Intermediate 1 Final Exam

Accounting Cycle (10 steps)

1. Identify Transactions
2. Analyze transactions
3. record transactions in journal
4. post journals to general ledger
5. prepare unadjusted trial balance
6. record adjusting journal entries to general ledger
7. prepare adjusted trial balance
8. prepare f/s
9. record closing entries
10. prepare post closing trial balance

Adjusting Journal Entries, need to know how to calculate and record

1. Depreciation Expense
2. Deferred Revenue
3. Accrued Expense

Debits increase…

Assets

Losses

Expenses

Credits increase…

Liabilities

Equity

Gains

Revenue

Depreciation AJE

DR: Depreciation expense

CR: Accumulated Depreciation

Deferred/Unearned Revenue AJE

Original entry:

DR: Cash 20,000

CR: Deferred Revenue 20,000

25% of services provided have now been provided

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DR: Deferred revenue 5,000

CR: Revenue 5,000

Accrued Expenses AJE Example

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Accrued Expenses:

DR: Expense

CR: Accounts payable

Closing temporary accounts

Revenue/gain: credit retained earnings

Expense/loss: debit retained earnings

GAAP vs IFRS difference: stmt of cash flows

GAAP:

* Interest expense → operating section
* Dividends paid → financing section
* interest/dividends received → operating section

IFRS:

* Interest expense → operating or financing
* Dividends paid → operating or financing
* Interest/dividends received → operating or investing

GAAP vs IFRS difference: balance sheet

GAAP:

DTA-NOL ----- $

Valuation allowance ----- ($)

=DTA-NOL

IFRS: DTA-NOL, net $

Basic EPS

(net income-preferred dividends)/weighted average common shares outstanding

Preferred dividend calculation

(Par Value per share \* outstanding shares)\* dividend rate

Cost capitalization

\-Start-up costs and R&D are all expensed→ can’t be capitalized

\-”costs incurred to bring asset to its intended use”

\-interest and property taxes can be capitalized until “placed in service”

Permanent Differences

1. Municipal Bond Interest→ decreases taxable income
2. Meals and Entertainment→ increases taxable income
3. Fines/Penalties→ increases taxable income
4. Dividends received deduction → decreases taxable income

Temporary Differences

Transactions treated differently between book and tax that’ll reverse over time.


1. Bad debt expense(ADA vs Write off)→ deferred tax asset
2. Depreciation Expense(Straight-line vs MACRS) → deferred tax liability
3. Unearned Revenue(Liability vs. Cash) → deferred tax asset

Formula for calculating debit to income tax expense

(Net Income before Tax(NIBT) +/- permanent differences)\*Tax Rate= dr. income tax expense

Formula for calculating DTA or DTL

Temporary differences \* Tax rate

if tax value>book value → DTA

if book value>tax value →DTL

Formula for calculating credit to income tax payable

NIBT, after PDs +/- temporary differences=taxable income \* TR= cr. income tax payable

Effective tax rate

ITE/NIBT

NOL rule

carry forward indefinitely, subject to 80% limitation

NOL example-($100,000) tax loss in 2021 and $80,000 taxable income in 2022. Journal entries for 2021 and 2022 at 21% tax rate.

2021 JEs

dr. DTA-NOL→$21,000(100,000\*.21)

cr. Income Tax Expense→$21,000

2022 JEs

dr. Income tax expense→$16,800(80,000\*.21)

cr. DTA→$13,440((80,000\*.8)\*.21)

cr. Income tax payable→$3,360((80,000\*\*.2)\*\*.21)

NOL example 2-($1,000,000) tax loss in 2021, 10% DTA is questionable. $500,000 taxable income in 2022 and we can use all of the DTA. What are the journal entries for 2021 and 2022 at 21% tax rate

2021 JEs

dr. DTA-NOL→ $210,000(1,000,000\*.21)

cr. ITE→ 210,000

To account for the questionable DTA:

dr. ITE → $21,000 (210,000 \* 10%)

cr. Valuation allowance → $21,000

2022 JEs

To reverse the questionable DTA:

dr. Valuation allowance → $21,000

cr. ITE → $21,000

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dr. ITE → $105,000(500,000 \* .21)

cr. DTA → $84,000 (500,000\*.80)\*.21

cr. ITP → $21,000 (100,000 \* .21)

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\*126,000 left of DTA for year 3 and onwards

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A/R balance sheet approach

A/R balance or A/R aging→ balance in ADA

A/R Income statement approach

credit sales \* %→ dr. BDE cr. ADA

What would a debit in ADA mean(ADA is a credit account)

More accounts have been written off then had been estimated

Direct Write-off method (Tax)

dr. BDE

cr. A/R

write-off of ADA journal entry (GAAP)

dr. ADA

cr. A/R

recovery(or reinstatement) of write-off journal entry

1\.)

dr. A/R

cr. ADA

2\.)

dr. Cash

cr. A/R

Notes Payable with weird dates (i.e period starting 2/1)

1\.) Amortization table

2\.) Journal Entries

a. record borrowing

dr. cash

cr. note payable

b. record interest payable(11/12 if 2/1)

dr. interest expense

cr. interest payable

c. record payment

dr. interest payable, interest expense, n/p

cr. cash

Notes payable with normal dates (i.e period starting 1/1)

1\.) Amortization table

2\.) Journal entries→ NO INTEREST PAYABLE

a.) record borrowing

dr. cash

cr. note payable

b.) record payment

dr. interest expense

dr. note payable

cr. cash

Notes payable--difference between normal and not normal payments

normal dates→ no interest payable

weird dates → record interest payable

Imputed Interest Problem

Interest based on the implicit (fair value) interest rate.


1. Amortization table at standard rate
2. Amortization table at market rate
3. Journal entries

Journal Entries for Imputed Interest--review imputed interest problem

1. 1/1

dr. equipment

dr. discount on note payable

cr. note payable
2. 12/31

dr. note payable→ always comes from stated rate table

dr. interest expense→ must come from market rate table

cr. cash

cr. discount on np
3. 12/31-don’t have if borrowing cash

dr. depreciation expense

cr. accumulated depreciation

Lease classification criteria

If one or more criteria are met→ finance lease

if none of the criteria are met→ operating lease


1. ownership of the asset transfers to the lessee→ have to be told
2. bargain purchase option→ have to be told
3. lease term is for major part (greater than or equal to 75%) of the life of the asset→ calculate
4. PV of lease payments greater than or equal to 90% of the fair value of the asset→ calculate
5. specialized nature→ have to be told

Amortization of leases

Finance lease:

* ROU asset amortizes straight line over…
* Lease term (3,4)
* Useful life (1,2,5)

Operating lease:

ROU asset amortizes by principal reduction

Lease Amortization Table

* Beginning Balance (FMV/PV of the lease)
* Annual Payment → usually have to calculate with calc.
* Interest expense → BB \* Interest rate but if lease begins not on 1/1 than no interest in the first year
* Principle reduction → Annual payment-Interest expense
* Ending/Amortized balance → BB-Principal reduction

Finance Lease PP: Company leased equipment with a FMV of $113,649 on February 1st, 2021 and the first payment of $25,000 is due on the day the lease is signed. Interest rate is 5% and it is a 5 year lease term with a 6 year life. There is no ownership transfer at the end of the lease. What kind of lease is this? and what are the journal entries for 2021?

Financing Lease (meets criteria 3,4)

2/1/2021 JEs

dr. ROU asset---$113,649

cr. Lease payable $113,649

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dr. lease payable $25,000

cr. cash $25,000

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12/31/2021 JEs

dr. interest expense $4,063 (4432 \* 11/12)

cr. interest payable $4,063 (4432 \* 11/12)

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dr. amortization of ROU asset $20,836 (113,649/5(lease term)\*11/12)

cr. ROU asset $20,836 (113,649/5(lease term)\*11/12)

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dr. Lease payable LT $20,568 (reclassification)

cr. Lease payable ST $20,568 (reclassification)

OCI/AOCI

OCI (income statement account) closes to AOCI (b/s account)

OCI examples

* fair value adjustments to AFS investments
* prior service cost amortization

Total pension expense

Service cost+ interest cost (BY PBO \* Discount rate) - return on assets (BY plan asset \* ROR + Contributions made during the year \* ROR prorated) + amortization of prior service cost (PSC/life)

* Problem on exam wont be in year 1 so we wont have to amortize prior service cost

Plan Assets

BY Plan asset

\+ Contributions

\+ Return on assets (ROR \* BY plant assets + ROR \* Contributions)

\- Benefits paid

= EY Plan asset

Plan Benefit Obligation

BY PBO

\+Service costs

\+Interest costs

\-Benefits paid

=EY PBO

Determining if a pension plan is over or under funded

EY plan asset - EY PBO

if positive → funded → pension asset

if negative → underfunded → pension liability

Pension JEs

dr. Pension expense

dr. Pension asset → if funded

cr. Pension liability → if underfunded

cr. OCI (amort. of prior service cost) --wont need bc wont be in yr 1

cr. Cash (contributions)

Determining value of pension asset/liability when its not in the first year

1\.) Determine if plan was funded or underfunded in the previous year and by what amount (ex. underfunded by 60k)

2\.) Determine the difference in the changes to this pension asset and PBO for this year (ex. PA=129k and PBO=120k)

3\.) If PA>PBO for this year but the plan is still underfunded → dr. pension liability of the difference

4\.) If PA

operating activities--indirect method

Start with net income (bottom of income stmt)

Add back non-cash expenses (depreciation and amortization)

Adjust for non operating gains and losses (- gains + losses)

Subtract increase in current assets (A/R net of ADA)

Add decrease in current assets

Add increase in current liabilities and shareholders equity

Subtract decrease in current liabilities and shareholders equity

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operating activities--direct method

1. Revenue + change in A/R (not including ADA)
2. (COGS) + change in inventory and A/P
3. (S+A/Operating expenses)+ change in prepaids + change in accrued liabilities + depreciation expense + BDE
4. (Interest expense) + change in interest payable
5. (Income tax expense) + change in income taxes payable

Where to put the different kinds of debt investments on the SCF?

Trading investments →operating

AFS bonds →investing

HTM → investing

Journal Entry to reclassify OCI for AFS investment sold

dr. OCI-AFS $Balance

cr. Fair Value of adjustment $Balance

Equity Methods JEs (Use when own 20-50% of company)

1. To record purchase of investment

dr. Investment (price paid)

cr. Cash (price paid)
2. To record proportionate share of investments net income/loss

dr. Investment (% ownership *NI (total income-dividends) * price paid*

cr. Investment Income (% ownership *NI (total income-dividends) * price paid*
3. To record receipt of dividends

dr. cash

cr. investment

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Equity Method JE when excess that isn’t goodwill is paid

calculate: excess/useful life (of whatever caused you to purchase at a premium)

dr. Investment income

cr. Investment

Retained Earnings Calculation

Beginning RE

\+Net Income

\-Dividends

Ending RE