$100,000 Eag5. Eagle plans to purchase non-interest bearing investment securities once during the first year (e.g., common stock of other companies)

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1 Input Data For Eagle's Pro-Forma First-Year Accounting Entries Pro-forma Model: This Excel model provides pro-forma first-year financial statements, meaning statements that are estimated for planning purposes prior to the start of the first year. Start-up companies such as Eagle often include monthly, quarterly, and annual pro-forma statements in their business plans and Eagle plans to prepare such statements. However, this Excel model reports annual statements only. The pro-forma record-keeping entries that are used to create these annual statements are based on the financial measures below. The Annual Entries Aggregate Structurally Identical Planned Entries: Starting with Eag7, most of the pro-forma entries below aggregate several first-year entries that are expected to be recorded separately during the year. For example, there is a single entry below for planned first-year customer collections. When Eagle commences operations, it will record separate entries for actual customer collections and other events as they occur throughout the year, and make adjusting entries at the end of each reporting period (month, quarter, and year). The aggregate entries below are structurally identical to the separate entries Eagle will record during the year in that the same accounts are affected and the direction of these effects (whether the accounts increase or decrease) are the same. The notes in the center panels below will help you relate the annual pro-forma entries to those that will actually be recorded during the year. Eag1-6 are start-up events that are expected to occur when Eagle incorporates on the first day of year 1. Eag1 Issue $1 par value common stock in exchange for cash. shares issued received Eag2 Eag3 Eag4 Eagle plans to issue stock for cash once during the first year. Issue $1 par value common stock in exchange for product 1's patent. Eagle plans to issue stock for a patent once during the first year. Issue a note (short-term debt) to a bank in exchange for cash. Eagle plans to issue short-term debt once during the first year. Purchase production equipment for cash. 3,000 $1,500,000 shares issued patent value 2,000 $1,000,000 debt principal $70,000 Eagle plans to purchase PP&E with cash once during the first year. $100,000 Eag5 Purchase non-production equipment with a 10% down payment and the remainder long-term debt. debt principal downpayment Eag6 Eagle plans to purchase PP&E with debt financing once during the first year. Purchased marketable securities classified as short-term investments. Eagle plans to purchase non-interest bearing investment securities once during the first year (e.g., common stock of other companies) $540,000 $60,000 $800,000 Navigating Accounting Page 1 of 5 NavAcc LLC G. Peter & Carolyn R. Wilson

2 Eag7 Eag8 Eag9 Eag10 Eag11 Eag12 PP&E (production) depreciation charged to work-in-process Eag7-12 pertain to production. Eagle produces a single product. Purchase materials on account (when invoiced) Eag7 aggregates separate purchase entries that Eagle expects to record throughout the year as purchases occur. Transfer raw materials to work in process Eag8 aggregates the daily first-year entries Eagle expects to record as materials are used for production. Acquire other production inputs on account (when invoiced) Eag9 aggregates entries Eagle expects to record throughout the year as it acquires other production inputs besides materials. Eag10 aggregates month-end adjusting entries Eagle will record for depreciation and amortization. The depreciation pertains to production equipment and the amortization relates to the patent for Eagle's only product. Payments on accounts payable. Eag11 aggregates entries Eagle will record throughout the year when it pays for production inputs. Transfer from WIP to finished goods inventory (FGI). Eag12 aggregates entries Eagle will record throughout the year as goods complete the production process and are transferred to storage. cost $170,000 transfers $125,000 cost $180,000 PP&E patent $72,000 $120,000 $150,000 transferred $250,000 Navigating Accounting Page 2 of 5 NavAcc LLC G. Peter & Carolyn R. Wilson

3 Eag13 Eag13-14 could be combined into a single entry since they pertain to the same event: shipping goods to customers. Customers are billed for the products delivered to customers. (Eagle meets the revenue recognition criteria at the point of sale.) billings Eag14 Eag15 Eag16 Eag17 Eag18 Eag19 Eag13 aggregates entries Eagle will record throughout the year as goods are shipped to customers. Inventoried costs associated with goods delivered to customers. Eag14 aggregates entries that Eagle will record throughout the year as goods are shipped to customers. Accrue royalties on product delivered to customers. Eag 15 aggregates entries that Eagle will record throughout the year as goods are shipped to customers. Eagle licenses a product feature from from a third party and is obligated to pay a royalty whenever it ships product to customers. The third party has agreed that Eagle can defer royalty payments until year 2. Prepay insurance (non production). Eag16 aggregates entries Eagle will record throughout the year when it prepays insurance for the following period. PP&E (non-production) depreciation on equipment NP1 recognized in SG&A. (excludes capitalized leases) Eag17 aggregates month-end adjusting entries Eagle will record to match a portion of the historical cost of its nonproduction PP&E to the monthly revenues this PP&E helps generate. Thus, the monthly usage of PP&E is the economic event that will be recognized by these month-end adjusting entries. Insurance used (pre in Eag16) Eag18 aggregates month-end adjusting entries Eagle will record to match a portion of the cost of insurance pre in Eag16 to the current period's the insurance benefits. Thus, the monthly usage of insurance is the economic event that will be recognized by these month-end adjusting entries. Customer collections Eag19 aggregates entries that Eagle will record throughout the year as it collects cash from customers for sales recorded in Eag13. $500,000 costs $115,000 royalties $77,000 $24,000 depreciation $24,000 insurance used $18,000 received $280,000 Navigating Accounting Page 3 of 5 NavAcc LLC G. Peter & Carolyn R. Wilson

4 Eag20 Accrued interest on short-term and long-term debt Eag21 Eag22 Eag23 Eag20 aggregates month-end adjusting entries that Eagle will record to recognize the monthly interest associated with the debt recorded in Eag3 and 5. The benefits of having debt financing is the economic event that is recognized by the monthend adjusting entries summarized in Eag20. Preview of other debt entries: The interest (and principal) associated with the long-term debt issued in Eag5 will be the first day of the month after the interest is accrued. For example, the first payment will be on the first day of month 2 and this will be the interest accrued on the last day of month 1. Thus, interest will be accrued 12 times and 11 times during the first year. The aggregate effect of the eleven payments will be recorded in Eag22. For the short-term debt issued in Eag3, the total interest accrued at the end of the 12 months in Eag20 (and a portion of the outstanding principal) will be on the last day of the year (see Eag25). The monthly interest is the cost of this benefit. Transfers to current portion of long-term debt (including first-year payments in Eag22 and planned second year payments). Eag21 aggregates month-end adjusting entries Eagle will record to transfer debt principal from long-term debt to the current portion of long-term debt. These entries will insure that the debt principal due within the next year is classified as a current liability at the end of each month. For example, at the end of the first month, the cumulative principal that will be on the first day of months 2-13 is transferred and at the end of the second month the principal that will be on the first day of month 14 is transferred. The passage of time is the event recognized by these month-end adjustments. Payments on long-term debt secured by PP&E. Eag22 aggregates entries Eagle will record when it pays monthly interest and principal associated with the long-term debt issued in MMS 5 on the first day of each month of the first year (starting on the first day of the second month it is in business).(see the Eag20 discussion for additional details). Miscellaneous sales and general administrative (SG&A) expenses accrued. Eag23 aggregates month-end adjusting entries that Eagle will record to accrue miscellaneous expenses that will be the following month. For example, Eagle will accrue wages that employees earn during the last few days of the month that will not be nor recognized as an obligation to employees prior to the month-end adjusting entry. More generally, the events that will be recognized by these adjusting entries will be the contributions of resources by creditors during the month that will help generate the monthly revenues but will not have been recognized in the accounting system prior to the month-end adjustments. Eag23 recognizes the cumulative expense that will be accrued in the first year by such entries. Eag24 recognizes the portion of these costs that will be during the first year. accrued $53,500 transfer $92,000 principal accrued interest $48,000 $45,000 accrued $60,000 Navigating Accounting Page 4 of 5 NavAcc LLC G. Peter & Carolyn R. Wilson

5 Eag 24 Eag25 Eag26 Eag27 Payment of miscellaneous sales and general administrative (SG&A) expenses. Eag24 aggregates entries Eagle will record each month to record the payment of miscellaneous SG&A. These entries will include a portion of the previously accrued expenses recognized in Eag23 (those that will be accrued at the ends of months 1 through 11) plus other miscellaneous SG&A that will be expensed when it is. Payments on bank note (short-term debt). All interest was previously accrued in Eag20. Eag25 reflects a single event since Eagle makes one payment of short-term debt interest and principal on the last day of the year. The interest was already expensed in the 12 month-end accruals summarized in Eag20. Income tax expense recognized. Eag26 aggregates 4 quarter-ending adjusting entries Eagle will make to record the portion of the current year's estimated annual income taxes (current and deferred) that pertains to current quarter. Income taxes. Eag27 aggregates three quarterly tax payments that Eagle will make during the first year. Generally, companies make 4 quarterly income tax payments: three payments relate to the first three quarters of the current year and one relates to the 4th quarter of the prior year. Since Eagle is in its first year of operations, it only makes three payments. accrued expense during year expenses that were as they were incurred $55,000 $10,000 principal accrued interest $12,000 $3,500 current related to (increase) decrease in deferred tax assets $46,260 ($6,918) related to increase (decrease) in deferred tax liabilities $12,000 $39,321 Navigating Accounting Page 5 of 5 NavAcc LLC G. Peter & Carolyn R. Wilson