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Learning Module 4

Some Miscellaneous ItemsTypes of Income Statements

1) C___________________ or multi-step

2) S___________ S_________

What is Working Capital?

Net Working Capital

Revenue Recognition

Revenue Recognition- other than just selling things!

The latest• ASC 605-25, Revenue Recognition: Multiple-Element Arrangements, as amended by Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force

• ASC 985-605, Software: Revenue Recognition, as amended by ASU 2009-14, Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force

• ASC 605-28, Revenue Recognition: Milestone Method, as amended by ASU 2010-17, Milestone Method of Revenue Recognition – a consensus of the FASB Emerging Issues Task Force

-----------------------------------------------------------------The Basics When

Delivery has occurred or services have been renderedPrice is fixed or determinableCollectability is reasonably assured

Your Company sells a $100 gift certificate.

And when it is used to buy a pair of pants that cost you $40.

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On October 31, you purchased a three year subscription to a monthly magazine- “College Today”. You send them $180 and your subscription starts with the November issue. Here is the accounting on the books of “College Today” books.

October 31st

November 30

December 31st

Presentation on Financial Statements

Construction% of Completion Used when

1) __________________________________________________

2) __________________________________________________

3) __________________________________________________

Stephen’s Construction Company contracted on June 30, 2015 to build a new high rise apartment building for Gabrielle Properties. The construction is expected to take three years. The contract price is $50,000,000. Gabrielle pays Stephen’s $1,000,000 on the day the contract was signed. Costs, billings and cash receipts that are expected to be as follows: (in millions)

2015 2016 2017 2018 Costs 17 12 8 3 Billings* 20 14 6 10 Cash Collections* 18 12 8 12*includes 1,000,000 on day of signing

Percentage of Completion

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107

Go back to Stevens-

Steven’s Construction Company contracted on June 30, 2014 to build a new high rise apartment building for Gabrielle Properties. The construction is expected to take three years. The contract price is $50,000,000. Gabrielle pays Steven’s $1,000,000 on the day the contract was signed. Costs, billings and cash receipts that are expected to be as follows: (in millions)

2015 2016 2017 2018 Costs 17 12 8 3 Billings* 20 14 6 10 Cash Collections* 18 12 8 12*includes 1,000,000 on day of signing

Now assume that 2015 and 2016 go as planned, but in 201\7 you hit a snag. The actual costs are $20,000,000 and you still estimate that after that year, you will have $10,000,000 in costs to finish the project.

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Completed Contract

Used when 1) ______________________________________

2) ______________________________________

Kylie Construction May 18, 2015 to build a new sophisticated new machine for Joshie Company. The construction is expected to take two years. The contract price is $7,000,000. Joshie pays Kylie $1,000,000 on the day the contract was signed. Costs cannot be reasonable estimated. The actual costs, billings and cash receipts were as follows: (in millions)

2015 2016 2017 Costs 1 3 1 Billings 2 4 1 Cash Collections* 2 3 2

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Revenues recognized after Sale[edit]

Sometimes, the collection of receivables involves a high level of risk. If there is a high degree of uncertainty regarding collectibility then a company must defer the recognition of revenue. There are three methods which deal with this situation:

Installment sales method  allows recognizing income after the sale is made, and proportionately to the product of gross profit percentage and cash collected calculated. The unearned income is deferred and then recognized to income when cash is collected.[1] For example, if a company collected 45% of total product price, it can recognize 45% of total profit on that product.

Cost recovery method  is used when there is an extremely high probability of uncollectable payments. Under this method no profit is recognized until cash collections exceed the seller's cost of the merchandise sold. For example, if a company sold a machine worth $10,000 for $15,000, it can start recording profit only when the buyer pays more than $10,000. In other words, for each dollar collected greater than $10,000 goes towards your anticipated gross profit of $5,000.

Deposit method  is used when the company receives cash before sufficient transfer of ownership occurs. Revenue is not recognized because the risks and rewards of ownership have not transferred to the buyer. [2]

Installment SaleOn January 1, 2015, General Development Corporation acquired 100 acres of land in Florida for $10,000. They put $30,000 in infrastructure (roads and so forth) on the property. They broke the property into 400 quarter acre lots which they advertised for sale to at $2,600 per lot. During 2015 they sold 25 lots at an average price of $2,600. The terms were $100 down and the rest in 120 equal annual monthly payments of $27.76 which include interest at 6%. The Sales people get 10% of the sales price regardless of whether the buyer ultimately makes all the payments. Assume all purchasers made 6 payments during 2015. Assume this qualifies to be accounted for as an installment sale. Prepare all related journal entries for 2015.

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Cost Recovery-

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redo the last problem using the cost recovery accounting

Homework

You are building a building and accounting for the profit using the percentage of completion method. The contract is for $3,000,000. The total estimated costs are $2,400,000. In year 1, your costs were $600,000 and your billings were $900,000. In year two, your costs were $1,200,000 and the billings were $1,500,000. In year 3, costs were $600,000 and billings were $600,000.

Prepare journal entries for these transactions.

Helming Corp. sold a piece of real estate on January 2, 2015 for $5,000,000. It had purchased the property in 2002 for $4,500,000 in cash. At that time the land was worth $450,000 and the remainder was attributed to the building. At the time of the sale, the carrying value of the building was $3,650,000.

The terms of the sale were as follows:Downpayment $ 250,000Note Receivable $4,750,000Interest rate 10%Length of mortgage 20 yearsAnnual payment $ 557,933 due at end of each year

The sale has been consummated, the seller's receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use the installment method to account for this sale.

REQUIRED: Journal entries needed in 2015, 2016.

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PWC Revenue Recognition

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Deferred TaxesDifferences between Net Income and Taxable Income

T_________________________________ (could also be termed timing)

Such as

P________________________________

Such as

Deferred tax liabilitiesDeferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense/unpaid liabilities, or income is accrued but not taxed until received. Examples of such situations include:

a company claims tax depreciation at an accelerated rate relative to accounting depreciation

a company makes pension contributions for which tax relief is provided on a paid basis, whereas accounting entries are determined in accordance with actuarial valuations

Deferred tax assetsDeferred tax assets generally arise where tax relief is provided after an expense is deducted for accounting purposes.Examples of such situations include:

a company may accrue an accounting expense in relation to a provision such as bad debts, but tax relief may not be obtained until the provision is utilized

a company may incur tax losses and be able to "carry forward" losses to reduce taxable income in future years..

An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be realized.

MACRS

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M_______________ A_________________ C_________ R_____________ S___________

MACRS has the half year convention built into the tables. For all our problems we will assume that, for financial reporting, the company depreciates assets a full year during the year of acquisition and none in the year of disposition, unless the problem states otherwise.

Year

Depreciation Rate in % for Recovery Period3-year 5-year 7-year 10-year 15-year 20-year

1 33.33 20.00 14.29 10.00 5.00 3.7502 44.45 32.00 24.49 18.00 9.50 7.2193 14.81 19.20 17.49 14.40 8.55 6.6774 7.41 11.52 12.49 11.52 7.70 6.1775 11.52 8.93 9.22 6.93 5.7136 5.76 8.92 7.37 6.23 5.2857 8.93 6.55 5.90 4.8888 4.46 6.55 5.90 4.5229 6.56 5.91 4.462

10 6.55 5.90 4.46111 3.28 5.91 4.46212 5.90 4.46113 5.91 4.46214 5.90 4.46115 5.91 4.46216 2.95 4.46117 4.46218 4.46119 4.46220 4.46121 2.231

Acme, Inc. purchased new computer software on January 1, 2014. The cost of the software was $84,000. It is expected that the software will last 4 years and then be worthless. The company uses straight-line depreciation for reporting purposes. The software is three-year property for tax purposes. Assume that Acme makes $510,000 annually before depreciation and taxes and that this is the only fixed asset the company has. Included in the $510,000 is $10,000 of municipal bond interest that the company receives each the year. Prepare the journal entries as they relate to depreciation and taxes for each of the years and post the deferred tax T accounts for each of the years. The corporate tax rate is 30%.

Accounting Tax

Income before Depreciation and Taxes $ 510,000 $ 510,000

Depreciation Expense

Income before Permanent Differences & Taxes

Permanent Differences

Taxable Income

Tax Expense

Journal Entry for 2014

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Now prepare the journal entries for the next three years. Assume the same earnings and permanent differences.

MACRS GDS Property (General Depreciation System)124

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Property Class Personal Property (all property except real-estate)

3-year propertySpecial handling devices for food and beverage manufacture.

Special tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles

5-year property

Information Systems; Computers / Peripherals

Aircraft and parts (of non-air-transport companies)

Computers

Petroleum drilling equipment

Property with ADR class life of more than 4 years and less than 10 years

Certain geothermal, solar, and wind energy properties.

7-year property

All other property not assigned to another class

Office furniture, fixtures, and equipment

Property with ADR class life of more than 10 years and less than 16 years

10-year property

Assets used in petroleum refining and certain food products

Vessels and water transportation equipment

Property with ADR class life of 16 years or more and less than 20 years

15-year property

Telephone distribution plants

Municipal sewage treatment plants

Property with ADR class life of 20 years or more and less than 25 years

20-year propertyMunicipal sewers

Property with ADR class life of 25 years or more

Property Class Real Property (real estate)

27.5-year property Residential rental property (does not include hotels and motels)

39-year property Non-residential real property

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Kylie Company had income before taxes and depreciation last year of $500,000. Included in the other revenue section was $5,000 in municipal bond interest she received on Athens Municipal Bonds which the company owned. On January 1, 2014 she purchased a new goomahochie for $60,000. She estimates it will last two years and then be worthless. (For the uninformed, a goomachochie is used to produce goomies and is three-year property according to the IRS). She used straight-line depreciation to depreciate the goomahochie. During 2014 she paid fines of $20,000 for speeding. Her Bad Debt Expense for the year was $7,000. She actually wrote off $4,000 in accounts that she will never collect. During 2015, she paid fines of $6,000, received municipal bond interest of $2,000, had bad debt expense of $5,000 and wrote off $6,000. Prepare the journal entries for all of the years that relate to taxes. (Assume the same earnings each year before depreciation and permanent differences and a 30% tax rate and all taxes are accrued and then paid the following year.)

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Ruth just bought a new airplane - cost $600,000. She will use it to deliver stuffs for the next five years. At the end of the fifth year she expects it will be worthless. Ruth’s net income before depreciation and taxes for the year was $4,000,000. Her tax rate is 30%. Ruth uses the straight line method (half-year convention) when calculating depreciation for accounting purposes. For IRS purposes, the plane is considered five-year property. Assume the same earnings before depreciation and taxes for the next six years. Prepare all journal entries relating to depreciation and taxes for all five years.

What happens when tax rates change?

Why Successful People Never Bring Smartphones Into MeetingsYou are annoying your boss and colleagues any time you take your phone out during meetings, says new research from USC's Marshall School of Business, and if you work with women and people over forty they're even more perturbed by it than everyone else.The researchers conducted a nationwide survey of 554 full-time working professionals earning above $30K and working in companies with at least 50 employees. They asked a variety of questions about smartphone use during meetings and found:

86% think it’s inappropriate to answer phone calls during meetings 84% think it’s inappropriate to write texts or emails during meetings 66% think it’s inappropriate to write texts or emails even during lunches offsite The more money people make the less they approve of smartphone use.

The study also found that Millennials are three times more likely than those over 40 to think that smartphone use during meetings is okay, which is ironic considering Millennials are highly dependent upon the opinions of their older colleagues for career advancement.TalentSmart has tested the emotional intelligence of more than a million people worldwide and found that Millennials have the lowest self-awareness in the workplace, making them unlikely to see that their smartphone use in meetings is harming their careers.Why do so many people—especially successful people—find smartphone use in meetings to be inappropriate? When you take out your phone it shows a:

Lack of respect. You consider the information on your phone to be more important than the conversation at hand, and you view people outside of the meeting to be more important than those sitting right in front of you.

Lack of attention. You are unable to stay focused on one thing at a time. Lack of listening. You aren’t practicing active listening, so no one around you feels

heard. Lack of power. You are like a modern-day Pavlovian dog who responds to the

whims of others through the buzz of your phone. Lack of self-awareness: You don't understand how ridiculous your behavior looks

to other people.

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Lack of social awareness: You don't understand how your behavior affects those around you.

I can't say I'm surprised by the USC study's findings. My company coaches leadersusing 360° assessments that compare their self-perception to how everyone else sees them. Smartphone use in meetings is one of the most common coworker complaints.It’s important to be clear with what you expect of others. If sharing this article with your team doesn't end smartphone use in meetings, take a page out of the Old West and put a basket by the conference room door with an image of a smart phone and the message, "Leave your guns at the door."