Non-Current Assets - Oats and Sugar Web viewAssign gain or loss to Capital accounts. Pay...

Accounting (II) T&BD Midsemester Exam Revision

Assets (db balance) = Owners Equity (cr balance) + Liabilities (cr balance)

Contents1 Non-Current Assets.............................................................................................................................3

1.1 Measuring the cost of non-current assets...................................................................................3

1.2 Capital Expenditure.....................................................................................................................3

1.3 Depreciation................................................................................................................................4

1.4 Writing down non-current assets................................................................................................7

1.5 Revaluing non-current assets......................................................................................................7

1.6 Accounting for intangible assets: Goodwill..................................................................................7

2 Internal Control...................................................................................................................................8

2.1 Goals of Internal control..............................................................................................................8

2.2 The Bank reconciliation...............................................................................................................8

2.3 Preparing a bank reconciliation...................................................................................................9

2.4 Example bank reconciliation......................................................................................................10

2.5 Petty Cash..................................................................................................................................12

3 Partnerships.......................................................................................................................................13

3.1 Characteristics...........................................................................................................................13

3.2 Starting up a partnership...........................................................................................................13

3.3 Sharing Profits/Losses................................................................................................................13

3.4 Drawings....................................................................................................................................13

3.5 A new Partner............................................................................................................................14

3.6 Withdrawal of a partner............................................................................................................14

3.7 Liquidation.................................................................................................................................14

4 Companies (1)....................................................................................................................................15

4.1 Characteristics...........................................................................................................................15

4.2 Shareholders’ equity..................................................................................................................15

4.3 Issuing shares.............................................................................................................................16

Accounting (2) Transactions and Business Decisions 1Johanan Ottensooseroatsandsugar.wordpress.com

4.4 Dividends...................................................................................................................................16

4.5 Evaluating operations................................................................................................................17

4.6 Accounting for income taxes.....................................................................................................17


1 Non-Current AssetsChapter 11 – Non-Current Assets: Property, plant and equipment, and intangibles

1.1 Measuring the cost of non-current assets Cost of asset = sum of costs to bring the asset to usable place/condition i.e. purchase price + charges For land, includes stamp duty, commission, removal of previous buildings, etc.

o NB: Land and land improvements must be separate asset accounts since land does not depreciate

For equipment, includes transportation, customs, etc.

1.1.1 Interest on Non-Current Assets Interest may be expensed [db Interest Expense (an expense account)] or capitalized [i.e. db building (an asset account)]

1.1.2 Lump Sum Purchase of Assets Percentage of original total to reduced price

e.g.: Land, Building and Tractor, with a market value of $1,000,000, $500,000 and $80,000 respectively, are sold for a lump sum price of $1,250,000. Journalize this transaction.

Asset Original Price

As a percentage of total value(Original Price/Total Original Price)

x Final purchase price = Journalized cost

of each asset

Land $ 1,000,000.00 63% x $ 1,250,000.00 = $ 791,139.24

Building $ 500,000.00 32% x $ 1,250,000.00 = $ 395,569.62

Tractor $ 80,000.00 5% x $ 1,250,000.00 = $ 63,291.14Total $ 1,580,000.00 1 $ 1,250,000.00

Date Transactions & Descriptions Debit Credit15-Feb Building $ 791,139.24

Land $ 395,569.62Equipment (Tractor) $ 63,291.14

Cash at Bank $ 1,250,000Purchased Building, Land and Equipment with a lump sum payment of $1,250,000

1.2 Capital Expenditure Capital expenditure is debited to an asset account (e.g. db Vehicle)

o It extends the life or changes the function of an asset Maintenance expenditures are expensed (i.e. db expense: maintenance)


o They keep the asset in ordinary working order

1.3 Depreciation For matching principle/managerial decision making

e.g.

15-Feb Depreciation Expense: Vehicle $ 60,000Accumulated Depreciation: Vehicle $ 60,000

To record annual depreciation of vehicle

1.3.1 Methods of depreciation

1.3.1.1 Straight line easiest

Straight linedepreciation per year= (Cost−ResidualValue )Useful life ,∈ years

1.3.1.2 Units of production (UOP) method Accurate where output is measurable And where output is relative to useful life

UOPdepreciation perunit of output= (Cost−ResidualValue )Useful life ,∈unitsof production

NB: for UOP, times output from above equation by the amount of units produced in the time-period in the question.

1.3.1.3 Reducing balance (RB) method Accurate Is depreciated more at the beginning, as in real life

Depreciationrate=1−N (life of theasset ∈years)√ ResidualValueCost

Most probably, the depreciation rate will be given.

RBDepreciation=Carrying Amount∗DepreciationRate


1.3.1.4 Example/ComparisonA machine is purchased for $50,000,000. Its scrap value is $10,000,000. It will last 4 years. Alternatively, it will produce 100,000 goods. The first year it produces 10,000; the second 50,000; the third 30,000 and the last 10,000. Tabulate the depreciation.

Depreciation Table of Machine

Year Straight Line Units of Production Reducing Balance

Depreciation Carrying Units Depreciation Carrying Depreciation Carrying

0 $ 50,000,000 Total Units 100000 $ 50,000,000 $ 50,000,000

1 $10,000,000 $ 40,000,000 10000 $ 4,000,000 $ 46,000,000 $ 16,562,984.75 $ 33,437,015

2 $10,000,000 $ 30,000,000 50000 $ 20,000,000 $ 26,000,000 $ 11,076,335.47 $ 22,360,679

3 $10,000,000 $ 20,000,000 30000 $ 12,000,000 $ 14,000,000 $ 7,407,191.96 $ 14,953,487

4 $10,000,000 $ 10,000,000 10000 $ 4,000,000 $ 10,000,000 $ 4,953,487.81 $ 10,000,000

Residual Value

$10,000,000

1 2 3 4 $-

$5,000,000.00

$10,000,000.00

$15,000,000.00

$20,000,000.00

$25,000,000.00

Annual depreciation of Machine

Straight Line Units of Production Reducing Balance

As the graph shows:o Straight line annual depreciation is equalo UOP’s depends on outputo RB depreciates more at the start, and less at the endo All end with the same residual value


1.3.2 Other Issues

1.3.2.1 Partial years /annual rate by part of year used

1.3.2.2 Changing the useful life of a product Take old remaining amount and recalculate

1.3.2.3 Fully depreciated non-current assets may continue to be used

1.3.3 Disposing of a non-current Asset Asset account credited against debited contra(depreciation) account and loss

15-Feb Accumulated Depreciation: Vehicle $ 60,000Loss on Disposal of Vehicle $ 40,000

Vehicle $ 100,000.00To dispose of Vehicle

1.3.3.1 Selling a non-current Asset As with disposal, include db cash and (cr gain | db loss)

15-Feb Accumulated Depreciation: Vehicle $ 60,000.00Loss on Sale of Vehicle $ 30,000.00Cash at Bank $ 10,000.00

Vehicle $ 100,000.00To sell partially depreciated Vehicle at a loss

OR

15-Feb Accumulated Depreciation: Vehicle $ 60,000.00Cash at Bank $ 60,000.00

Gain on Sale of Vehicle $ 20,000.00Vehicle $ 100,000.00

To sell partially depreciated Vehicle with a profit


1.3.3.2 Trading in a non-current Asset As with sale, but as if two happening simultaneously

15-Feb Accumulated Depreciation: Vehicle (Old) $ 60,000.00Vehicle (New) $ 120,000.00

Cash at Bank $ 60,000.00Gain on exchange of Vehicle (Old) $ 20,000.00Vehicle (Old) $ 100,000.00

To exchange partially depreciated Vehicle

1.4 Writing down non-current assets When recoverable amount is less than assumed residual value db loss after usual depreciation journal entry

15-Feb Loss on write-down of vehicle $ 60,000Vehicle $ 60,000

Recognizing impairment loss on building

1.5 Revaluing non-current assets First usual depreciation entry Then db Asset | cd Revaluation reserve for an upwards revaluation Db Revaluation reserve | cd asset for downwards revaluation

15-Feb Revaluation Reserve $ 60,000Vehicle $ 60,000

To record downward revaluation of Vehicle

1.6 Accounting for intangible assets: Goodwill Account for the difference in purchase price and market price of assets of a bought company Can only be reduced (amortized | depreciation), not increased

15-Feb Assets (Including Recievables, land, inventory, etc) $ 10000000Goodwill $ 2000000

Liabilities $ 3000000Cash at Bank $ 9000000

To record purchase of revision enterprises


2 Internal Control

2.1 Goals of Internal control Safeguard business assets Encourage adherence to business practices Promote operational efficiency Ensure accurate accounting records

A system is made effective if it:

Emphasizes the importance of hiring competent and ethical personnel Responsibilities are assigned There are proper channels for authorization (e.g., cheque requisition forms) Separation of duties

o Operations | accountingo Custody of assets | accountingo Authorization | custody of assetso Accounting | accounting (e.g. bookkeeper separate from cash reconciliation person)

2.2 The Bank reconciliationThis compares Cash at Bank (internal) and the Bank Statement (from the Bank).

There are only a few situations where it is ok if they are different:

2.2.1 Recorded by the business but not the bank Deposits in transit (business has recorded them already, bank hasn’t yet processed them) Outstanding Cheques (business has issued them, bank has not yet paid them)

2.2.2 Recorded by Bank but not by business Bank collections (paid by customers to banks directly) EFTs Service charge (learned from Bank statement) Interest revenue on savings (as above) Cost of specially printed cheques (as above)

And not ok.

Dishonoured cheques (was a cash receipt, has to be written down to 0) Cheques returned but not dishonoured (as above)

2.2.3 Errors made by business or bankTo be corrected by either party


2.3 Preparing a bank reconciliation1. Compare balance per books (cash at bank in general ledger) and balance per bank (from bank

statement)2. To the bank statement, add or subtract relevant:

2.1. Add deposits in transit (cash receipts in the ledger not in the statement)2.2. Subtract outstanding cheques (cash payments in the books not in statement)2.3. This gives adjusted bank balance

3. Journalise items on the statement that aren’t in the ledger; to cash at bank:3.1. Debit

3.1.1.Bank collections3.1.2.EFT cash receipts3.1.3.Interest revenue

3.2. Credit3.2.1.EFT cash payments3.2.2.Service charges3.2.3.Cheque printing charges3.2.4.Other bank charges

3.3. This gives adjusted book balance4. Compare adjusted bank balance and adjusted book balance

If cash is different in till to in receipts, the cash deposit for the day is:

15-Feb Cash at Bank 2000Cash short/over 3.05

Sales revenue 2003.05Daily Cash Sales


2.4 Example bank reconciliation

Oats and SugarBank ReconcilliationSeptember 20X9

Bank Balance, September 20X9, from statement 1000Add: Deposits in transit

20 Sep, (eg1) $550 550 550

Less Outstanding Cheques15 Sep, (eg1) $250 25017 Sep, (eg2) $350 350 -600

Adjusted Bank Balance, September 20X9 950

Journal entries for reconciliation30 - Sep Cash at bank 10000

Bill Receivable 9000Interest Revenue 1000

Bill receivable, with interest, collected by bank

30 - Sep Cash at bank 50Interest Revenue 50

Interest earned on cheque account balance

30 - Sep Misc. Expenses 30Cash at bank 30

Bank service charge

30 - Sep Accounts receivable - X accounts 4000Cash at bank 4000

Cheque dishonoured


Oats and SugarSummary of Adjustments to Cash at BankSeptember 20X8

Cash at BankBalance, September 30 from ledger 1100

Add: Bank collection of bill receivable 10000Interest earned on Cheque account balance 50 10050

Less: Service Charge 30Dishonoured cheque 4000EFT - Rent 6170 -10200

Adjusted Cash at Bank 950


2.5 Petty CashPetty cash is a float for minor, irregular, everyday expenses. Created, withdrawn from: expenses recorded when replenished.

2.5.1 Opened:

15-Feb Petty Cash 2000Sales revenue 2000

To open the petty cash fund

2.5.2 Replenished

15-Feb Office Supplies 150Delivery Expenses 50Catering 300Miscellaneous Expenses 120

Cash at Bank 620To replenish Petty Cash fund


3 PartnershipsNB: Capital accounts have a credit balance

3.1 Characteristics Limited life Mutual agency Unlimited liability Co-ownership of property No other tax (e.g. no company tax( Each partner has own owner’s equity account

3.2 Starting up a partnership Each owner gets an owners equity account equal to the sum of their net input Each asset contributed is debited against a credit in their Capital account

3.3 Sharing Profits/LossesCan be done based on:

Prescribed fraction Capital contribution (% of individual capital to partnership capital) Based on service Based on a combination

3.4 DrawingsAccumulated into a Drawings account

Closed by subtracting against Capital account


3.5 A new PartnerA few options

3.5.1 Purchase a partner’s interest

15-Feb Capital, Dr Old 2000Capital, Mr New 2000

To transfer Old's capital to New

3.5.2 Invest into a partnership

15-Feb Assets 2000Capital, Mr New 2000

Mr New invests in Assets and gets admitted into partnership

3.5.3 With a bonus to the old PartnerCredit the difference to old partners, according to agreed split

3.5.4 With Bonus to new partnerDebit the difference to old partners (i.e. they pay they bonus from their capital share)

3.6 Withdrawal of a partnerAll assets must be revalued before the withdrawal of a partner (e.g. depreciation accounted for, etc.)

3.7 Liquidation1. Sell assets2. Assign gain or loss to Capital accounts3. Pay liabilities4. Distribute remainder

3.7.1 Sale of non-cash assetsNon-cash assets realisation @ purchase price

Realisation Cash @ sale price

Realisation Capital @ difference

3.7.2 Deficiency1. Covered by Partner2. If unable, covered by other partners


4 Companies (1)

4.1 Characteristics Limited liability Perpetual succession Separate legal person Company tax No mutual agency Ownership =/ management

4.2 Shareholders’ equityCapital account is “Share Capital”

4.2.1 Retained earnings1. Close sales revenue to income summary2. Close expenses to income summary3. Close income summary to retained earnings

30-Jun Sales Revenue 2000Income Summary 2000

Close sales revenue

Income summary 500Expenses 500

Close expenses

Income Summary 1500Retained earnings 1500

Close Net Profit to Retained Earnings

4.2.2 Types of shares Normal Preference

o Usually bought to fund somethingo Usually fixed dividendso Have first right in liquidation


4.3 Issuing shares

4.3.1 Cash purchase

15-Feb Cash at bank 2000Share Capital 2000

Issued shares

4.3.2 Non-cash purchase

15-Feb Asset 2000Share Capital 2000

Issued shares in exchange for Asset

4.3.3 Issuing shares payable by instalments1. Application2. Allotment3. Call

4.3.4 Issuing preference sharesAs above, but capital account is “preference share capital

4.4 Dividends15-Feb Retained earnings 2000

Dividends payable 2000Declared a cash dividend

Dividends payable 2000Cash at Bank 2000

Paid cash dividendNB: can be cumulative, where dividends in arrears must be paid


4.5 Evaluating operations

4.5.1 Share value Market value Book value

o

Book value per share=Total equity−Equity allocated ¿ preferenceshares ¿Number of ordinary shares

o Total equity=Share capital+Preference share capital+Retained earnings

4.5.2 Rate of return on total assets

Rate of return on totalassets=Net profit before tax+interest expenseTotal assets

4.5.3 Rate of return on ordinary shareholders equity

Rate of return onordinary shareholder s' equity=Net profit−PreferencedividendsOrdinary shareholder s' equity

4.6 Accounting for income taxesDifference between expense and payable amount to deferred tax liability (if expense is greater)

Or to Future income tax benefit (if payable is greater)

4.6.1 Income tax expenseExpense on income statement

Income tax expense= (Net profit before income tax )∗(Income tax rate)

4.6.2 Income tax payableLiability on balance sheet

Income tax payabe=Taxable income (¿ taxreturn )∗Income tax rate


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