Input Data For MMS'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 MMS often include monthly, quarterly, and annual pro-forma statements in their business plans and the Computations sheet in this Excel model derives the monthly estimates that would be used for such statements. However, this Excel model reports annual statements only. The pro-forma record-keeping entries that are used to create these statements are based on the annual financial measures below, which aggregate monthly data from the Computation sheet (as discussed next). The Annual Entries Aggregate Structurally Identical Planned Entries: Starting with MMS 8, 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 MMS 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). Most of the aggregate entries below are structurally identical to the separate entries MMS 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. For a few situations, the accounts are the same for the aggregate and separate entries but the direction of the effects can differ. The notes in the center panels below indicate these exceptions and, more generally, will help you relate the annual proforma entries to those that will actually be recorded during the year. MMS1 MMS 1-7 are start-up events that are expected to occur when MMS incorporates on the first day of year 1. Issue $1 par value common stock in exchange for cash. Shares issued Cash received MMS2 MMS3 MMS4 MMS5 MMS6 MMS7 MMS plans to issue stock for cash once during the first year. Issue $1 par value common stock in exchange for product 1's patent. MMS 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. MMS plans to issue short-term debt once during the first year. Purchase production equipment (types P1 and P2) for cash. MMS plans to purchase PP&E with cash once during the first year. Purchase non-production equipment (type NP1) with a 10% down payment and the remainder long-term debt. MMS plans to purchase PP&E with debt financing once during the first year. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 5A: Recognize the down payment. (2) 5B: Recognize the debt principal. Sign a computer lease and classify it as a capital lease. The computers will not be used for production. MMS plans to initiate a single capital lease during the first year. Purchased marketable securities classified as short-term investments. MMS plans to purchase investment securities once during the first year. 2,500 $1,250,000 Shares issued Patent value 6,000 $3,000,000 Debt principal 40,000 Paid $500,000 Debt principal borrowed Down payment $450,000 $50,000 Present value at lease initiation $47,365 Paid $850,000 Navigating Accounting Page 1 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS 8-18 pertain to production and inventory valuation. MMS plans to begin production during the first month it is in business. MMS8 MMS9 Purchase materials on account (price variances are recorded to VarsDir). MMS8 aggregates separate purchase entries that MMS expects to record throughout the year as purchases occur. MMS will record the purchases to a material inventories account at standard cost and record the related variances to a temporary variance account (VarsDir). The separate purchase entries will be structurally identical to the MMS8 entry except that VarsDir will increases (decreases) when the actual costs are more (less) than the standard costs. Transfer raw materials to work in process (quantity variances are recorded in VarsDir). MMS9 aggregates the daily first-year entries MMS expects to record as materials are used for production. MMS will track the actual and standard quantities of materials used daily and their standard costs. The daily entries will record the material costs transferred to work in process at standard costs and quantities and record the related variances to VarsDir. The daily entries will be structurally identical to the MMS9 entry except that VarsDir will increases (decreases) when the actual costs are more (less) than the standard costs. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 9A: Recognize the materials used to produce product 1. (2) 9B:Recognize the materials used to produce product 2. Standard cost Actual cost $49,698 $49,345 Product 1: standard cost of standard quantity Product 1: standard cost of actual quantity $17,250 $18,188 Product 2: standard cost of standard quantity Product 2: standard cost of actual quantity MMS10 Manufacturing: direct labor purchased on account (labor variances are recorded in VarsDir). MMS10 aggregates the daily first-year entries MMS expects to record as employees whose efforts can be traced directly to specific products (direct labor) earn wages. MMS will record daily direct-labor costs to work in process at standard costs and related variances to VarsDir. They will also record the actual wages employees have earned to accounts payable (companies generally record such obligations to wages payable). MMS16 records the payments of these wages (and other obligations recorded in accounts payable).the daily entries will be structurally identical to the MMS10 entry except that VarsDir will increases (decreases) when the actual costs are more (less) than the standard costs. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 10A: Recognize the direct labor costs incurred to produce product 1. (2) 10B: Recognize the direct labor costs incurred to produce product 2. $23,550 $23,228 Product 1: standard cost Product 1: actual cost $52,000 $56,500 Product 2: standard cost Product 2: actual cost $20,700 $22,425 Navigating Accounting Page 2 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS11 Manufacturing: overhead purchased on account. MMS 11 aggregates entries MMS expects to record throughout the year as it acquires production inputs that can not be traced precisely to specific products (e.g., utilities, building rentals, supervisory salaries). MMS records the cost of all overhead resources to accounts payable. In practice, companies generally record overhead to accounts payable during the reporting period (or to subsidiary accounts such as wages payable) but they also record additional overhead at the end of the reporting period to accrued liablities (or to subsidiary accounts such as accrued wages). Preview of other overhead entries: MMS's two overhead pools (OvhA and OvhB) are temporary inventory accounts that will start and end each month with zero balances. These accounts will increase when actual costs are added to them in MMS11 and 12 and decrease when standard overhead costs are "applied" to products as they are produced (in MMS13 and 14). The difference between the actual costs incurred each month and the standard costs applied (the overhead variances) will be closed to cost of good sold at month end in MMS17. Pool A Pool B MMS12 PP&E (production) depreciation charged to overhead pool A & product 1 patent amortization charged directly to WIP1. $44,675 $122,150 MMS 12 aggregates month-end adjusting entries MMS will record for depreciation and amortization. The depreciation pertains to production equipment whose usage can not be traced precisely to specific products and thus this cost is assigned to overhead. The amortization relates to the patent for product 1 and thus this cost can be traced precisely to product 1 (WIP1). To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 12A: Recognize PP&E depreciation assigned to overhead. (2) 12B: Recognize patent amortization assigned to overhead. PP&E Patent MMS13 MMS14 MMS15 MMS16 Assign Pool A overhead to Products 1 and 2. MMS 13 aggregates entries that MMS will record throughout the year as products are produced. These entries will assign an overhead charge overhead Pool A to products at standard rates (per unit completed). This will leave variances in the overhead accounts (OvhA and OvhB) because actual costs were recorded into these accounts and standard costs are assigned out. These variances are removed from the overhead accounts at the end of the reporting period via MMS17. Assign Pool B overhead to Products 1 and 2. Similar to MMS 13, except costs from overhead Pool B are applied. Transfer from WIP to finished goods inventory (FGI). MMS 15 aggregates entries MMS will record throughout the year as products complete the production process and are transferred to storage. Payments on accounts payable. MMS 16 aggregates entries MMS will record throughout the year when it makes payments to vendors. $52,875 $67,500 Product 1 Product 2 $18,881 $60,394 Product 1 Product 2 $82,600 $32,900 Product 1 Product 2 $238,231 $137,544 Paid $236,076 Navigating Accounting Page 3 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS17 Transfer (close) variances to cost of good sold. MMS reports inventories at standard cost, which are presumed to approximate actual costs. To this end, MMS17 aggregates 12 month-end entries that will close the temporary variance account to cost of good sold. The month-end balances in the inventories accounts will then be either zero (VarsDir, OvhA, and OvhB) or recorded at standard cost (MatInv, Wip1, Wip2, and FGI). As a result, the amounts recognized as inventories in month-end, quarter-end, and year-end balance sheets (which will be the total amounts recorded in inventories accounts on these dates) will be recognized at standard cost. The monthly entries will be structurally identical to the MMS17 entry in that the same accounts will be affected but the direction of these effects will depend on whether the VarsDir balance is positive or negative immediately prior to these closing entries being recorded. Thus, MMS17 records the net effect of the twelve monthly variances. Pool A overhead Pool B overhead (under) over applied (under) over applied ($18,275) ($6,650) GAAP only allows companies to report inventories at standard cost for external reporting when standard costs approximate actual costs. As a result companies generally report them at actual for external reporting and at standard for internal reporting. To this end, instead of assigning all of the variances to cost of sales (as MMS does in this entry), companies assign part of the variances to inventories and part to cost of sales. The related entry ensures that both ending inventories and cost of sales are reported at actual costs. Direct favorable (unfavorable) variances MMS18 Adjust LIFO layers to reflect year-end costs. MMS 18 aggregates 4 quarter-ending adjusting entries MMS will make to insure that ending inventories are stated at LIFO. Generally, companies only make these entries when they report financial statements to the general public (e.g., these adjusting entries are generally not made for monthly internal reports). Similar to MMS17, MMS18 records the net effect of the four quarterly adjustments on the LIFO layers. ($6,487) Product 1 Layer 1 increase Product 1 Layer 2 increase $1,202 $0 To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 18A: Recognize an adjustment to Product 1's LIFO layers. (2) 18B: Recognize an adjustment to Product 2's LIFO layers. Product 2 Layer 1 increase Product 2 Layer 2 increase MMS 19-31 directly involve customers (shipments, billings, collections, product, and price-protection discounts). $455 $0 MMS19 MMS20 MMS 19-21 could be combined into a single entry since they pertain to the same event: shipping goods to customers in the stable market. Customers are billed for the products delivered to the mature stable market MMS 19 aggregates entries MMS will record throughout the year as goods are shipped to customers in the stable market (starts in month 3). Inventoried costs goods delivered to the mature stable market. MMS20 aggregates entries that MMS will record throughout the year as goods are shipped to customers in the stable market. Invoiced $477,100 Product 1 cost Product 2 cost $181,255 $79,668 Navigating Accounting Page 4 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS21 Accrue royalties on product 2 delivered to the mature stable market. MMS 21 aggregates entries that MMS will record throughout the year as Product 2 is shipped to customers in the stable market. MMS licenses the right to produce and sell Product 2 from a third party and is obligated to pay a royalty whenever Product 2 revenues are recognized. The third party has agreed that (1) MMS can defer royalty payments until year 2 and (2) the royalty obligation will be cancelled if customers return goods. Royalties $35,000 MMS 22-23 could be combined into a single entry since they pertain to the same event: shipping goods to customers in the riskier market. MMS22 MMS23 MMS24 MMS25 Customers are billed for product 2 delivered to the riskier market. Product 1 is not sold in this market. Revenues are deferred at shipment until the end of the return and price-protection period. MMS 22 aggregates entries MMS will record throughout the year as goods are shipped to customers in the riskier market (starting in month 3). Inventoried costs product 2 delivered to the riskier market. MMS segregates the inventories associated with deferred revenues. MMS23 aggregates entries that MMS will record throughout the year as goods are shipped to customers in the riskier market. Accrued Interest income on accounts receivable. MMS24 aggregates entries MMS will record throughout the year when customers' receivables become past due and thus subject to an interest penalty. Part of this interest will be collected by year end and part will remain uncollected. This entry could also be viewed as an adjusting entry (where adjustments are made when customers are billed). Customer collections. MMS 25 aggregates entries that MMS will record throughout the year as it collects cash from customers for sales recorded in MMS19. Customers who pay within 10 days of shipping (and billing) will receive an early-payment discount. MMS will have made no prior allowances for these discounts. Invoiced $71,400 Cost $34,339 Interest accrued $1,146 Cash received after discounts Discounts assigned to stable market $463,566 $1,431 To help you better understand this entry, it is split into three entries in the BSE sheet: (1) 25A: Recognize collections if there had been no discount. (2) 25B: Recognize discounts assigned to stable market, related to sales where revenue has already been recognized. (3) 25C: Recognize discount assigned to riskier market, related to sales where revenue is deferred. Discounts assigned to riskier market $214 Navigating Accounting Page 5 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS26 Set allowances for product and price protection. MMS26 aggregates entries MMS will record at the end of each quarter to establish or replenish allowances for sales and price protection. To help you better understand this entry, it is split into five entries in the BSE sheet: (1) 26A: Recognize an allowance for the deferred revenues expected for the riskier market. (2) 26B: Recognize an allowance for the expected price protection discounts deferred revenues for the riskier market. (3) 26C: Recognize an allowance for the revenues expected for the stable market. (4) 26D Recognize an allowance for the inventoried costs expected for the stable market. (5) 26E: Recognize an allowance for the royalty costs expected for the stable market. Allowance needed for deferred revenues expected riskymarket Allowance needed for deferred revenues expected riskymarket price protection $10,710 $4,760 Allowance needed for revenues expected stablemarket Allowance needed for inventoried costs associated with expected stable-market $8,050 $4,480 Allowance needed for royalty costs expected stablemarket $350 Navigating Accounting Page 6 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS27 Product (realized) MMS 27 aggregates entries MMS will record throughout the year when customers return products. Customers receive no refund of accrued interest related to MMS24, which is paid when products are returned. No royalties are due on returned products. Also, none of the revenues these had been recognized prior to the. To help you better understand this entry, it is split into six entries in the BSE sheet: (1) 27A: Pay a refund to customers from both markets who had already paid prior to returning goods. The refund is the amount these customers were originally billed less any discount they received for early payment. (2) 27B: Forgive the original amount billed to customers in both markets who had not paid prior to returning products. (3) 27C: Collect accrued interest. It is not refundable. (4) 27D: Reinstate inventories returned from the stable market. (5) 27E: Reclassify inventories returned from the risky market. (6) 27F: Reverse previously recorded stable-market royalties. Refunds: original billings less early-- payment discounts paid by stable and risky market customers prior to returning products Forgiven receivables: original billings that were not yet paid when stable and risky market customers returned products $11,327 $1,245 Collected accrued interest on accounts receivable from stable and risky market customers returning products Inventoried costs product-1 stablemarket $10 $2,116 Inventoried costs product-2 stablemarket Inventoried costs product-2 riskymarket $794 $3,571 Royalties stable-market $200 Navigating Accounting Page 7 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS28 Price-protection discounts realized in risky market. MMS28 aggregates entries MMS will record throughout the year when customers receive price-protection discounts in the risky market. Reimburse customers for prior payments Cancellation of accounts receivable $2,938 $322 MMS29 MMS 29-31 could be combined into a single entry since they pertain to the same event: the end of the risky-market product return period. Revenue is recognized on some of the prior sales in the riskier market, net of early payment discounts. MMS30 MMS31 MMS32 MMS33 MMS34 MMS29 aggregates entries MMS will record throughout the year when product-return periods end in the risky market (and thus when related revenue and cost of good sold will be recognized). Note: Early payment discounts pertaining to customers who do not return products (that will have been deducted from the deferred revenue liability when cash was collected in MMS25) will be transferred to the income statement in MMS29. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 29A: Recognize gross revenues. (2) 29B: Recognize discounts previously deducted from the deferred revenue liability. Hint: Essentially this entry transfers the net revenues that have been "stored" in the deferred revenue liability to gross revenues and its contra account, discount for early payments. Recognize product 2 inventoried costs revenues recognized in riskier market MMS30 aggregates entries MMS will record throughout the year when product return periods end in the risky market. Recognize royalties related to revenues recognized in riskier market MMS31 aggregates entries MMS will record throughout the year when product return periods end in the risky market. Prepay insurance (non production). MMS32 aggregates entries MMS will record throughout the year when it prepays insurance. PP&E (non-production) depreciation on equipment NP1 recognized in SG&A. (excludes capitalized leases) MMS33 aggregates month-end adjusting entries MMS 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 (prepaid in MMS32) MMS34 aggregates month-end adjusting entries MMS will record to match a portion of the cost of insurance prepaid in MMS32 to the periods the insurance benefits. Thus, the monthly usage of insurance is the economic event that will be recognized by these month-end adjusting entries. Invoices when goods were delivered (gross revenues recognized) Related discounts for early payments $38,305 $125 Cost transferred from FGI when goods were delivered $20,238 Royalties accrued when revenue recognized $9,600 Paid $18,000 Depreciation $50,000 Used $12,000 Navigating Accounting Page 8 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS35 MMS36 Provision for bad debts. MMS35 aggregates month-end adjusting entries MMS will record to ensure that the month-end allowance for bad debts is sufficient to cover the anticipated future write-offs (of accounts receivable outstanding at month end). Thus, the monthly adjusting entries recognize events that occur during the month (and possibly earlier) that affect the collectibility of the ending receivables (such as changes in general economic conditions). Write-off accounts receivable. MMS36 aggregates entries MMS will record throughout the year when customers' receivables are written off as uncollectible. Provision $17,050 Write-offs MMS37 MMS38 MMS39 Accrued interest on short-term and long-term debt MMS37 aggregates month-end adjusting entries that MMS will record to recognize the monthly interest the debt recorded in MMS3 and 5. The benefits of having debt financing is the economic event that is recognized by the month-end adjusting entries summarized in MMS37. Preview of other debt entries: The interest (and principal) the long-term debt issued in MMS 5 will be paid 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 paid 11 times during the first year. The aggregate effect of the eleven payments will be recorded in MMS39. For the short-term debt issued in MMS 3, the total interest accrued at the end of the 12 months in MMS 37 (and a portion of the outstanding principal) will be paid on the last day of the year (see MMS 53). The monthly interest is the cost of this benefit. Transfers to current portion of long-term debt (including first-year payments in MMS39 and planned second year payments). MMS38 aggregates month-end adjusting entries MMS 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 paid on the first day of months 2-13 is transferred and at the end of the second month the principal that will be paid 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. $9,573 Accrued $42,272 Transfer $149,162 MMS 39 aggregates entries MMS will record when it pays monthly interest and principal 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 MMS38 discussion for additional details). Principal Previously accrued interest To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 39A: Recognize the principal portion of the payment (a financing activity on the SCF). (2) 39B: Recognize the interest portion of the payment (an operating activity on the SCF). $68,146 $34,608 Navigating Accounting Page 9 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS40 MMS41 Miscellaneous sales and general administrative (SG&A) expenses accrued. MMS40 aggregates month-end adjusting entries that MMS will record to accrue miscellaneous expenses that will be paid the following month. For example, MMS will accrue wages that employees earn during the last few days of the month that will not be paid 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. MMS 40 recognizes the cumulative expense that will be accrued in the first year by such entries. MMS 41 recognizes the portion of these costs that will be paid during the first year. Payment of miscellaneous sales and general administrative (SG&A) expenses. Accrued $44,000 MMS 41 aggregates entries MMS 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 MMS 40(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 paid. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 41A: Recognize the portion of the payment that was previously accrued. (2) 41B: Recognize portion of the payment that was expensed as it was paid. Previously accrued expense paid during year Expenses that were paid as they were incurred MMS42 MMS43 MMS44 Accrued interest on capitalized lease. MMS42 aggregates month-end adjusting entries that MMS will record to recognize the monthly interest the capital-lease obligation recognized in MMS6. The benefits of having lease financing is the economic event that is recognized by the month-end adjusting entries summarized in MMS42. The interest portions of the monthly payments are part of the cost of this financing. Preview of other lease entries: The interest (and principal) the capital lease obligation recognized in MMS 6 will be paid 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 paid 11 times during the first year. The aggregate effect of the eleven payments will be recorded in MMS44. MMS45 records depreciation related to the lease asset recognized in MMS6. Transfers to current portion of capital lease obligation. MMS43 aggregates month-end adjusting entries MMS will record to transfer principal from long-term capital lease obligation to the current portion of the capital lease obligation. These entries will insure that the principal due within the next year is classified as a current liability at the end of each month. The passage of time is the event recognized by these month end adjustments. Payments on capitalized lease. $40,333 $11,000 Accrued $4,139 Transfer $6,119 MMS 44 aggregates entries MMS will record when it makes monthly lease payments the capital lease recognized in MMS 6. These payments will be made 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 MMS42 discussion for additional details). To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 44A: Recognize the principal portion of the capital lease payment (a financing activity on the SCF) and (2) 44B: Recognize the interest portion of the capital lease payment (an operating activity on the SCF). Principal Interest previously accrued $2,796 $3,804 Navigating Accounting Page 10 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS45 MMS46 MMS47 MMS48 MMS49 Depreciation of capitalized lease (equipment type NP2). MMS45 aggregates month-end adjusting entries MMS will record to recognize the monthly depreciation of the capitallease asset recognized in MMS6. These entries will match a portion of the capitalized value of the lease to the monthly revenue the leased computers help generate. Capitalize software development costs, cash outlays. MMS46 aggregates entries MMS will record throughout the year as software development costs that qualify for capitalization are incurred. Amortize software development costs. MMS47 aggregates month-end adjusting entries that MMS will record to recognize the amortization of previously capitalized software development costs. These entries will match portions of the software development costs capitalized in MMS46 to the monthly revenues the related development activities will help generate. Interest income accrued on marketable securities. MMS48 aggregates month-end adjusting entries that MMS will record to accrue interest income related to the marketable securities purchased in MMS7. The accrued interest is collected during the next month. It is accrued before it is collected to match the income to the reporting period when it is earned. MMS48 recognizes the cumulative interest income that will be accrued in the first year. MMS49 recognizes the portion of this interest that will be collected during the first year. Interest collected from marketable securities. MMS49 aggregates entries MMS will record to recognize the portion of the previously accrued interest income recognized in MMS 48 that is collected during the first year. Non-production $4,737 Capitalized $60,000 Amortized $9,000 Accrued $51,000 Previously accrued income collected during first year MMS50 Sell marketable securities. MMS plans to sell securities once during the first year (on the last day of the year). There will be no previously recognized unrealized gains or losses the sold securities (see MMS51). That is, the gains/losses that are expected to be recognized in MMS50 will be due to changes in the value of the sold investments that will occur in the fourth quarter (after the third quarter valuation adjustment that is included in MMS51). $40,800 Historical cost Proceeds net of selling costs $119,000 $131,750 Previously recognized unrealized gains and losses $0 Navigating Accounting Page 11 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS51 Adjust the marketable securities to their fair market value, with the pretax unrealized gains and losses recorded to other comprehensive income. The tax effects of recognizing these gains and losses is recognized in MMS56. MMS51 aggregates 4 quarter-ending adjusting entries MMS will record to insure that marketable securities (which are all classified as available-for-sale) are stated at their fair values at the end of the quarters. Generally, companies only make these entries when they report financial statements to the general public (e.g., these adjusting entries are not made for monthly internal reports). Historical cost of Fair market value of unsold securities unsold securities that have unrealized that have unrealized gains gains To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 51A: Recognize the pretax adjustment to accumulated unrealized gains (MSurg) needed to ensure the correct ending balance. Note that the ending balance in MSurg is the same as the adjustment here because this is the first entry to the account. (2) 51B: Recognize the pretax adjustment to accumulated unrealized losses (MSurl) needed to ensure the correct ending balance. The ending balance in MSurl is the same as the adjustment here because this is the first entry to the account. $272,000 $353,600 Historical cost of unsold securities that have unrealized losses Fair market value of unsold securities that have unrealized losses MMS52 MMS53 On the last day of the year, dispose of some of the PP&E acquired earlier in the year. MMS52 reflects a single event that occurs on the last day of the year. MMS sells part of the PP&E purchased at the start of the year for cash. The first-year depreciation related to this disposal has already been recorded. Payments on bank note (short-term debt). All interest was previously accrued in MMS37. MMS 53 reflects a single event since MMS 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 MMS 37. To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 53A: Recognize the principal portion of the short-term debt payment (a financing activity on the SCF). (2) 53B: Recognize the interest portion of the payment (an operating activity on the SCF). $459,000 $390,150 Historical cost of disposals Disposal proceeds, net of disposal costs $500,000 $425,000 Accumulated financial reporting depreciation of disposals $50,000 Principal Previously accrued interest $10,000 $4,800 Navigating Accounting Page 12 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson
MMS54 Income tax expense recognized. MMS54 aggregates 4 quarter-ending adjusting entries MMS will make to record the portion of the current year's estimated annual income taxes (current and deferred) that pertains to current quarter. Current Related to decrease (increase) in deferred tax assets MMS55 MMS56 To help you better understand this entry, it is split into three entries in the BSE sheet: (1) 54A: Recognize the current provision of the tax expense. (2) 54B: Recognize the portion of the deferred provision an (increase) decrease in deferred tax assets. (3) 54C: Recognize the portion of the deferred provision an increase (decrease) in deferred tax liabilities. Income taxes paid. MMS55 aggregates three quarterly tax payments that MMS 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 MMS is in its first year of operations, it only makes three payments. Tax impact of the unrealized gains and losses recorded earlier. $0 ($26,001) Related to increase (decrease) in deferred tax liabilities $25,251 Paid $0 MMS56 records the tax consequences of MMS51. Unrealized gains (losses) give rise to deferred tax liabilities (assets). To help you better understand this entry, it is split into two entries in the BSE sheet: (1) 56A: Recognize the tax consequences of the unrealized gains for the year (a deferred tax cost). (2) 56B: Recognize the tax consequences of the unrealized losses for the year (a deferred tax benefit) Net tax consequences for OCI (check figure) Tax rate used to compute the tax costs and benefits ($3,825) 30% Navigating Accounting Page 13 of 13 NavAcc LLC G. Peter & Carolyn R. Wilson