Accounting Principles 8th Edition

1
PART III Decision Tools
Lecture 32
Course Review
Instructor Adnan Shoaib
2
Learning Objectives

1. Reviewing the topics of the course that are
   already covered
2. Identifying the decision making tools that are
   studied in the last section of the outline
3. Revisit the contingent liabilities
4. Revisit the income taxes
5. Revisit the Pension benefit
6. Revisit the revenue recognition
7. Further analysis tools that should be studied
8. Course Conclusion

3
Managements Decision-Making Process

• PART I Review of Basic Concepts
• Course Brief
• Accounting History
• Financial Accounting and Accounting Standards
• Conceptual Framework underlying Financial
  Accounting
• Review of Accounting Information System

4
Managements Decision-Making Process

• PART II Corporate Accounting Concepts and Issues
• Practical Issues related to Income statement
• Practical issues related to balance sheet and
  cash flow
• Practical Issues in Cash and Receivables
• Valuations of Inventory issues
• Acquisition and disposition of property, plant
  and equipment
• Depreciation, impairment and depletion
• Intangible assets
• Current Liabilities and contingencies
• Corporation Dividend, retained earnings, income
  reporting, shareholders equity
• Dilutive securities and earning per share
• Investments
• Revenue recognition
• Accounting for income taxes
• Accounting for pension and post-retirement
  benefits
• Accounting and time value of money concepts

5
Managements Decision-Making Process

• PART III Decision Tools
• Statement of cash flow
• Financial Statement analysis
• Accounting for leases
• Cost volume profit Relationship
• Incremental analysis and capital budgeting

6
Decision Tools

• Statement of Cash flow
• Preparation of the Statement
• Usefulness
• Classification of cash flows
• Format of statement
• Steps in preparation
• Examples
• Sources of information
• Indirect vs. direct method
• Special Problems in Statement Preparation
• Adjustments to net income
• Accounts receivable (net)
• Other working capital changes
• Net losses
• Significant noncash transactions
• Use of a Worksheet
• Preparation of worksheet
• Analysis of transactions
• Preparation of final statement

7
Decision Tools

• Financial Statement Analysis
• Basics of Financial Statement Analysis
• Need for comparative analysis
• Tools of analysis
• Horizontal and Vertical Analysis
• Balance sheet
• Income statement
• Retained earnings
• Ratio Analysis
• Liquidity
• Profitability
• Solvency
• Summary

• Earning Power and Irregular Items
• Discontinued operations
• Extraordinary items
• Changes in accounting principle
• Comprehensive income
• Quality of Earnings
• Alternative accounting methods
• Pro forma income
• Improper recognition

8
Decision Tools

• Accountign for Leases
• Leasing Environment
• Who are players?
• Advantages of leasing
• Conceptual nature of a lease
• Accounting by Lessee
• Capitalization criteria
• Accounting differences
• Capital lease method
• Operating method
• Comparison
• Accounting by Lessor
• Economics of leasing
• Classification
• Direct-financing method
• Operating method

• Special Accounting Problems
• Residual values
• Sales-type leases
• Bargain-purchase option
• Initial direct costs
• Current versus noncurrent
• Disclosure
• Unresolved problems

9
Decision Tools

• Cost Volume Profit Relationship
• Cost Behavior Analysis
• Variable costs
• Fixed costs
• Relevant range
• Mixed costs
• Identifying variable and fixed costs
• Cost-Volume-Profit Analysis
• Basic components
• CVP income statement
• Break-even analysis
• Target net income
• Margin of safety
• Changes in business environment
• CVP income statement revisited

10
Decision Tools

• Incremental Analysis and Capital Budgeting
• Incremental Analysis
• Managements decision-making process
• Accept special-price order
• Make or buy
• Sell or process further
• Retain or replace equipment
• Eliminate unprofitable segment
• Allocate limited resources
• Capital Budgeting
• Evaluation process
• Annual rate of return
• Cash payback
• Discounted cash flow NPV and IRR

11
Revisited Contingencies or Contingent
Liabilities
12
Contingencies
An existing condition, situation, or set of
circumstances involving uncertainty as to
possible gain (gain contingency) or loss (loss
contingency) to an enterprise that will
ultimately be resolved when one or more future
events occur or fail to occur.
FASB ASC 450-10-05-4. Predecessor literature
Accounting for Contingencies, Statement of
Financial Accounting Standards No. 5 (Stamford,
Conn. FASB, 1975), par. 1.
LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
13
Gain Contingencies

• Typical Gain Contingencies are
• Possible receipts of monies from gifts,
  donations, and bonuses.
• Possible refunds from the government in tax
  disputes.
• Pending court cases with a probable favorable
  outcome.
• Tax loss carryforwards (Chapter 19).

Gain contingencies are not recorded. Disclosed
only if probability of receipt is high.
LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
14
Loss Contingencies
Contingent Liability
The likelihood that the future event will confirm
the incurrence of a liability can range from
probable to remote.

• FASB uses three areas of probability
• Probable.
• Reasonably possible.
• Remote.

LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
15
Loss Contingencies
Scorcese Inc. is involved in a lawsuit at
December 31, 2012. (a) Prepare the December 31
entry assuming it is probable that Scorcese will
be liable for 900,000 as a result of this suit.
(b) Prepare the December 31 entry, if any,
assuming it is not probable that Scorcese will be
liable for any payment as a result of this suit.
(a) Lawsuit loss 900,000 Lawsuit
liability 900,000
(b) No entry is necessary. The loss is not
accrued because it is not probable that a
liability has been incurred at 12/31/12.
LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
16
Loss Contingencies
Illustration 13-10
LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
17
Loss Contingencies

• Common loss contingencies
• Litigation, claims, and assessments.
• Guarantee and warranty costs.
• Premiums and coupons.
• Environmental liabilities.

LO 4 Identify the criteria used to account for
and disclose gain and loss contingencies.
18
Loss Contingencies
Litigation, Claims, and Assessments
Companies must consider the following factors, in
determining whether to record a liability with
respect to pending or threatened litigation and
actual or possible claims and assessments.

• Time period in which the action occurred.
• Probability of an unfavorable outcome.
• Ability to make a reasonable estimate of the loss.

LO 5 Explain the accounting for different types
of loss contingencies.
19
Loss Contingencies
Guarantee and Warranty Costs
Promise made by a seller to a buyer to make good
on a deficiency of quantity, quality, or
performance in a product.
If it is probable that customers will make
warranty claims and a company can reasonably
estimate the costs involved, the company must
record an expense.
LO 5 Explain the accounting for different types
of loss contingencies.
20
Loss Contingencies
Guarantee and Warranty Costs
Two basic methods of accounting for warranty
costs

• Cash-Basis method
• Expense warranty costs as incurred, because
• it is not probable that a liability has been
  incurred, or
• it cannot reasonably estimate the amount of the
  liability.

LO 5 Explain the accounting for different types
of loss contingencies.
21
Loss Contingencies
Guarantee and Warranty Costs
Two basic methods of accounting for warranty
costs

• Accrual-Basis method
• Charge warranty costs to operating expense in the
  year of sale.
• Method is the generally accepted method.
• Referred to as the expense warranty approach.

LO 5 Explain the accounting for different types
of loss contingencies.
22
Loss Contingencies
Streep Factory provides a 2-year warranty with
one of its products which was first sold in 2012.
In that year, Streep spent 70,000 servicing
warranty claims. At year-end, Streep estimates
that an additional 400,000 will be spent in the
future to service warranty claims related to 2012
sales. Prepare Streeps journal entry to record
the 70,000 expenditure, and the December 31
adjusting entry.
2012 Warranty expense 70,000 Cash 70,000 12/3
1/12 Warranty expense 400,000 Warranty
liability 400,000
LO 5 Explain the accounting for different types
of loss contingencies.
23
Loss Contingencies
Premiums and Coupons
Companies should charge the costs of premiums and
coupons to expense in the period of the sale that
benefits from the plan.

• Accounting
• Company estimates the number of outstanding
  premium offers that customers will present for
  redemption.
• Company charges the cost of premium offers to
  Premium Expense and credits Estimated Liability
  for Premiums.

LO 5 Explain the accounting for different types
of loss contingencies.
24
Loss Contingencies
Illustration Fluffy Cakemix Company offered its
customers a large nonbreakable mixing bowl in
exchange for 25 cents and 10 boxtops. The mixing
bowl costs Fluffy Cakemix Company 75 cents, and
the company estimates that customers will redeem
60 percent of the boxtops. The premium offer
began in June 2012 and resulted in the
transactions journalized below. Fluffy Cakemix
Company records purchase of 20,000 mixing bowls
as follows.
Inventory of Premium 15,000 Cash 15,000
20,000 x .75 15,000
LO 5 Explain the accounting for different types
of loss contingencies.
25
Loss Contingencies
Illustration The entry to record sales of
300,000 boxes of cake mix would be
300,000 x .80 240,000
Cash 240,000 Sales Revenue 240,000
Fluffy records the actual redemption of 60,000
boxtops, the receipt of 25 cents per 10 boxtops,
and the delivery of the mixing bowls as follows.
Cash (60,000 / 10) x 0.25 1,500 Premium
Expense 3,000 Inventory of Premium
4,500 Computation (60,000 / 10) x 0.75
4,500
LO 5
26
Loss Contingencies
Illustration Finally, Fluffy makes an
end-of-period adjusting entry for estimated
liability for outstanding premium offers
(boxtops) as follows.
Premium Expense 6,000 Premium Liability 6,000
LO 5 Explain the accounting for different types
of loss contingencies.
27
Loss Contingencies
Environmental Liabilities
A company must recognize an asset retirement
obligation (ARO) when it has an existing legal
obligation associated with the retirement of a
long-lived asset and when it can reasonably
estimate the amount of the liability.
NOTE The SEC argues that if the liability is
within a range, and no amount within the range is
the best estimate, then management should
recognize the minimum amount of the range.
LO 5 Explain the accounting for different types
of loss contingencies.
28
Loss Contingencies
Environmental Liabilities

• Obligating Events. Examples of existing legal
  obligations, which require recognition of a
  liability include, but are not limited to
• decommissioning nuclear facilities
• dismantling, restoring, and reclamation of oil
  and gas properties
• certain closure, reclamation, and removal costs
  of mining facilities
• closure and post-closure costs of landfills.

LO 5 Explain the accounting for different types
of loss contingencies.
29
Loss Contingencies
Illustration On January 1, 2012, Wildcat Oil
Company erected an oil platform in the Gulf of
Mexico. Wildcat is legally required to dismantle
and remove the platform at the end of its useful
life, estimated to be five years. Wildcat
estimates that dismantling and removal will cost
1,000,000. Based on a 10 percent discount rate,
the fair value of the asset retirement obligation
is estimated to be 620,920 (1,000,000 x
.62092). Wildcat records this ARO as follows.
Drilling platform 620,920 Asset retirement
obligation 620,920
LO 5 Explain the accounting for different types
of loss contingencies.
30
Loss Contingencies
Illustration During the life of the asset,
Wildcat allocates the asset retirement cost to
expense. Using the straight-line method, Wildcat
makes the following entries to record this
expense.
December 31, 2012, 2013, 2014, 2015, 2016
Depreciation expense (620,920 /
5) 124,184 Accumulated depreciation 124,184
LO 5 Explain the accounting for different types
of loss contingencies.
31
Loss Contingencies
Illustration In addition, Wildcat must accrue
interest expense each period. Wildcat records
interest expense and the related increase in the
asset retirement obligation on December 31, 2012,
as follows.
December 31, 2012
Interest expense (620,092 x 10) 62,092 Asset
retirement obligation 62,092
LO 5 Explain the accounting for different types
of loss contingencies.
32
Loss Contingencies
Illustration On January 10, 2017, Wildcat
contracts with Rig Reclaimers, Inc. to dismantle
the platform at a contract price of 995,000.
Wildcat makes the following journal entry
to record settlement of the ARO.
January 10, 2017
Asset retirement obligation 1,000,000 Gain on
settlement of ARO 5,000 Cash 995,000
LO 5 Explain the accounting for different types
of loss contingencies.
33
Loss Contingencies
Self-Insurance
Self-insurance is not insurance, but risk
assumption. There is little theoretical
justification for the establishment of a
liability based on a hypothetical charge to
insurance expense.
Illustration 13-12
LO 5 Explain the accounting for different types
of loss contingencies.
34
Revisited Accounting for Deferred and Prior
taxation
35
Fundamentals of Accounting for Income Taxes
Corporations must file income tax returns
following the guidelines developed by the
Internal Revenue Service (IRS), thus they

• calculate taxes payable based upon IRS code,
• calculate income tax expense based upon GAAP.

Amount reported as tax expense will often differ
from the amount of taxes payable to the IRS.
LO 1 Identify differences between pretax
financial income and taxable income.
36
Fundamentals of Accounting for Income Taxes
Illustration Chelsea, Inc. reported revenues of
130,000 and expenses of 60,000 in each of its
first three years of operations. For tax
purposes, Chelsea reported the same expenses to
the IRS in each of the years. Chelsea reported
taxable revenues of 100,000 in 2012, 150,000 in
2013, and 140,000 in 2014. What is the effect
on the accounts of reporting different amounts of
revenue for GAAP versus tax?
LO 1 Identify differences between pretax
financial income and taxable income.
37
Book vs. Tax Difference
Illustration 19-2
GAAP Reporting
2012
2013
2014
Total
Revenues
130,000
130,000
130,000
390,000
Expenses
60,000
60,000
60,000
180,000
Pretax financial income
70,000
70,000
70,000
210,000
Income tax expense (40)
28,000
28,000
28,000
84,000
Illustration 19-3
Tax Reporting
2012
2013
2014
Total
Revenues
100,000
150,000
140,000
390,000
Expenses
60,000
60,000
60,000
180,000
Pretax financial income
40,000
90,000
80,000
210,000
Income tax payable (40)
16,000
36,000
32,000
84,000
LO 1 Identify differences between pretax
financial income and taxable income.
38
Book vs. Tax Difference
Illustration 19-2
Comparison
2012
2013
2014
Total
Income tax expense (GAAP)
28,000
28,000
28,000
84,000
Income tax payable (IRS)
16,000
36,000
32,000
84,000
Difference
12,000
(8,000)
(4,000)
0
Income tax expense (40)
28,000
28,000
28,000
84,000
Are the differences accounted for in the
financial statements?
Yes
Year
Reporting Requirement
2012
Deferred tax liability account increased to
12,000
2013
Deferred tax liability account reduced by 8,000
2014
Deferred tax liability account reduced by 4,000
LO 1 Identify differences between pretax
financial income and taxable income.
39
Financial Reporting for 2010
Balance Sheet
Income Statement
2012
2012
Assets
Revenues
Expenses
Liabilities
Deferred taxes 12,000
Income tax payable 16,000
Income tax expense 28,000
Equity
Net income (loss)
Where does the deferred tax liability get
reported in the financial statements?
LO 1 Identify differences between pretax
financial income and taxable income.
40
Temporary Differences

• A Temporary Difference is the difference between
  the tax basis of an asset or liability and its
  reported (carrying or book) amount in the
  financial statements that will result in taxable
  amounts or deductible amounts in future years.

Future Taxable Amounts
Future Deductible Amounts
Deferred Tax Liability represents the increase in
taxes payable in future years as a result of
taxable temporary differences existing at the end
of the current year.
Deferred Tax Asset represents the increase in
taxes refundable (or saved) in future years as a
result of deductible temporary differences
existing at the end of the current year.
Illustration 19-22 Examples of Temporary
Differences
LO 2 Describe a temporary difference that
results in future taxable amounts.
41
Future Taxable Amounts and Deferred Taxes
Illustration In Chelseas situation, the only
difference between the book basis and tax basis
of the assets and liabilities relates to accounts
receivable that arose from revenue recognized for
book purposes. Chelsea reports accounts
receivable at 30,000 in the December 31, 2012,
GAAP-basis balance sheet. However, the
receivables have a zero tax basis.
Illustration 19-5
LO 2 Describe a temporary difference that
results in future taxable amounts.
42
Future Taxable Amounts and Deferred Taxes
Illustration Reversal of Temporary Difference,
Chelsea Inc.
Illustration 19-6
Chelsea assumes that it will collect the accounts
receivable and report the 30,000 collection as
taxable revenues in future tax returns. Chelsea
does this by recording a deferred tax liability.
LO 2 Describe a temporary difference that
results in future taxable amounts.
43
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
A deferred tax liability represents the increase
in taxes payable in future years as a result of
taxable temporary differences existing at the end
of the current year.
Illustration 19-4
2012
2013
2014
Total
Income tax expense (GAAP)
28,000
28,000
28,000
84,000
Income tax payable (IRS)
16,000
36,000
32,000
84,000
Difference
12,000
(8,000)
(4,000)
0
LO 2 Describe a temporary difference that
results in future taxable amounts.
44
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration Because it is the first year of
operations for Chelsea, there is no deferred tax
liability at the beginning of the year. Chelsea
computes the income tax expense for 2012 as
follows
Illustration 19-9
LO 2 Describe a temporary difference that
results in future taxable amounts.
45
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration Chelsea makes the following entry
at the end of 2012 to record income taxes.
Income Tax Expense 28,000 Income Tax Payable
16,000 Deferred Tax Liability 12,000
LO 2 Describe a temporary difference that
results in future taxable amounts.
46
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration Computation of Income Tax Expense
for 2013.
Illustration 19-10
LO 2 Describe a temporary difference that
results in future taxable amounts.
47
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration Chelsea makes the following entry
at the end of 2013 to record income taxes.
Income Tax Expense 28,000 Deferred Tax Liability
8,000 Income Tax Payable 36,000
LO 2 Describe a temporary difference that
results in future taxable amounts.
48
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration The entry to record income taxes
at the end of 2014 reduces the Deferred Tax
Liability by 4,000. The Deferred Tax Liability
account appears as follows at the end of 2014.
Illustration 19-11
LO 2 Describe a temporary difference that
results in future taxable amounts.
49
Future Taxable Amounts and Deferred Taxes

• Starfleet Corporation has one temporary
  difference at the end of 2012 that will reverse
  and cause taxable amounts of 55,000 in 2013,
  60,000 in 2014, and 75,000 in 2015.
  Starfleets pretax financial income for 2012 is
  400,000, and the tax rate is 30 for all years.
  There are no deferred taxes at the beginning of
  2012.
• Instructions
• Compute taxable income and income taxes payable
  for 2012.
• Prepare the journal entry to record income tax
  expense, deferred income taxes, and income taxes
  payable for 2012.

LO 2 Describe a temporary difference that
results in future taxable amounts.
50
Future Taxable Amounts and Deferred Taxes
a.
a.
LO 2 Describe a temporary difference that
results in future taxable amounts.
51
Future Deductible Amounts and Deferred Taxes
Illustration During 2012, Cunningham Inc.
estimated its warranty costs related to the sale
of microwave ovens to be 500,000, paid evenly
over the next two years. For book purposes, in
2012 Cunningham reported warranty expense and a
related estimated liability for warranties of
500,000 in its financial statements. For tax
purposes, the warranty tax deduction is not
allowed until paid.
Illustration 19-12
LO 3 Describe a temporary difference that
results in future deductible amounts.
52
Future Deductible Amounts and Deferred Taxes
Illustration Reversal of Temporary Difference.
Illustration 19-13
When Cunningham pays the warranty liability, it
reports an expense (deductible amount) for tax
purposes. Cunningham reports this future tax
benefit in the December 31, 2012, balance sheet
as a deferred tax asset.
LO 3 Describe a temporary difference that
results in future deductible amounts.
53
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
A deferred tax asset represents the increase in
taxes refundable (or saved) in future years as a
result of deductible temporary differences
existing at the end of the current year.
LO 3 Describe a temporary difference that
results in future deductible amounts.
54
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration Hunt Co. accrues a loss and a
related liability of 50,000 in 2012 for
financial reporting purposes because of pending
litigation. Hunt cannot deduct this amount for
tax purposes until the period it pays the
liability, expected in 2013.
Illustration 19-14
LO 3 Describe a temporary difference that
results in future deductible amounts.
55
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration Assuming that 2012 is Hunts first
year of operations, and income tax payable is
100,000, Hunt computes its income tax expense as
follows.
Illustration 19-16
LO 3 Describe a temporary difference that
results in future deductible amounts.
56
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration Hunt makes the following entry at
the end of 2012 to record income taxes.
Income Tax Expense 80,000 Deferred Tax
Asset 20,000 Income Tax Payable 100,000
LO 3 Describe a temporary difference that
results in future deductible amounts.
57
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration Computation of Income Tax Expense
for 2013.
Illustration 19-17
LO 3 Describe a temporary difference that
results in future deductible amounts.
58
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration Hunt makes the following entry at
the end of 2013 to record income taxes.
Income Tax Expense 160,000 Deferred Tax
Asset 20,000 Income Tax Payable 140,000
LO 3 Describe a temporary difference that
results in future deductible amounts.
59
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration The entry to record income taxes
at the end of 2013 reduces the Deferred Tax Asset
by 20,000.
Illustration 19-18
LO 3 Describe a temporary difference that
results in future deductible amounts.
60
Future Deductible Amounts and Deferred Taxes

• Illustration Columbia Corporation has one
  temporary difference at the end of 2012 that will
  reverse and cause deductible amounts of 50,000
  in 2013, 65,000 in 2014, and 40,000 in 2015.
  Columbias pretax financial income for 2012 is
  200,000 and the tax rate is 34 for all years.
  There are no deferred taxes at the beginning of
  2012. Columbia expects to be profitable in the
  future.
• Instructions
• Compute taxable income and income taxes payable
  for 2012.
• Prepare the journal entry to record income tax
  expense, deferred income taxes, and income taxes
  payable for 2012.

LO 3 Describe a temporary difference that
results in future deductible amounts.
61
Future Deductible Amounts and Deferred Taxes
a.
a.
LO 3 Describe a temporary difference that
results in future deductible amounts.
62
Future Deductible Amounts and Deferred Taxes
Deferred Tax AssetValuation Allowance
A company should reduce a deferred tax asset by a
valuation allowance if it is more likely than not
that it will not realize some portion or all of
the deferred tax asset. More likely than not
means a level of likelihood of at least slightly
more than 50 percent.
LO 4 Explain the purpose of a deferred tax asset
valuation allowance.
63
Future Deductible Amounts and Deferred Taxes
Callaway Corp. has a deferred tax asset balance
of 150,000 at the end of 2012 due to a single
cumulative temporary difference of 375,000. At
the end of 2013 this same temporary difference
has increased to a cumulative amount of 500,000.
Taxable income for 2013 is 850,000. The tax
rate is 40 for all years. No valuation account
is in existence at the end of 2012. Instructions A
ssuming that it is more likely than not that
30,000 of the deferred tax asset will not be
realized, prepare the journal entries required
for 2013.
LO 4 Explain the purpose of a deferred tax asset
valuation allowance.
64
Future Deductible Amounts and Deferred Taxes
LO 4 Explain the purpose of a deferred tax asset
valuation allowance.
65
Future Deductible Amounts and Deferred Taxes
Deferred Tax AssetValuation Allowance
Balance Sheet Presentation
LO 4 Explain the purpose of a deferred tax asset
valuation allowance.
66
Revisited Using Pension Sheet
67
Using a Pension Work Sheet
The General Journal Entries columns determine
the journal entries to be recorded in the formal
general ledger.
The Memo Record columns maintain balances
for the unrecognized pension items.
LO 5 Use a worksheet for employers pension plan
entries.
68
Using a Pension Work Sheet
At January 1, 2012, Beaty Company had plan assets
of 280,000 and a projected benefit obligation of
the same amount. During 2012, service cost was
27,500, the settlement rate was 10, actual and
expected return on plan assets were 25,000,
contributions were 20,000, and benefits paid
were 17,500. Instructions Prepare a pension
worksheet for Beaty for 2012.
LO 5 Use a worksheet for employers pension plan
entries.
69
Using a Pension Work Sheet
Prepare a pension worksheet for Beaty for 2012.
(280,000 x 10)
(10,500) net liability
LO 5 Use a worksheet for employers pension plan
entries.
70
Using a Pension Work Sheet
Note the following about the Work Sheet

• The balance in the Pension Asset / Liability
  column should equal the net balance in the memo
  record this is the net funded position of the
  pension plan. If a credit balance, Pension
  liability if a debit balance, Pension asset.
• For each transaction or event, the debits must
  equal the credits.

LO 5 Use a worksheet for employers pension plan
entries.
71
Prior Service Cost
Amortization of Prior Service Cost
Company should not recognize the retroactive
benefits as pension expense entirely in the year
of amendment. Employer should recognize the
pension expense over the remaining service lives
of the employees who are expected to benefit from
the change in the plan.

• Amortization Method
• Board prefers a years-of-service method.
• SFAS No. 158 allows use of the straight-line
  method.

LO 6 Describe the amortization of prior service
costs.
72
Using a Pension Work Sheet
The following defined pension data of Rydell
Corp. apply to the year 2012.
Projected benefit obligation, 1/1/12 (before
amendment) 560,000 Plan assets, 1/1/12
546,200 Pension liability 13,800 On January 1,
2012, Rydell Corp., through plan amendment,
grants prior service benefits having a present
value of 120,000 Settlement rate 9 Service
cost 58,000 Contributions (funding)
65,000 Actual (expected) return on plan assets
52,280 Benefits paid to retirees 40,000 Prior
service cost amortization for 2012 17,000
Instructions For 2012, prepare a pension work
sheet for Rydell Corp. that shows the journal
entry for pension expense.
LO 6 Describe the amortization of prior service
costs.
73
Using a Pension Work Sheet
(135,720) liability
74
Using a Pension Work Sheet
Pension Journal Entry for 2012.
Dec. 31
Pension Expense 83,920 Other
Comprehensive Income (PSC) 103,000 Pension
Asset/Liability
121,920 Cash 65,000
LO 6 Describe the amortization of prior service
costs.
75
Using a Pension Work Sheet
Jackson Company adopts acceptable accounting for
its defined benefit pension plan on January 1,
2011, with the following beginning balances plan
assets 200,000 projected benefit obligation
250,000. Other data are as follows.
LO 8 Explain the corridor approach to amortizing
gains and losses.
76
Using a Pension Work Sheet
Pension Work Sheet for 2011

Expected Return on Plan Assets 200,000 x 10
20,000
(57,000)
LO 8 Explain the corridor approach to amortizing
gains and losses.
77
Using a Pension Work Sheet
Pension Journal Entry for 2011
Pension Expense 21,000 OCI Gain/Loss
2,000 Pension Asset/Liability
7,000 Cash 16,000
Dec. 31
LO 8 Explain the corridor approach to amortizing
gains and losses.
78
Using a Pension Work Sheet
Pension Work Sheet for 2012

Actual return Expected Return
(217,700) liability
LO 8 Explain the corridor approach to amortizing
gains and losses.
79
Using a Pension Work Sheet
Pension Journal Entry for 2012
Dec. 31
Pension Expense 95,100 Other
Comprehensive Income (PSC) 105,600 Pension
Asset/Liability
160,700 Cash 40,000
LO 8 Explain the corridor approach to amortizing
gains and losses.
80
Using a Pension Work Sheet
Pension Work Sheet for 2013

(203,400) liability
Plug
LO 8 Explain the corridor approach to amortizing
gains and losses.
81
Using a Pension Work Sheet
Pension Journal Entry for 2013
Dec. 31
Pension Expense 89,370 Pension
Asset/Liability 14,300 Other Comprehensive
Income (G/L) 14,070 Other Comprehensive
Income (PSC) 41,600 Cash 48,000
LO 8 Explain the corridor approach to amortizing
gains and losses.
82
Revisited Revenue Recognition
83
Completed Contract and Percentage-of-Completion
Methods Compared
84
Accounting for the Cost of Construction and
Accounts Receivable
With both the completed contract and
percentage-of-completion methods, all costs of
construction are recorded in an asset account
called construction in progress.
85
Gross Profit RecognitionGeneral Approach
In both methods the same amounts of revenue,
cost, and gross profit are recognized.
In both methods we add gross profit to the
construction in progress asset.
86
Gross Profit RecognitionGeneral Approach
The same journal entry is recorded to close out
the billings on construction contract and
construction in progress accounts under the
completed contract and percentage-of-completion
methods.
87
Timing of Gross Profit Recognition Under the
Completed Contract Method
Under the completed contract method, all revenues
and expenses related to the project are
recognized when the contract is completed.
88
Timing of Gross Profit Recognition Under the
Percentage-of-Completion Method
Using the percentage-of-completion method, we
recognize a portion of the estimated gross profit
each period based on progress to date.
We determine the amount of gross profit
recognized in each period using the following
logic
89
Percentage-of-Completion Method Allocation of
Gross Profit
90
Percentage-of-Completion Method Allocation of
Gross Profit
Notice that the gross profit recognized in each
period is added to the construction in progress
account.
91
Percentage-of-Completion Method Allocation of
Gross Profit
The income statement for each year will report
the appropriate revenue and cost of construction
amounts.
92
Course Concluded

• Accounting is the father of all subjects
• Accounting basics
• Accounting Concepts
• Decision tools
• Advance form of accounting leads to financial
  management and finance
• Corporate and basic accounting difference

93
Allah Bless all of you
Good Luck for your Future Endeavors
94
End of Lecture 32
Live everyday as the first day of your life .
So plan as much as you can with great spirits to
the new dawns