accounting 3 class handouts for professor howard j. levine

Accounting 3

Class Handouts

For Professor

Howard J. Levine

Note: This packet should be brought to class every week. If you forget or misplace it you can reprint the set by going to the Valley College web site and navigating to Howard Levine’s instructor page:

http://www.lavc.edu/hlevine

http://www.lavc.edu/hlevine

Handout 1

Handout 2

Retained Earnings

Total income since incorporation $1,200,000

Total cash dividends paid 240,000 Total par value of 20% stock dividends distributed (market value of $125,000) 75,000 Excess of proceeds over par value of stock issued 125,000

What is the current balance of Retained Earnings?

Handout 3

Handout 4

STATEMENT OF CASH FLOWS

Cur Liab (CL) Operating (O)

Other Asset

(OA) Investing (I) L-T Liab (LTL) Financing (F) Increase (+)*

S/H Equity

(SHE) Non-Cash

(N/C) Decrease (-)* 1 Sale of equipment at a gain 2 Issue shares of common stock 3 Purchase land 4 Decrease in accounts payable 5 Increase in accounts receivable 6 Redeem long-term bonds payable 7 Decrease in salaries payable 8 Decrease in prepaid expenses 9 Decrease in accounts receivable 10 Purchase equipment 11 Increase in merchandise inventory

12 Acquire patent by issuing preferred stock

13 Decrease in supplies 14 Buy back shares of preferred stock 15 Borrow notes payable (due in 5 years) 16 Sell a new issue of bonds

17 Pay dividends to preferred stockholders

18 Acquire building by issuing common stock

19 Decrease in taxes payable 20 Purchase building 21 Sell long-term debt investments 22 Acquire land financed by a mortgage 23 Record depreciation on fixed assets 24 Increase vacation payable

* An increase (+) to an operating activity item means that the amount is added to net income

and a decrease (-) means that the amount is deducted from net income.

Handout 5

STATEMENT OF CASH FLOWS DIRECT METHOD

Assume the following transactions: Cash collections on receivables 1,300 Cash dividends on common stock paid 35 Cash dividends on preferred stock paid 120 Cash purchases of inventories 750 Cash receipts of dividends 12 Depreciation expense 92 Interest payments 35 Payment of expenses 300 Proceeds from issuance of common stock 650 Proceeds from bridge financing 700 Proceeds from sale of equipment 200 Repurchasing of issued shares 300 Purchase of land 600 Purchase of trading securities 17 What is the Net Cash Provided by Operating Activities? Net Cash Provided by Financing Activities?

Handout 6

Handout 7

Revenue Recognition Output Methods: A fitness store operates a chain of clubs that are oriented towards younger, very athletic people. Members pay a $1,200 annual fee, which gives them access to all of the clubs in the chain during all operating hours. Since it does not matter when they use the facilities, the most appropriate measurement would be based on the passage of time. How much revenue per month should be recognized? Input Methods: A construction company is building a wind farm in Palm Springs that is expected to take six months to complete. The expected costs are: Wind turbines $2,000,000 (delivered immediately) All other costs 3,000,000 (paid over six months) Total costs $5,000,000 How would you allocate the revenues to the project?

Handout 8

Revenue Recognition

Scale Co. offers a promotional coupon with every product it sells. The coupon gives the Scale Co. customer an opportunity to buy an electric drill that normally sells for $50 for only $30 (a 40% discount). The coupon must be redeemed within one year of the purchase. Scale Co. estimates that 80% of customers will take advantage of the coupon. What is the stand-alone selling price of the coupon?

Handout 9

Variable Consideration Siddhi enters into a contract that pays Siddhi $2,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $4,000 and a 40% chance the contract will pay an additional $6,000, depending on the outcome of the consulting contract. Siddhi concludes that this contract qualifies for revenue recognition over time. a. Assume Siddhi estimates variable consideration as the most likely amount. What is the amount of revenue Siddhi would recognize for the first month of the contract? b. Assume Siddhi estimates variable consideration as the expected value. What is the amount of revenue Siddhi would recognize for the first month of the contract?

Handout 10

Gift Cards Noah sells gift cards redeemable for Noah products either in-store or online. During 2018, Noah sold $6,000,000 of gift cards, and $5,400,000 of the gift cards were redeemed for products. As of December 31, 2018, $450,000 of the remaining gift cards had passed the date at which Noah concludes that the cards will never be redeemed. How much gift card revenue should Noah recognize in 2018?

Handout 11

Contracts Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts:

Estimated Additional Cost Incurred Cost to Complete

2018 $ 3,000,000 $6,000,000

2019 5,000,000 2,000,000

2020 2,500,000 0

What is Robertson’s percentage completion in 2018?

Handout 12

Present Value Assume that you have a rich uncle who dies. In his will, he leaves you with the following option: You can have $100,000 today or $200,000 in 10 years. Interest rates are 10%. Which should you choose? Answer: From the present value tables we see that the present value of $1 at 10% for 10 years is .38554. You multiply $200,000 x .38554 to find that today’s value is $77,108, not the $100,000 that it seems. So take the money over the next ten years! To prove this: Year 1 .............................. $100,000 * 10% = $10,000 Year 2 .............................. $110,000 * 10% = $11,000 Year 3 .............................. $121,000 * 10% = $12,100 Year 4 .............................. $133,100 * 10% = $13,310 Year 5 .............................. $146,410 * 10% = $14,641 Year 6 .............................. $161,051 * 10% = $16,105 Year 7 .............................. $177,156 * 10% = $17,716 Year 8 .............................. $194,872 * 10% = $19,487 Year 9 .............................. $214,359 * 10% = $21,440 Year 10 ............................. $235,800 * 10% = $23,580 By taking the money slowly you end up with $259,380 instead of $200,000 as promised. This is called compound interest and is a very important financial tool.

Handout 13

JOURNAL ENTRIES FOR UNCOLLECTIBLE ACCOUNTS -

ALLOWANCE METHOD Blocker Company estimates its uncollectible accounts based on an analysis of receivables. On December 31, a junior accountant prepared the following aging schedule for the company's $88,000 in outstanding receivables. Estimated

Uncollectible Accounts Age Interval Amount % Amount Not due ............................................ $58,650 2% $1,173 1–30 days past due .......................... 13,220 4% 529 31–60 days past due ........................ 8,930 20% 1,786 61–90 days past due ........................ 4,000 30% 1,200 Over 90 days past due ..................... 3,200 50% 1,600 $88,000 $6,288

The Allowance for Doubtful Accounts currently has a $210 debit balance. 1. Prepare the adjusting entry to record the company's estimate of

uncollectible accounts. 2. Prepare the journal entry to write off the following accounts: T. Donaldson ................................................ $ 700 J. Kyle ......................................................... 450 D. Mize ....................................................... 1,000

3. Prepare the journal entry to record receipt of the $450 owed by J. Kyle.

4. What circumstances would cause the Allowance for Doubtful Accounts to have a debit balance prior to adjustment?

Handout 14

Handout 15

The Yukon Corporation incurred the following transactions in February 2106, their first month of operations:

Which inventory method will show the highest profits?

Units Purchased

Units Sold

Unit Cost

February 1 400 $7.00 February 8 800 $7.30 February 17 500 February 25 200 $7.70 February 28 400

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Handout 17

Handout 18

INTANGIBLE ASSETS Definition Legal Life Patents - Exclusive right to produce and 20 years sell a product with one or more unique features Copyrights - Exclusive right to publish and Life of author sell a literary, artistic, or + 70 years musical composition Trademarks - Exclusive right to use a name, Indefinite life; term, or symbol in identifying registration and marketing a product renewed every 10 yrs. Goodwill - Intangible asset that results Indefinite life from superior location, product quality, reputation, or managerial skills; evidenced when a company is purchased at a price that is higher than the market value of its net assets (assets minus liabilities)

Handout 19

DEPRECIATION CALCULATIONS DECLINING-BALANCE METHOD ABC Marketing recently purchased a machine that cost $80,000. The machine is expected to last 4 years and have a residual value of $6,000. Calculate the depreciation expense to be recorded each year under the declining-balance method.

Handout 20

CALCULATION OF NET PAY Blake Edwards is married. He claims two withholding allowances. During the week of July 21, he worked 46 hours. Blake is in a non-exempt position. His regular wage rate is $16.00 per hour. In addition to social security, Medicare and federal income taxes, there is California SDI and California income tax. Assume that the FICA rate is 6.20%, the Medicare rate is 1.45%, the SDI rate is 1.0% and the California income tax rate is 3%. 1. Calculate Blake's net pay assuming Federal income tax withheld is $125 and California income tax withheld is $50. 2. Prepare the journal entry to record the pay to Blake. 3. Prepare the journal entry when the payroll taxes are paid. 4. What other taxes is the employer responsible for?

Handout 21

Handout 22

Mortgage Payable

On January 1, 2018, Jim purchased a home for $300,000 and made a down payment of $100,000. He obtained a 30-year mortgage at a 6% annual rate to finance the remainder. If his monthly payment is $1,200 per month, how much will he still owe the bank on March 31, 2018?

Handout 23

DISTRIBUTION OF DIVIDENDS—COMMON AND

PREFERRED SHAREHOLDERS Belson Corporation has 5,000 shares of $100 par value, 5% cumulative preferred stock. It also has 5,000 shares of $100 value common stock. In the prior year it had horrible cash flow problems and did not pay dividends; in the current year it declares a $65,000 dividend. Compute who gets what.

Belson Corporation

Preferred stock is cumulative. Dividend = $65,000

Preferred Common Total Shareholders Shareholders Distributed

Handout 24

DISTRIBUTION OF DIVIDENDS—STOCK

DIVIDENDS Jones Corporation has $100,000 in Retained Earnings. It declares a 5% stock dividend on its 10,000 shares of $10 par value common stock. The market price of the stock on the date of declaration is $15/share. How many shares are issued? What is the amount debited to Dividends? The entry would be:

accounting 3 class handouts for professor howard j. levine

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