When the Bank Reconciliation Says ADD Cheat Sheet

CHEAT SHEET TOPICS BANK RECONCILIATION Adjustments required for what the bank knows but what we DO NOT know When the bank reconciliation says ADD Debit Cash Credit account corresponding with the entry on the bank rec When the bank reconciliation says LESS: Debit account corresponding with the entry on the bank rec Credit Cash NSF: Non-Sufficient Funds o Anything mentioned about NSF (the fee related to an NSF cheque or the amount that was returned): Dr Accounts Receivable Cr Cash Calculating Interest on the Bank Loan o Interest is charged on the TOTAL outstanding amount: (Current Portion of the Bank Loan + Bank Loan) * Interest Rate  The Current Portion is the amount owing to the bank THIS year, therefore if they give you an amount on the Bank Reconciliation that represents paying both the principle amount of the loan AND the interest, the principle is the Current Portion (found under Current Liabilities on the Balance sheet) and the remaining amount is the Interest Expense o I.e. Bank Rec states that you paid 12,000 toward the bank loan and interest (likely in a footnote), but the balance sheet states that the Current Portion of the Bank Loan is 9,000. The entry would be as follows: Dr Interest Expense 3,000 Dr Bank Loan 9,000 Cr Cash 12,000 PETTY CASH Set Up or Increase Petty Cash Float Dr Petty Cash Cr Cash Using Petty Cash Through Dr Whatever the money was spent on (usually an expense) Cr Cash Close or Decrease Petty Cash Float Dr Cash Cr Petty Cash RECEIVABLES Recording a Sale Dr Accounts Receivable Cr Sales Revenue Write – Off Dr Allowance for Doubtful Accounts Cr Accounts Receivable Recovering a Previously Written off Account (only recover the amount that is actually being collected, not the entire amount) o Step 1: Reverse Write Off Dr Accounts Receivable Cr Allowance for Doubtful Accounts o Step 2: Record the Collection of Cash Dr Cash Cr Accounts Receivable BAD DEBTS VALUATION Percentage of Outstanding Accounts Receivable o Step 1: Multiply E/B in A/R by the percentage deemed to be uncollectable, this is your E/B in your Allowance for Doubtful Accounts o Step 2: Take a T/B in AFDA o Step 2: Find the plug in AFDA, this is your Bad Debts Expense Dr Bad Debts Expense Cr Allowance for Doubtful Accounts Aging Method o A schedule of outstanding debts will be given: Age of Outstanding Accounts not yet due 0 – 30 days 31 – 60 days 61 – 90 days 91+ days past due Amount Outstanding 10,000 8,000 5,000 2,500 2,000 Percentage Deemed Uncollectible 2% 8% 20% 35% 50% o Step 1: multiply amount outstanding by the percentage deemed uncollectible, add up all amounts, this is the ending balance in AFDA Age of Outstanding Accounts not yet due 0 – 30 days 31 – 60 days 61 – 90 days 91+ days past due TOTAL Amount Outstanding 10,000 8,000 5,000 2,500 2,000 Percentage Deemed Uncollectible 2% 8% 20% 35% 50% Dollar Amount Uncollectible 200 640 1000 875 1000 3715 THIS IS YOUR E/B IN AFDA o Step 2: take a T/B in AFDA o Step 3: find the plug in AFDA, this is your Bad Debts Expense Dr Bad Debts Expense Cr Allowance for Doubtful Accounts NOTES RECEIVABLE Converting an Account Receivable into a Note Receivable (DO NOT record any interest on the day it is converted) Dr Notes Receivable Cr Accounts Receivable 3 Times to Record Interest Revenue o When the customer pays (if within the note term, i.e. 90 days) o At the end of the note term o At the end of the fiscal period (if the note term spans across two fiscal periods, i.e. assume a January – December fiscal year, if a 90 day note is issued December 1 you would record interest revenue for 1 month) Recording Customer Payments: o Recording a customer payment when the note lies entirely in this fiscal period (i.e. assume January – December fiscal year, 90 day note issued on March 1, customer pays on June 1) Dr Cash (Note + Interest) Cr Note Receivable (Amount outstanding) Cr Interest Revenue (Note Receivable*Int. Rt.*n/12) ***in this particular example n=3 o Recording a customer payment when the note lies across two fiscal periods (i.e. assume January – December fiscal year, 90 day note was issued on December 1 of last year, customer pays this year on February 15) Dr Cash (Note + Interest Receivable + Interest Revenue) Cr Note Receivable (Amount outstanding) Cr Interest Receivable (Note Receivable*Int. Rt. *1/12) Cr Interest Revenue (Note Receivable*Int. Rt.*1.5/12) ***Look to the Balance Sheet for Note Receivable amount (Can also find interest receivable here instead of calculating it) Recording Interest at the end of a fiscal period when payment isn’t expected until the next period (i.e. assume January – December fiscal year, 90 day note was issued on December 1 of this year, one month of interest needs to be recorded at the end of the fiscal year) Dr Interest Receivable (Note Receivable*Interest Rate*n/12) Interest Revenue (Note Receivable*Interest Rate*n/12) Writing Off A Note Receivable o Writing off an account when the note was issued in the same period (i.e. assume January – December fiscal year, 90 day Note was issued January 15th, decided to write off November 30th)  Step 1: Record Interest Earned Dr Interest Receivable (Note Rec. * Int. Rt. * n/12) Cr Interest Revenue (Note Rec. * Int. Rt. * n/12) ***in this case n=3  Step 2: Convert Note Receivable and Interest Receivable into an Account Receivable Dr Accounts Receivable (Note Rec. + Int. Rec.) Cr Notes Receivable (Amount Outstanding) Cr Interest Receivable (amount calc. above)  Step 3: Write off Account Dr Allowance for Doubtful Accounts Cr Accounts Receivable o Writing off an account when the note was issued in a previous period (i.e. assume January – December fiscal year, Note was issued December 15th, decided to write off September 30th)  Step 1: Record Interest Earned This period Dr Interest Receivable (Note Rec. * Int. Rt. * n/12) Cr Interest Revenue (Note Rec. * Int. Rt. * n/12) ***In this case n=2.5 (months this period until the end of the note term)  Step 2: Convert Note Receivable and Interest Receivable into an Account Receivable Dr Accounts Receivable (Note Rec. + Int. Rec.) Cr Notes Receivable (Amount Outstanding) Cr Interest Receivable (amount calc. above + amount from the previous fiscal period – found on balance sheet or calculate)  Step 3: Write off Account Dr Allowance for Doubtful Accounts Cr Accounts Receivable SALES DISCOUNTS/SALES RETURNS AND ALLOWANCES The beginning of the case will have a lot of facts about how the Sales dollars were earned, draw the following tree to help understand the information they are giving you Sales A/R Cash (Sales*Credit Sales %) (Sales*Cash Sales%) ***Debit and Credit Card sales are considered Cash Discount (A/R*% paid within discount period)*Discount % Discount (Cash*% paid with actual cash)*Discount % Transaction: Dr Cash (Cash – Discount) Dr Accounts Receivable (A/R – Discount) Dr Sales Discounts (Add two discounts) Cr Sales Recording a Sales Discount (this T-Account is used whenever a discount is given based on the method of payment or timing of payment, i.e. paid within the discount period) Dr Sales Discounts Cr Cash or A/R Recording a Sales Return or Allowance (this T-Account is used whenever a discount is applied for a reason regarding the product, i.e. the front of a refrigerator was scratched, or whenever something is returned) Dr Sales Returns and Allowances Cr Cash or A/R INVENTORY TRANSACTIONS: Purchase became part of inventory in the last fiscal period, but was paid for this period o To Record a return that happened during THIS period: Dr Accounts Payable (for the amount of the return) Cr Inventory (for the amount of the return) o To Record a payment that was made in time to receive a discount Dr Accounts Payable (amount in A/P) Cr Inventory (for the amount of the discount) Cr Cash (amount remaining in A/P – the discount) o To Record a payment that was NOT made in time to receive a discount Dr Accounts Payable (amount in A/P, also total purchase price) Cr Cash (amount in A/P, also total purchase price) Purchase became part of inventory this fiscal period and was paid for this fiscal period Dr Inventory Cr Cash Purchase became part of inventory this fiscal period and will be paid for in the next fiscal period Dr Inventory Cr Accounts Payable INVENTORY VALUATION METHODS For the following valuation methods, please refer to the example below. All three methods will follow the same example but will calculate a different Ending Balance in Inventory and a different Cost of Goods Sold. The case states that a physical count of inventory has been completed and it has revealed that there are 535 units on hand at the end of the year. Purchase #4 was shipped FOB Shipping Point and will not be delivered until after the Fiscal Year End: 1.) FIFO (FIRST IN FIRST OUT) To calculate you ending inventory using FIFO, work backwards up the Inventory T-Account to calculate what the dollar value of ending inventory is Ending Inventory in units = units physically in inventory + any FOB Shipping Point Purchases still in transit (these will not be included in the physical count since they will still be on the truck – i.e. you cannot count something that is not physically there) Ending Balance in Units = 535 units (physically there) + 200 (units in transit P#4) = 735 units Purchase #4 200 units available, therefore since we are trying to find the value of 735 units, this purchase must be in the ending inventory in entirety $3,000 Remaining Units = 735 – 200 units from Purchase #4 = 535 units still to be accounted for Purchase #3 450 units available, therefore since we are still trying to find the value of 535 units, this purchase must be in the ending inventory in entirety $8,000 Remaining Units = 535 – 450 units from Purchase #3 = 85 units still to be accounted for Purchase #2 300 units available, therefore since we are still trying to find the value of 85 units, only a portion of this purchase must be in the ending inventory 85 units * $16.667 = $1414 Total Ending Inventory =$3000 (P#4) + $8,000 (P#3) + $1,414 (P#2) =12,414 Cost of Goods Sold: =Cost of Goods Available for Sale – Ending Inventory =$26,500 – 12,414 =$14,086 Dr COGS Expense Cr Inventory 14,086 14,086 2.) SPECIFIC IDENTIFICATION Something similar to the following chart will be included either in the body of your exam or as an exhibit: Since Purchase #4 was shipped FOB Shipping Point and will not be delivered until the next fiscal period, this purchase will NOT be included on this exhibit and will need to be added to the ending inventory (cannot count units that are not physically there) Modify the exhibit in your workbook (always show your work here as they will NOT mark any work that you do on the case itself) to make it look like something similar to this: Note: Purchase #4: DO NOT multiply the number of units by the unit price. Any time you have the ENTIRE purchase in your ending inventory use the dollar figure that you calculated in your Inventory (Dollars) T-Account for this purchase. Since the unit price has been rounded you will end up with a close figure to the number that you calculated for this purchase but it will not be exact. You will end up losing the mark if you do this. Ending Inventory = 12,886 ***This was calculated by adding all of the numbers in the Cost of Inventory column Cost of Goods Sold: = Cost of Goods Available for Sale – Ending Inventory = $26,500 – 12,886 = $13,614 Dr COGS Expense Cr Inventory 13,614 13,614 3.) WEIGHTED AVERAGE UNIT COST Average Unit Cost =COGAFS/UAFS =$26,500/1,400 units =18.929 (always round to 3 decimals) Ending Inventory (Units) =535 (units physically there) + 200 (units in transit P#4) =735 Ending Inventory (Dollars) = Ending Inventory (Units) * Average Unit Cost =735 units * $18.929 =$13,913 Cost of Goods Sold: Cost of Goods Available for Sale – Ending Inventory =$26,500 - $13,913 =$12,587 Dr COGS Expense Cr Inventory 12,587 12,587 DEPRECIATION FORMULAS 1. Straight Line: HistoricalCost−ResidualValue ∗n UsefulLife 12 2. Units of Output HistoricalCost−ResidualValue ∗¿ of unitsused UsefulLife∈Units 3. Declining Balance Method (HistoricalCost− Accumulated Depreciation)∗1 /UsefulLife∗n/12 4. Double Declining Balance Method (HistoricalCost− Accumulated Depreciation)∗ 2/UsefulLife∗n/12 ***When using the Declining Balance Method, or the Double Declining Balance Method you must always check the Net Book Value to ensure that the new amount of depreciation calculated will not cause the New Net Book Value to be lower than the residual Value NBV=HistoricalCost − AccumulatedDepreciation ( Amount∈ ADaccount+ Depreciationcalculatedusing f NBV>ResidualValue Depreciation calculated will not cause the NBV to go below the Residual Value and the amount calculated can be posted Dr Depreciation Expense Cr Accumulated Depreciation NBV< Residualvalue Depreciation calculated CANNOT be posited because it will cause the NBV to go below the Residual Value Calculating Allowable Depreciation: NBV (prior to depreciation calculation) – Residual Value ***Depreciating this amount will cause the NBV to be equal to the Residual Value. In the future if the asset continues to be useful the asset will no longer be depreciated. It is considered to be fully depreciated. Dr Depreciation Expense Cr Accumulated Depreciation FIXED ASSETS Recording a Purchase Dr Asset Cr Cash/Accounts Payable/Common Shares (however paid for) ***always record at the amount purchased for, not the list price Recording a Repair Dr Repairs Expense Cr Cash or Accounts Payable (however paid for) Recording a Trade-In o Step 1: Depreciate Old Asset up until time of trade in Dr Depreciation Expense Cr Accumulated Depreciation o Step 2: Record the Trade In Dr New Asset (historical cost) Dr A/D – Old Asset (O/B in A/D + Amount of Dep’n in Step 1) Dr Loss on Trade/Cr Gain on Trade (plug) Cr Old Asset (historical cost) Cr Cash (H.C. of New Asset – Trade In Allowance) ***Can also calculate the Gain/Loss by comparing the NBV to the trade in allowance If the NBV > Trade in Allowance… you have a loss If the NBV < Trade in Allowance… you have a gain The difference between the NBV and the trade in is your gain or loss Recording a Sale o Step 1: Depreciate Old Asset up until time of Sale Dr Depreciation Expense Cr Accumulated Depreciation o Step 2: Record the Sale Dr Cash (amount received for sale of asset) Dr A/D – Old Asset (O/B in A/D + Amount of Dep’n in Step 1) Dr Loss on Sale/Cr Gain on Sale (plug) Cr Old Asset (historical cost) ***Can also calculate the Gain/Loss by comparing the NBV to the amount received for the sale of the asset If the NBV > Cash Received… you have a loss If the NBV < Cash Received… you have a gain The difference between the NBV and the cash received is your gain or loss Recording a Disposal o Step 1: Depreciate Old Asset up until time of Disposal Dr Depreciation Expense Cr Accumulated Depreciation o Step 2: Record the Disposal Dr A/D – Old Asset (O/B in A/D + Amount of Dep’n in Step 1) Dr Loss on Disposal (plug) Cr Old Asset (historical cost) Cr Cash (cost of disposing of the asset, if applicable) ***Can also calculate the Loss by adding the NBV to the cost of disposing of the asset (if applicable), if not the Loss is just the NBV INTANGIBLES Purchasing an intangible asset Dr Intangible Asset Cr Cash Amortizing an intangible asset Dr Amortization Expense Cr Intangible Asset Amortization calculation: o If the Intangible was acquired during this fiscal period (n is the number of months from the date of purchase until the end of the fiscal period) Cost of Acquiring ¿ ∗n UsefulLife ¿ Asset 12 o If the Intangible was acquired during a pervious fiscal period (n is the number of months from the date of purchase until the end of the fiscal period, will usually be 12) RemainingBalance∈ Intangible AssetT Account ∗n RemainingUseful Life 12 *** the useful life is always the lower of the legal life and the amount of time the company can expect to earn revenues from the intangible asset NOTE: You cannot capitalize a cost as an intangible asset if it is an internally generated expense (i.e. paying to have a logo designed cannot be capitalized as a trademark). RESEARCH AND DEVELOPMENT Research is ALWAYS an expense Dr Research Expense Cr Cash Development costs can be capitalized but should not be depreciated until the asset is completely developed and ready for use or brought to market. Dr Asset Development Cr Cash IMPAIRMENT Results when the NBV is lower than the Recoverable Amount (this will be given) o Step 1: Depreciate asset until the date the recoverable amount is given Dr Depreciation Expense Cr Accumulated Depreciation o Step 2: Calculate the Impairment (if it exists)  If the NBV > RA, impairment exists (find the difference between these two numbers, this is your impairment expense) Dr Impairment Loss Cr Accumulated Depreciation  If the NBV < RA, no impairment exists, no entry required OPERATING EXPENSES Rent o Expiry of Last Year’s Lease Dr Rent Expense (Amount of months this year * monthly rent) Cr Prepaid Rent (One month’s rent, found on B/S) Cr Cash (Rent Expense – Prepaid Rent) o Signing a New Lease Dr Rent Expense (Amount of months this year * monthly rent) Dr Prepaid Rent (One month’s rent) Cr Cash (Rent Expense + Prepaid Rent) Insurance o Expiry of Last Year’s Policy Dr Insurance Expense (amount given on B/S) Cr Prepaid Insurance (amount given on B/S) o Signing a New Policy Dr Insurance Expense (amount of months used * monthly rate) Dr Prepaid Insurance (remaining months * monthly rate) Cr Cash (Insurance Expense + Prepaid Insurance) Salaries/Wages o Paying Last Year’s Outstanding wages Dr Wages/Salaries Payable (Amount found on B/S) Cr Cash (Amount found on B/S) o Paying/Accruing This Year’s Wages Dr Wages/Salaries Expense (Wages/Salaries Payable + Cash) Cr Wages/Salaries Payable (Amount Owing) Cr Cash (Amount Paid) Taxes Outstanding from Last Year Dr Taxes Payable (Amount found on B/S) Cr Cash (Amount found on B/S) Unearned Revenue o Money has been collected this fiscal period but work will not be preformed until the next fiscal period: Dr Cash/Sales Returns & Allowances (if something was return) Cr Unearned Revenue o Money was collected in a previous fiscal period but the work was preformed this fiscal period Dr Unearned Revenue Cr Sales CLOSING ENTRIES NET INCOME Closing Entry #1: Close all Revenues and Contra Revenues Dr Revenues (T/B of all revenue accounts) Cr Sales Discounts (T/B of account) Cr Sales Returns and Allowances (T/B of account) Cr Income Summary (Revenues – Sales Returns & Allowances – Sales Discounts) Closing Entry #2: Close All Expenses Dr Income Summary (Sum of all expense accounts) INCOME SUMMARY C1 C2 NET T/B INCOME C4 T/B C5 0 Cr All Expenses (T/B in each account) Closing Entry #3: Record Income Taxes Dr Income Tax Expense (Net Income * Tax Rate) Cr Income Tax Payable (Net Income * Tax Rate) Closing Entry #4: Close Income Tax Expense Dr Income Summary (Same amount as C#3) Cr Income Tax Expense (Same amount as C#3) Closing Entry #5: Close Income Summary Dr Income Summary (T/B in Income Summary) Cr Retained Earnings (T/B in Income Summary) NET LOSS Closing Entry #1: Close all Revenues and Contra Revenues Dr Revenues (T/B of all revenue accounts) Cr Sales Discounts (T/B of account) Cr Sales Returns and Allowances (T/B of account) Cr Income Summary (Revenues – Sales Returns & Allowances – Sales Discounts) Closing Entry #2: Close All Expenses Dr Income Summary (Sum of all expense accounts) Cr All Expenses (T/B in each account) Closing Entry #3: Close Income Summary Dr Retained Earnings (T/B in Income Summary) Cr Income Summary (T/B in Income Summary) INCOME SUMMARY C1 C2 NET LOSS T/B C3 C4 0