JOURNAL ENTRIES APPENDIX

Transcription

1 The Ultimate Accountants Reference: Including GAAP, IRS and SEC Regulations, Leases, and More, 3rd Edition Steven M. Bragg Copyright 2010 by John Wiley & Sons, Inc. APPENDIX B JOURNAL ENTRIES B.1 ACQUISITIONS 712 B.2 BILL AND HOLD TRANSACTIONS 714 B.3 BANK RECONCILIATION 714 B.4 CURRENT LIABILITIES 714 B.5 DEBT, CONVERTIBLE 716 B.6 DEBT EXTINGUISHMENT 718 B.7 DEBT ISSUED WITH STOCK WARRANTS 719 B.8 DEBT SECURITY TRANSFERS AMONG PORTFOLIOS 720 B.9 DIVIDENDS 721 B.10 EFFECTIVE INTEREST METHOD 723 B.11 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) 723 B.12 EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS 724 B.13 EQUITY SECURITY TRANSFERS BETWEEN AVAILABLE-FOR-SALE AND TRADING PORTFOLIOS 725 B.14 FIXED ASSETS 726 B.15 FOREIGN CURRENCY 728 B.16 INTANGIBLE ASSETS 729 B.17 INVENTORY ADJUSTMENTS 730 B.18 INVENTORY IN TRANSIT 731 B.19 INVENTORY VALUATION 732 B.20 INVESTMENTS IN DEBT SECURITIES 732 B.21 LEASES LESSEE ACCOUNTING 734 B.22 LEASES LESSOR ACCOUNTING 734 B.23 LONG-TERM CONSTRUCTION CONTRACTS 736 B.24 MARKETABLE EQUITY SECURITIES 737 B.25 NOTES AND BONDS 738 B.26 OPTIONS 740 B.27 PENSIONS 741 B.28 RECEIVABLES 742 B.29 REVENUE RECOGNITION WHEN RIGHT OF RETURN EXISTS 744 B.30 REVENUE, INSTALLMENT 744 B.31 REVENUE, SERVICE 745 B.32 SALE-LEASEBACK TRANSACTIONS 746 B.33 STOCK 746 B.34 STOCK APPRECIATION RIGHTS (SAR) 748 B.35 STOCK SUBSCRIPTIONS 749 B.36 TAXES 749 B.37 TREASURY STOCK 750 B.38 WARRANTS 752 This appendix contains a comprehensive list of every journal entry that an accountant is likely to deal with. The entries are listed in alphabetical order, and include explanatory text. This text may be sufficient for one to copy into actual journal entry descriptions, with slight modifications. The text makes additional explanatory notations where necessary, but the main focus is on presenting a brief summary of each entry. The journal entries are listed under general topic headings, which are as follows: Acquisitions Bill and hold transactions 710

2 App. B Journal Entries 711 Bank reconciliation Current liabilities Debt, convertible Debt extinguishment Debt issued with stock warrants Debt security transfers among portfolios Dividends Effective interest method Employee stock ownership plan (ESOP) Equity method of accounting for investments Equity security transfers between available-for-sale and trading portfolios Fixed assets Foreign currency Intangible assets Inventory adjustments Inventory in transit Inventory valuation Investments in debt securities Leases lessee accounting Leases lessor accounting Long-term construction contracts Marketable equity securities Notes and bonds Options Pensions Receivables Revenue recognition when right of return exists Revenue, installment Revenue, service Sale-leaseback transactions Stock Stock appreciation rights Stock subscriptions Taxes Treasury stock Warrants A set of accounts is listed for each sample journal entry, which may vary somewhat from the titles of accounts used in one s company. If there are a wide range of possible entries to different accounts, then this is noted with an entry in brackets, such as [Salaries itemize by department]. A triple x is noted under the debit or credit heading for each entry, denoting the most likely entry that would be made. If there is a reasonable chance that either a debit or credit entry would be made, then this is noted in the description.

3 712 App. B Journal Entries There are a few instances where journal entries should be reversed in the following accounting period. When this is necessary, a warning note is attached to the bottom of the relevant journal entries. B.1 ACQUISITIONS To record an acquisition using the fair market value of assets and liabilities, with an entry to goodwill that records the difference between this total and the price paid. Accounts receivable Marketable securities (current market value) Inventory (lower of cost or market) Computer equipment (appraised value) Computer software (appraised value) Furniture & fixtures (appraised value) Manufacturing equipment (appraised value) Goodwill Accounts payable Debt (book value) Common stock Additional paid-in capital Negative Goodwill Offset To record the offsetting of negative goodwill against accounts that do not have to be carried at fair value. Since the accounts that must be carried at fair value include cash, receivables, and inventory, the primary asset left for offsetting purposes is usually fixed assets. Negative goodwill Fixed assets If there are not sufficient assets available for the complete offsetting of negative goodwill, then the remaining balance of negative goodwill is recognized as an extraordinary item, as shown next. Negative goodwill Fixed assets Extraordinary item gain on purchase Write-off of Impaired Goodwill If the fair value of a reporting unit is less than its book value, then some portion of the goodwill asset originally created as part of the acquisition of that reporting unit must be charged to expense in the current period. The entry is shown next.

4 App. B Journal Entries 713 Impaired goodwill expense Goodwill Increased Investment in Subsidiary If the acquiring entity does not initially purchase all outstanding shares of an acquiree but later purchases additional shares, then the additional payment is recorded as an increase in the investment in the subsidiary. The entry is shown next. Investment in subsidiary Spin-off of Subsidiary When a parent company spins off a subsidiary to its shareholders in which it held a majority ownership interest, it must remove the book value of the subsidiary s assets and liabilities from its books. If the net book value of the subsidiary is positive, the parent company records this as a retained earnings reduction, as shown next. Accounts payable Debt Other liabilities Retained earnings Accounts receivable Inventory Fixed assets Other assets If the net book value of the subsidiary is negative, the parent company records this as an addition to the additional paid-in capital account, as shown next. Accounts payable Debt Other liabilities Accounts receivable Inventory Fixed assets Other assets Additional paid-in capital

5 714 App. B Journal Entries B.2 BILL AND HOLD TRANSACTIONS A common problem with bill and hold transactions is that the sale is recorded, but the subtraction from inventory of the items sold is not, resulting in a sale with a 100% gross margin. To avoid this, use the second part of the following journal entry to shift the sold inventory items into a special cost of goods sold account that clearly identifies the items sold. When the items are eventually shipped to the customer, the third journal entry is used to shift the expense into the regular cost of goods sold account. By using this approach, one can monitor the Cost of Goods Sold Bill and Hold account to determine which billed inventory items have not yet been shipped. Accounts receivable Sales Cost of goods sold bill and hold Inventory Cost of goods sold Cost of goods sold bill and hold B.3 BANK RECONCILIATION To adjust the accounting records to reflect differences between the book and bank records. The cash entry is listed as a credit, on the assumption that bank-related expenses outweigh the interest income. Bank charges card charges Interest income B.4 CURRENT LIABILITIES Accrue benefits. To accrue for all employee benefit expenses incurred during the month, for which an associated payable entry has not yet been made. Medical insurance expense Dental insurance expense Disability insurance expense Life insurance expense Accrued benefits This entry should be reversed in the following accounting period. Accrue bonuses. To record an estimated bonus amount. This entry assumes that a separate bonus expense account is charged, though it is also common practice to

6 App. B Journal Entries 715 charge a salaries expense account. The accrual is reversed when the bonus is actually paid. Bonus expense Accrued salaries Accrue commissions. To accrue the estimated commission expense prior to payment. The liability is recorded in an accrued salaries account in order to conserve the number of liability accounts, but can also be recorded in a separate accrued commissions account. This entry is typically reversed in the following accounting period to offset the actual commission payment. Commission expense Accrued salaries Accrue property taxes. To accrue for the property tax liability incurred during the accounting period based on the known base of fixed assets. Property tax expense Property tax payable This entry should not be reversed in the following accounting period, since the tax payment will not normally occur in the following period, but instead only once or twice per year. The actual payment should be charged directly against the accrual account with the following entry: Property tax payable Accrue royalties. To accrue the amount of royalties due to a supplier that have been earned but are not yet due for payment. This entry is reversed when the royalty payment is made. Royalty expense Accrued royalty liability

7 716 App. B Journal Entries Accrue salaries and wages. To accrue for salaries and wages earned through the end of the accounting period, but not yet paid to employees as of the end of the accounting period. Direct labor expense [Salaries itemize by department] Payroll tax expense Accrued salaries Accrued payroll taxes This entry should be reversed in the following accounting period. Accrue vacation pay. To accrue vacation pay earned by employees, but not yet used by them, subject to the year-end maximum vacation carryforward limitation. The same entry can be used to record accrued sick time. Payroll taxes [Salaries itemize by department] Accrued vacation pay This entry should not be reversed in the following accounting period, since the vacation time may not be used in the following period. Instead, the actual vacation-related payment should be charged directly against the accrual account. Accrue warranty claims. To accrue a reserve for warranty claims when a sale is made. Warranty expense Accrued warranty liability Record customer advances. To record the liability associated with a customer advance prior to completion of services or delivery of goods to the customer. The second entry assumes that an advance is actually a deposit on the use of a company asset and will be returned once the usage period is completed. Customer advances Customer deposits B.5 DEBT, CONVERTIBLE Record conversion of convertible debt to equity, book value method. If bondholders wish to convert their bonds into company stock, the following entry is used, on the assumption that the remaining balance of the bonds represents the value of the resulting equity.

8 App. B Journal Entries 717 Bonds payable Premium on bonds payable [if premium existed] Discount on bonds payable [if discount existed] Capital stock at par value Additional paid-in capital Record conversion of convertible debt to equity, market value method. This is a less-used alternative to the preceding book value method, under which any new stock issuance is valued at the market rate. The entry includes a gain or loss to reflect the difference between the market price of the equity and the book value of the bonds being converted, with the offset to the gain or loss being recorded in the Additional paid-in capital account. Bonds payable Loss on bond conversion [if any] Premium on bonds payable [if premium existed] Gain on bond redemption [if any] Discount on bonds payable [if discount existed] Capital stock at par value Additional paid-in capital Record issuance of convertible debt with strike price already in the money. This entry is used to record the intrinsic value of the conversion feature at the time of bond issuance, which is based on the difference between the strike price and the fair market value of the stock, multiplied by the number of shares into which the debt can be converted. This intrinsic value is added to the Additional paid-in capital account. Discount on bonds payable [if applicable] Premium on bonds payable [if applicable] Bonds payable Additional paid-in capital Record issuance of convertible debt with strike price already in the money but contingent upon a future event. The calculation is the same as for the last journal entry but only after the contingent event has occurred. In the meantime, the strike price issue is ignored, as shown in the first entry. Once the contingent event has occurred, the second journal entry shows a shift in funds to the Additional paid-in capital account, with the offset to a discount account. Bonds payable Discount on bonds payable Additional paid-in capital

9 718 App. B Journal Entries Record conversion to equity with accrued but unpaid interest expense. Ifthetermsofa convertible debt agreement require bondholders to forgo any accrued interest expense at the time they convert bonds to company stock, the related journal entry should include the recognition of that expense, as well as an offset to the capital account, as noted in the following journal entry: Interest expense Long-term debt Capital, par value [various stock accounts] Capital [various stock accounts] Record conversion to equity following a sweetening of conversion feature. If a company induces its bondholders to convert their holdings to equity by subsequently improving the conversion feature of the bond agreement, it must record an expense for the difference between the consideration given to induce the conversion and the consideration originally noted in the bond agreement. The entry is as follows: Bonds payable Debt conversion expense Capital account, par value Additional paid-in capital B.6 DEBT EXTINGUISHMENT Repurchase of debt. This entry is used when a company elects to buy back issued debt ahead of its expiration date. There is usually a loss on the retirement to reflect the premium usually paid to investors to give up their bonds, while any remaining discount or premium on the debt must also be recognized at this time. Bonds payable Loss on bond retirement Premium on bonds payable [if applicable] Discount on bonds payable [if applicable] Repurchase of debt with subsequent gain in intrinsic equity value. When convertible debt is retired for which the intrinsic value of its equity component has already been recorded, the intrinsic value must be determined again at the repurchase date and removed from the Additional paid-in capital account. If the value of the equity component has risen since the initial entry, then the entry is as follows:

10 App. B Journal Entries 719 Bonds payable Additional paid-in capital Discount on bonds payable Gain on debt extinguishment Repurchase of debt with subsequent loss in intrinsic equity value. When convertible debt is retired for which the intrinsic value of its equity component has already been recorded, the intrinsic value must be determined again at the repurchase date and removed from the Additional paid-in capital account. If the value of the equity component has fallen since the initial entry, then the entry is as follows: Bonds payable Additional paid-in capital Loss on debt extinguishment Discount on bonds payable Asset transfer to eliminate debt. When a company exchanges an asset with a lender to eliminate a debt, the value of the transferred asset is first written up or down to match its book value to its fair market value, as shown in the first entry. Its fair market value, as well as any accrued and unpaid interest expense, is then netted against the remaining debt, as shown in the second entry. Both entries assume a gain on the transaction, though the entry can be reversed to record a loss. Asset account Gain on asset transfer Note payable Interest payable Asset account Gain on debt settlement B.7 DEBT ISSUED WITH STOCK WARRANTS Initial entry of bonds sale with attached warrants. The first entry is used to assign a value to the warrants attached to the sale of bonds, based on the relative values of the warrants and bonds. The entry includes a provision for any discount or premium on bonds sold. The second entry shifts funds into an expired warrants account, on the assumption that the warrants are never exercised by the holder.

11 720 App. B Journal Entries Discount on bonds payable [if applicable] Premium on bonds payable [if applicable] Bonds payable Additional paid-in capital Additional paid-in capital Additional paid-in capital expired warrants B.8 DEBT SECURITY TRANSFERS AMONG PORTFOLIOS Shift investment designation from the available-for-sale debt security portfolio to the trading debt security portfolio. Any debt security shifted from the available-for-sale portfolio to the trading portfolio must be recorded at its fair market value on the date of the transfer. The first journal entry records the recognition of a loss on the transfer date, while the second entry records a gain. Investment in debt securities held for trading Loss on debt securities Investment in debt securities available for sale Unrealized loss on debt securities available for sale Investment in debt securities held for trading Unrealized gain on debt securities available for sale Investment in debt securities available for sale Gain on holding debt securities Shift investment designation from the available-for-sale debt security portfolio to the heldto-maturity debt security portfolio. Any debt security shifted from the available-for-sale portfolio to the held-to-maturity portfolio must be recorded at its fair market value on the date of the transfer. The first journal entry records the recognition of a loss on the transfer date, while the second entry records a gain. Investment in debt securities held to maturity Loss on debt securities Investment in debt securities available for sale Unrealized loss on debt securities available for sale Investment in debt securities held to maturity Unrealized gain on debt securities available for sale Investment in debt securities available for sale Gain on holding debt securities Shift investment designation from the held-to-maturity debt security portfolio to the available-for-sale debt security portfolio. To record any accumulated gain or loss on a held-to-maturity debt security being transferred into the available-for-sale portfolio, which is recorded in other comprehensive income. The first entry records a loss on the transaction, while the second entry records a gain.

12 App. B Journal Entries 721 Investment in debt securities available for sale Unrealized loss on holding debt securities Investment in debt securities held to maturity Investment in debt securities available for sale Investment in debt securities held to maturity Unrealized gain on holding debt securities Shift investment designation from the held-to-maturity debt security portfolio to the heldfor-trading debt security portfolio. To record any accumulated gain or loss on a heldto-maturity debt security being transferred into the held-for-trading portfolio, which is recorded in earnings. The first entry records a loss on the transaction, while the second entry records a gain. There are no unrealized gains or losses to recognize, since no gains or losses are recognized for held-to-maturity debt investments. Investment in debt securities held for trading Loss on holding debt securities Investment in debt securities held to maturity Investment in debt securities held for trading Investment in debt securities held to maturity Gain on holding debt securities B.9 DIVIDENDS Dividend declaration, cash payment. To separate the sum total of all declared dividends from retained earnings once dividends have been approved by the board of directors. Retained earnings Dividends payable Dividend declaration, property dividend. To record the gain or loss on any property to be distributed as a dividend to shareholders, based on the fair value of the asset to be distributed on the date of declaration. Retained earnings [asset fair value] Loss on property disposal [if applicable] Gain on property disposal [if applicable] Dividends payable [asset net book value] Dividend payment, property dividend. To eliminate the dividend payable obligation and remove the asset being distributed from the company s records, including all related accumulated depreciation or amortization.

13 722 App. B Journal Entries Dividend payable Accumulated amortization [if needed] Accumulated depreciation [if needed] Asset Dividend declaration, small stock dividend. To record a small stock dividend, record the fair value of the issued shares on the declaration date by removing the funds from the Retained earnings account and shifting them to the Stock and Additional paid-in capital accounts. Retained earnings Stock par value Stock additional paid-in capital Dividend declaration, large stock dividend. To record a large stock dividend, record the par value of the issued shares on the declaration date by removing the funds from the Retained earnings account and shifting them to the Stock account. Retained earnings Stock par value Dividend declaration, scrip dividend. To record the creation of a note payable to shareholders instead of the usual cash dividend. Retained earnings Notes payable Dividend declaration, liquidating. To record a return of capital to investors, rather than a more traditional dividend that is theoretically based on a distribution of profits. Additional paid-in capital Dividends payable Dividend payment in cash. To issue cash payment to shareholders for dividends declared by the board of directors. The first entry shows the payment of a traditional cash dividend, while the second entry shows the payment of a scrip dividend.

14 App. B Journal Entries 723 Dividends payable Dividends payable Notes payable B.10 EFFECTIVE INTEREST METHOD Interest, imputed. To recognize the additional interest expense on a bond after it has been issued with a stated rate below the market rate (first entry), or to recognize a reduced level of interest expense on a bond after it has been issued with a stated rate higher than the market rate (second entry). Interest expense Discount on bonds payable Interest expense Premium on bonds payable B.11 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Incurrence of loan to purchase shares. To record a loan on the company books when either it or its ESOP obtains a loan with a third-party lender in order to purchase shares from the company. Notes payable Purchase of shares by ESOP from sponsoring company. To record the transfer of company shares to the ESOP entity when it purchases the shares from the company. The shares have not yet been allocated to employees. Unearned ESOP shares Common stock Payments against note payable by ESOP. To record a reduction in the note payable incurred by the ESOP or the company on its behalf. The second entry records the allocation of shares to plan participants, as triggered by the reduction in the note payable.

15 724 App. B Journal Entries Interest expense Notes payable Compensation expense Additional paid-in capital Unearned ESOP shares Dividends declared on shares held by ESOP. To record either a reduction in retained earnings (for shares allocated to employees by the ESOP) or compensation expense (for shares held by the ESOP) at the time of a dividend declaration. Retained earnings [for allocated shares in ESOP] Compensation expense [for unallocated shares in ESOP] Dividends payable B.12 EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS Investment (equity method). To record the company s cash or loan investment in another business entity. Investment in [company name] Notes payable Investment (equity method), record share of investee income. To record the company s proportional share of the income reported by [name of company in which investment was made]. The second entry records in a Deferred taxes account the amount of income taxes related to the investor s share of investee income. Investment in [company name] Income from equity share in investment Income tax expense Deferred tax liability Investment (equity method), record dividends from investee. To reduce the amount of the original investment by the cash value of dividends received. In the second entry, we assume that deferred income tax was already recognized when the investor recorded a share of investee income, and now shift the portion of the deferred taxes related to dividends received to the Taxes payable account.

16 App. B Journal Entries 725 Investment in [company name] Deferred tax liability Taxes payable Investment (equity method), record periodic amortization of incremental increase in investee assets due to allocation of excess purchase price. To reduce the equity in the investee s income as recorded by the investor, based upon the periodic amortization of any investee assets to which value was assigned as a result of the apportionment of an investment exceeding the book value of the investee. Equity in [company name] income Investment in [company name] Investment (equity method), sale of investment at a gain. To record a cash payment in exchange for liquidation of an investment, including the recording of a gain on the transaction. The second entry recognizes an income tax on the investment gain above any income tax previously deferred, and also shifts any previously deferred income tax into a current Taxes payable account. Investment in [company name] Gain on sale of investment Income tax expense Deferred tax liability Taxes payable Investment (equity method), sale of investment at a loss. To record a cash payment in exchange for liquidation of an investment, including the recording of a loss on the transaction. The second entry eliminates any previously deferred income tax. Loss on sale of investment Investment in [company name] Deferred tax liability Income tax expense B.13 EQUITY SECURITY TRANSFERS BETWEEN AVAILABLE-FOR-SALE AND TRADING PORTFOLIOS Shift investment designation from a trading security to an available-for-sale security. To shift the designation of a security currently recorded as a trading security to that of an

17 726 App. B Journal Entries available-for-sale security. The journal entry includes provisions for the recognition of any gains or losses on the fair value of the securities transferred since they were last marked to market. Investments available for sale Loss on equity securities Investments held for trading Gain on equity securities Shift investment designation from an available-for-sale security to a trading security. To shift the designation of a security currently recorded as an available-for-sale security to that of a trading security, which requires the recognition of all unrealized gains or losses. The first entry assumes the recognition of unrealized losses on securities, while the second entry assumes the recognition of unrealized gains. Investments held for trading Loss on equity securities Investments available for sale Unrealized loss on available-for-sale securities Investments held for trading Unrealized gain on available-for-sale securities Investments available for sale Gain on equity securities B.14 FIXED ASSETS Depreciation. To record the depreciation incurred during the month. The amortization account is used to write off intangible assets. Depreciation, computer equipment Depreciation, computer software Depreciation, furniture & fixtures Depreciation, leasehold improvements Depreciation, manufacturing equipment Amortization expense Accum. depreciation, computer equipment Accum. depreciation, computer software Accum. depreciation, furniture & fixtures Accum. depreciation, leasehold improvements Accum. depreciation, manufacturing equipment Intangible assets Fixed asset (capitalization of interest). To capitalize interest expense associated with the construction of a qualified asset.

18 App. B Journal Entries 727 Asset account Interest expense Fixed asset (impairment of). To record the reduction in book value when an asset s fair value is less than its book value. Impairment loss Accumulated depreciation Fixed asset (retirement obligation). To record legally mandated asset retirement costs. The first entry records the initial ARO liability, while the second entry shows ongoing adjustments to the present value of the ARO liability as the termination date of the liability approaches and its present value increases. The third entry records a gradual reduction in the asset retirement liability account as actual expenses are incurred to remove an asset. The fourth entry records the final settlement of the liability; a loss will be incurred if the actual expense exceeds the amount of the initial liability, while a gain will be recorded if the reverse is true. Asset account Asset retirement obligation Accretion expense Asset retirement obligation Asset retirement obligation Accounts payable Asset retirement obligation Loss on settlement of ARO liability Gain on settlement of ARO liability Fixed asset (sale of). To record the cash received from the sale of an asset, as well as any gain or loss in its sale. This entry also eliminates all associated accumulated depreciation that has built up over the term of the company s ownership of the asset. Accumulated depreciation Loss on sale of assets [various fixed asset accounts] Gain on sale of assets Fixed asset (outbound donation). To record the donation of a company asset to a charitable organization. This entry clears the original asset and depreciation entries from the company s records, and also records a gain or loss on the transaction in relation to the asset s fair market value after being netted against the asset s net book value.

19 728 App. B Journal Entries Charitable donations Accumulated depreciation Loss on property donation Gain on property donation Asset account Fixed asset (purchase with stock). To record the acquisition of an asset with company stock. The amount of the stock paid out must be split between the Par value and Paid-in capital accounts, depending upon the predetermined par value of each share issued. Asset account Stock, par value Stock, additional paid-in capital Fixed asset (exchange for a dissimilar asset). To record the trade of a company asset for a different type of asset, including a cash payment. Any loss on this transaction is caused by the remaining net book value of the asset being relinquished being higher than its fair value, with the reverse being true for a gain. The debit to the Accumulated depreciation account is used to clear from the accounting records the accumulated depreciation associated with the asset being traded away. Asset account for new asset Accumulated depreciation Loss on asset exchange Gain on asset exchange Asset account for asset traded away Fixed asset (write-off). To record the unreimbursed disposal of an asset. This entry also eliminates all associated accumulated depreciation that has built up over the term of the company s ownership of the asset. Accumulated depreciation Loss on disposal of assets [various fixed asset accounts] B.15 FOREIGN CURRENCY Financial statement translation adjustment. To record the difference between the exchange rate at the end of the reporting period and the exchange rate applicable to individual transactions. The sample entry shows credit adjustments to several accounts, but these entries

20 App. B Journal Entries 729 could easily be debits instead, depending on changes in applicable exchange rates during the reporting period. Accumulated translation adjustments Various noncash asset accounts Net income Dividends declared Translation of foreign currency transactions. To record any changes in the spot rate of exchange at which transactions denominated in a foreign currency will be recorded at the date when financial statements are issued. The first journal entry records a loss on a decline in the spot rate on an account receivable (resulting in a reduction in the amount of the receivable in U.S. dollars), while the second entry does the same for an account payable (resulting in an increase in the payable in U.S. dollars), and the third entry does this for an outstanding loan payable (resulting in an increase in the loan payable in U.S. dollars). For gains on these transactions, the second line of each entry would be reversed, and a credit to a gain account would be substituted for the loss account. Loss on foreign exchange transaction Accounts receivable Loss on foreign exchange transaction Accounts payable Loss on foreign exchange transaction Loans payable Recognition of the sale of a foreign subsidiary. To recognize any accumulated translation gains or losses as the result of the sale or write-down of a company s investment in a foreign subsidiary. The entry can be reversed if a gain is to be recognized. Loss on sale of business entity Accumulated translation adjustments B.16 INTANGIBLE ASSETS Acquisition of intangible asset. To record the purchase of an intangible asset (shown here as a customer list). The second entry shows amortization of the intangible asset. Customer list

21 730 App. B Journal Entries Customer list amortization expense Accumulated customer list amortization Impairment of intangible asset. To record a decline in the fair value of an intangible asset (shown here as a customer list) below its net book value. Loss on impairment Customer list B.17 INVENTORY ADJUSTMENTS Adjust inventory for obsolete items. To charge an ongoing expense to the cost of goods sold that increases the balance in a reserve against which obsolete inventory can be charged (first entry). The second entry charges off specific inventory items against the reserve. Cost of goods sold Obsolescence reserve Obsolescence reserve Raw materials inventory Work-in-process inventory Finished goods inventory Adjust inventory to lower of cost or market. To reduce the value of inventory to a market price that is lower than the cost at which it is recorded in the company records. Loss on inventory valuation Raw materials inventory Work-in-process inventory Finished goods inventory Adjust inventory to physical count. To adjust inventory balances, either up or down, as a result of changes in the inventory quantities that are noted during a physical count. The following entries assume that there are increases in inventory balances. If there are declines in the inventory balances, then the debits and credits are reversed. Raw materials inventory Work-in-process inventory Finished goods inventory Cost of goods sold

22 App. B Journal Entries 731 Write off abnormal scrap/spoilage. To shift unexpected, one-time scrap or spoilage costs directly to the cost of goods sold, effectively writing off this amount in the current period. Cost of goods sold Work-in-process inventory B.18 INVENTORY IN TRANSIT Record received goods. To increase inventory levels as a result of a supplier delivery. Raw materials inventory Accounts payable Move inventory to work-in-process. To shift the cost of inventory to the work-in-process category once production work begins on converting it from raw materials to finished goods. Work-in-process inventory Raw materials inventory Move inventory to finished goods. To shift the cost of completed inventory from work-inprocess inventory to finished goods inventory. Finished goods inventory Work-in-process inventory Sell inventory. To record the elimination of the inventory asset as a result of a product sale, shifting the asset to an expense and also recording the creation of an accounts receivable asset to reflect an unpaid balance from the customer on sale of the product. Cost of goods sold Finished goods inventory Accounts receivable Revenues Overhead cost pool

23 732 App. B Journal Entries B.19 INVENTORY VALUATION Record indirect expenses incurred. To add to the overhead cost pool the amount of indirect expenses related to the production process. Overhead cost pool Accounts payable Record indirect wages incurred. To add to the overhead cost pool the amount of indirect wages related to the production process. Overhead cost pool Wages payable Record receipt of supplies. To add the cost of incidental manufacturing supplies to the overhead cost pool for eventual allocation to inventory. Overhead cost pool Accounts payable Record normal scrap/spoilage. To shift the normal, expected amount of scrap or spoilage cost to the overhead cost pool, from whence it is allocated as a part of overhead to inventory. Overhead cost pool Work-in-process inventory Allocate overhead costs to inventory. To shift the amount of costs built up in the overhead cost pool to the work-in-process and finished goods inventory categories, as well as to the cost of goods sold for any inventory sold during the period. Cost of goods sold Work-in-process inventory Finished goods inventory B.20 INVESTMENTS IN DEBT SECURITIES Initial investment designated as held for trading. To record an investment in debt securities that management intends to trade for a profit in the short term.

24 App. B Journal Entries 733 Investment in debt securities held for trading Initial investment designated as available-for-sale. To record an investment in debt securities that management intends to hold as a long-term investment. Investment in debt securities available-for-sale Initial investment designated as held-to-maturity. To record an investment in debt securities that management has the intent and ability to hold to the debt maturity date. Investment in debt securities held-to-maturity Gain or loss on debt investment designated as held for trading. The first journal entry records the immediate recognition in the current period of a loss due to a drop in the value of a debt investment designated as a trading security. The second journal entry records the immediate recognition of a gain due to an increase in the value of a debt investment designated as a trading security. Loss on debt security investment Investment in debt securities held for trading Investment in debt securities held for trading Gain on debt securities held for trading Gain or loss on debt investment designated as available for sale. The first journal entry records the immediate recognition in the current period of a loss due to a drop in the value of a debt investment designated as an available-for-sale security, which is reported in the Other Comprehensive Income section of the income statement. The second journal entry records the immediate recognition of a gain due to an increase in the value of a debt investment designated as an available-for-sale security. Unrealized loss on debt security investment Deferred tax benefit Investment in debt securities available-for-sale Investment in debt securities available-for-sale Unrealized gain on debt security investment Deferred tax liability

25 734 App. B Journal Entries Impairment in value of debt investments classified as held to maturity. To record a loss on a held-to-maturity debt investment, which only occurs when management considers a drop in value to be permanent in nature. Loss on debt investment Investment in debt securities held-to-maturity B.21 LEASES LESSEE ACCOUNTING Lease, capital (initial record by lessee). To record the initial capitalization of a lease, including imputed interest that is associated with the transaction and both the short-term and long-term portions of the associated account payable. A second entry records the interest expense associated with each periodic payment on the capital lease. A third entry records the depreciation expense associated with the capital lease in each accounting period. Capital leases Unamortized discount on notes payable Short-term liabilities Long-term liabilities Interest expense Unamortized discount on notes payable Depreciation expense Accumulated depreciation capital leases B.22 LEASES LESSOR ACCOUNTING Initial lease record by lessor (sales-type lease). To record the initial lease transaction by the lessor, including the recognition of a sale, recording of an unearned interest liability, incurrence of a liability for any initial direct costs, and the transfer of the leased asset out of inventory. Lease receivable Cost of goods sold Sales Inventory Accounts payable [any initial direct costs] Unearned interest Receipt of cash payments by lessor (sales-type lease). To record the receipt of cash and the offsetting reduction in the lease receivable when periodic lease payments are made by the lessee to the lessor.

26 App. B Journal Entries 735 Lease receivable Recording of periodic interest revenue by lessor (sales-type lease). To periodically record earned interest by shifting interest from the Unearned interest account into the Interest revenue account. Unearned interest Interest revenue Return of asset to lessor at end of lease (sales-type lease). To record the receipt of a leased asset back into inventory upon its return by a lessee who has completed a lease term. Inventory Lease receivable Initial lease record by lessor (direct financing lease). To record the initial lease transaction by the lessor, including the recording of an unearned interest liability, the incurrence of a liability for any initial direct costs, and the transfer of the leased asset out of inventory. Lease receivable Initial direct costs Asset [specify account] Unearned interest Receipt of cash payments by lessor (direct financing lease). To record the receipt of cash and the offsetting reduction in the lease receivable when periodic lease payments are made by the lessee to the lessor. Lease receivable Recording of periodic interest revenue by lessor (direct financing lease). To periodically record earned interest by shifting interest from the Unearned interest account into the Interest revenue account, with a portion of the unearned interest being allocated to an offset of initial direct costs.

27 736 App. B Journal Entries Unearned interest Interest revenue Initial direct costs Return of asset to lessor at end of lease (direct financing lease). To record the receipt of a leased asset upon its return by a lessee who has completed a lease term. Asset [specify account] Lease receivable B.23 LONG-TERM CONSTRUCTION CONTRACTS Record additional revenues under percentage of completion method. To record the amount of extra revenues thus far not recognized, comprising the difference between project expenses and the estimated gross profit margin, less prior billings. The second entry is the recording of a proportional amount of offsetting cost of goods sold, so that the principle of matching revenues to expenses is observed. Unbilled contract receivables Contract revenues earned Cost of recognized revenues Construction in progress Record excessive billings under percentage of completion method in a liability account.to record the amount of excess billings over the amount of project expenses and the estimated gross profit margin in a liability account. Contract revenues earned Billings exceeding project costs and margin Record amount of costs exceeding the total project billing. To record the estimated amount of expenses incurred on a project that will exceed the total billable amount of the contract. This is a loss recognizable in the current period. Loss on uncompleted project Estimated loss on uncompleted contract

28 App. B Journal Entries 737 B.24 MARKETABLE EQUITY SECURITIES Initial investment designated as held for trading. To record an investment that management intends to trade for a profit in the short term. Investment in equity securities held for trading Initial investment designated as available for sale. To record an investment that management intends to hold as a long-term investment. Investment in equity securities available for sale Gain or loss on investment designated as held for trading. The first entry shows the immediate recognition in the current period of a loss due to a drop in the value of an investment designated as a trading security, as well as the related tax effect. The second entry shows the immediate recognition in the current period of a gain due to an increase in the value of an investment designated as a trading security, as well as the related tax effect. Loss on equity security investment Deferred tax benefit Investment in equity securities held for trading Provision for income taxes Investment in equity securities held for trading Provision for income taxes Gain on equity security investments Deferred tax liability Gain or loss on investment designated as available for sale. The first entry shows an unrealized loss in the Other comprehensive income account on an investment designated as available for sale, as well as the related tax effect. The second entry shows an unrealized gain in the Other comprehensive income account on an investment designated as available for sale, as well as the related tax effect. In both cases, the tax effect is netted against the Investment account, rather than a Provision for income taxes account. Unrealized loss on equity security investment Deferred tax benefit Investment in equity securities available for sale Investment in equity securities available for sale Unrealized gain on equity security investment Deferred tax liability

29 738 App. B Journal Entries Impairment in value of equity investments classified as available for sale. When a drop in the value of an available-for-sale investment is judged to be other than temporary, the first journal entry should be used to recognize the drop in value. The entry includes the initial recognition of a related income tax benefit on the transaction. If one had previously recognized an income tax benefit associated with the loss but prior to its classification as a permanent decline in value, the offset to the deferred tax benefit would have been the investment account itself. If so, one should shift the offset from the investment account to an income tax liability account, as shown in the second journal entry. Loss on equity securities Deferred tax benefit Unrealized loss on available-for-sale securities Provision for income taxes Loss on equity securities Unrealized loss on available-for-sale securities Provision for income taxes B.25 NOTES AND BONDS Sale of bonds at a discount. The first entry is made when bonds are sold at a discount from their face value, thereby increasing the effective interest rate. The second entry is made periodically to gradually reduce the discount, charging the offsetting debit to the interest expense account. Discount on bonds payable Bonds payable Interest expense Discount on bonds payable Sale of bonds at a premium. The first entry is made when bonds are sold at a premium from their face value, thereby reducing the effective interest rate. The second entry is made periodically to gradually reduce the premium, charging the offsetting credit to the interest expense account. Premium on bonds payable Bonds payable Premium on bonds payable Interest expense Sale of debt issued with no stated interest rate. When there is no stated interest rate on a debt instrument, one must record the present value of the note using the market rate of interest at the time of the issuance. The first entry shows the initial recording of the debt sale, while the second entry shows the periodic reduction in interest expense payable.

30 App. B Journal Entries 739 Discount on note payable Note payable Interest expense Discount on note payable Issuance of debt for cash and other rights. When debt is issued in exchange for cash and some other form of consideration, the difference between the present value and face value of the debt is recorded as unearned consideration, to be recognized as the consideration is earned by the issuer. The first entry shows the initial recording of such a transaction, while the second entry shows the gradual reduction in unearned revenue. Discount on note payable Note payable Unearned revenue Unearned revenue Revenue Capitalization of debt issuance costs. Costs associated with the issuance of debt should be capitalized when the related debt is issued, as noted in the first journal entry. This amount should be ratably recognized over the term of the debt on a straight-line basis, as is shown in the second journal entry. Bond issuance costs Bond issuance expense Bond issuance costs Notes issued for property. When a company issues debt in exchange for property, it discounts the note at either the stated interest rate on the debt or at the market rate (if the stated rate is not considered to be a fair rate). In either case, the value of the property acquired shall be debited, usually along with a discount on the note payable. The first entry shows this initial transaction, while the second entry shows the periodic reduction in the discount and corresponding recognition of interest expense. Property [various accounts] Discount on note payable Note payable Interest expense Discount on note payable

31 740 App. B Journal Entries B.26 OPTIONS Options issued with strike price below the market price. If stock options are issued at a strike price that is already below the market price on the date of issuance, then the difference between the two prices must be immediately recognized as deferred compensation. The entry is as follows: Deferred compensation expense Options additional paid-in capital Options earned over time. Options are typically earned over time as services are performed for a company or vesting periods are completed. The periodic entry to recognize the Deferred compensation expense account is as follows: Compensation expense Deferred compensation expense Options used to purchase shares. When an option holder exercises the option to purchase shares, the journal entry is identical to the simple purchase of shares without the presence of an option. This transaction is shown in the first entry. However, if some deferred compensation was recognized at the time of the initial stock grant, then the Options additional paid-in capital account is reversed as part of the entry. This transaction is shown in the second journal entry. Common stock par value Common stock additional paid-in capital Options additional paid-in capital Common stock par value Common stock additional paid-in capital Options lapsed (SFAS 123 approach). If an option holder elects to let a fully vested option lapse, the following entry does not reverse the associated compensation expense (as is the case under APB 25), but rather shifts the related equity into a different account. Options additional paid-in capital Capital unexercised options Options purchased by the company (SFAS 123 approach). To recognize any compensation expense associated with unvested shares that are being purchased by a company, to the extent that the price paid is higher than the value of the options as measured under the fair