Thursday, July 31, 2014
FRANCHISE ACCOUNTING
WHAT IS FRANCHISING it is where a leading , known business entered into agreement in which for fee ONE PARTY ( FRANCHISOR) gives the other party ( FRANCHISEE) the rights to perform certain functions or sell certain products or services of the franchisor.
A SUBSTANTIAL PERFORMANCE OF THE FRANCHISOR IS THE KEY TO RECOGNITION OF THE INITIAL FRANCHISE FEE. SUBSTANTIAL PERFORMANCE OF THE FRANSHISOR DENOTES CONSUMMATION OFTHE TRANSACTIONS WHEN:
1. THERE IS NO REMAINING OBLIGATION BY AGREEMENT , TRADE OR PRACTICE TO REFUND THE INITIAL FEE. OR TO EXCUSE NON PAYMENT OF UNPAID NOTES
2. SUBSTANTIALLY ALL THE INITIAL SERVICES OF THE FRANCHISOR HAVE BEEN PERFORMED
3. ALL OTHER CONDITIONS WHICH AFFECT CONSUMMATION HAVE BEEN MET.
EXAMPLE :
INITIAL FEE IS 250,000.00 , INITIAL DOWN IS 50,000, BALANCE OF 40,000 YEARLY PAY AT 12% INTEREST.
METHOD 1 ( THE SUBSTANTIAL FUTURE SERVICES ARE YET TO BE PROVIDED TO THE FRANCHISEE, THAT MEANS PERFORMANCE OF FRANCHISOR HAS YET TO OCCUR.
CASH 50,000
NOTES RECEIVABLE 200,000
UNEARNED INITIAL FEE 250,000
TAKE NOTE IT IS CREDITED TO A SUSPENSE ACCOUNT, OR DEFERRED ACCOUNT OR A LIABILITY ACCOUNT. BECAUSE THE PERFORMANCE HAS NOT YET SUBSTANTIALLY MET.
METHOD 2 THE PROBABILITY OF REFUNDING IS REMOTE AND THE AMOUNT OF FUTURE SERVICES OF FRANCHISOR IS MINIMAL, THAT MEANS PERFORMANCE HAS ALMOST TAKEN PLACE.
CASH 50,000
NOTES REC 200,000
REVENUE EARNED 250,000
TAKE NOTE IT IS CREDITED TO AN DEFINITE INCOME ACCOUNT BECAUSE THE POSSIBILITY OF THE AGREEMENT TO TAKE PLACE.
METHOD 3
THE DOWN PAYMENT IS NOT REFUNDABLE , BUT A SIGNIFICANT SERVICES BY THE FRANCHISOR IS YET TO BE PERFORMED
CASH
NOTES
UNEARNED 200,000
REVENUE EARNED 50,000
SINCE THE DOWN IS NOT REFUNDABLE , IS CREDITED DIRECT TO INCOME ACCOUNT.
METHOD 4
THE DOWN IS NOT REFUNDABLE ., THE COLLECTION OF NOTES IS UNCERTAIN , SO NOTES IS NOT RECORDED
CASH 50,000
EARNED REVENUE
METHOD 5
THE DOWN IS EITHER REFUNDABLE . OR SUBSTANTIAL SERVICES MUST BE PERFORMED BEFORE THE FEE CAN BE CONSIDERED EARNED.
CASH
UNEARNED FEE
IN THE FRANCHISE AGREEMENT , THERE ARE A LOT OF CONDITIONS:
1. THERE IS AN INITIAL FRANCHISE FEE NORMALLY FOR A NUMBER OF YEARS WITH A LOT OF CONDITIONS SUCH AS:
a. AMOUNT OF DOWN PAYMENT AT A CERTAIN TIME LIKE UPON SIGNING OF THE AGREEMENT
b. a certain amount again on a certain date say start of operation , or a certain conditions that has to be met.
c. the balance covered by a notes with interest for a certain period and the date of the start of amortization
2. THERE IS ALSO SOME COST OR EXPENSES BY THE FRANCHISOR ASSOCIATED TO THE INITIAL FEE SUCH AS TRANSFER OF FIXED ASSETS, TRAINING AND DEVELOPMENT COST . ALL OF WHICH IS TIED UP WITH A DATE OF PERFORMANCE.
3. THERE IS ALSO A CONTINUING FEE BASED ON WHATEVER IS THE AGREEMENT, SAY A PERCENTAGE OF SALES, FOR A CERTAIN NUMBER OF PERIODS, THEN THAT FEE IS CHANGED FOR ANOTHER AMOUNT ONWARD.
4. THERE IS ALSO A CONTINUING COST TO BE INCURRED BY FRANCHISOR . THE FAIR MARKET VALUE OF THIS CONTINUING COST IS ALSO DETERMINED.
ILLUSTRATIVE PROBLEM
A CONTRACT HAS BEEN SIGNED ON MAY 1, 2011, WITH THE FF; PROVISIONS
1. AN INITIAL IRREVOCABLE FEE OF 500,000 TO BE PAID AS FF:
100,000 UPON SIGNING mAY 1, 2011
50,000 WHEN OPERATION STARTS. IN OCTOBER 2011
350,000 PAYABLE 7 YEARS OR 50,000 BEG. MAY 1 2011 AT 12% INTEREST.
2. DIRECT COST ASSOCIATED WITH THE INITIAL FEE THIS IS NOT A CONTINUING COST, THIS IS RELATIVE TO THE INITIAL FEE.
a 80,000 COST OF EQUIPMENT DELIVERY ON MAY1 2011, THE FAIR MARKET IS 120,000.
b. initial services of 140,000 , 50,000 prior to signing, 90,000 to be incurred in oct 1 2011.
3. CONTINUING FEE of 10% of gross sales , which is estimated to be 90,000 per month , for 3 years , then 150,000 a month thereafter.
4. CONTINUING COST starting the commencemnent of operation, to be incurred by franchisor 10,000 a month., these cost have a fair market value of 11,000.
JOURNAL ENTRIES:
MAY 1
1. CASH 100,000
NOTES REC. 350,000
REVENUE 120,000
UNEARNED REVENUE 330,000
THE REVENUE OF 120,000 IS ARRIVED AT BECAUSE THE EQUIPMENT WAS PERFORMED BY THE FRANCHISOR ON TIME, OF COURSE THE 330,000 IS ASSUMED TO BE UNEARNED DEPENDING ON THE DATE OF THE PERFORMANCE OF ANY AGREEMENT.
2. COST OF EQUIPMENT 80,000
MACHINERY AND EQUIPMENT 80,000
OF COURSE IF THERE IS ACCUMULATED DEPN , IT IS DEBITED
3. FRANCHISE EXPENSE 60,000
ACCTS. PAYABLE 60,000
this is relative to initial fee and not regular continuing fee
OCT 1
1. CASH 50,000
REVENUE FROM INITIAL FEE 50,000
THIS IS AS PER AGREEMENT TO BE RECEIVED OCT.
2. UNEARNED INITIAL FRANCHISE FEE 258,000
REVENUE FROM INITIAL FRANCHISE FEE 258,000
explanation : since all the agreement by oct has already been met, a need to recognized the actual revenue must be computed.
supposed to be the 330,000 is credited to revenue on entry no. 2 in OCT. but the 72,000 has not incurred yet by the franchisor because it will be incurred monthly, hence cannot credit to revenue in total now. THAT IS WHY 330,000 LESS 72,000 IS 258,000.00 this 72,000 will be amortized for 36 months.
THE INITIAL FEE IS 500,000
1. TO DEDUCT THE FAIR MARKET VALUE OF THE EQUIPMENT (120,000)
2. TO DEDUCT THE POSSIBLE DEFICIENCY BETWEEN THE
CONTINUING FEE AGAINSt THE CONTINUING COST as ff:.
THE CONTINUING FEE IS ONLY( 90,000 X 10% 9,000
THE CONTINUING COST IS HAS A FAIR MARKET VALUE OF 11,000
DEFICIENCY A MONTH 2,000
FOR 3 YEARS AS PER CONTRACT 36 MOS
TOTAL .................................... ( 72,000
--------------------------------------------------------------------------------------------------
ADJUSTED INITIAL FEE 308,000
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LESS : THE PAYMENT IN OCT and already credited to revenue ( 50,000)
NET .......... TO BE CREDITED TO REVENUE FROM INITIAL FEE 258,000
3. FRANCHISE EXP 80,000
ACCTS. PAYABLE
4. CASH 9,000
UNEARNED INITIAL 2,000
REVENUE CONTINUING FEE 11,000
THE 2,000 IS DEBITED TO UNEARNED FOR THE NEXT 36 MONTHS TO CLOSE THE UNEARNED INITIAL REVENUE
5. franchise exp 10,000
accts/ pay 10,000
NOVEMBER
CASH 9,000
UNEARNED INITIAL REVENUE 2,000
REVENUE EARNED CONTINUING 11,000
FRANCHISE EXP 10,000
PAYABLE 10,000
DECEMBER
CASH 9,000
UNEARNED 2,000
REVENUE 11,000
FRANCHISE EXP 10,000
PAYABLE 10,000
INTEREST RECEIVABLE 28,000
INTEREST INCOME 28,000
TO ACCRUE INTEREST INCOME
JAN 2012
INTEREST INCOME 28,000
INT. REC 28,000
REVERSE THE ACCRUED.
CASH 9,000
UNEARNED 2,000
REVENUE 11,000
franchise exp 10,000
accts. pyable 10,000
this will be the repetitive entry onward , except the amortization f the 2,000.00 and of course the additional entry on the collection of notes receivable
THE ENTRY IN FEB, ONWARD
Friday, July 18, 2014
LONG TERM CONSTRUCTION ACCOUNTING
BECAUSE OF THE LONG PERIOD OF TIME TO FINISH A CERTAIN PROJECT BEING UNDERTAKEN BY CONSTRUCTION COMPANIES, IT BECOMES DIFFICULT TO DETERMINE HOW MUCH INCOME SHOULD BE RECOGNIZE IN THE FINANCIAL STATEMENT CONSIDERING THAT THE COMPLETION OF THE PROJECT WILL NOT BE FINISHED IN THE ORDINARY ACCOUNTING PERIOD, HENCE AN ACCOUNTING FOR SUCH SITUATION WAS DEVELOP.
THAT ARE TWO METHODS THAT WAS DEVELOP TO ANSWER FOR THIS ISSUE.
A. PERCENTAGE OF COMPLETION METHOD
B. COMPLETED CONTRACT METHOD.
UNDER THE PERCENTAGE OF COMPLETION METHOD, THE PERCENTAGE OF THE ACTUAL AMOUNT SPENT AT THE END OF THE INTERIM PERIOD IS OBTAINED AGAINST THE TOTAL ESTIMATED COST THAT IS STILL NEEDED TO COMPLETE THE PROJECT AT THE END OF THE INTERIM PERIOD.
WHAT ARE THE ACCOUNTS USED IN CONSTRUCTION ACCOUNTING
1. CONSTRUCTION IN PROGRESS -
A. DEBITED FOR THE COST OF CONSTRUCTION
B DEBITED FOR THE NET REVENUE
A. CREDITED TO NEGATIVE NET REVENUE( EXCEPT WHEN A TOTAL LOSS WILL BE INCURRED.
B. CREDITED AT THE END OF THE CONTRACT FOR THE CONTRACT PRICE BY DEBIT TO ADVANCE BILLING.
THAT MEANS THERE ARE TWO TYPES OF TRANSACTION THAT ENTERS TO THIS ACCOUNT, THE COST AND THE PROFIT , WHICH TOTALS THE CONTRACT PRICE.
AT THE END OF THE CONTRACT THE BALANCE OF THIS ACCOUNT SHALL BE CLOSED TO THE ADVANCE BILLING ACCOUNT WHICH ACCUMULATES THE REGULAR BILLING OF THE CONTRACT PRICE WHICH IS DEBITED TO ACCOUNTS RECEIVABLE AND CREDITED TO ADVANCE BILLING. NATURALLY , THE ADVANCE BILLING WILL DEFINITELY HAVE A BALANCE REPRESENTING THE CONTRACT PRICE.
2. ADVANCE BILLING ACCOUNT
CREDITED EVERY TIME A BILLING STATEMENT IS MADE AND WOULD END UP WITH THE TOTAL CONTRACT PRICE AND DEBITED AT THE END OF THE CONTRACT FOR THE CONTRACT PRICE. WITH THE CREDIT TO CONSTRUCTION IN PROGRESS
3. CONSTRUCTION EXPENSE OR COST
DEBITED TO THE AMOUNT ARRIVED AT BY MULTIPLYING THE COMPLETION PERCENTAGE OF THE PROJECT AS AGAINST THE PARTIAL AND ESTIMATED COST TO FINISH THE PROJECT. RATIO X TOTAL ESTIMATED COST OF THE PROJECT
4. CONSTRUCTION REVENUE = CREDITED TO THE AMOUNT ARRIVED AT BY MULTIPLYING THE COMPLETION RATIO AS AGAINST THE TOTAL PROJECT PRICE
:
SAMPLE:
TOTAL COST ALREADY INCURRED TODATE 300 23.1%
ADD: ESTIMATED COST STILL TO BE INCURRED UNTIL
THE PROJECT IS FINISHED 1,000
TOTAL PARTIAL ACTUAL COST AND ESTIMATED COST
TO FINISH THE PROJECT 1,300 100%
THE PERCENTAGE OF COMPLETION IS 23.1%
THIS PERCENTAGE 23.1% WILL NOW BE APPLIED TO THE TOTAL CONTRACT PRICE OF THE PROJECT TO GET THE GROSS REVENUE.( JUST LIKE GROSS SALES )
THE SAME PERCENTAGE SHALL BE APPLIED TO THE ACCUMULATED ACTUAL COST PLUS THE ESTIMATED COST STILL NEEDED TO COMPLETE THE PROJECT TO BE ABLE TO GET THE EQUIVALENT COST INCURRED AS OF THAT DATE ( JUST LIKE COST OF SALES)
EXAMPLE:
ASSUMING CONTRACT PRICE IS 5,000
MULTIPLY BY 23.1% 1,155 AS GROSS REVENUE
LESS: ESTIMATED COST TO FINISH 1,300
MULTIPLY BY 23.1% 23.1% 300.30 AS COST OF FINISHED PORTION.
EQUALS THE REVENUE FOR THIS PERIOD 854.70
CONTRACT PRICE WHOLE CONTRACT 5,000
LESS: ESTIMATED COST WHOLE CONTRACT 1,300
EXPECTED REVENUE 3,700
SINCE 23.!% IS FINISHED X 3700.00 = 854.70
IN EFFECT THIS 854.70 IS 23.!% OF THE NET REVENUE, JUST LIKE THE GROSS PROFIT IN CASE OF NON CONSTRUCTION BUSINESS.
THEN THE ORDINARY TRANSACTION WILL BE THE SAME SUCH AS:
1. THE PURCHASE OR USE OF MATERIALS , LABOR , OVERHEAD ETC. THE RECORDING SYSTEM WOULD DEPEND ON THE ACCOUNTING SYSTEM THAT THE COMPANY WOULD LIKE TO ADOPT, SAYING THEY WANT TO REFLECT THE COST OF MATERIALS, LABOR , OVERHEAD AND OTHER COST.
CONSTRUCTION IN PROGRESS 300
CASH OR PAYABLE 300
2. THE BILLING
ACCTS. RECEIVABLE 20
ADVANCE BILLING 20
3, COLLECTION
CASH 20
ACCTS. REC 20
4. THE RECOGNITION OF THE REVENUE
CONSTRUCTION IN PROGRESS 1,155
CONSTRUCTION REVENUE 1,155
5. TO RECORD THE COST OF CONSTRUCTION
CONSTRUCTION COST 300.30
CONSTRUCTION IN PROGRESS 300.30
AT THE END OF YEAR OF CONTRACT , THE TOTAL BALANCE OF THE CONSTRUCTION IN PROGRESS ACCOUNT WOULD BE THE TOTAL COST , PLUS THE NET REVENUE ( MARK UP X COMPLETION RATIO 100%.( what isbeing debited to construction in process acct is the whole cost of building that project and the profit or mark up ..
THIS CONSTRUCTION IN PROGRESS ACCOUNT WILL BE CLOSED TO ADVANCE BILLING ACCOUNT.SINCE THIS IS AN OFFSET TO ACCTS. RECEIVABLE WHICH THE TOTAL CONTRACT PRICE WILL PASSED THRU THIS ACCTS. REC. ACCT.
THE CONSTRUCTION REVENUE ACCOUNT WOULD BE THE MARK UP ITSELF.
IN EFFECT THE NET BALANCE OF THE CONSTRUCTION IN PROGRESS IN THE ENTRY IN NO. 4, 5 REPRESENTS THE REVENUE FOR THE PERIOD HANGED IN THE ASSET ACCOUNT CONSTRUCTION IN PROGRESS AS A TEMPORARY ACCOUNT UNTIL IT WILL BE CLOSED AT THE END OF THE CONTRACT.
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TO ILLUSTRATE ;
A CONSTRUCTION CO. IS CONTRACTED TO CONSTRUCT A BUILDING ESTIMATED TO COST 800,000 AT A PRICE OF 1,000,000 TO FINISHED IN 3 YEARS
2011 2012 2013 total
CUMULATIVE COST INCURRED 136,500 386,100 413,900 800,000
ESTIMATED COST TO FINISHED TO PROJECT 513,500 328,900
TOTAL PARTIAL AND ESTIMATED COST 650,000 715,000
PARTIAL BILLING 104,000 455,000 351,000
COLLECTION 65,000 429,000 416.000
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JOURNAL ENTRY
CONST. IN PROGRESS 136,500 249,600 413,900
CASH / ACCTS PYABLE ETC 136,500 249,600 413,900
cost of labor , materials etc,
ACCTS REC. 104,000 455,000 441,000
ADVANCE BILL 104,000 455,000 441,000
CASH 65,000 429,000 416,000
ACCTS. RECE 65,000 429,000 416,000
CONST IN PROGRESS 210,000 330,000 460,000
CONST REVENUE 210,000 330,000 460,000
to record revenue at 21%of contract price. revenue at 54% revenue at 100%
CONSTRUCTION COST 136,500 249,600 413,900
CONST IN PROGRESS 136,500 249,600 413,900
record cost to produce rev. 21% of cost
ADJUSTING ENTRY:
ADVANCE BILLING 1,000,000
CONSTRUCTION IN PROGRESS 1,000,000
THE 249,600 IN THE SECOND YEAR IS THE ACTUAL EXPENSES FOR THAT YEAR , SO THAT ADDING 136,500 PLUS 249,600 IS THE ACCUMULATED ACTUAL EXP. UP TO YEAR 2012 IS 386,100
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HOW THE CONSTRUCTION REVENUE ARRIVE AT:
2011 COMPLETION RATIO ON THE BASIS OF EXPENSES INCURRED
ACTUAL EXPENSES 136,500
DIVIDE total cost 650,000
EXPENSE RATIO 21%
GROSS REVENUE = CONTRACT PRICE 1.0m X 21% 210,000
FOR THE COST 650,000 X 21% ( 136,500)
NET REVENUE 73,500
=====================================================================
2012 EXPENSE RATIO
CUMULATIVE EXPENSES/COST 386,100
DIVIDE TOTAL EXPENSE ESTIMATE 715,000
COMPLETION RATIO 54%
cum this yr cum. lyr. this yer
GROSS REVENUE FOR THE CONT.PRICE 1,000,000 X 54% 540,000 -210,000 = 330,000
GROSS COST 715,000 X 54% 386,100 - 136,500 = 249,600
NET REVENUE 153,900 - 73,500 = 80,400
TAKE NOTE THAT YOU CANNOT COMPUTE THE NET REVENUE FOR SUCCEEDING YEAR UNLESS YOU COMPUTE THE CUMULATIVE NET REVENUE AS OF THE PRESENT YEAR , SAY THE 153,900 THEN DEDUCT THE REVENUE LAST YEAR , 73,500 TO GET 80,400
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
2013 THE LAST YEAR OF CONTRACT
FINAL CUMULATIVE EXPENSES 800,000
COMPLETION RATIO 100%
cum. thisyer cum lyr this yr
GROSS REVENUE FOR THE CONT. PRICE 1,000,000 X 100% 1,000,000 - 540,000 460,000
GROSS COST 800,000 X 100% 800,000 -386,100 413,900
net revenue 200,000 200,000 -153,900 46,100
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DONT BE CONFUSED ON THE JOURNAL ENTRY ON REVENUE, WHAT WAS ADOPTED IS JUST LIKE AN ORDINARY RECORDING OF GROSS SALES AND THE RECORDING OF COST OF SALES, HERE , THE COMPLETION RATIO IS FIRST APPLIED TO THE CONTRACT PRICE BUT ARE REDUCED BY THE COMPLETION RATIO APPLIED TO THE ESTIMATED COST OR EXPENSES AS OF THAT YEAR , THE NET EFFECT IS ALSO NET REVENUE ( CONTRUCTION REVENUE LESS CONSTRUCTION COST )
=========================================================================
IF YOU WE ARE GOING TO PUT THESE ENTRIES INTO T ACCOUNTS :
ACCTS RECEIVBLE CONTR. IN PROCESS CONTRUCTION REVENUE
dr cr dr cr dr cr
ADVANCE BILLING CONTRUCTION EXPENSE CONTRUCTION COST
dr cr dr cr dr cr
THE FOLLOWING WILL BE THE BALANCES END OF 2013
PROFIT AND LOSS
2011 2012 2013
CONTRUCTION REVENUE 210,000 330,000 460,000
CONSTRUCTION COST 136,500 249,600 413,900
NET REVENUE 73,500 80,400 46,100
BALANCE SHEET
ASSETS
CASH 65,000 494,000 910,000
ACCTS. REC. 39,000 65,000 90,000
CONS.PROGRESS 210,000 -
LESS: ADV. BILL 104,000) 106,000
TOTAL 210,000 559,000 1,000,000
LIABILITIES
ACCTS. PAYABLE 136,500 386,100 800,000
ADVANCE BILLING 559,000
less: const. in progress 540,000 19,000
NET INCOME 73,500 80,400 46,100
RETAINED EARNINGS 73,500 153,900
TOTAL 314,000 559,000 1,000,000
===========================================================
THE ADVANCE BILLING AS A RULE MUST BE OFFSET OR CONTRA ACCOUNTS TO CONSTRUCTION IN PROGRESS, IF CONSTRUCTION IN PROGRESS ACCOUNT IS BIGGER THAT MEANS THE EXPENSES IS IN EXCESS OF THE BILLING ( put to asset side )
if the advance bill is more than the construction in progress , it means, the billing is excess of the cost. reflect to liabilities side .
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POSSIBLE LOSS ON LONG TERM CONSTRUCTION
there is a possibility that while the construction is going on, it is estimated that it will incur a loss.
there are two types of loss.
1. the estimated future cost may indicate a loss on the current period, but there will be a profit on the total contract.
2. the estimated cost may indicate that totally a loss will be incurred.
EXAMPLE of a contract that the result will be a net loss as whole, that means it may have profit on some years but in total for the whole contract it will be a net loss.
the following data is given:
YEAR 1 YEAR 2 YEAR 3 TOTAL
CONTRACT PRICE 910,000
COST TODATE 136,500 386,100 990,000 990,000
ESTIMATED COST TO COMPLETE513,500 603,900
TOTAL PARTIAL AND ESTIMATE 650,000 990,000 990,000
PERCENT OF COMPLETION 21% 39% 100%
journal entries yr. 1:
CONTRUCTION IN PROGRESS 136,500 249,600 603,900
ACCTS. PAYABLE
CONTRUCTION PROGRESS 191,100 354,900
CONST. REVENUE 191,100
CONSTRUCTION COST 136,500 386,100
CONST. IN PROGRESS 191,100 386100
THERE IS A PROFIT OF 54,600 IN YEAR 1, BUT IN YEAR TWO , THERE IS A LOSS OF 85,800.
TAKE NOTE THAT BY THE END OF YEAR 2 , IT IS ESTIMATED THE YEAR 3 WILL ALSO BE A LOSS JUST LIKE THE 2ND YEAR.
IF A LOSS IS EXPECTED FOR THE WHOLE CONTRACT , THE ENTIRE LOSS OF THE WHOLE CONTRACT SHOULD ALREADY BE RECOGNIZED IN THE YEAR WHERE IT IS DISCOVERED. THAT MEANS THE CUMULATIVE PROFIT AS THAT DATE MUST BE THE AMOUNT OF THE TOTAL LOSS
THE REGULAR ENTRY DEBITING CONSTRUCTION COST OR EXPENSE FOR YEAR 2 IS STILL NEEDED AND THE CREDIT TO CONSTRUCTION REVENUE , AND A CREDIT TO CONST. IN PROGRESS FOR THE GROSS LOSS..
IF THIS THE CASE THE COMPUTATION OF NET REVENUE IN yr. 3 Need TO BE IGNORED.. EVEN THE SUPPOSED CREDIT TO CONSTRUCTION IN PROGRESS ACCOUNT IN RECOGNIZING THE NET LOSS IN YEAR 2 NEED TO BE REVERSED BECAUSE IF THE WHOLE CONTRACT WILL BE A LOSS THERE IS NO USE to have A BALANCE FOR THE CONSTRUCTION IN PROGRESS ACCOUNT REPRESENTING A LOSS ( note that construction in progress includes the net revenue ), that is why even the profit of year 1 , debited to construction in process has to be reversed , in year 2. SO WHAT IS LEFT ON THE BALANCE OF CONSTRUCTION IN PROGRESS ACCOUNT IS THE CUMULATIVE COST OR EXPENSE IN CONSTRUCTING THE PROJECT.
NOW SINCE THE LOSS IN YEAR 3 HAS TO BE RECOGNIZED IN YEAR TWO AN ENTRY DEBITING CONST. COST OR EXPENSE AND CREDITING RESERVE FOR LOSS IS NEEDED SO THAT THE CUMULATIVE PROFIT FOR YEAR WILL APPEAR TO BE THE WHOLE TOTAL LOSS OF THE PROJECT.
IN SHORT THE ABOVE STATEMENT IN SUMMARY APPEARS LIKE THIS
CONST. COST 249,600
CONSTRUCTION REVENUE 163,800
CONST. IN PROGRESS 85,800 LOSS
to record the const. cost this year and the revenue at 39% and record the loss
CONS. IN PROGRESS 85,800
RESERVE FOR LOSS YEAR 2 85,800
to reclassify the above entry so tha the const. in progress be closed to reserve for loss
RESERVE FOR LOSS YEAR 1 54,600
CONST. IN PROGRESS 54,600
to reverse the balance of const. in progress last year and charged to reserve for loss
CONSTRUCTION COST 48,800
RESERVE FOR CONTRACT LOSS 48,800
to anticipate the loss in year 3 by crediting it to reserve for loss
IN EFFECT THIS IS THE COMPOUND ENTRY:
of the above entries:
CONST COST EXP 298,400
CONST. REVENUE 163,800
RESERVES FOR CONTRACT LOSS 80,000
CONST. IN PROGRESS 54,600
SUMMARING THESE ENTRIES , THE CONST. IN PROGRESS WOULD NOW HAVE A BALANCE REPRESENTING THE TOTAL COST OF THE PROJECT AS OF YEAR TWO OF 386,100 AND DOES NOT ANYMORE INCLUDE THE PROFIT IN YEAR 1 54,600 AND NET LOSS OF YEAR 2 OF 85,800.00, THEREFORE 54,600 IN CONST. IN PROCESS LAST YEAR IS DEBITED TO RESERVE FOR LOSS, AND THE 85,800 CREDIT TO CONST. IN PROGRESS YEAR 2 IS DEBITED AND CREDITED TO RESERVE FOR LOSS.
THE NET LOSS IN YEAR 3, OF 48,800 WILL BE RECORDED THIS YEAR 2 AND CHARGD TO RESERVE FOR CONTRACT LOSS.
IF THE RULE IS, IF THE WHOLE CONTRACT WILL BA LOSS, THEYEAR WHERE THE LOSS IS KNOWN SHOULD RECOGNIZED THE TOTAL LOSS of the whole contract THAT MEANS THE LOSS IN THE SUCCEEDING YEARS SHOULD ALSO BE CHARGED TO THE YEAR WHERE THE TOTAL LOSS WAS KNOWN. IN THIS CASE IN YEAR 2
IF THIS IS CASE THE RETAINED EARNINGS AS OF THE YEAR WHERE THE LOSS IS ANTICIPATED MUST TURNED OUT TOBE EQUAL TO THE TOTAL LOSS OF THE CONTRACT. EVEN THE CONTRACT HAS NOT YET ENDED.
IN THE YEAR 3 , THE FOLLOWING ENTRIES
CONSTRUCTION IN PROGRESS 603,900
ACCTS. PAYABLE 603,900
purchase and pay all expenses for the project year 3
RESERVE FOR CONTRACT LOSS 80,000
ADVANCE BILLING 910,000
CONSTRUCTION IN PROGRESS 990,000
to close advance billing andclose the construction in progress and the reserve for contract loss.
IF YOU TAKE THE BALANCE SHEET BALANCE AS OF YEAR 3
ACCTS. RECEIVABLE 910,000 THE CONTRACT PRICE assume no collection.
ACCTS PAYABLE 990,000 the cost assume no payment
CUMULATIVE PROFIT /LOSS ( 80,000)
TOTAL 910,000
==============================================================
PROBLEM :
THE FOLLOWING DATA
YR. 1 YEAR 2 YEAR 3
CONTRACT PRICE 875,000
CONSTRUCTION COST THISYR. 125,000 232,500 455,000 812,500
ESTIMATED COST TO COMPLETE 500,000 455,000
BILLING TO BUYER 100,000 437,500 337,500 875,000
COLLECT 62,500 412,500 400,000 875,00
TAKE NOTE THE CONSTRUCTION COST IS NOT TO DATE , IT IS FOR THE CURRENT YEAR. IN COMPUTING FOR THE COMPLETION RATIO , IT MUST BE BASED ON CUMULATIVE COST SPENT.
THERE IS A LOSS IN THE 2ND YEAR , BUT THE TOTAL CONTRACT IS A PROFIT.
COMPUTE FOR THE ESTIMATED INCOME OR LOSS FOR EACH YEAR. AND THE INCOME REALIZED EACH YEAR.
MAKE JOURNAL ENTRIES.
MAKE BALANCE SHEET/ PROFIT AND LOSS.
Sunday, July 13, 2014
TREASURY STOCKS
TREASURY STOCKS
When a company's issued or sold stocks is reacquired afterwhich held in its name rather than formally retired , it is referred to TREASURY STOCKS.
These treasury stocks may be subsequently be re issued or sold or formally retired..
Treasury stock should not be viewed as an asset, instead, it should be reported as reduction to the owners equity . It does not confer upon the corporation stockholders right, such as dividends or voting rights.
Treasury shares may or may not participate in stock dividends, or stock splits,
The acquisition of treasury stocks decreases the number of shares outstanding, while reissuing it increases the number of shares outstanding, but the legal capital is not changed either by the reacquistion or reissuance.
there is no income or less on the reacquisition , reissuance or retirement . Howver, the retained earnings can be decreased by the treasury stock transactions , but is never increased by such transactions.
TWO METHODS ON HOW TO RECORD TREASURY TRANSACTIONS
1. COST METHOD - the purchase or reacquisition is recorded by debiting treasury stock account for the cost of the purchase and crediting cash.
TREASURY STOCK ( actual price x no of shares
cash
the cost is determined by the CURRENT MARKET PRICE OF THE STOCK and is not necessary tied to the original issue price when it was sold.
the balance of the treasury stock is deducted from the stockholders equity as a separate amount..
when it will be finally RETIRED , the debit balance in the treasury stock is CREDITED and the debits are allocated proportionately to the appropriate CAPITAL STOCK., PAID IN CAPITAL, and RETAINED EARNINGS as ff
1. debited amount for capital stock is number shares retired x par value, this is to reduce the stocks outstanding.
2. debit paid in capital account : no. of shares retired divided by outstanding shares x balance of paid in capital accounts.( why debit this account , because this treasury when this was originally issued may have created the paid in capital , hence , this is debited to paid in capital.
3. the balance is debited to retained earnings.( this is not to distort the profit and loss statement since this transaction is not an ordinary expense.
If the treasury stock is subsequently sold, the difference between acquisition cost when it was reacquired and the selling price is credited to PAID IN CAPITAL .
the entry is , if sold at book value.
CASH
TREASURY STOCK ( no. of share x price when it was reacquired)
entry if sold more than book value
CASH
TREASURY STOCK ( shares sold x acquisition cost)
PAID IN CAPITAL FROM TREASURY( excess of price vs. acquisition cost x shares sold)
IF SOLD LESS THAN BOOK VALUE
CASH
PAID IN capital from treasury ( this is debited if there is previous credit to this account caused by sale of treasury stock. before , if none then debited to retiained earnings.
TREASURY STOCK
if the stockholders equity increase due to sale of treasury stock , a paid in capital account such as PAID IN CAPITAL FROM TREASURY STOCK IS CREDITED.
,
IF THE stockholder equity is decreased due to sale less than its acquisition cost, PAID CAPITAL IS DEBITED TO THE EXTENT OF A CREDIT TO PAID CAPITAL PREVIOUSLY RECORDED because it was sold previously at more than the acquisition cost.
if no previous sale made where a paid in capital was registered, and the subsequent sale was made at below acquisition cost then the whole difference between the cash and the value of treasurry stock is debited to retained earnings.
EXAMPLE: THE OUTSTANDING SHARES IS 10,000 SHARES 10 PAR VALUE, BUT SOLD AT 15.00 SO THERE IS A PAID IN CAPITAL OF 50,000
1. 1000 SHARES WAS REACQUIRED AT 16.00 PER SHARE.
TREASURY STOCK 16,000
CASH 16,000
2. SOLD 200 OF TREASURY STOCK AT 20.00, OR 4.00 MORE THAN BOOK VALUE.
CASH 4,000
TREASURY STOCK 3,200
PAID IN CAPITAL TREASURY 800 ( 4 X 200)
3. SOLD 500 AT 14 OR 2.00 LESS THAN THE ACQUISITION COST OF 16.00
CASH 7,000
PAID IN CAPITAL 800 taken from previous credit when some were sold
retained earnings 200
treasury stock 8,000
4. RETIRED 300 SHARES THE REMAINING TREASURY STOCK
CAPITAL STOCK 300 X 10 3,000
PAID IN CAPITAL 300 divide 10,000 x 50,000 1,500
retained earnings 300
treasury stock ( 300 x 16.00) 4,800
IN THE PRESENTATION OF STOCKHOLDERS EQUITY, PRIOR TO REACQUISITION AND SALE ,THE TREASURY STOCK IS SHOWN AS A DEDUCTION NOT ON THE CAPITAL STOCK BUT IN A SEPARATE ITEM.
COMMON STOCK 100,000
PAID N CAPITAL 50,000
TOTAL 150,000
RETAINED EARNINGS 30,000
LESS : TREASURY STOCK ( 16,000)
STOCKHOLDERS EQUITY 164,000
+++++++++++=======================================================
2. PAR OR STATED VALUE METHOD OF ACCOUNTING TREASURY STOCK.
If the par value method is used , the purchase of treasury stock is regarded as a WITHDRAWAL of group of stockholders. Similarly the sale of reissuance of treasury stock, under this method is viewed as the ADMISSION OF NEW GROUP OF STOCKHOLDERS
THUS THE REACQUISITION AND SALE ARE VIEWED AS SEPARATE TRANSACTIONS.
USING THE ABOVE EXAMPLE, THE FOLLOWING ENTRIES ARE MADE.
1. REACQUISITION:
TREASURY STOCK ( 1,000 X 10 10,000
PAID IN CAPITAL IN EXCESS OF PAR( 1000/10000 X 50,00 6,000
CASH 1,000 X 16 16,000
2. SELL 200 AT 20.00 PER SHARE
CASH 4,000
TREASURY STOCK ( 200 X 10 ) 2,000
PAID IN CAPITAL TREAS. STOCK 2,000
3. SELL 500 AT 14.00
CASH 7,000
TREASURY STOCK 5,000
PAID IN CAPITAL TREA.STOCK 2,000
4. RETIRED THE REMAINING 300
CAPITAL STOCK 3,000
TREASURY STOCK 3,000
+=================================================================
EXERCISES: 1
the stockholder equity as of dec. 1995 is shown below
common stock , 15.00 par , 240,000 shares outstanding 3,600,000
paid in capital in excess of par 480,000
retained earnings 900,000
Jan 1996, reacquired 15,000 shares at 16.00.
these treasury stocks were disposed as ff:
JUly 1, sold, 5,000 at 20.00
aug 1 sold 7,000 at 14.00
sept retired 1,000.
required : using cost method. prepare entries
prepare stockholders equity dec. 1996, with retained earnings 1,005,000 before treasury stocks transaction..
USING PAR VALUE METHOD ., prepare the same
======================================================================
ENTRIES IF COST METHOD
1. TREASURY STOCK 240,000
CASH 240,000
2. CASH 100,000
TREASURY STOCKS 80,000
PAID IN CAPITAL TREA. STOCK 20,000
3. CASH 98,000
PAID IN CAPITAL 14,000
TREASURY 112,000
4. CAPITAL 15,000
PAID IN CAPITAL 1,000
TREASURY STOCK 16,000
COMMON 240,000 , 15 PAR VALUE ?
PAID IN CAPITAL ?
TOTAL ?
RETAINED EARNINGS ?
less: TREASURY STOCKS ?
TOTAL STOCKHOLDERS EQUITY
=================================================================
EXPLANATIONS
1.. IN COST METHOD, YOU RECORD THE REACQUISITION BASED ON WHATEVER PRICE IT IS PAID.
2. WHEY IT IS TOTALLY SOLD AT ONE TIME, SAY AT BELOW THE REACQUISITION COST , CHARGE THE DIFFERENCE TO TWO ACCOUNTS : ONE DEBIT TO PAID IN CAPITAL TO THE EXTENT OF RATIO OF THE SOLD QTY OVER THE TOTAL SHARES OUTSTANDING , THE RESULTING RATIO X THE EXISTING PAID IN CAPITAL, THE BALANCE DEBIT TO RETAINED EARNINGS.
CASH
PAID IN CAPITAL
RETAINED EARNINGS
TREASURY
3. HOWEVER IF SOLD AT ONE TIME SAY ABOVE COST, THEN CREDIT THE DIFFERENCE TO PAID IN CAPITAL.
CASH
TREASURY
PAID IN CAP
4. IF NO. 2 AND 3 DID NOT HAPPEN, BUT IN NO. 2, PARTIAL OF THE TREASURY STOCKS WAS SOLD ABOVE ACQUISITION COST THEN, THE SAME ENTRY MADE IN NO. 3
5. IF SUBSEQUENT TO THE SALES ABOVE ACQUISITION , A SALE WAS MADE AT BELOW COST , THEN THE FF: IS THE ENTRY AND THE AMOUNT TO BE USED.
CASH.
PAID IN CAPITAL ( the amount will be to extent of the credit made in no. 3., the balance goes or absorb by the retained earnings.
RETAINED EARNINGS
TREASURY
6. the remaining treasury stocks if sold in whole , at below cost, then the debit amount for the paid in capital will ( remaining shares/ outstanding x paid in capital original.)
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
IF USING PAR VALUE METHOD, THESE ARE THE ENTRIES.
1. TREASURY STOCK 225,000
? ? 15,000/275,000 X 480,000
RETAINED EARNINGS ?
CASH 240,000
2. CASH 100,000
TREASURY 75,000
? 25,000
3. CASH 98,000
? 7,000
TREASURY STOCKS 105,000
4. CAPITAL STOCK 15,000
TREASURY STOCKS 15,000
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
EXPLANATIONS: FOR USING PAR VALUE:
1. IN USING PAR VALUE YOU DEBIT OR CREDIT THE TREASURY STOCK ACCOUNT USING PAR VALUE AND NOT THE MARKET PRICE .
2.. WHEN THE TREASURY STOCK IS SOLD AT BELOW PAR VALUE , IT IS DEBITED TO PAID IN CAPITAL , BUT ITS AMOUNT IS NOT DEPENDING ON THE PREVIOUS SALES WHERE THERE IS A CREDIT TO PAID IN CAPITAL THAT IS IT WAS SOLD AT ABOVE COST , UNLIKE IN COST METHOD.
EXERCISE 3.
Bantex company stockholders equity 1996 are given below
1. issued 30,000 shares of 9% preferred stoc, 20 par , and was subscribed at 26
2. issued 50,000 shares of 30 par at 33
3. reacquired and retired 4,000 shares of preferred stock at 28
4. reacquired 6000 shares of common at 35
5. sold 1,000 shares of treasury at 37.
using cost method , prepare entry
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