Error Correction (Sample Problem) – counterbalancing errors

March 3, 2011 5 comments

kuya joseph, may tanung po ako regarding sa ERROR CORRECTION PO. anu po ang sagot nyo dito sa dalawang magkaibang tnung na ito. ung isa po kasi expense method yung gamit, yung isa naman po asset method yung gamit. nalilito lang po kasi ako kasi magkaiba po kame ng sgot ng klasmate ko. sana po matulungan nyo ako. salamat!

eto po ung tnung:

4. PREPAID EXPENSES: KENZO CO. entered into a contract with an advertising agency to provide and develop promotional ads for its products. On August 31, 2010, a total of P18,000 was paid to the agency and this was booked as expenses. The ad will run for a period of one year. No adjustment was made as of the year end.

2010 2011
Expense
Prepaid Expenses
Net income
RE before closing
RE after closing

5. PREPAID EXPENSES: On March 1, 2010, BRUCE CO., paid P36,000 for 12 months rent in advance and the entire amount was included in the Prepaid rent account and was charged to expenses only on the following year.

2010 2011
Expense
Prepaid Expenses
Net income
RE before closing
RE after closing

salamat po ulit in advance!:D

This was posted by chibi

Kenzo Co. Problem:

Base sa problem, it used the EXPENSE method. The method tells you how the orinal entry was made.  So, kung EXPENSE method ang way ng entry, ang original entry na nagawa ay charge the whole thing sa expense and cash:

Ang problema ngayon, hindi naman dapat lahat ay nai-expense dahil magbebenefit ka sa expense na ito for a total of twelve months at four months palang ang nakakalipas. Dapat yung hindi pa nau-use up na part ay irecognize as a Prepaid Advertising Expense. So ganito ang solution dyan:

Ok, since walang adjustment na ginawa, mali ang balanse ng mga accounts. Base sa solution, at the end of the year dapat 6,000 lang ang nirecognize na expense since 4 months palang naman ang nakakalipas. 18,000 * 4/12 = 6,000. Since walang adjustment na nagawa sa original entry, sobra sobra yung expense na nirecord mo ng 12,000 kaya on year 2010, OVERSTATED ang expense mo at Understated naman ang Retained Earnings mo (since sa RE mo icclose ang Net Income mo na understated dahil sa sobra sobrang expense). At the same time, since wala kang nirecognize na Prepaid Expense, UNDERSTATED naman ang asset mo at the end of 2010.

On the following year 2011, since wala kang prepaid na nirecognize, syempre, wala ka ring expense na nirecognize. So, Understated naman ang expense this year ng 12,000 at overstated ang Net Income mo. By this time however, ang net effect sa Retained Earnings mo ay zero na, meaning fairly stated na ang Retained Earnings mo. Bakit? Kasi Counterbalancing Error ang nangyari. In effect kasi, dapat by year 2011 lahat ng expense mo nasa Retained Earnings mo na which happened in 2010. So by year 2011, fairly stated na ang RE mo. Same thing with your Prepaid Expense. By year 2011, dapat zero na ang Prepaid Expense mo. Since wala ka naman talagang nirecognize na Prepaid Expense to begin with, we can say that your Total Assets by year 2011 are fairly stated.

Bruce Co. Problem

Base sa problem, ASSET METHOD ang ginamit na pagrerecord. Sa asset method, the whole payment was charged to Prepaid Expense (the asset) and Cash. So this time naman, lahat nirecord sa Prepaid Expense, yung nga lang ulit, hindi inadjust at the end of the year and then the following year, inexpense lahat. So sa orignal entry, ganito ang nangyari:

So on the first year wala kang expense na nirecognize however 10/12 of the total payment should’ve been recorded as an Expense kasi 10 months ang lumipas since the rent started. So, eto ang analysis:

Since wala kang nirecognize na expense, kulang/understated ang Expense mo ng 30,000. It was computed as: 36,000 * 10/12 = 30,000.  In effect, Overstated ang Retained Earnings mo ng 30,000. Since wala kang adjusting entry na ginawa, sobra sobra naman yung Prepaid Rent mo ng 30,000 and in effect, 30,000 Overstated ang Asset mo.

On year 2011 naman, lahat ng expense nirecognize mo. Dapat 6,000 lang ang expense mo on 2011. Since you charged the whole 36,000 to expense on year 2011, overstated ang expense mo by 30,000 and understated ang Net Income mo ng 30,000.  However, your Retained Earnings this year will be fairly stated. Bakit? Kasi by this year the whole 36,000 ng rent ay naicharge na sa expense and eventually closed to Retained Earnings. Same thing with your Prepaid Rent, by this year dapat naman talaga ay zero na ang balance nya since the rent ends this year.


If there are any further question, please post your comments at the bottom of this page. Thanks!! :)

Adjusting Entries questions

July 2, 2010 9 comments

From:Renalyn

2nd year accountancy student po aku. .

naguguluhan pu kc aku sa adjusting pa pinaghahalu halu na yung mga notes pati interest then me mga given dates na hindi specific kng months ba o days lang ikukumpyut. .i2 pu. .

the notes payable worth 30,000 is a 90-12% note acquired on November 30, 2009. No interest has been recorded. .

ska po may possibility ba na sa isang comprehensive problem is merong dalawang accounts payable sa Adjusting Entry? ?

me adjustment pu ba sa gantu. .
the co. ends december 31, 2009. . the 1000 of insurance expense is applicable to the first qqqquarter of 2010? ?

pasensya na pokung maraming tanung ang galing nyu po kc mag explain n mga thought na kailangan ng mga nagvivisit ng blog nyu eE. .

GODBLESS po! ! thamks in advance. .

Tatandaan nyo lang palagi, ang nagccause ng adjusting entries ay ang “Accrual Basis of Accounting”. Diba sa accrual basis of accounting, dito yung inirerecognize ang income pag na-earn at expense pag na-incur. Always keep this in mind. Kaya naman kailangan mag-adjust kasi minsan, hindi nai-uupdate ang records ng kumpanya para mareflect ang tamang balanse ng mga accounts if we will follow the accrual basis of accounting

On Interest Accruals and Note Payables:

“…the notes payable worth 30,000 is a 90-12% note acquired on November 30, 2009. No interest has been recorded. .”

Sa school, tatandaan mo, pag months ang ibinigay na description (e.g. 2-month note; 5-month note), pag nagcompute ka ng interest, use 12 months. Pag days ang binigay (e.g. 30-day note; 45-day note; 60-day note) use 360 or 365 days (usually sinasabi ito pero pag walang sinabi, it’s safe to use 365 days). Pag naman years, edi use years. Pag exact date ang binigay, at nasa alanganing date (e.g. note dated October 17) use 365 days.

Tandaan nyo palagi, ang RATE na ibinibigay sa inyo ay Annual Percentage Rate. Otherwise, sasabihin yan kung pang-monthly rate, quarterly rate or semi-annual rate yan. Pero pag walang sinabi, annual rate yan.

To answer your question. Since ang kumpanya nirecord lang nya nung na-acquire yung note (kasi talaga sa totoong buhay ina-update mo lang ang mga bagay-bagay during end of month or end of the year, or pag kinailangan, hindi inaaraw-araw ang pag-uupdate nitong mga to kaya kelangan ng so-called “adjusting entries”), kailangan mo irecognize yung interest na kinita nya during the time na hawak mo yung note which is from November 30, 2009 to the Balance Sheet date (which is usually Dec. 31) since sabi 90-day ito, we will use “days” as a means of computing the interest:

so…

30,000   *   12%   *   31 / 365   =  305.75

So, the company must accrue 305.75 na interest income for this particular note.  Kung maitatanong nyo, bakit “31/365″ ang allocation ko? Kasi sabi ko nga, yung 9% pag one year na rate yun. So, kukunin mo lang yung part ng year na yun kung saan hawak mo yung note at kumita ka which is 31 days of the 365 days of the year.

“ska po may possibility ba na sa isang comprehensive problem is merong dalawang accounts payable sa Adjusting Entry? ?”

You’re talking about “Notes Payable, diba”. Oo, hija, especially sa auditing problems. Minsan tatlo, apat, lima. Marami. Sa totoong buhay maraming notes payable ang meron ang kumpanya even as much as how many debtors meron ang kumpanya. Pero, makukuha mo yan pag nagpractice ka nang nagpractice.

“the co. ends december 31, 2009. . the 1000 of insurance expense is applicable to the first qqqquarter of 2010? ?”

Meron. The fact na sinabi na hindi 1,000 ay para sa first quarter ng 2010, evidence yun na may adjusting entry kang kelangang gawin. PERO, depende ang magiging adjusting entry mo sa initial entry mo (or yung entrada mo nung na-accquire mo yung insurance). Pero ulit, according sa wording ng problem mo, ang ginamit nya ay Expense Method kasi ang sabi “1000 of the insurance expense” ipinahihiwatig nito na nirecord nya as expense yung buong insurance. So be careful sa wording ng problem at intindihin ang kinikwento ng problem.

Since ang  initial entry mo ay expense method (lahat ng insurance ay nirecord mo as Insurance expense), ganito ang magiging adj entry mo:

(dr) Prepaid Insurance   1,000

(cr) Insurance Expense 1,000

Bakit ganyan? Kasi Overstated ang EXPENSE mo eh, kasi nga nirecord mo lahat nung simula as an expense.  Eh hindi pa naman expense yung 1000 diba, next quarter pa yun magiging expense. Kaya babawasan mo yung expense mo by crediting it for an amount equal dun sa applicable pa next quarter.

Assuming naman kunyari, ang initial entry mo ay using Asset method (ang insurance mo ay ipinasok mo sa Prepaid Insurance nung na-acquire mo yung insurance) ganito magiging adj entry mo:

(dr) Insurance Expense xxx

(cr)  Prepaid insurance xxx

Bakit “xxx”, kasi hindi natin alam kung magkano ang buong insurance sa problem na ito. Ang alam lang natin dapat ang ending balance ng Prepaid Insurance mo ay 1000. Sa entry na ito, importanteng malaman nyo na ina-update natin ang balance ng Prepaid Insurance by recognizing part of it as an expense for the year and leaving those applicable for next year.

Pag may further questions, magcomment lang po :)

Deposits in Transit & Outstanding Checks

July 2, 2010 4 comments

From: Darlene

kuya,
paturo nman kung panu mgcompute ng outstanding checks and deposit in transit..

thanks,..c:c:

Eto ang formula:

Pero, syempre, let us explain the reason behind that formula, hindi kasi straight-line rule yan, marami kasi variations depende sa kung anong mga information/data ang available sayo.

Deposits in Transit and Outstanding Checks

Ano ba ang Deposit in Transit?

Ang mga deposit in transit ay ang cash ng kumpanya na idedeposito na sana sa banko kaso lang, hindi agad syempre nagclear.

Ano naman ang Outstanding Checks?

Ang mga outstanding checks naman ay ang mga babayarin ng kumpanya na ibinayad na sa mga pinagkakautangan ng kumpanya ngunit sa kung ano mang dahilan ay hindi pa ito nababayaran ng banko. Let’s start by discussing what a Bank Statement is.

Ang Bank Statement

Pag nagtatrabaho na kayo, sa kumpanya tuwing end of the month, nakakareceive tayo ng tinatawag na “Bank Statement” kung saan inirereflect doon yung lahat ng naging transaksyon mo sa pera mo sa bank, both receipts and disbursement. Nakalista doon lahat ng idiniposito mo, lahat ng binabayad mo, mga bank charges, pati narin bank errors. So full-disclosure talaga ang ginagawa ng bank para ipakita sayo kung papaano nag-move yung balanse ng Cash mo.

Sa mga hindi pa nakakakita nito sa totoong buhay, eto ang isang example ng isang aktwal na bank statement, para makita nyo yung sinasabi ko:
Click nyo ito

Diba andaming sulat? Usually ganyan ang mangyayari sa bank statement nyo pag nagsimula na kayo gumawa ng recon. Maraming klase ng format ng bank statement – may hiwalay ang bank credits sa debits, may magkakasama lahat lahat, may nakaayos according sa transactions. Wala kasing standard sa presentation ng Bank Statement kaya nagkaka-iba iba.

Kung papansinin nyo, maraming “check marks” (as in yung mark na check hindi cheke) at sulat-sulat ang bank statement. Iyan ay sa kadahilanang sa totoong buhay, ikaw mismo ang magbibilang kung anong deposito ba ang in-transit pa, kung anong check ba ang hindi pa naeencash.

Both Deposits in Transits (DIT) and Outstanding Checks (OS) are caused by the timing difference between transactions mo sa books at pagrereflect nito sa bank. Syempre wala naman tayo telekinetic powers para malaman agad ng bank kung anong pinag-gagagawa mo sa cash mo at maireflect nya agad. Lahat ng ginagawa mo sa pera mo sa bank, nag-uundergo ng proseso which usually takes a couple of days bago mai-post sa account mo sa bank.

Paano nagkakaroon ng DIT at OS

Gaya ng sinabi ko, ang lahat ng transaksyon na ginagawa mo sa bank usually takes a couple of days bago mag”clear” at maipost sa account mo (yung  records mo sa bank) habang ikaw naman sa loob ng kumpanya mo, as transaction occurs, nagrerecord ka na agad. IDEALLY, dapat kung ano ang balanse mo sa Cash mo sa book mo, equal dapat sa balanse mo sa Cash mo sa Bank kasi iisang pera lang naman ang pinag-uusapan natin dito eh, diba? Pero, since tao nga lang tayo at kailangan natin ng oras para maiproseso ang mga bagay-bagay, nagkakaiba madalas (if not everytime) ang balanse mo sa Bank Statement mo at sa Cash mo sa libro mo at a particular period of time (which is usually the end of the month).

Syempre, magtataka ka, saan nanggaling ang diperensya? Paano nagkaroon ng diperensya. Kaya ang kumpanya gumagawa ng “Bank Reconciliation”. Yun ang silbi noon – para ipakita sa users kung paano nagkaiba ang balanse sa Bank Statement at sa Book records mo.

Madalas, ang mga DIT at OS ay mga deposito at cheke na ginawa during the last couple of days of the month – kasi matatapos ang processing nito sa bank next month na at sa next month narin ito na bank statement ma-rereflect. Usually ito yung mga dated at the end of the month.

NEVER will you see these items (DIT and OS) in the bank – sa book nanggagaling ang mga difference na ito kaya book adjustments ang mga ito.

So, paano ginagawa ang pacocompute ng DIT at OS sa totoong buhay? Usually manual ito (as in iisa-isahin mo lahat ng nakalista sa bank statement mo at ikukumpara mo sa records mo). Pero, due to technological advancements, pede mo na madownload ang mga bank statement mo in an excel format tapos i-uupload mo nalang sa system nyo at yung computer nyo nalang gumagawa. Kaso ako, para makasiguro talaga (kasi minsan may glitches sa computer), Dino-download ko nalang yung records namin from the system into an excel file tapos sa Excel ko nalang sya pagkukumparahin. Para-paraan nalang sa mga formula para maging automatic yung computation mo sa DIT at OS mo for the month (teka, computer subject na to, ehhehe) using Excel.

Anong logic ng Formula?

DIT:

Kung i-aadd mo yung DIT mo last month sa mga total deposits mo ngayon, eto yung amount na nagrerepresent ng total deposits na ineexpect mong ma-cclear ng banko. Kaso, since hindi lahat yan magcclear, ibabawas mo yung na-clear lang sa bank (Receipts for the Month, per bank). So yung matitira, yung mga deposito mo na hindi nagclear or the so-called Deposit in Transit. Etong amount na ito, hindi lang para sa mga deposito sa buwan na ito. This amount may inlude those old old deposits from previous months na for some reason, hindi parin nagcclear hanggang sa ngayon. Isa pa ito sa function ng bank recon – namomonitor mo yung mga DIT at OS na matagal nang hindi pa nagcclear.

OS:
Same din ang logic. Kung pagsasama-samahin mo lahat ng cheke na hindi pa nagclear last month sa lahat ng cheke na isinulat at ibinayad mo this month, ang makukuha mong amount is yung pera na ineexpect mo na binayaran ng bank sa 3rd parties. However, this will not be the case. Hindi lahat yun mababayaran sa buwan na it0. Kaya, ibabawas mo yung amount na nabayaran lang ng bank (Checks paid, per bank). So ang matitira sayo ay ang outstanding checks mo.

TIPS:

Sa discussion ko na ito, tulad nga ng sinabi ko nung simula, hindi yan straight-cut rule sa pagcompute ng DIT at OS. Ipinaliwanag ko lamang ang logic kung bakit may at saan nanggagaling ang deposit in transit at outstanding checks. Ang importante pag nagsasagot kayo sa school, intindihin nyo yung hinahanap at kung anong data lang ang available sa inyo. Tapos iapply nyo itong tinalakay ko.

If there are further questions about the topic, please don’t hesitate to post a comment.

Operating Lease

February 14, 2010 Leave a comment

kuya, pano po ba to?hindi ko po kasi naintindihan yung discussion sa amin eh….

A Company leased office premises to B Company for a 5 year term beginning January 1, 2009. under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is P1,250,000 per annum. however, as an inducement to enter the lease, A granted B the first 6 mos. of the lease rent-free. in its December 31, 2009 income statement, what amount should A report as rental income?

kuya, patulong…pasensiya na po.hindi ko kasi maintindihan. thank you in advance…

Sa operating lease, madali lang yan. Pag nagsosolve kayo ng operating lease alamin nyo kung magkano ang magiging total proceeds over the lease term tapos ang accrual ay simply spreading out the amount over the lease term. As simple as that.

Sa problem na ito,

Total proceeds:

800,000 * 1 year = 800,000 proceeds from year

1,250,000 * 4 years = 5,000,000 proceeds from year 2 to 5

800,000/12 * 6 = (400,000) ito yung 6 months rents fee. Bakit 800,000? Kasi sabi “first 6 mos” which refers to the proceeds from year 1 na gagawing free.

So total proceeds will be: 800,000 + 5,000,000 – 400,000 = 5,400,000

Then, to know the yearly amount to accrue, spread the total proceeds evenly throughout the period. So:

Yearly accrual = Total Proceeds / lease term

5,400,000 / 5 = 1,080,000 yearly.

*but if lease began on a different date other than january 1, appropriate the yearly accrual.
Take note of any SECURITY DEPOSIT.

Ang security deposit ay ang additional na kabayaran ng Lessee sa unang pag-uusap ng lessor at ng lessee. Ito usually yung tinatawag na “initial deposit”. From the word itself, “kasiguraduhan” ito on the part of the Lessor na kabayaran kung ano mang maaring mag-cause ng cost sa part ng lessor assuming any terms of the lease will be breached by the lessee. Ang security deposit ay treated as a Liability until earned. Kelan na-eearn? Pag may breach of contract on the part of the Lessee.

Categories: Operating Lease

Accrual to Cash Accounting

February 6, 2010 9 comments

Ang topic po na ito ay mahalaga lalo sa pag-gawa ng Cash Flow Statement especially for Direct Method, which shows how cash are received and disbursed. Laging tandaan, sa pag gawa ng CFS ang mahalaga sa iyo ay kung kelan ka nakatanggap ng cash o kelan ka gumasta ng cash. Ang cash basis of accounting, based on IFRS/PFRS, ay hindi ginagamit for general purpose financial statement. Ngunit, gagawin natin ito dahil importanteng malaman ng isang investor or ng entity itself kung saan nanggagaling ang cash inflow at kung saan napupunta ang cash outflow. So, on the part of the prospective investor, malalaman nya kung worth ba mag-invest sa isang kumpanya, kung kikita ba sya through cash dividends or makikita nya kung gaano ka-liquid (kung gaano kabilis magconvert ng cash ang isang kumpanya) a gaano ka solvent (kung nakakabayad ba ng utang) ang isang kumpanya. On the part of the Company, malalaman nya kung paano ginagastos ang cash therefore, mas magiging madali ang financial planning sa kanila.

This topic will only help you give the idea how to get the cash flow from a specific account(s). Full discussion is on the Cash Flow Statement Topic.

Pag kinukuha nyo ang cash flow, importanteng gumamit kayo ng t-account. Mas madali kasi isolve ang lahat pag may t-account instead na nagmememorize. Mas logical kasi diba. I will assume you know how to use T-Account. :)

Bago kayo magconvert, itanong nyo muna sa sarili nyo kung anong possible accounts ang affected then you’ll go from there.

Just a reminder, para sa mga hindi po marunong gumamit ng T-Account:

Assume any DEBIT/CREDIT account. To get the value of x:

T-ACCOUNT.png picture by joseph0487

Tapos from there, i-modify nyo nalang yung T-account.

A. Cash Received from Customers

From the description itself, sabi, ito yung salapi na natanggap natin mula sa mga customers outside the entity. So, ano ba usually ang mga accounts na may kinalaman sa customers? Sa asset side, Accounts Receivable. Sa liability side Unearned Income. The thing is, using a T- account, you should be able to tell how much cash flow in to the company coming from customers. Eto sya:

ARUI.png picture by joseph0487

**yung income earned, if any lang.

Yung cash na galing sa AR, ito yung mga nakolekta nating utang ng customers. Yung cash naman na galing sa Unearned income, ito yung ibinigay ng customer sa atin na pera in advance, kaya hindi pa earned. So pag in-add nyo yung dalawang amounts:

Cash from AR + Cash from UEI = Total Cash Received from Customers.

Example:

p1-1.png picture by joseph0487

Ang sagot ay  $ 23,900

Eto ang solution:

correctd.jpg picture by joseph0487

Pano ko nakuha yung 20,500 na Sales on Account?

Yung Total sales mo kasi ay 26,000. It is composed of the Cash Sales, the Earned Income (previously Unearned, and Sales on Account. Kung papansinin nyo sa Unearned income, walang cash advances from customer for year 2010. So ang makukuha lang natin ay yung 3,000 na earned income. So…

26,000 – 2,500 Cash Sales – 3,000 Earned Income = 20,500 Sales on Account.

So, we can compute the Cash Received from customers:

17,900 (Cash from AR)

+ 2,500 (Cash Sales)

20,400 Total Cash from Customers

B. Cash Paid to Vendors

Ano bang usual account for vendors? Edi Accounts Payable!

AP.png picture by joseph0487

C. Cash Paid to Other Operating Expenses (Prepayments; e.g. Prepaid Insurance)

ppd.png picture by joseph0487

D. Cash paid to Other Operating Expenses (e.g. Salaries Expense, Advertising Expense, etc)

sp.png picture by joseph0487

E. Cash Received for Other Income (e.g. Rent)

rent.png picture by joseph0487

F. Cash Paid for Interest

int.png picture by joseph0487

G. Cash Paid for Taxes

tax-1.png picture by joseph0487


Problem

prob.png picture by joseph0487

answer key:

Paid to vendors: 9,500

Paid to Insurance: 65,000

Paid to Advertising: 5,400

Received from Rent: 9,140

kuya pahabol lang nga tanong:

Dun sa cash payment to vendor

COS + Inventory End + AP beg – Inv Beg – AP End = Cash Paid to vendors

Total Cash Paid to vendors = Cash Purchases + Paid Purchases on Account
Yung sa unang formula po kasi parang ina-ssume na all purchases are on account (tama po ba)
So pag silent yung problem (yun po yung assumption?)…

Yes, unless otherwise specified, Purchases are made on account. Pero syempre, beware of any hints na maaring may cash purchases. Kung walang hints, assume all are made on account.

Tapos sa Sales Revenue naman
Given ang beg end Cash Account balance ,Paano kung sinabi ng problem ALL CASH RECEIPTS WERE FROM CUSTOMERS (eto na po ba yung Cash Sales o Cash Sales + Collections on Account?)

Yes, pero isama mo rin yung CASH RECEIVED FROM CUSTOMER ADVANCES. Basically lahat ng salaping nanggaling sa customers.

Sales Revenue ???
Cash beg 700 , end 980
Total Cash disbursed during period 1160
ALL CASH RECEIPTS WERE FROM CUSTOMERS
AR beg 1200, end 1660
AR written off , 30

* anyway, sa cash to accrual na to, pero related parin sa SCF
bale naderive yung cash receipts(1440) via T-Account ng cash tapos Sales on Account (490) via t-account ng AR. Tapos in-add, anyway di yun yung tanong ko… bakit yung Cash receipts from customers(1440) eh treated LAHAT as Cash Sale, ang assumption na naman ba eh walang collection from AR??? (may sense po ba tanong ko), parang initial ko po kasing pagkaka-intindi eh, yung 1440 cash receipt , part nun ay cash sales (dr Cash cr sales) at collection on sales on account ( dr Cash cr AR)

Base sa problem, ang pagkakaintindi ko ay nakreceive ka ng cash worth 1,440 at since sinabi that everything is collection from customers, it impliedly tells us that this 1,440 is a credit to AR, meaning a collection of accounts. It assumed na lahat ay collection on Sales on Account since wala namang sinabi kung magkano ang Cash Sales. Pag nakakaencounter kayo ng ganitong problems, stick to what is given and the assumptions. Sa mga collections from customers, unless walang sinabi kung magkano dun ang cash sales or cash advances, always assume that everything is a collection of Sales on Account. :) By the way ang Sales Revenue ay equal to 1,930.

(kung may tanong, sabihin lang po)

topic on Cash Flow Statement to follow

Interest Expense

January 17, 2010 Leave a comment

Elvin

Ano ba ung concepts ng computations ng mga accrued interest sa notes receivables at interest income. Kasi pag nababasa ako ng Financial accounting madali lng ung mga illustrations pero pag auditing problems na nakakalito ung mga computations. Ano bang concepts dun? Thanks kuya in advance, more power and God bless.

Tandaan mo lang: Kada taon, kumikita ng interest ang Notes (if Long-Term) or any form of amount due to a creditor. Ang interest kasi ay ang “kabayaran” sa pagpapautang sa atin at pag-gamit ng pera ng iba, parang renta. So, taon-taon, nagbabayad tayo ng interest based sa carrying value ng kautangan natin. Also, make sure if there is payment of Principal. Minsan kasi taon-taon hinuhulugan ng may-utang ang principal.

Isipin mo nalang ang isang halaman. Ang halaman, constantly tumutubo (interest) pero, taon-taon, pinuputol natin. Pag nagpuputol tayo ng part ng halaman, ang tinutukoy nun ay PAYMENT OF PRINCIPAL and INTEREST. Taon-taon, tumutubo pero putol tayo nang putol hanggang sa huling tubo na nya at puputulin na rin natin pati ugat (full payment). At ang Carrying Value nya ay ang current height ng puno as of year end.

Computation ng interest sa notes kapag:

Interest bearing ang notes:     FACE VALUE of notes   x   Interest Rate

Non-interest Bearing ang notes: CARRYING VALUE of the notes    x    Effective interest rate

(this was discussed in the Notes Payable/Receivable lecture)

Pag nag-aaudit ka, tatandaan mo palagi, dapat:

1. ) may accrual ng interest at the end of the year kung unpaid pa ang interest. Ang madalas na itanong sa audit ay kung magkano ang Unrecorded Interest or the Interest Expense for the year. Usually, magbibigay ang problem ng several payables/receivables at ilan lang dun ang notes (na kumikita ng interest) at Bonds.

2) Idistinguish mo rin kung ano dun sa mga notes ang Interest-Bearing at Non-Interest Bearing bago ka magcompute ng interest.

3.) Alamin ang Carrying value ng Notes or Bonds as of date of computation ng interest.

4.) Take note of the DATE. Napaka-importante ng date! At saka ka magcompute ng interest. Dapat kasi inaapportion ang interest depende kung kelan sya na-incur.

Tandaan: HINDI PALAGI EQUAL ANG INTEREST PAYABLE AT THE END OF THE YEAR at INTEREST EXPENSE FOR THE YEAR.

Bakit? May mga payables kasi na binabayaran ang interest sa alanganing buwan (hindi at the end of the year). So pag ang tanong, “accrued interest” for the year, ito lang yung interest sa taon na hindi pa binabayaran kasi hindi pa due pero incurred na since interest mo yun para sa taon.

Example:

2010, may Notes Payable ka (company uses calendar year) and Interest payable and principal of 10,000 payable every april 1.

As of  April 1 2010:

Carrying Value: 70,000

Interest Rate: 2%

END OF 2010:

Interest Expense:  70,000 * 2% = 1,400

Interest Payable: 70,000  * 2% = 1,400

(pareho pa since kakasimula palang)

END OF 2011

Interest Expense: ( 70,000 * 2% * 3/12) + (60,000 * 2% * 9/12) = 1,250 (laging, iapportion ang interest)

Accrued Interest Expense: 60,000 * 2% * 9/12 = 900

Carrying Value ng note: (70,000 * 1.02) tumubo frm apr. 2010 to apr 2011 MINUS (10,000 + 1,400) pinutol yung Interest at Principal PLUS (60,000 * .02 * 9/12) tumubo from apr. 2011 to dec. 2011.

71,400 – 11,400 + 900 = 60,900

Technique sa Aud Prob:

1) Wag magpapa-overwhelm sa Problems!! Pag gumagawa ng problems ang examiner, ang isang number is consisted of different financial accounting problems mixed into one problem. Ang gawin mo lang, putul-putulin ang problem. Ang aud prob kasi, pinagsama-samang financial accounting problems lang yan. Usually, unrelated problems. Tandaan mo lang, kung nanonood ka dati ng Batibot, “pagsama-samahin ang pare-pareho”. Meaning to say, yung mga problems na related lang ang pag-sama-samahin mo. Habang nag-sasagot ka, isa isahin mo para hindi ka ma-overwhelm sa haba ng problem.

2.) Pangalawa, mag-entries ka! Isulat mo yung mga correcting entry para alam mo yung adjustment sa mga accounts. Ung entry mo, kahit ikaw nalang nakakaintindi para mabilis. Effective kasi pag nagsusulat ng correcting entry kasi nalalaman mo yung effects sa iba’t ibang accounts. At pag nagpresent na ng sunod-sunod na tanong sa account balances, at may correcting entry ka, mabilis mong malalaman ang iaadd mo at idededuct mo sa account na tinatanong.

3.) Syempre, intindihin ang essence ng problem, alamin ang tinatanong.

Notes Receivable/Payable

January 3, 2010 13 comments

julianrey15

kuya kuya!! :D accountancy student din po ako :D
paturo naman po nung discounting of own notes. yung interest bearning at non interest bearing, yung pag aammortize tska po yung mga entries na kelangan kase po sa wednesday ay exam ko na po sa financial accounting 1 :D naghahanda lang po ako.

tska po kuya yung sa assignment of a/r yung mga meron pang conditional sales at secured borrowings. kase po hindi masyadong nadiscuss yun at natatakot lang po akong baka iexam din yun kaya papaturo po ako. ty po! :)

lau

kuya padiscuss naman po ng notes receivable po lalo na po ung restructuring ng notes… TY

Ano ba ang promissory note? Para saan ba ito?

According sa Act No. 2031, Chapter 16, Section 184 (sa ating Negotiable Instruments Law)

Sec. 184. Promissory note, defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise inwriting made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

Sa madaling sabi, ito yung utang na sinulat mo, binigay mo sa nagpautang sayo at sinasabi mo na “babayaran mo yun, promise”. Kaya promissory note, hehehe. But seriously, ganon nga yun. Kung mapapansin nyo, sa definition, may mga highlighted parts. Yun kasi yung mga elements ng isang NegotiablePromissory note. Pero since financial accounting ang itatalakay ko dito, hindi nyo naman kelangang hanapin yan sa quiz nyo. Ang importante sa test nyo sa financial accounting, yung mga data sa promissory notes.

I. TYPES

There are two types of Notes (receivable/payable).

  • Interest-Bearing Notes
  • Non-interest Bearing Notes

Sa dalawang nabanggit, tandaan niyo palagi na parehong may interest yan. Ang interest kasi ay ang “payment for the use of money”. Ano ang pinag-iba ng dalawa?

Sa interest-bearing notes, the rate is applied to the FACE of the note because the interest is not imputed in the face amount of the note yet. So kung may interest bearing note ka payable in one year worth P2,000 at an interest rate of 3% per annum, sa isang taon, ang interest nya ay P60

Sa non-interest bearing notes, ang interest ay imputed na sa FACE amount ng note. So, pag nakita mo yung face amount non-interest bearing note, kasama na dun yung interest. Kung baga, yun yung future value ng note mo (Principal plus Interest). So, ano gagawin mo para macompute mo yung interest? Edi i-present value mo yung note. So sa example kanina, kung may NON-interest bearing note ka payable in one year worth P2,000 at an interest rate of 3% per annum, sa isang taon, ang interest mo ay P58 (explain ko mamaya).

II. EXAMPLES and ENTRIES

Tandaan natin:

  • palaging mag-aaccrue ng interest at year end (pag long-term ang notes, meaning extends to more than 1 year)
  • alamin muna kung interest bearing or non-interest bearing ang note. Malalaman mo naman ito depende sa wording ng problem. Usually pag interest bearing ang sinasabi “…bearing an interest of”  o di kaya   “…an interest bearing note”.
  • carefully take note of the DATE for it is important in computing the interest.
  • Kung serial (installment) ang bayad ng principal, mag-ingat. Dapat iamortize ang principal palagi para tama ang interest na makokompute mo.
  • ang rate na binibigay, unless otherwise specified, ay ANNUAL interest. So pag short term lang ang note, palaging iappropriate based lang kung gano katagal yung note.

INTEREST BEARING NOTE

1.  Assume that on April. 1 2010, Tomasino Corp. issued a 30-day note for P2,000, bearing an interest of 2% per annum. What are the entries?

notes.png picture by joseph0487

we had an interest of 3 pesos computed as (2,000 * 2% * 30/360). Tandaan, inappropriate ko yung interest sa 30 days lang.

2. On June 1, 2010 Dela Rosa wrote a promise to pay P2,000,000 to  Benavides, bearing an interest of 3%, on May 30, 2013 with the interest payable yearly. What are the entries?

notes2.png picture by joseph0487

So at the end of every year (Dec. 31), nag-aaccrue tayo ng interest payable/receivable.

Interest is computed as: (2,000,000 * 3% * 7/12)

So pag tinanong, how much is the total interest for the year:

2010 = 35,000 2011= 60,000    (35,000 + 25,000) 2012 = 60,000    (35,000 + 25,000) 2013= 25,000

ang interest for the year ay ang total na interest na na-incur/earned for the whole year

Madali lang diba?

NON-INTEREST BEARING NOTE

Sa non-interest bearing note entries, parang bonds lang yan. Hindi gaano naiiba yung entries nito sa bonds kasi dito, we’ll use a “Discount on Notes Payable” account. The discount will represent a Deferred Interest Income (on the payee’s side) or an Prepaid Interest Expense (on the maker’s side) which has to be amortized yearly to reflect in the income statement the amount being recognized as interest income/expense.

Sa non-interest bearing note, ang PROCEEDS mo ay equal sa present value ng note mo (Face Amount minus Discount). So binawas yung interest. Sa maker’s side, kaya para syang Prepaid Interest kasi imbes na matatanggap mo yung buong amount ng face, binawas na yung imputed interest kaya yung proceeds mo face amount minus discount. Sa payee’s side, kaya parang deferred interest income sya kasi yung binigay mong proceeds sa nangugutang, mas mababa sa face value kasi nga binawas mo yung interest so in effect parang bayad na yung interest. Confused much? Tignan nyo yung examples para medyo maliwanagan kayo.

SITUATION A – LUMP SUM PAYMENT OF PRINCIPAL AT THE END

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of P3,455,350. Assume that the company uses calendar year as its accounting period. Give the entries.

Dito, hindi sinabi ang rate. So we have to compute for the effective interest rate. The fair market value of the machine is considered as the present value of the note kasi yun yung proceed na natanggap mo. So lumalabas, kung at the end, babayaran ni St. Raymund si Beato Angelico ng total of P4,000,000 edi may interest na P544,650. Ang face amount ng note ay  P4,000,000 kaya dun sa 4M na yun, imputed na ang interest. Kaya kelangan nating kunin yung effective rate.

Ang PV rate natin ay 3,455,350 / 4,000,000 = 0.8638 kung titignan nyo sa PV of a Single Payment table yan sa period na 3 years, lalabas na 5% ang Effective Annual Rate. Hindi naman siguro ipapacompute ng prof nyo yan. Malamang yan sasabihin nalang yung rate or magsusupply sila ng table.

nonint-1.png picture by joseph0487

The effective interest rate is applied to the carrying value of the note. Ito ang table ng interest at carrying value tapos papakita ko kung paano kinompute yung yearly interest

NOTES3.png picture by joseph0487

Since hindi sakto yung end of period sa calendar end period, yung interest iaappropriate natin. Kung baga ganito yung logic kung paano kinukuha yung accrual ng interest every Dec. 31

interestillust.png picture by joseph0487

Clear?

Usually naman tinatanong sa test yung CV at December 31 (year end). Carrying value is computed as Notes Receivable minus Discount on Notes receivable.

disctamort.png picture by joseph0487

SITUATION B – PERIODIC PRINCIPAL PAYMENT

Ang pinag-iba naman nito sa unang situation, yung principal binabayaran every period.  (parang serial bonds naman to)

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of P3,771,481. The principal is to be paid P1,333,333  every April 30. Assume that the company uses calendar year as its accounting period. Give the entries.

Syempre kelangan nating kompyutin yung effective annual rate. Since lumalabas na parang annuity ito, yung PV ng Note (the fair value of the machine) is to be divided by the annuity.

PV Factor = 3,771,481 / 1,333,333

PV Factor = 2.8286

if you’ll look at the PV of Ordinary Annuity Table, this amount will fall under 3% (for 3 periods, syempre).

So, eto mga entries

sernotes-1.png picture by joseph0487

Bale yung entries kanina nadagdagan ng Periodic Payment every April 30. Saka take note of the interest, always apply the interest on the carrying value after the payment of principal.

ito yung computation ng interest saka yung table ng amortization:

noteamort.png picture by joseph0487

DISCOUNTING OF NOTES RECEIVABLE

Nagdidiscount ang isang entity ng kanyang Notes Receivable kung kailangan nito ng salapi/cash immediately. Bale, imbes na hihintayin nyang matapos yung term ng notes, ibebenta nalang nya ang note nya sa bank (termed as discounting). Pero syempre, the bank would withhold a certain amount na magsisilbing kabayaran mo sa pagbigay nila sayo ng immediate cash (which is called the discount). Let’s not confuse the term “discount” in this topic with the “discount on notes receivable”. Magkaiba yun.

So, when we discount, makakatanggap tayo ng Cash, tatanggalin natin sa balance sheet ang Notes Receivable (since binenta nga natin) at mayroon tayong Interest Gain/Loss from Discounting.

Ang Discount naman ay kino-compute as (MV * Discount Rate * Remaining Holding Period/365)

Ang proceeds na matatanggap natin ay equal sa MATURITY VALUE NG NOTES minus THE DISCOUNT (MV – Disct)

So, let’s say for example De Porres discounted his120-day, 7%,  P6,000 note to the bank for 18% discount after holding it for 40 days.

1. Compute for the Maturity value of the Note

6,000 * 7% * 120/365 = 138 interest

138 + 6000 = 6,138.08 MV

2. Compute for the Discount

6,138.08  * 18% * 80/365 = 242.16

3. Compute for the Proceeds

6138.08 – 242.16 =  5,859.92

Entries:

(dr) Cash        5,859.92

(dr) Interest Expense   186.08

(cr) Notes Receivable      6,000

(cr) Interest Revenue     46

TAKE NOTE: Be careful of the denominator pag nagkokompyut kayo ng interest sa discounting. Always use the whole year’s days 360 or 365 NOT the term of the note.


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