors as sales discount, sales return, and allowances and uncollectible accounts. Notification: NP xx Sales Discount xx AR assigned xx NP xxxx Cash received (xxx) Balance xxxx Interest expense xx AR xxxx Collection (xxxx) Balance xxxx

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xx Cash assigned

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Remittance from the bank: Cash xx Interest expense (1%xxx) xx NP xx AR assigned xx AR xx

AR assigned xx Entity shall disclose its equity in the assigned accounts. AR assigned xx Less: NP xx Equity xx Factoring is a sale of AR on a without recourse, notification basis. Factor assumes responsibility for uncollectible factored accounts. In assignment, assignor retains ownership of the accounts assigned. Casual factoring- normal sale of accounts receivable, without other deductions Cash xx Sale discounts xx Commission xx Receivable from factor xx AR xx  Customer is subsequently allowed a credit of xx for damaged merchandise:

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Sale returns and allowance xx Sale discounts (2%xTT) xx Receivable from factor xx  Final settlement: Cash Receivable from factor If customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer to the card issuer who will then pay the retailer the appropriate amount minus credit service charge AR Sales Cash Credit card service charge AR-diners club Notes received from officers, employees, shareholders and affiliates shall be designated separately Dishonored notes shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any interest and other charges. AR 4

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NR Interest Income When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or other financing company. Payee then becomes an endorser and the bank becomes the endorsee Endorsement may be with recourse which means that the endorser shall pay the e4ndorsee if the maker dishonors the note. This is the contingent or secondary liability of the endorser; or it could: NR- current portion Less: Unearned interest income TOTAL NR-noncurrent portion Less: Unearned interest income CURRENT VALUE  Noninterest bearing note with down payment and ordinary annuity. Cash price is not given Cash NR Equipment Gain on sale of equipment Unearned



Unearned interest income Interest Income Effective interest is used using the prevailing market interest.

INVENTORIES - Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such a sale or in the form of materials or supplies to be consumed in the production process or in the rendering the services. - FOB destination and shipping point determine ownership of goods and the party who is be without recourse with means that the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity. In the absence to the contrary, endorsement is assumed to be with recourse. - Principal xx Interest (1Mx12%x180/360) xx MV (full term of the note) xx

Discount: (1.060Mx15%x120/360) xx Net proceeds: 1.060-53K= 1.007M Principal xx Accrued interest (1Mx12%x60/360) xx CV xx

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Cash Loan on NR discounting NR Interest Income If the discounting is with recourse, the transaction is accounted for as either conditional sale of note receivable recognizing contingent liability and secured borrowing a. Conditional sale: Cash Loss on NR discounting NR discounted Interest Income

The NR discounted account is deducted from the total note receivable when preparing the balance sheet with disclosure of contingent liability.  The note is paid by the marker to the first bank NR discounted NR  If the note is dishonored by the marker sand the entity pays the first bank the maturity value, plus protest fee and other bank charges of xx AR Cash NR discounted NR If the discounting is treated as secured borrowing, NR is not derecognized but instead an accounting liability is recorded at an amount equal to the face amount of the NR discounted\] Cash Interest expense Liability for NR discounted Interest income  No gain or loss because the 

Term of the note 180 Less: Days expired from.. to 60 Discount period 120D

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discounting is borrowing If the note discounted is made by the party discounting, a primary liability exist, not a contingent liability since in this case, the marker is the one originally liable to the bank for the loan obtained Cash Discount on NP (500Kx12%) NP-bank Interest bearing noteinterest being included in the face value Interest – bearing note, interest is compounded annually: NR Land Gain on sale of land Accrued interest receivable Interest income (12%x1M)

Cash NR Accrued IR Interest Income Face value Interest accrued Total Interest: 1.254M x 12%

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2nd year: Accrued IR Interest Income Face value Interest accrued for 1st year Total Interest: 1.120Mx12% 3rd year:

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Noninterest bearing note: NR Sales Unearned I.I Gross income: sales- cogs Cash NR Unearned interest income Interest income  Bond outstanding method is used Supposed to pay the freight charges. Freight collect and freight prepaid determined the party who actually paid the freight charge FAS- free alongside. Seller bears all expense and risk in delivering the goods to the dock. The buyer bears the cost of loading and shipment and the title passes to the buyer when the carrier takes possession of the goods. Consigned goods are recorded by the consignor

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by means of memorandum entry. Inventories shall be presented as one line item but the retails of the inventories shall be disclosed in the notes to FS- finished goods, goods in process, raw materials and manufacturing supplies. Inventory shortage is usually close to cost of goods sold because this often the result of normal shrinkage. If abnormal and material, shortage shall be separately classified and presented as other expense. Net method (if the discount period has expired): Purchase discount loss AP Gross method is more practical than net method. Net method has theoretical correct historical cost. Cost if inventories: a. Cost of purchase b. Cost of conversion c. Other cost in bring the inventories to their present location and condition Cost of purchase includes purchase price, import

duties, irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of finished goods, materials and services. - Trades discounts, rebates and other similar items are deducted in determining the cost of purchase. - When inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing. - Storage cost on goods in process are capitalized but storage cost on finished goods are expensed. - Abnormal amounts are expensed - Cost of inventories of a service provider consists primarily of the labor and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead. GROSS PROFIT METHOD AND RETAIL INVENTORY METHOD - There are two methods for approximating inventory: 6

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Gross Profit Method and Retail Method Sales discounts and sales allowance are not included in the computation of net sales as this would create an ending inventory. In sales allowance, there is no physical transfer of goods from the customer but a mere reduction in the sales price. - Cost 100 Initial markup

20

Net markup (60-40)= 20 Net markdown (30-20)= 10 Maintained markup (230200)= 30 -

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Original retail

120 Additional mark up

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New Sales Price

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40 160 Mark up cancelation 40 New sales price 120 Markup cancelation ( 10) Markdown (15) New sales price 95 Markdown cancellation 5 New sales price 100

Departmental transfer in or debit = addiction to purchases at cost and at retail. Sales returns and allowances = deducted from sales. Increases ending inventory by decreasing COS. Normal shrinkage deducted from GAS at retail. Abnormal = at cosr and retail. Approaches in using retail: conservative ,average cos, fifo approach.

Gas conservative 1,200,00 2,000,000 Cost ratio: 60% Markdpwn (140,000) Markdown cancelation (15,000) 1,200,00 1,875,000 Cost ratio : 64% Less: Sales 1,450,000 Sales Returns (50,000) Employee discount 40,000 Spoilage and breakage 35,000 1,475,000 Ending Inventory at retail 400,000 Conservative cost (400T x 60%) 240,000 -

Cost Retail COST RETAIL Beg. Inventory 180,000 250,000 Net Purchases 1,020,000 1,575,000 Add markup 200,000 Markup cancelation (25,000)

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Average Cost (400T x 64%) 256,000 Conservative cost: lower of average cost or market. Average cost- historical cost If there is no beginning inventory, inventory value would be the same under both average and FIFO method Fifo is based on the assumption that markup and markdown apply to

goods purchased during the year and not to beginning inventory. Cost Retail Beginning inventory 900,000 Purchases 1,800,000

495,000

3,300,000

Net markup 300,000 Net markdown (600,000) Net purchases 3,000,000

1,800,000

Current year cost ratio: 60 % GAS 3,900,000

2,295,000

Less: Sales 2,700,000 Ending inventory at retail 1,200,000 FIFO cost (1,200,000 x 60%) 720,000 FINANCIAL VALUE -

ASSET

AT

FAIR

Investment are assets not direct identified with the 7

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operating activities of an entity and occupy only an auxiliary relationship to the central revenue producing activities of the entity Investments are held for (1) accretion of wealth (interest, rental...