Accounting Principles: Revenue Recognition, Bad Debt, Returns, LIFO, Warranty, Depreciation, and Bonds
Assets | = | Liab. | + | Stockholders’ Equity | I/S Caption | ||
On November 7th, 2019, I buy a ticket to run a race for $200 and run the race – revenue recognition | |||||||
200 (Cash) | = | + | 200 (Ret. Earn) | Revenue | |||
Defer all revenue at the time of sale | |||||||
1000 | = | 1000 Def Rev | + | ||||
Recognize some as time passes (e.g., 10%) | |||||||
= | -100 Def Rev | + | 100 Ret. Earnings | Revenue | |||
Kroger sells a $1000 gift card on January 1, 2020. Historically, 90% of gift cards are redeemed, and 10% are unused. $600 is redeemed in 2020, $300 in 2021, and none thereafter; $900 total redemption; $100 breakage | |||||||
2020 | +1000 Cash | = | 1000 Def Rev | + | |||
= | -600 | + | +600 Ret. Earnings | Revenue | |||
= | -67 | + | +67 Ret. Earnings 100$ total breakage * 2020 redemptions/total expected redemptions = 100$ * (300/900)=33 | Breakage rev | |||
2021 | = | -300 Def Rev | + | + Ret. Earnings | |||
= | -33 | + | +33 Ret. Earnings | Breakage rev | |||
A jacket costs Spartan $50 to make and sells for $200 and is sent immediately on receipt of payment. Also, a season package retails for $750. A special package retails for $800. | |||||||
800 Cash -50 Inventory | = | 632 Unearn. Rev | + | 168 Ret. Earnings -50 | Merch. Revenue COGS | ||
On August 31, 2020, Apollo has revenue of $1 billion in Q4 and estimates 4% as uncollectible – bad debt expense. On September 30, 2020, Apollo accountants estimate that accounts of $30 million will never be paid. Write-off. | |||||||
8/31/20 8/31/20 9/30/20 | +1b A/R -30m A/R | = | +40 (-Bad debt expense) -30m (Bad debt expense) | + | 1b (Ret. Earn.) -40 (Ret. Earn.) | Revenue | |
Amazon sells $150,000 in goods in January, with a COGS of approximately 40%. Amazon expects 15% of these sales to be returned. | |||||||
+150k Cash -60k Inventory +9k Exp. Inv. Returns | = | +22.5k Returns liability | + | +150k Retained earnings -60k Retained earnings -22.5k Retained earnings +9k Retained earnings | Revenue COGS Returns COGS | ||
The sales period ends, and Amazon sees that 10% of the sales were returned. No other January sales can be returned.*** | |||||||
-15k Cash +6k Inventory -6k Exp. Inv. Returns -3k Inventory** | = | -15k Returns liability -6k Returns reserve 7.5k Returns liability | + | +7.5k Retained earnings | Revenue COGS** | ||
LIFO Reserve = Ending Inventory FIFO – Ending Inventory LIFO; difference between current cost and LIFO inventory value: LIFO Reserve LIFO INVENTORY = FIFO INVENTORY – LIFO RESERVE; FIFO is generally higher; Change in LIFO Reserve = COGSLIFO – COGSFIFO; COGSFIFO = COGSLIFO – Change in LIFO Reserve (Change = FY-PY); Cumulative tax saving using LIFO: LIFO reserve * tax rate | |||||||
Warranty: Cuisinart sells merchandise for $200,000 cash on December 31, 2022. Merchandise includes a 1-year warranty against manufacturing defects as part of the selling price of the product. Based on historical experience, Cuisinart estimates warranty costs will be 0.5% of sales. Assume that in 2023, the company incurs $1,100 of actual warranty costs (replacement parts, labor, etc.) | |||||||
Sale time 2023 | +200k Cash -1100 Cash | = | + 1000 Warranty liab. -1000 Warranty liab. | + | +200k Retained earnings -1000 Retained earnings -100 Retained earnings | Revenue Warranty expense Warranty expense | |
Cuisinart sells merchandise for $10,000 cash on December 31, 2022, and ten extended warranties for $50 per product for one year, beginning on December 31, 2022. Cuisinart incurred costs of $200 related to servicing the warranties in 2023. | |||||||
2022 1 year l. | +10k Cash +500 Cash -200 Cash | = | +500 Deferred revenue -500 Deferred revenue | + | +10k Retained Earnings -200 Retained earnings +300 Retained earnings | Warranty expense Revenue | |
Depreciation charge per year = (Acquisition cost – Salvage value) / useful life. Hertz buys a car on January 1, 2006, for $20,000 cash. Useful life is 5 years, and the salvage value will be $5,000. How would Hertz account for the purchase and the depreciation expense transactions? | |||||||
Jan 2006 Jan 2007 Jan 2008 | -20k cash; +20k PPE +3000 (-Acc. Depr) +3000 (-Acc. Dep) | = | + | -3000 Retained earnings -3000 Retained earnings | Depreciation expense Depreciation expense | ||
Suppose Hertz sells the car (after recording depreciation expense) on January 1, 2011, for $7,000? How would you account for that transaction? | |||||||
12/31/10 | +7000 Cash -20k PPE +15k -(Acc. Dep) | = | + | +2k Retained earnings | Gain on sale | ||
On January 1, 2007, one year after purchasing, Hertz decides to keep the car an extra year (i.e., until December 31, 2011); changing useful life to 6 years. How much is left to be depreciated? 20k-5k-3k=12k; What is remaining useful life? (5-1)+1=5 yrs; What is new annual dep? 12k/5yrs=2.4k | |||||||
Book value vs market value: Intangible assets – Intellectual Property, Brand Value, Human Capital, Customer loyalty, Growth opportunities R&D expense are expensed – not capitalized, besides certain software development things. BUT: Once technological feasibility has occurred, costs are capitalized and expensed over the useful life of the software; internally developed: expensed; externally developed: capitalized Microsoft capitalized $100,000 software development cost on January 1, 2020. Software useful life is 5 years and 0 salvage. How does Microsoft record amortization expense on December 31, 2020? Straight line method amortization cost: Cost-Salvage / Useful life. Yearly amort. expense: 20k | |||||||
12/31/20 | Software -(Acc. Amort.) +20k | = | + | -20k Retained earnings | Amortization expense | ||
| If the software is capitalized with a 2-year useful life, how much is on the balance sheet at the end of 1999? • Amounts capitalized during 1999: $1,782 • 50% of capitalized cost from 1998: $1,561 / 2 = $781 • Total: $1,782+ $781 = $2,563 | ||||||
Annuity: PV = Annual Cash Flow x [1-(1+r)-t]/r (Cash flow received every year); par value is stated or face value of bond Interest expense: Market rate at issuance * net bond payable; Interest payable: coupon rate * par amount Bond issued on January 1, 2022. Proceeds $10,000. Market interest rate 6%; final payment is to be made at the end of the third year (December 31, 2024). Par value = $10,000, Coupon rate is 6%. Interest payments at the end of each year and repayment of principal is at the end of the third year | |||||||
12/31/20 | Software -(Acc. Amort.) +20k | = | + | -20k Retained earnings | Amortization expense | ||
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