BAT - SUMMATIVE REVIEW
Day 1 - Ownership
Sole Proprietorship - one owner business
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Characteristics
Advantages / Disadvantages
No practical question required
Partnerships (Ch. 14)
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Characteristics & Advantages/Disadvantages
Types – General, Limited, LLP
* Profit Splitting – Salary  Interest Allowance  Ratio
* Add New , * Retire Partner
, Ex. 14-3, 14-7, 14-8, 14-10…
Corporations (Ch. 15 & 16)
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Characteristics
Types of shares - Common Stock vs Preferred Stock (cumulative, participating)
Equity section – Contributed Capital vs Retained Earnings  not a practical question
*Dividend Distribution – calculation/entries
Issue Shares, *Retire Shares”, Cash & Share Dividends
Ex. 15-1, 15-3, 15-7, 15-14, 15-19…
Short Answer - test will involve 1 of the following or a question related to the same concepts as 1 of the following.
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Is mutual agency and advantage or disadvantage for a partnership? (Contract, within scope of business)
What type of partnership would you recommend for a group of lawyers and why?
A growing partnership is considering incorporation. What is the main advantage and what will be the main
disadvantage of becoming a corporation?
Day 2 - Assets & Liabilities
Accounts and Notes Receivable (Ch. 10)
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Uncollectable Accounts / Bad Debts
o Income Statement Method, Balance Sheet Method, Direct Write-off
o Write-offs (all to AFDA; “Hybrid” – last year’s sales to AFDA; this year’s to BD Expense)
o Subsequent Recovery (2 entries required)
Note Receivable (charges interest) … and for the company you are issuing the note to this is a Notes Payable
…KNOW for BOTH
o issue, maturity (honored or dishonored),
o calculate date of maturity and interest
o accrual required if goes over year-end
o If sign note vs issue note - becomes note payable an interest expense
A/R Turnover … Days Sales Uncollected
Bonds Payable & Notes Payable
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Issue bonds - face value, premium, discount
Long-Term Notes – fixed payment, interest plus fixed principal amount
Short-Term Notes Payable – covered as the “other company” in the Notes Receivable section (above)
Repaying Bonds and notes
Bonds and notes at maturity
Advantage/disadvantage of Bonds vs Long-term Note (a loan really) vs issuing shares
Short Answer - test will involve 1 of the following or a question related to the same concepts as 1 of the following.
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Which is better way of financing? Loan, bond, issue shares? Why
If we are not positive that a customer will not pay then we should wait until we are sure before we record
anything related to their potential non-payment. Discuss.
In CC  Common Shares, Preferred Shares, CCFROCS, CCFROTS
What is Treasury Shares? Contra-Equity
Issue Common and Preferred
Mar. 2 Cash
100,000
Common Shares
60,000
Preferred Shares
40,000
Declare dividend - $40,000 … P/S $10,000 and C/S $30,000
Dec. 1 Dividends Declared / R/E
Dec. 31
40,000
Dividends Payable – C/S
30,000
Dividends Payable- P/S
10,000
If use Div. Declared… it is closed to R/E at year-end
Pay dividends on Jan. 13th
Jan. 13
Dividends Payable – C/S
30,000
Dividends Payable- P/S
10,000
Cash
40,000
Dividends Declared to a corporation is like ___________ to a SP or Partnership. DRAWINGS
What significant date is missing above? Date of Record – no entry required
Retiring Shares … Of the 6,000 shares issued on Mar. 2 nd the corporation purchases and retires 800 of the
shares for $9/share.
April 25 Common Shares
8,000
Cash
7,200
Cont. Capital From RoCS
800
Of the remaining 5,200 the corporation purchase and retires 50 shares for $11.50
May 25 Common Shares
CCFROCS
Cash
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500
75
575
If no CCFROCS would debit R/E … balance in CCFROCS is now $725
What if issued more C/S between Apr. 25 and May 25 … Answer… need to recalculate the average price
of C/S before doing retirement
Of the remaining 5,150 shares the corporation purchases and retires 1,500 shares for $10.75/share
July 4
Common Shares
15,000
CCFROCS
725 (the remaining balance)
Retained Earnings
400
Cash
16,125
Process for Dividing Shares
1st Dividends in Arrears – to P/S if cumulative
2nd Current P/S Dividend – at stated rate/share
3rd Common Shares - get remainder UNLESS … P/S are partially or fully participating (see A, B below)
3rd A) C/S get same “Return on Equity” as P/S (for current year)
3rd B) Split remainder on ratio of share capital balances
* if partially participating, check to see that P/S is not over their max, if so, reduce P/S
additional to max
Shareholder’s Equity Summary – December 31, 2014
Preferred Shares - $2/share cumulative and participating to $2.85/share
100,000 shares authorized; 20,000 shares issued & outstanding
Common Shares – unlimited authorized; 250,000 shares outstanding
Contributed Capital From Retirement of Common Shares
Retained Earnings
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$842,000
1,187,500
35,000
3,467,000
The last time common shares received a dividend was December of 2011 and no dividends have been
declared since then.
Since the start of the business in 2008, the only shares that have been issued were 3,000 Preferred
Shares were issued on January 1, 2013.
On December 12, 2014 the Board of Directors declared a total of $200,000 for distribution as dividends.
Description
P/S
C/S
$842,000 (41.49%)
$1,187,500(58.51%)
20,000 share
250,000 shares
Dividend Declared
Total
200,000
Dividends in Arrears
2012 – 17000 x $2 = 34,000
74,000
---
2013 – 20000 x $2 = 40,000
P/S Current Dividend
(74,000)
126,000
(40,000)
20,000 x $2
40,000
---
--
56,413
12,276
17,311
C/S same Return on Equity as P/S
RonE = 40,000 / 842,000 = 4.75%
To C/S = 40000/842000 x 1187500
86,000
(56,413)
29,587
Split Remainder based on Equity
P/S = 29,587 x 0.4149 = 12,276
P/S Max Additional =(2.85-2)x20,000 =
17,000 (therefore don’t need to limit)
C/S = 29,587- 12,276 = 17,311
What is maximum dividend such that the P/S participating feature does NOT kick in?
$171, 413
What is the minimum dividend that would allow P/S to receive their max of $2.85/share?
To get to $17,000 additional … 41.49% x Remainder After C/S = 17,000
Remainder After C/S = 17000 / 0.4149
= 40,974
THEREFORE, must declare minimum of 171,413 + 40974 = 212,387
(29,587)
0
Aee, Bee and Cee start a partnership with cash investments by Aee ($200,000) and Bee ($350,000). Cee had an
existing business with Equipment ($150,000) and Accumulated Depreciation ($40,000) some inventory ($50,000),
supplies ($3,000) and has a business loan ($30,000) that the partnership will assume. Also, the equipment was
appraised at a FMV of $80,000.
2014
Jan. 1 Cash
550,000
Equipment
80,000
Inventory
50,000
Supplies
3,000
Loan
30,000
Aee, Capital
200,000
Bee, Capital
350,000
Cee, Capital
103,000
At the end of 2014 the business had a profit of $225,000. The partnership agreement stated that profits/losses
would be split based on the following:
 Salary Allowances of $70,000; $20,000 and $110,000 respectively
 Interest Allowance of 9% beginning capital balances
 a ratio of 2:2:3
Description
Aee
Bee
Cee
Net Income
Total
225000
70000
Salary Allowances
20000
110000
(200000)
25000
18000
31500
9270
Interest Allowances (9% x Capital)
Split Remaining Over-allocation
Aee = 2/7 x 33770
(58770)
(33,770)
(9649)
(9649)
Bee = 2/7 x 33770
(14472)
Cee = 3/7 x 33770
33770
0
Total
78351
41851
104798
If Aee, Bee and Cee had drawings of $85,000; $40,000 and $60,000 what would the capital balances be at year-end?
Aee ~ $193,351
Bee ~ $351,851
Cee ~ $147,798
TOTAL ~ $693,000
On January 1, 2015 the three existing partners agree to take Dee as a partner for a cash investment of $290,000
Options …
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What if Dee made a deal with Aee to purchase their interest for the $290,000?
Jan. 1 Aee, Capital
Dee, Capital
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(What if made a deal with multiple partners?)
193,351
193,351
Dee’s investment will determine his capital … what % would Dee own
Jan. 1 Cash
Dee, Capital
290,000
290,000
Dee % = 290,000 / (693,000 + 290,000) = 29.5%
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Dee will receive 20% for the investment
Net Assets (before)
$693,000
Add: Investment by Dee
290,000
Net Assets (after)
983,000
- what the business owned before the investment (A –L or OE)
- the assets will increase with Dee’s investment
x 20%
Dee’s Ownership
196,600
Invested By Dee
290,000
Bonus To Existing
93,400
Aee
(2/7 x 93,400)
$26,686
Jan. 1 Cash
Dee, Capital
Aee, Capital
Bee, Capital
Cee, Capital
Bee
Cee
(…)
(…)
$26,686
$40,028
290,000
196,600
26,686
26,686
40,028
If used 35% interest for the $290,000 … Dee’s Capital would be $344,050 and
the bonus would be TO DEE for $54,050 which will have to come from Aee, Bee
and Cee’s capital based on the ratio THUS Aee’s capital will be debited for
$15,443. Would require WLC’s similar to above.
Jan. 1 Cash
Aee, Capital
Bee, Capital
Cee, Capital
Dee, Capital
290,000
15,443
15,443
23,164
344,050
Retiring Partner … “rewind” … assume that Dee
was NOT involved and the capital total for Aee, Bee & Cee
is the $693,000
BTW, you have already done a retirement when Aee retired by selling their
interest to Dee BUT this was a personal transaction … see above
Assume that Aee wants to retire from the business and the partnership agrees to
pay Cee $150,000 cash.
Aee Capital
Paid to Aee
Bonus to Remaining Partners
$193,351
150,000
43,351
Bee
(2/5 x 43,351)
$17,340
Jan. 1 Aee, Capital
Cash
Bee, Capital
Cee, Capital
Notice, only use ratios
of the remaining
partners for division of
the bonus.
Cee
(3/5 x 43,353)
2:2:3
$26,011
193,351
150,000
17,340
26,011
Account & Notes Receivable …
On October 13, 2014 Acme issues 2 notes. To Aee Ltd. a $24,000 note for 60day note with an interest rate of 6%. The note to Bee Inc. is a $50,000 note with
a 120-day term and an interest rate of 8¼%. Both notes are issued to finance a
sale on that date.
Oct. 13 Notes Receivable
Sales
74,000
74,000
Due Dates…
Aee’s Note ($24,000 ; 6%)
Oct
18 (31-13)
Nov
30
Dec
12 (Due Date)
60
Interest….
= 24,000 x 0.06 x 60/365
= 236.71
Bee’s Note ($50,000  8¼%)
Oct.
18
Nov
30
Dec
31
Jan
31
Feb
10 (Due Date)
120 (79 in ’14 ; 41 in ‘15)
Interest …
= 50,000 x 0.0825 x 120/365
= 1,356.16
For 2014 = 50,000 x 0.0825 x 79/365
= 892.81
For 2015 = 1,356.16 – 892.81 = 463.35
On Dec. 12th Aee Ltd. honors the note and transfers the cash to our account.
Dec. 12 Cash
Notes Receivable
Interest Revenue
24,236.71
24,000.00
236.71
NOTICE… if we were making the entries for Aee Ltd. it would be
Dec. 12
Notes Payable
Interest Expense
Cash
24,000.00
236.71
24,236.71
On December 31st the balance in A/R was $130,000 and Notes Receivable was
$50,000. The AFDA balance was 12,000 Dr. (since it includes write-offs from
last year’s sales and also this year’s sales).
There are no concerns about the collection of the Note Receivable. We will use
the balance sheet method for AFDA at a rate of 2% of receivables (could have
use “Aged A/R” but this seems to be working out relatively accurately)
Using BS Method
Estimated AFDA = 130,000 x 2% = 2,600
Current Balance in AFDA
12,000 Dr
Adj. Required
14,600 to make AFDA $2,600 Cr.
Dec. 31 Bad Debt Expense
AFDA
14,600
14,600
Note: balance in AFDA is now $2,600 Cr. And Bad Debt Expense is $14,600 (since
all write-offs were to AFDA) – see your T-accounts (on paper or in your mind)
Dec. 31 Interest Receivable
Interest Revenue
892.81
892.81
NOTE: To start 2015 … A/R = 130,000…AFDA = 2,600 (Cr.)…Bad Debt Exp. $0 …
Notes Rec’ble 50,000 … Accrued Interest 892.81 … Interest Revenue $0
On Feb. 10 Bee Inc. does not pay the note (dishonoured)
Jan. 1 Interest Revenue
Interest Receivable
892.81
892.81
Now, with reversing (above), the Interest Revenue has a debit of 892.81 (“that’s odd”,
but wait) and the Accrued Interest is zero…
Feb. 10 A/R – Bee Inc.
Interest Revenue
Notes Receivable
51,356.16
1,356.16
50,000.00
Now the int. revenue will be 463.35 (which is interest related to this year)
IF NO REVERSING was done on Jan. 1
Feb. 10 A/R – Bee Inc.
Interest Receivable
Interest Revenue
Notes Receivable
51,356.16
892.81
463.35
50,000.00
On Feb. 3, 2015 a receivable ($900) from Eff Ltd. is declared uncollectable –
(although we don’t need to know it, this was from a 2014 sale).
Feb. 3 AFDA
A/R – Eff Ltd.
900
900
On Mar. 2, 2015 a $456 receivable from Haych Inc. is declared uncollectable
(original sale on Jan. 5, 2015)
Mar. 2 AFDA
A/R – Haych Ltd.
456
456
NOTE: If specified, you could use the method where sales from the current year
are written off by debiting BD Expense rather than AFDA.
April 1 a cheque from Haych Ltd. ($456) is received along with an apology.
Apr. 1 A/R – Haych Ltd.
AFDA
1 Cash
A/R – Haych Ltd.
456
456
456
456
At the end of the year, the AFDA has a balance of $13,900 (Dr.) … A/R $157,000
… BD Expense ($0) … Sales $1,128,000
This year, they are changing to the Income Statement method and using an
estimating percentage of 1½% of sales.
Income Stmt Method…
Estimated BD Expense = 1,128,000 x 0.015 = 16,920
BD Expense Unadjusted
0
Adjustment Required
16,920
(assuming all written off to AFDA)
Notice the differences … the estimate is a % of sales and is an estimate of the
BD Expense (not AFDA) … compare estimate to the income stmt account -- BD
Expense … adjust the expense to become the estimate
Dec. 31 Bad Debt Expense
16,920
AFDA
16,920
Now the adjusted balances will be … BD Expense 16,920 … AFDA $3,020 (Cr.)