103
Learning Module 4
Some Miscellaneous Items
Types of Income Statements
1) C___________________ or multi-step
2) S___________ S_________
What is Working Capital?
Net Working Capital
104
Revenue Recognition
Revenue Recognition- other than just selling things!
The latest
• ASC 605-25, Revenue Recognition: Multiple-Element Arrangements, as amended by Accounting
Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of
the FASB Emerging Issues Task Force
• ASC 985-605, Software: Revenue Recognition, as amended by ASU 2009-14, Certain Revenue
Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task
Force
• ASC 605-28, Revenue Recognition: Milestone Method, as amended by ASU 2010-17, Milestone
Method of Revenue Recognition – a consensus of the FASB Emerging Issues Task Force
----------------------------------------------------------------The Basics
When
Delivery has occurred or services have been rendered
Price is fixed or determinable
Collectability is reasonably assured
Your Company sells a $100 gift certificate.
And when it is used to buy a pair of pants that cost you $40.
105
On October 31, you purchased a three year subscription to a monthly magazine- “College
Today”. You send them $180 and your subscription starts with the November issue. Here is the
accounting on the books of “College Today” books.
October 31st
November 30
December 31st
Presentation on Financial Statements
106
Construction
% of Completion
Used when
1) __________________________________________________
2) __________________________________________________
3) __________________________________________________
Stephen’s Construction Company contracted on June 30, 2015 to build a new high rise apartment
building for Gabrielle Properties. The construction is expected to take three years. The contract
price is $50,000,000. Gabrielle pays Stephen’s $1,000,000 on the day the contract was signed.
Costs, billings and cash receipts that are expected to be as follows: (in millions)
2015
Costs
17
Billings*
20
Cash Collections*
18
*includes 1,000,000 on day of signing
Percentage of Completion
2016
12
14
12
2017
8
6
8
2018
3
10
12
107
108
Go back to StevensSteven’s Construction Company contracted on June 30, 2014 to build a new high rise apartment
building for Gabrielle Properties. The construction is expected to take three years. The contract
price is $50,000,000. Gabrielle pays Steven’s $1,000,000 on the day the contract was signed.
Costs, billings and cash receipts that are expected to be as follows: (in millions)
2015
Costs
17
Billings*
20
Cash Collections*
18
*includes 1,000,000 on day of signing
2016
12
14
12
2017
8
6
8
2018
3
10
12
Now assume that 2015 and 2016 go as planned, but in 201\7 you hit a snag. The actual costs are
$20,000,000 and you still estimate that after that year, you will have $10,000,000 in costs to finish
the project.
109
110
Completed Contract
Used when 1) ______________________________________
2) ______________________________________
Kylie Construction May 18, 2015 to build a new sophisticated new machine for Joshie Company.
The construction is expected to take two years. The contract price is $7,000,000. Joshie pays
Kylie $1,000,000 on the day the contract was signed. Costs cannot be reasonable estimated.
The actual costs, billings and cash receipts were as follows: (in millions)
Costs
Billings
Cash Collections*
2015
1
2
2
2016
3
4
3
2017
1
1
2
111
Revenues recognized after Sale[edit]
Sometimes, the collection of receivables involves a high level of risk. If there is a high degree of uncertainty
regarding collectibility then a company must defer the recognition of revenue. There are three methods which
deal with this situation:

Installment sales method allows recognizing income after the sale is made, and proportionately to the
product of gross profit percentage and cash collected calculated. The unearned income is deferred and then
recognized to income when cash is collected.[1] For example, if a company collected 45% of total product
price, it can recognize 45% of total profit on that product.

Cost recovery method is used when there is an extremely high probability of uncollectable payments.
Under this method no profit is recognized until cash collections exceed the seller's cost of the merchandise
sold. For example, if a company sold a machine worth $10,000 for $15,000, it can start recording profit only
when the buyer pays more than $10,000. In other words, for each dollar collected greater than $10,000
goes towards your anticipated gross profit of $5,000.

Deposit method is used when the company receives cash before sufficient transfer of ownership occurs.
Revenue is not recognized because the risks and rewards of ownership have not transferred to the buyer.[2]
112
Installment Sale
On January 1, 2015, General Development Corporation acquired 100 acres of land in Florida for
$10,000. They put $30,000 in infrastructure (roads and so forth) on the property. They broke the
property into 400 quarter acre lots which they advertised for sale to at $2,600 per lot. During
2015 they sold 25 lots at an average price of $2,600. The terms were $100 down and the rest in
120 equal annual monthly payments of $27.76 which include interest at 6%. The Sales people
get 10% of the sales price regardless of whether the buyer ultimately makes all the payments.
Assume all purchasers made 6 payments during 2015. Assume this qualifies to be accounted for
as an installment sale. Prepare all related journal entries for 2015.
113
114
115
Cost Recovery-
redo the last problem using the cost recovery accounting
116
Homework
You are building a building and accounting for the profit using the percentage of completion
method. The contract is for $3,000,000. The total estimated costs are $2,400,000. In year 1,
your costs were $600,000 and your billings were $900,000. In year two, your costs were
$1,200,000 and the billings were $1,500,000. In year 3, costs were $600,000 and billings were
$600,000.
Prepare journal entries for these transactions.
Helming Corp. sold a piece of real estate on January 2, 2015 for $5,000,000. It had purchased
the property in 2002 for $4,500,000 in cash. At that time the land was worth $450,000 and the
remainder was attributed to the building. At the time of the sale, the carrying value of the building
was $3,650,000.
The terms of the sale were as follows:
Downpayment
Note Receivable
Interest rate
Length of mortgage
Annual payment
$ 250,000
$4,750,000
10%
20 years
$ 557,933 due at end of each year
The sale has been consummated, the seller's receivable is not subject to future subordination,
and the seller has no continuing involvement with the property. However, because the initial
investment is inadequate, the seller must use the installment method to account for this sale.
REQUIRED: Journal entries needed in 2015, 2016.
117
PWC Revenue Recognition
118
119
120
Deferred Taxes
Differences between Net Income and Taxable Income
T_________________________________ (could also be termed timing)
Such as
P________________________________
Such as
Deferred tax liabilities
Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense/unpaid
liabilities, or income is accrued but not taxed until received. Examples of such situations include:

a company claims tax depreciation at an accelerated rate relative to accounting depreciation

a company makes pension contributions for which tax relief is provided on a paid basis, whereas accounting
entries are determined in accordance with actuarial valuations
Deferred tax assets
Deferred tax assets generally arise where tax relief is provided after an expense is deducted for accounting
purposes.Examples of such situations include:

a company may accrue an accounting expense in relation to a provision such as bad debts, but tax relief
may not be obtained until the provision is utilized

a company may incur tax losses and be able to "carry forward" losses to reduce taxable income in future
years..
An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax
expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is
deemed more likely than not that the asset will be realized.
121
MACRS
M_______________ A_________________ C_________ R_____________ S___________
MACRS has the half year convention built into the tables. For all our problems we will assume
that, for financial reporting, the company depreciates assets a full year during the year of
acquisition and none in the year of disposition, unless the problem states otherwise.
Year
Depreciation Rate in % for Recovery Period
3-year
5-year
7-year
10-year
15-year
20-year
1
33.33
20.00
14.29
10.00
5.00
3.750
2
44.45
32.00
24.49
18.00
9.50
7.219
3
14.81
19.20
17.49
14.40
8.55
6.677
4
7.41
11.52
12.49
11.52
7.70
6.177
5
11.52
8.93
9.22
6.93
5.713
6
5.76
8.92
7.37
6.23
5.285
7
8.93
6.55
5.90
4.888
8
4.46
6.55
5.90
4.522
9
6.56
5.91
4.462
10
6.55
5.90
4.461
11
3.28
5.91
4.462
12
5.90
4.461
13
5.91
4.462
14
5.90
4.461
15
5.91
4.462
16
2.95
4.461
17
4.462
18
4.461
19
4.462
20
4.461
21
2.231
122
Acme, Inc. purchased new computer software on January 1, 2014. The cost of the software was
$84,000. It is expected that the software will last 4 years and then be worthless. The company
uses straight-line depreciation for reporting purposes. The software is three-year property for tax
purposes. Assume that Acme makes $510,000 annually before depreciation and taxes and that
this is the only fixed asset the company has. Included in the $510,000 is $10,000 of municipal
bond interest that the company receives each the year. Prepare the journal entries as they relate
to depreciation and taxes for each of the years and post the deferred tax T accounts for each of
the years. The corporate tax rate is 30%.
Income before Depreciation and Taxes
Depreciation Expense
Income before Permanent Differences & Taxes
Permanent Differences
Taxable Income
Tax Expense
Journal Entry for 2014
Accounting
Tax
$ 510,000
$ 510,000
123
Now prepare the journal entries for the next three years. Assume the same earnings and
permanent differences.
124
MACRS GDS Property
(General Depreciation System)
Property Class
Personal Property (all property except real-estate)
Special handling devices for food and beverage manufacture.
3-year property
Special tools for the manufacture of finished plastic products, fabricated metal products,
and motor vehicles
Information Systems; Computers / Peripherals
Aircraft and parts (of non-air-transport companies)
Computers
5-year property
Petroleum drilling equipment
Property with ADR class life of more than 4 years and less than 10 years
Certain geothermal, solar, and wind energy properties.
All other property not assigned to another class
7-year property
Office furniture, fixtures, and equipment
Property with ADR class life of more than 10 years and less than 16 years
Assets used in petroleum refining and certain food products
10-year property
Vessels and water transportation equipment
Property with ADR class life of 16 years or more and less than 20 years
Telephone distribution plants
15-year property
Municipal sewage treatment plants
Property with ADR class life of 20 years or more and less than 25 years
Municipal sewers
20-year property
Property with ADR class life of 25 years or more
Property Class
Real Property (real estate)
27.5-year property
Residential rental property (does not include hotels and motels)
39-year property
Non-residential real property
125
126
Kylie Company had income before taxes and depreciation last year of $500,000. Included in the
other revenue section was $5,000 in municipal bond interest she received on Athens Municipal Bonds
which the company owned. On January 1, 2014 she purchased a new goomahochie for $60,000.
She estimates it will last two years and then be worthless. (For the uninformed, a goomachochie is
used to produce goomies and is three-year property according to the IRS). She used straight-line
depreciation to depreciate the goomahochie. During 2014 she paid fines of $20,000 for speeding.
Her Bad Debt Expense for the year was $7,000. She actually wrote off $4,000 in accounts that she
will never collect. During 2015, she paid fines of $6,000, received municipal bond interest of $2,000,
had bad debt expense of $5,000 and wrote off $6,000. Prepare the journal entries for all of the years
that relate to taxes. (Assume the same earnings each year before depreciation and permanent
differences and a 30% tax rate and all taxes are accrued and then paid the following year.)
127
128
Ruth just bought a new airplane - cost $600,000. She will use it to deliver stuffs for the next five
years. At the end of the fifth year she expects it will be worthless. Ruth’s net income before
depreciation and taxes for the year was $4,000,000. Her tax rate is 30%. Ruth uses the straight line
method (half-year convention) when calculating depreciation for accounting purposes. For IRS
purposes, the plane is considered five-year property. Assume the same earnings before depreciation
and taxes for the next six years. Prepare all journal entries relating to depreciation and taxes for all
five years.
What happens when tax rates change?
129
Why Successful People Never Bring Smartphones Into Meetings
You are annoying your boss and colleagues any time you take your phone out during meetings, says new
research from USC's Marshall School of Business, and if you work with women and people over forty they're
even more perturbed by it than everyone else.
The researchers conducted a nationwide survey of 554 full-time working professionals earning above $30K and
working in companies with at least 50 employees. They asked a variety of questions about smartphone use
during meetings and found:

86% think it’s inappropriate to answer phone calls during meetings

84% think it’s inappropriate to write texts or emails during meetings

66% think it’s inappropriate to write texts or emails even during lunches offsite
The more money people make the less they approve of smartphone use.

The study also found that Millennials are three times more likely than those over 40 to think that smartphone use
during meetings is okay, which is ironic considering Millennials are highly dependent upon the opinions of their
older colleagues for career advancement.
TalentSmart has tested the emotional intelligence of more than a million people worldwide and found that
Millennials have the lowest self-awareness in the workplace, making them unlikely to see that their smartphone
use in meetings is harming their careers.
Why do so many people—especially successful people—find smartphone use in meetings to be inappropriate?
When you take out your phone it shows a:

Lack of respect. You consider the information on your phone to be more important than the conversation
at hand, and you view people outside of the meeting to be more important than those sitting right in front
of you.

Lack of attention. You are unable to stay focused on one thing at a time.

Lack of listening. You aren’t practicing active listening, so no one around you feels heard.

Lack of power. You are like a modern-day Pavlovian dog who responds to the whims of others through
the buzz of your phone.

Lack of self-awareness: You don't understand how ridiculous your behavior looks to other people.

Lack of social awareness: You don't understand how your behavior affects those around you.
I can't say I'm surprised by the USC study's findings. My company coaches leadersusing 360° assessments that
compare their self-perception to how everyone else sees them. Smartphone use in meetings is one of the most
common coworker complaints.
130
It’s important to be clear with what you expect of others. If sharing this article with your team doesn't end
smartphone use in meetings, take a page out of the Old West and put a basket by the conference room door with
an image of a smart phone and the message, "Leave your guns at the door."