Wednesday, March 31, 2010

Normal Balances of Accounts

What is a Normal Balance

The sum of increases to the account is equal to or greater than the decreases to the account. Hence, the account is considered to have a normal balance.

Tuesday, March 30, 2010

What is Accounting Business Transaction?

There are two important criteria for an action to be considered an Accounting Business Transaction
  1. The business transaction must be recorded
  2. Transactions that are not related directly to outsiders are sometimes referred to as internal transactions.

Monday, March 29, 2010

Consolidation of Variable Interest Entities

What is the consolidation of Variable Interest Entities? Who gains or loses when voting rights do not determine consolidation?

The FASB has developed a risk-and-reward model and  introduced the notion of a variable-interest entity.

A variable-interest entity (VIE) is an entity that must have one of the following characteristics:  

  • Insufficient Equity Investment at risk- Stockholders are assumed to have sufficient capital investment to support the entity's operations. 
  • Stockholders lack decision-making rights-  Stockholders do not have the influence to control the company's management decision.  
  • Stockholders do not absorb the losses or receive the benefits-  Stockholders are shielded from losses related to primary risks that they have assumed, or their returns must be severally limited or must be shared with other people related to the transaction. 

Sunday, March 28, 2010

Maturity Value Definition

What is the accounting definition of Maturity Value?

Bond Maturity Value is the amount of an obligation to be collected or paid at maturity by the bond issuer that is equal to the principal plus any interest.

Wednesday, March 24, 2010

Zero-Interest-Bearing Notes

How to do deal with a Note that is not issued at face value? Zero-Interest-Bearing Notes

Companies that receive zero-interest-bearing notes will hold it with a present value that is the cash paid to the issuer. At the time of purchase, the company knows both the future amount and the present value of the note. Therefore, it can compute the interest rate accurately.

This special interest rate is often referred to as the implicit interest rate. Companies record the difference between the future amount and the present value as a discount. The company must amortize this discount to interest revenue over the life of the zero-interest-bearing note. 

Monday, March 22, 2010

Net Income Practice Problem

Solve for net income with the following facts:

Last year, beginning and ending total liabilities were $8,400 and $10,000, for a small local business.

At year-end, the owner's equity was $26,000 and the company had total assets that were $2,000 larger than at the beginning of this year.

If new capital stock issued exceeded dividends by $2,400,  calculate net income or net loss for the year?

Accounting Solution to Net Income Problem:

Capital Accounting ending $26,000
Total Liabilities Accounting ending $10,000

The company's Assets ending $36,000

Assets ending is larger than $2,000 at the beginning of the year.  Thus, the beginning total assets is $34,000. With beginning total assets of $34,000 and beginning liabilities of $8,400 our beginning total stockholders equity would be $25,600.  

Capital ending P26,000.00
Dividends 2,400.00

Total $28,400.00
Less Capital, beginning 25,600.00

Net income answer is $ 2,800.00

Friday, March 19, 2010

S Corporation Requirements

To qualify for S corporation status, the corporation must meet the following requirements or they will not be considered by the IRS to be a S Corporation:

  • Be a domestic corporation 
  • Have only allowable shareholders 
    • Including individuals, certain trust, and estates and
    • May not include partnerships, corporations or non-resident alien shareholders 
  • Have no more than 100 shareholders 
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations. 

Saturday, March 13, 2010

Earned Services Journal Entry

This is a basic journal entry to record the cash earned from services that the company does.

Type of Journal Entry
Account titles
Providing the service or sales that the company is in the business to perform for cash
Fees Earned


Wednesday, March 10, 2010

Is Variability of Returns Related to Accounting Risk?

Accounting Question: Is Variability of Returns Related to Accounting Risk?

Yes. Risk is the overall probability that a business activity will lead to an unfavorable result. The variability of returns is integrally related to this because it concerns the amount of return that a company may get from one of their investments.

For example, Degree of Operating Leverage  is a measure of business risk used by company's on their balance sheets,  Degree of Operating Leverage (DOL) demonstrates a small percentage change in a company's  sales can lead to a significant change on their EBIT or operating income that would not otherwise occur.

Additional Accounting Related Information on Financial Leverage and Variability of Returns:

Monday, March 8, 2010

Different Business Depreciation Methods

What is the straight-line depreciation method, units of production depreciation method, and double declining balance method if an investor purchase a business for $55 million dollars and the business will remain useful for 10 years (1,000,000 miles). At the end, the business will have residual value of $5 million.

Additional facts:

What will happen if 80,000 miles are put on the ship the first year and 115,000 miles the second year.

Using the above three methods, what is the business depreciation for the first and second years.

Accounting Answer:

If the straight line method is used, first determine the useful life and determine a rate in this case, which equals 1/10 of the entire useful life.

If the units of production method is used, this requires you amortize the current value by the proportion utilized $50,000,000/$ 1,000,000*usage

If the the double declining method of depreciation is used, this means that the accountant applies the rate chosen to declining methodology, but double the rate used each year so in each year you will charge 20% of the written down balance on a depreciation schedule.

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