CR Unit 1

Time Value of Money

$1 recieved today is worth more than $1 received in the future

Interest

Rent paid for the use of money for a period of time

Compound Interest

Interest is earned not only on initial investment but also accumulated interest earned previously

Annuity

Series of cash flows of the same amount each period

Ordinary Annuity

Payment Occurs at End of Period

Annuity Due

Payment Occurs at Beginning of Period

Liability

Present obligation to transfer an economic benefit

Callable

Lender can demand repayment at any time

Short Term Note Payable Interest Bearing

Debit Cash, Credit Notes Payable

Debit Interest Expense, Notes Payable, Credit Cash

Finance Lease

Economically similar to an installment purchase (substance over form), 5 criteria for determining

Operating Lease

Not a finance lease (more of a “true” lease)

Transfer of Ownership

Lessee formally becomes owner

Purchase option that lessee is reasonably certain to exercise

Lessee probably becomes owner, there’s a BPO

Lease term covers major portion of economic life of asset

Lease covers 75% of remaining asset life

Present value of lease payments constitutes substantially all of the asset’s fair value

PV lease pmts >= 90% of asset fair value

Leased asset has no alternative use after lease

Lessor can’t lease asset to anyone else

BPO Bargain Purchase Option

purchase price is set below fair value

1st Entry to Record Right of Use Asset

Debit Right of Use Asset, Credit Lease Payable

1st Lease Payment (Ordinary Annuity)

Debit Interest Expense, Lease Payable, Credit Cash

Record Amortization

Debit Amortization Expense, Credit Right of Asset

Amortization Expense Calculation for Annuity Due

Carrying Value/Length

Interest Expense Calculation

Carrying value * Interest Rate

Lessor Perspective Record Agreement

Debit Lease Receivable, Credit Equipment

Lessor Perspective 1st Payment

Debit Cash, Credit Lease Receivable, Interest Revenue

1st Lease Payment (Annuity Due)

Debit Lease Payable, Credit Cash

2nd Lease Payment (Annuity Due)

Debit Interest Expense, Lease Payable, Credit Cash

Lessor POV Records Agreement (Annuity Due)

Debit Lease Receivable, COGS, Credit Equipment, Sales Revenue

Operating Lease Lessor POV Record 1st PMT

Debit Cash Credit Deferred Lease Revenue

Operating Lease 2nd PMT

Debit Interest Expense, Lease Payable, Credit Cash, Debit Amortization Expense, Credit Right of Use Asset

Operating Lease Lessor POV 2nd PMT

Debit Deferred Lease Revenue, Credit Lease Revenue, Debit Cash, Credit Deferred Lease Revenue

Short Term Note Payable Non Interest Bearing Issuance

Debit Inventory, Discount on Notes Payable, Credit Notes Payable

Short Term Note Payable Non Interest Bearing Maturity

Debit Inventory, Credit Discount on Notes Payable, Debit Notes Payable, Credit Cash

Uncertainty is key for

Contingencies

Do we accrue for gain contingencies?

NO

Loss contingencies are accrued when

event is probable and dollar amt is reasonably estimated

Loss contingencies are disclosed but not accrued when

loss is probable but dollar amt is not reasonably estimated

What if expected future cash outflow is a range of possibilities?

Accrue the amount considered most likely

What if all amounts in the range are equally likely?

Accrue the minimum amount, disclose the full range

Claim is not made but it’s probable it will be

Contingency

Claim is not made but it’s reasonably possible or remote

Do nothing

Types of Loss Contingencies

Uncollectible Accounts Receivable, Warranties, Litigation Claims, Governmental Investigations (e.g., fines & penalties), Subsequent Events, Unasserted Claims or Assessments

Warranty Sales Journal Entry

Debit Cash

Warranty Adjusting Entry

Debit Warranty Expense, Credit Warranty Liability

Satisfy Warranty Claims Entry

Debit Warranty Liabilty, Credit Cash

Lawsuits filed against the company are loss contingencies

Disclosure required, no accrual

Bonds

Public/Private, $1000-2000, Company/Gov Issued

Principal

Issuer is obligated to repay a stated amount

Stated rate also called

Coupon/Nominal Rate

Bond indenture

Outlines bond issuance, including payment and redemption schedules, covenants, and trustee information

Stated Interest Rate

Fixed percentage of the bond’s face value stated in indenture; determines cash interest paid

Market Interest Rate

Rate market is willing to accept for bonds of a certain risk; fluctuates with supply and demand

Discount

Issued for less than face value

Premium

Issued for more than face value

If market rate > stated rate, bonds will sell at a

Discount

If market rate < stated rate, bonds will sell at a

Premium

If market rate = stated rate, bonds will sell at

Face value (Par)