19,99 €
19,99 €
-100%
Sammeln Sie Punkte in unserem Gutscheinprogramm und kaufen Sie E-Books und Hörbücher mit bis zu 100% Rabatt.
Mehr erfahren.
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The all-new fast-reference problem solver for controllers The Vest Pocket Controller is the handy pocket problem-solver that gives today's busy executives and accountants the helpful information they need in a quick-reference format. Whether in public practice or private industry, professionals will always have this reliable reference tool at their fingertips because it easily goes anywhere-to a client's office, on a business trip, or to an important lunch meeting. * Covers management areas a controller is likely to encounter * Easy-to-use Q & A format offering hundreds of explanations supported by a multitude of examples, tables, charts, and ratios * Other titles by Bragg: Running an Effective Investor Relations Department: A Comprehensive Guide, Accounting Best Practices, Sixth Edition, and Just-in-Time Accounting, Third Edition Packed with practical techniques and rules of thumb for analyzing, evaluating, and solving the day-to-day problems every controller faces, The Vest Pocket Controller helps you quickly pinpoint what to look for, what to watch out for, what to do, and how to do it.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 526
Veröffentlichungsjahr: 2010
0,0
Bewertungen werden von Nutzern von Legimi sowie anderen Partner-Webseiten vergeben.
Legimi prüft nicht, ob Rezensionen von Nutzern stammen, die den betreffenden Titel tatsächlich gekauft oder gelesen/gehört haben. Wir entfernen aber gefälschte Rezensionen.
Ähnliche
Table of Contents
Praise
Title Page
Copyright Page
PREFACE
ABOUT THE AUTHOR
FREE ONLINE RESOURCES BY STEVE BRAGG
PART I - ACCOUNTING STANDARDS
CHAPTER 1 - REVENUE RECOGNITION
When Can I Report Revenue at Gross Instead of Net?
How Does the Installment Method Work?
Can I Recognize Revenue When There Is a Right of Return?
When Can I Record Bill-and-Hold Sales?
How Does the Percentage-of-Completion Method Work?
How Does the Completed-Contract Method Work?
What Types of Pricing Arrangements Are Used in Contracts?
How Do I Account for Contract Losses?
How Do I Account for Additional Claims under a Contract?
How Does the Deposit Method Work?
How Do I Account for Installation Fees?
What Recognition Methods Can I Use for Service Billings?
How Do I Record Revenue for Franchise Sales?
CHAPTER 2 - INVESTMENT ACCOUNTING
Which Securities Are Designated as Marketable Equity Securities?
What Is the Accounting for Marketable Equity Securities?
What Is the Accounting for Transfers between Available-for-Sale and Trading Investments?
What Is the Accounting for Investments in Debt Securities?
What Is the Accounting for Debt Securities among Portfolios?
How Are Deferred Tax Effects Recognized for Changes in Investment Valuation?
What Is the Accounting for Significant Equity Investments?
What Is the Accounting for an Investment Amortization?
What Is the Accounting for an Equity Method Investment Impairment?
When Is the Equity Method No Longer Used?
What Are the Key Decisions for Recording Gains or Losses on Securities?
CHAPTER 3 - INVENTORY ACCOUNTING
How Do I Account for Goods in Transit?
How Does Inventory Ownership Vary under Different Delivery Situations?
How Do I Account for Consigned Inventory?
What Overhead Do I Allocate to Inventory?
How Do I Account for the Lower of Cost or Market Rule?
How Does the First-in, First-out Valuation Method Work?
What Are the Advantages and Disadvantages of FIFO Valuation?
How Does the Last-in, First-out Valuation Method Work?
What Are the Advantages and Disadvantages of LIFO Valuation?
How Does the Dollar-Value LIFO Valuation Method Work?
How Does the Link-Chain Valuation Method Work?
How Does the Weighted-Average Valuation Method Work?
CHAPTER 4 - FIXED ASSET ACCOUNTING
What Is Included in the Capitalized Cost of a Fixed Asset?
What Is the Price of a Purchased Fixed Asset?
What Is the Price of a Fixed Asset Obtained through an Exchange?
What Is the Price of a Fixed Asset Obtained with a Trade-in?
What Is the Price of a Group of Fixed Assets?
What Is the Accounting for Improvements to Fixed Assets?
How Is Interest Associated with a Fixed Asset Capitalized?
What Is the Accounting for a Fixed Asset Disposition?
What Is the Accounting for an Asset Retirement Obligation?
What Is the Accounting for Donated Assets?
What Is the Accounting for Construction in Progress?
What Is the Accounting for Land?
What Is the Accounting for Leasehold Improvements?
How Is an Asset’s Depreciation Basis Calculated?
What Are the General Depreciation Concepts?
How Is Straight-Line Depreciation Calculated?
How Is Double-Declining Balance Depreciation Calculated?
How Is Sum-of-the-Years’ Digits Depreciation Calculated?
How Is Units-of-Production Depreciation Calculated?
What Is the Accounting for Asset Impairment?
What Is the Accounting for Intangible Assets?
CHAPTER 5 - DEBT ACCOUNTING
When Is Debt Categorized as Short Term or Long Term?
How Are Bonds Sold at a Discount or Premium Recorded?
What Is the Effective Interest Method?
How Is Debt Issued with No Stated Interest Rate Recorded?
How Are Debt Issuance Costs Recorded?
How Is a Debt Issuance with Attached Rights Recorded?
How Is a Debt Issuance for Property Recorded?
How Is a Debt Extinguishment Recorded?
How Is a Temporary or Permanent Bond Default Recorded?
How Is a Restructured Bond Obligation Recorded?
How Is an Asset Transfer to Eliminate Debt Recorded?
How Is Convertible Debt Recorded?
How Is Debt Issued with Stock Warrants Recorded?
CHAPTER 6 - STOCKHOLDERS’ EQUITY
What Is Par Value?
How Is Stock Valued that Is Issued for Property or Services?
What Are the Characteristics of Preferred Stock?
What Is Convertible Preferred Stock?
What Is a Stock Split?
What Is a Stock Subscription?
What Is Retained Earnings?
What Is a Stock Warrant?
What Are the Key Dates Associated with Dividends?
What Is a Property Dividend?
What Is a Stock Dividend?
What Is a Liquidating Dividend?
What Is Treasury Stock?
What Is the Constructive Retirement Method?
What Is a Stock Option?
How Is a Stock Option Recorded under the Intrinsic Value Method?
How Is a Stock Option Recorded under the Fair Value Method?
How Do Option Expirations Impact Compensation Expense?
What Happens When an Option Expires?
What Happens if the Company Buys Options from the Option Holder?
How Is the Option Vesting Period Recognized?
What Are Stock Appreciation Rights?
How Do I Account for Stock Appreciation Rights?
How Does an Employee Stock Ownership Plan Work?
CHAPTER 7 - LEASE ACCOUNTING
What Is the Accounting for an Operating Lease by the Lessee?
What Is the Accounting for a Capital Lease by the Lessee?
How Does the Lessor Account for an Operating Lease?
How Does the Lessor Account for a Sales-Type Lease?
How Does the Lessor Account for a Direct Financing Lease?
What Is the Accounting for a Lease Termination?
What Is the Accounting for a Lease Extension by the Lessee?
What Is the Accounting for a Lease Extension by the Lessor?
What Is the Accounting for a Sublease?
What Is the Accounting for a Sale-Leaseback Transaction?
CHAPTER 8 - FOREIGN CURRENCY ACCOUNTING
What Is the Goal of Foreign Currency Accounting?
How Does the Current Rate Method Convert Foreign Currency Transactions into ...
How Does the Remeasurement Method Convert Foreign Currency Transactions into ...
What Conversion Method Is Used for Occasional Foreign Currency Transactions?
How Do I Decide Which Conversion Method to Use?
What Is the Accounting for Foreign Currency Translation Adjustments?
What Exchange Rates Are Used for Conversion Calculations?
How Is Foreign Exchange Handled in Intercompany Transactions?
PART II - ACCOUNTING MANAGEMENT
CHAPTER 9 - CLOSING THE BOOKS
What Types of Closes Are There?
What Problems Contribute to a Delayed Close?
How Does Activity Acceleration Improve the Close?
How Do Reporting Changes Improve the Close?
How Can Journal Entry Optimization Improve the Close?
How Can I Improve the Inventory Close?
How Can I Improve the Payroll Close?
How Can I Improve the Payables Close?
What Is Included in a Closing Checklist?
What Extra Closing Steps Are Needed by a Public Company?
CHAPTER 10 - CASH MANAGEMENT
What Types of Float Are Associated with a Check Payment?
What Is Value Dating?
What Is a Lockbox?
What Is Remote Deposit Capture?
Why Is Cash Concentration Useful?
What Strategies Are Available for Cash Concentration?
What Is Physical Sweeping?
When Do Sweeps Occur?
When Are Intercompany Loans Linked to Cash Sweeps?
What Is Notional Pooling?
What Is a Bank Overlay Structure?
What Short-Term Investment Options Are Available?
What Investment Strategies Are Used for Short-Term Investments?
CHAPTER 11 - RECEIVABLES MANAGEMENT
How Do I Create and Maintain a Credit Policy?
How Do I Obtain Financial Information about Customers?
How Does a Credit-Granting System Work?
What Payment Terms Should I Offer to Customers?
When Should I Review Customer Credit Levels?
How Can I Adjust the Invoice Content and Layout to Improve - Collections?
How Can I Adjust Billing Delivery to Improve Collections?
Should I Offer Early Payment Discounts?
How Do I Optimize Customer Contacts?
How Do I Manage Collection Information?
How Do I Handle Payment Deductions?
How Do I Collect Overdue Payments?
When Should I Take Legal Action to Collect from a Customer?
CHAPTER 12 - INVENTORY MANAGEMENT
How Do I Increase the Accuracy of Inventory Records?
How Do I Reduce the Number of Stock-Keeping Units in Inventory?
How Do I Reduce Inventory Purchases?
How Do I Compress Inventory Storage Space?
How Do I Avoid Inventory Losses on Short Shelf Life Items?
How Do I Improve Picking Efficiency?
How Do I Store Inventory to Reduce Picking Travel?
How Do I Reduce Inventory Scrap?
How Do I Identify Obsolete Inventory?
How Do I Sell Obsolete Inventory?
CHAPTER 13 - DEBT MANAGEMENT
What Is Commercial Paper?
What Is Factoring?
What Is Accounts Receivable Financing?
What Is Field Warehouse Financing?
What Is Floor Planning?
What Is an Operating Lease?
What Is a Capital Lease?
What Is a Line of Credit?
What Is a Bond?
What Types of Bonds Can Be Issued?
What Is a Bridge Loan?
What Is Receivables Securitization?
What Is a Sale and Leaseback Arrangement?
How Does One Interact with Credit Rating Agencies?
How Do the Credit Rating Agency Scores Compare to Each Other?
CHAPTER 14 - EQUITY REGISTRATION
What Methods Are Used to Register Stock for Sale?
What Are the Contents of a Form S-1?
When Is a Form S-3 Used?
When Is a Form S-8 Used?
What Is a Shelf Registration?
Why Must a Registration Statement Be Declared Effective?
When Can the Regulation A Exemption Be Used?
What Are the Advantages of Using a Regulation A Exemption?
What Is the Process for Using the Regulation A Exemption?
What Are the Restrictions on Using the Regulation D Exemption?
When Can Rule 144 Be Used to Register Stock?
PART III - FINANCIAL ANALYSIS
CHAPTER 15 - FINANCIAL ANALYSIS
How Do I Calculate the Breakeven Point?
What Is the Impact of Fixed Costs on the Breakeven Point?
What Is the Impact of Variable Cost Changes on the Breakeven Point?
How Do Pricing Changes Alter the Breakeven Point?
How Can the Product Mix Alter Profitability?
How Do I Calculate Price Variances?
How Do I Calculate Efficiency Variances?
How Do I Conduct a Profitability Analysis for Services?
How Are Profits Affected by the Number of Days in a Month?
Which Research and Development Projects Should Be Funded?
How Do I Create a Throughput Analysis Model?
How Do I Determine if More Volume at a Lower Price Creates More Profit?
Should I Outsource Production?
Should I Add Staff to the Bottleneck Operation?
Should I Produce a New Product?
CHAPTER 16 - PRICING ANALYSIS
What Is the Lowest Price that I Should Accept?
How Do I Set Long-Range Prices?
How Should I Set Prices over the Life of a Product?
How Should I Set Prices against a Price Leader?
How Do I Handle a Price War?
How Do I Handle Dumping by a Foreign Competitor?
When Is Transfer Pricing Important?
How Do Transfer Prices Alter Corporate Decision Making?
How Does the External Market Price Work as a Transfer Pricing Method?
How Does Adjusted Market Pricing Work as a Transfer Pricing Method?
How Do Negotiated Transfer Prices Work as a Transfer Pricing Method?
How Does the Contribution Margin Work as a Transfer Pricing Method?
How Does the Cost-Plus Method Work as a Transfer Pricing Method?
How Do the Transfer Pricing Methods Compare to Each Other?
CHAPTER 17 - COST REDUCTION ANALYSIS
What Reports Are Used for Cost Reduction Projects?
What Is Spend Analysis?
How Is the Spend Database Constructed?
How Does Supplier Consolidation Work?
How Does Parts Consolidation Work?
Can Spend Analysis Work for MRO Items?
What Is Spend Compliance?
Which Reports Should Be Used for Spend Analysis?
What Is the Analysis for a Workforce Reduction?
What Is the Cost of a Workforce Reduction?
What Are the Alternatives to a Workforce Reduction?
How Does 5S Analysis Reduce Costs?
How Are Check Sheets Used?
How Is Error Quantification Used?
How Is Fixed Cost Analysis Used?
How Are Ishikawa Diagrams Used?
How Is Value Stream Mapping Used?
What Is Waste Analysis?
CHAPTER 18 - METRICS
How Do I Calculate Accounts Payable Turnover?
How Do I Calculate Accounts Receivable Turnover?
How Do I Calculate the Average Receivable Collection Period?
How Do I Calculate the Cash-to- Working-Capital Ratio?
How Do I Calculate the Core Growth Rate?
How Do I Calculate the Cost of Capital?
How Do I Calculate the Current Ratio?
How Do I Calculate Customer Turnover?
How Do I Calculate the Debt Coverage Ratio?
How Do I Calculate the Debt-to-Equity Ratio?
How Do I Calculate the Dividend Payout Ratio?
How Do I Calculate Economic Value Added?
How Do I Calculate Expense Coverage Days?
How Do I Calculate Fixed Charge Coverage?
How Do I Calculate Inventory Accuracy?
How Do I Calculate Inventory Turnover?
How Do I Calculate the Margin of Safety?
How Do I Calculate Net Worth?
How Do I Calculate the Price/Earnings Ratio?
How Do I Calculate the Quick Ratio?
How Do I Calculate Times Interest Earned?
How Do I Calculate Working Capital Productivity?
PART IV - CONTROL SYSTEMS
CHAPTER 19 - BUDGETING
Why Is Budgeting Important?
How Do the Various Budgets Fit Together?
How Is the Revenue Budget Constructed?
How Are the Production and Inventory Budgets Constructed?
How Is the Purchasing Budget Constructed?
How Is the Direct Labor Budget Constructed?
How Is the Overhead Budget Constructed?
How Is the Cost of Goods Sold Budget Constructed?
How Is the Sales Department Budget Constructed?
How Is the Marketing Budget Constructed?
How Is the General and Administrative Budget Constructed?
How Is the Staffing Budget Constructed?
How Is the Facilities Budget Constructed?
How Is the Research Department Budget Constructed?
How Is the Capital Budget Constructed?
How Are the Budgeted Financial Statements Constructed?
How Is the Financing Budget Constructed?
What Is a Flex Budget?
CHAPTER 20 - CAPITAL BUDGETING
What Is Capital Budgeting?
What Are the Problems with Capital Budgeting Analysis?
Why Focus on Bottleneck Investments?
When Should I Invest in a Bottleneck Operation?
What Capital Budgeting Application Form Should I Use?
Should I Invest in Upstream Workstations?
Should I Invest in Downstream Workstations?
Should I Lease an Asset or Buy It?
What Is Net Present Value?
What Cash Flows Are Included in a Net Present Value Calculation?
What Is Investment Payback?
CHAPTER 21 - CONTROL SYSTEMS
What Are the Controls for a Computerized Accounts Payable System?
What Are the Controls for Procurement Cards?
What Are the Controls for Order Entry, Credit, and Shipping?
What Are the Controls for Drop-Shipped Orders?
What Are the Controls for a Perpetual Inventory Tracking System?
What Are the Controls for Billing?
What Are the Controls for Collections?
What Are the Controls for Check Receipts?
What Are the Controls for Investments?
What Are the Controls for Payroll?
PART V - PUBLIC COMPANY ACCOUNTING
CHAPTER 22 - SEC FILINGS
What Is the Form 8-K?
What Information Is Included in the Annual and Quarterly Reports?
When Must Annual and Quarterly Reports Be Filed?
What Is the Form S-1?
What Is the Form S-3?
What Is the Form S-8?
What Forms Require a Payment to the SEC?
How Do I Make a Fedwire Payment?
CHAPTER 23 - PUBLIC COMPANY ACCOUNTING TOPICS
When Is Interim Reporting Required?
What Is the Integral View of Interim Reporting?
What Is the Discrete View of Interim Reporting?
How Are Changes in Accounting Principle and Estimate Accounted for in Interim Periods?
When Is Segment Information Required?
How Are Reportable Segments Determined?
How Is Basic Earnings per Share Calculated?
How Is Diluted Earnings per Share Calculated?
What Methods Are Used for Calculating Diluted Earnings per Share?
How Should Non-GAAP Information Be Disclosed?
INDEX
Additional Praise for The Vest Pocket Controller
“The Vest Pocket Controller presents the accounting community with a fantastic resource that provides relevant and concise guidance. The question-and-answer format allows the reader the opportunity to find the answer and review the accounting treatment with some additional insight and commentary. The Vest Pocket Controller is an indispensable guide for all accountants.”
—Josh Nowack, CPA, MBA, Nowack Strategic Business Advisory & CPA
“The Vest Pocket Controller provides important information in an easy-to-use format. This book should be required reading for anyone in an accounting or finance role as it is a resource that will be referenced time and again. Since reading the book for the first time, I find myself referring to its content on a regular basis. Not only will you find The Vest Pocket Controller in my vest pocket, but I will also be giving it to everyone in my accounting department.
—Steven Randall, Managing Partner, Vonya Global LLC
“This book is a quick reference guide for a controller. It provides clear and concise answers with explanations to the various questions a controller may have in his day-today operations, with plenty of examples. A valuable addition to any controller’s library.”
—Priya K Srinvasan, Owner, Priya K Srinivasan CPA
“The Vest Pocket Controller is a comprehensive, incredibly well-organized reference for controllers and accounting professionals alike complete with real-world scenarios and easy-to-follow journal entries. Once again, Steven Bragg has put together a must-have accounting ‘cheat sheet’ for CPAs, accountants, and all level of finance professionals.”
—Adrienne Gonzalez, Founding Editor,JrDeputyAccountant.com
“Steve provides a clear and effective guide for readers from accountants to financial managers. This book covers key topics concisely and clearly and earns a place as a key reference book.”
—Paul Apodaca, Principal at Apodaca Consulting and Finance Manager, WONIK Quartz International
Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data
Bragg, Steven M.
The vest pocket controller/Steven M. Bragg.
p. cm.
Includes index.
eISBN : 978-0-470-62560-6
1. Managerial accounting. 2. Corporations-Accounting.
3. Accounting. I. Title.
HF5657.4.B723 2010
658.15’11-dc22
2009051056
PREFACE
This is a handy pocket problem solver for the controller. It covers the multitude of areas that a controller may address during the working day—accounting standards, management issues, financial analysis, controls, and even how to handle a variety of public company issues. It does so with hundreds of concise explanations that are supported by a multitude of examples, tables, charts, and ratios. The layout is designed for quick comprehension of such questions as:
• Should I report revenue at gross or net?
• What are the different types of marketable securities, and how do I account for them?
• How do I use the FIFO and LIFO inventory valuation methods?
• How do I account for bond discounts and premiums?
• How do I record a treasury stock transaction?
• When is a lease a capital lease?
• How do I convert foreign currency transactions into the home currency?
• How do I achieve a fast close?
• How do I set up cash sweeping or notional pooling?
• How do I create a perpetual inventory system?
• What exemptions are available for stock registrations?
• How do I create a throughput analysis model?
• How do I set long-range prices?
• How do I create a spend analysis system?
• Should I lease an asset or buy it?
• What controls should I implement for the core accounting systems?
Part I (Chapters 1-8) covers the most heavily used GAAP accounting standards. These standards are segregated into the topics of revenue recognition, investments, inventory, fixed assets, debt, stockholders’ equity, leases, and foreign currency accounting. Numerous explanatory examples are intermingled with the text.
Part II (Chapters 9-14) addresses a number of management areas that a controller is likely to encounter. These include a discussion of the steps needed to close the books, the banking structures needed to marshal cash into the proper investments, how to accelerate the collection of receivables, what can be done to minimize the investment in inventory, what types of debt are available, and how to register equity for sale.
Part III (Chapters 15-18) delves into a variety of financial analysis topics, with a particular focus on bottleneck analysis, how to set prices correctly, and how to reduce costs. Chapter 18 contains a number of the metrics that a controller is most likely to need, along with helpful examples.
Part IV (Chapters 19-21) describes the primary control systems that a controller needs to ensure that transactions are as error-free as possible. It also describes a comprehensive budgeting system and how to analyze capital budgeting proposals so that only truly necessary assets are acquired.
Part V (Chapters 22-23) covers a number of the more common reports that must be filed periodically with the SEC as well as the accounting issues that are specific to the public company: earnings per share, interim reporting, and segment reporting.
Throughout, The Vest Pocket Controller has been structured to provide concise answers to the questions that a controller is most likely to encounter during a typical business day. Keep it handy for easy reference and daily use.
ABOUT THE AUTHOR
Steven Bragg, CPA, has been the chief financial officer or controller of four companies as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books through John Wiley & Sons except where indicated:
Accounting and Finance for Your Small Business Accounting Best Practices Accounting Control Best Practices Accounting Policies and Procedures Manual Advanced Accounting Systems (Institute of Internal Auditors) Billing and Collections Best Practices Business Ratios and Formulas The Controller’s Function Controller’s Guide to CostingController’s Guide to Planning and Controlling Operations
Controller’s Guide: Roles and Responsibilities for the New Controller
ControllershipCost AccountingCost Reduction AnalysisEssentials of Payroll Fast Close Financial Analysis GAAP Guide GAAP Policies and Procedures Manual GAAS Guide Inventory Accounting Inventory Best Practices Investor Relations Just-in-Time Accounting Management Accounting Best Practices Managing Explosive Corporate Growth Mergers and Acquisitions The New CFO Financial Leadership Manual Outsourcing Payroll Accounting Payroll Best Practices Revenue Recognition Run the Rockies (CMC Press) Running a Public Company Sales and Operations for Your Small Business The Ultimate Accountants’ ReferenceThe Vest Pocket Controller Throughput Accounting Treasury Management
FREE ONLINE RESOURCES BY STEVE BRAGG
Mr. Bragg Steve issues a free accounting best practices podcast. You can sign up for it at www.accountingtools.com, or access it through iTunes.
PART I
ACCOUNTING STANDARDS
CHAPTER 1
REVENUE RECOGNITION
When Can I Report Revenue at Gross Instead of Net?
Reporting on a “gross” basis is appropriate when the entity takes ownership of the goods being sold to its customers, with the risks and rewards of ownership accruing to it. For example, if the entity runs the risk of obsolescence or spoilage during the period it holds the merchandise, gross reporting would normally be appropriate. However, if the entity merely acts as an agent for the buyer or seller from which it earns a commission, “net” reporting would be more appropriate. These factors are indicators that revenue should be recorded at its gross amount:
• The company that is the primary obligor in the arrangement is the company responsible for the fulfillment of the order, including the acceptability of the product or service to the customer.
• The company has general inventory risk. This exists if a company takes title to a product before the product is ordered by a customer or will take title to the product if the customer returns it.
• The company has physical loss inventory risk. This exists if the title to the product is transferred to the company at the shipping point and then transferred to the customer upon delivery.
• The company establishes the selling price.
• The company changes the product or performs part of the service.
• The company has multiple suppliers for the product or service ordered by the customer.
• The company is involved in determining the nature, type, characteristics, or specifications of the product or service by the customer.
• The company has credit risk for the amount billed to the customer. This exists if the company must pay the supplier irrespective of whether the customer has paid.
A company should record revenue at its net value if a preponderance of the preceding bullet points were not the case, and especially if it is being paid what is in essence a commission.
How Does the Installment Method Work?
Under the installment method, revenue recognition is deferred until the period of cash collection. The seller recognizes both revenues and cost of sales at the time of the sale; however, the related gross profit is deferred to those periods in which cash is collected. The installment method can be used in most sales transactions for which payment is to be made through periodic installments over an extended period of time and the collectibility of the sales price cannot be reasonably estimated. This method is applicable to the sales of real estate, heavy equipment, home furnishings, and other merchandise sold on an installment basis. The six to use in accounting for sales under the installment method are presented next.
1. During the current year, record sales and cost of sales in the regular manner. Record installment sales transactions separately from other sales. Set up installment accounts receivable identified by the year of sale (e.g., Installment Accounts Receivable—2010).
2. Record cash collections from installment accounts receivable. Cash receipts must be properly identified as to the year in which the receivable arose.
3. At the end of the current year, transfer installment sales revenue and installment cost of sales to deferred gross profit properly identified by the year of sale. Compute the current year’s gross profit rate on installment sales as follows:
Alternatively, the gross profit rate can be computed as follows:
Can I Recognize Revenue When There Is a Right of Return?
A company can record revenue from a sales transaction at the time of the sale if all of the next conditions are met, and the company must accrue any estimated losses (such as warranty or sales returns) at the same time:
• The sale price is fixed on the sale date.
• The buyer is obligated to pay the seller.
• The buyer’s payment obligation would not be changed if the product is subsequently damaged or destroyed.
• The seller does not have significant future performance obligations connected to the sale.
• The amount of future returns can be reasonably estimated.
When Can I Record Bill-and-Hold Sales?
In a bill-and-hold situation, a company bills its customer but stores the sold goods on behalf of the customer. This scenario presents a high risk for fraud, since customers may not agree to or be aware of the sales. Accordingly, all of the next factors must be present before a bill-and-hold transaction can be recorded as revenue:
• The customer requests this arrangement.
• The customer has a substantial business purpose for doing so.
• There is a fixed delivery schedule to the customer.
• The goods are both segregated and ready for shipment.
How Does the Percentage-of-Completion Method Work?
The principal method for recognizing revenue under a long-term construction contract is the percentage-of-completion method. It recognizes income as work on a contract (or group of closely related contracts) progresses. The recognition of revenues and profits is related to costs incurred in providing the services required under the contract.
Under this method, work in progress (WIP) is accumulated in the accounting records. If the cumulative billings to date under the contract exceed the amount of the WIP plus the portion of the contract’s estimated gross profit attributable to that WIP, the contractor recognizes a current liability captioned “billings in excess of costs and estimated earnings.” This liability recognizes the remaining obligation of the contractor to complete additional work prior to recognizing the excess billing as revenue.
If the reverse is true—that is, the accumulated WIP and gross profit earned exceed billings to date—the contractor recognizes a current asset captioned “costs and estimated earnings in excess of billings.” This asset represents the portion of the contractor’s revenues under the contract that have been earned but not yet billed under the contract provisions. Where more than one contract exists, these assets and liabilities are determined on a project-by-project basis, with the accumulated assets and liabilities being separately stated on the balance sheet. Assets and liabilities are not offset unless a right of offset exists. Thus, the net debit balances for certain contracts are not ordinarily offset against net credit balances for other contracts.
How Does the Completed-Contract Method Work?
The completed-contract method recognizes income only when a construction contract is complete or substantially complete. It is most commonly used for shorter-duration contracts or when it is not possible to use the percentage-of-completion method.
Under this method, contract costs and related billings are accumulated in the accounting records and reported as deferred items on the balance sheet until the project is complete or substantially complete. A contract is regarded as substantially complete if remaining costs of completion are immaterial. When the accumulated costs (WIP) exceed the related billings, the excess is presented as a current asset (inventory account). If billings exceed related costs, the difference is presented as a current liability. This determination is also made on a project-by-project basis with the accumulated assets and liabilities being stated separately on the balance sheet. An excess of accumulated costs over related billings is presented as a current asset, and in most cases an excess of accumulated billings over related costs is presented as a current liability.
What Types of Pricing Arrangements Are Used in Contracts?
There are four types of contracts based on their pricing arrangements.
1. Fixed-price contracts. Contracts for which the price is not usually subject to adjustment because of costs incurred by the contractor. The contractor bears the risks of cost overruns.
2. Time-and-materials contracts. Contracts that provide for payments to the contractor based on direct labor hours at fixed rates and the contractor’s cost of materials.
3. Cost-type contracts. Contracts that provide for reimbursement of allowable or otherwise defined costs incurred plus a fee representing profits.
4. Unit-price contracts. Contracts under which the contractor is paid a specified amount for every unit of work performed.
EXAMPLE
Domino Construction Inc. enters into a government contract to construct an early warning radar dome. The contract amount is for $1,900,000, on which Domino expects to incur costs of $1,750,000 and earn a profit of $150,000. Costs expected to be incurred on the project are:
Concrete pad175,000Pad installation labor100,000Radar dome1,150,000Dome installation labor325,000Total cost1,750,000
This is a two-month project, where a concrete pad is installed during the first month and a prefabricated dome is assembled on the pad during the second month. To comply with bank loan agreements, complete generally accepted accounting principles (GAAP)-basis financial statements are prepared by Domino at each month-end. Domino encounters problems pouring the concrete pad, requiring its removal and reinstallation. The extra cost incurred is $175,000. During the second month, in order to meet the completion deadline, Domino spends an extra $35,000 on overtime for the dome construction crew. Domino records different billable amounts and profits under these five contract scenarios:
Month 1Month 2Total billing at completion1,900,0001,900,000- Expected total costs(1,750,000)(1,925,000)- Additional costs(175,000)(35,000)+ Loss already recorded—25,000
1. Fixed-price contract. At the end of the first month of work, Domino has already lost all of its profit and expects to incur an additional loss of $25,000. It then incurs an additional loss of $35,000 in the second month. Domino issues one billing upon completion of the project. Its calculation of losses on the contract is presented next.
2. Cost plus fixed fee. Domino completes the same project but bills it to the government at cost at the end of each month and also bills a $150,000 fixed fee at the end of the project that is essentially a project management fee and which comprises all of Domino’s profit. The project completion entry follows.
3. Cost plus award. Domino completes the same cost-plus-fixed-fee contract just described but also bills the government an additional $50,000 for achieving the stipulated construction deadline, resulting in a total profit of $200,000. The project completion entry is presented next.
4. Time-and-materials contract with no spending cap. Domino completes the same project but bills all costs incurred at the end of each month to the government. The additional material cost of the concrete pad is billed at cost, while the overtime incurred is billed at a standard hourly rate with a 25% markup. Domino’s profit is contained within the markup on its labor billings. Domino records a profit on the project of $115,000 on total billings of $2,075,000. Its calculation of profits on the contract is:
5. Time-and-materials contract with spending cap. Domino completes the same time-and-materials project just described, but the contract authorization is divided into two task orders: one authorizing a spending cap of $450,000 on the concrete pad installation while the other caps spending on the radar dome at $1,500,000. Domino records a loss of $10,000 on total billings of $1,950,000. Its calculation of profits on the contract is:
How Do I Account for Contract Losses?
When the current estimate of total contract costs exceeds the current estimate of total contract revenues, a provision for the entire loss on the entire contract is made. Losses are recognized in the period in which they become evident. The loss is computed on the basis of the total estimated costs to complete the contract, including the contract costs incurred to date plus estimated costs (use the same elements as contract costs incurred) to complete. The loss is presented as a separately captioned current liability on the balance sheet.
How Do I Account for Additional Claims under a Contract?
Claims represent amounts in excess of the agreed-on contract price that a contractor seeks to collect from customers for unanticipated additional costs. The recognition of additional contract revenue relating to claims is appropriate if it is probable that the claim will result in additional revenue and if the amount can be estimated reliably. All of the next four conditions must exist in order for the probable and estimable requirements to be satisfied.
1. The contract or other evidence provides a legal basis for the claim.
2. Additional costs are not the result of deficiencies in the contractor’s performance.
3. Additional costs are identifiable and reasonable.
4. The evidence supporting the claim is objective and verifiable, not based on management’s “feel” for the situation or on unsupported representations.
How Does the Deposit Method Work?
The deposit method is used in a real estate sale where the sale is, in substance, the sale of an option and not real estate. The seller does not recognize any profit and does not record a receivable. Cash received from the buyer (initial and continuing investments) is reported as a deposit on the contract. However, some cash may be received that is not subject to refund, such as interest on the unrecorded principal. These amounts are used to offset any carrying charges on the property. If the interest collected on the unrecorded receivable is refundable, the seller records this interest as a deposit before the sale is completed and then includes it as a part of the initial investment once the sale is consummated. If deposits on retail land sales eventually are recognized as sales, the interest portion of the deposit is recognized separately as interest income. For contracts that are canceled, the nonrefundable amounts are recognized as income and the refundable amounts are returned to the depositor at the time of cancellation.
EXAMPLE
Elbrus Investments enters into two separate property acquisition transactions with the Buena Vista Land Company.
1. Elbrus pays a $50,000 deposit and promises to pay an additional $800,000 to buy land and a building in an area not yet properly zoned for the facility Elbrus intends to construct. Final acquisition of the property is contingent upon these zoning changes. Buena Vista does not record the receivable, and records the deposit with the following entry:
Cash50,000Customer deposits50,000
Part of the purchase agreement stipulates that Buena Vista will retain all interest earned on the deposit and that 10% of the deposit is nonrefundable. Buena Vista earns 5% interest on Elbrus’s deposit over a period of four months, resulting in $208 of interest income that is offset against the property tax expenses of the property with the next entry:
Cash208Property tax expense208
Immediately thereafter, the required zoning changes are turned down, and Elbrus cancels the sales contract. Buena Vista returns the refundable portion of the deposit to Elbrus and records the nonrefundable portion as income with this entry:
Customer deposits50,000Income from contract cancellation10,000Cash40,000
2. Elbrus pays a $40,000 deposit on land owned and being improved by Buena Vista. Elbrus immediately begins paying $5,000/month under a four-year, 7% loan agreement totaling $212,000 of principal payments and agrees to pay an additional $350,000 at closing, subject to the land being approved for residential construction. After two months, Buena Vista has earned $167 of refundable interest income on Elbrus’s deposit and has been paid $7,689 of refundable principal and $2,311 of refundable interest on the debt. Buena Vista records these events with the next entry.
Cash10,167Customer deposits10,167
The land is approved for residential construction, triggering sale of the property. Buena Vista’s basis in the property is $520,000. Buena Vista uses the next entry to describe completion of the sale.
Cash350,000Note receivable204,311Customer deposits50,167Gain on asset sale84,478Land520,000
How Do I Account for Installation Fees?
A fee may be charged to install equipment. If customers normally cannot purchase the equipment in a separate transaction, the installation fee is considered an advance charge for future services. The fee is recognized as revenue over the estimated service period. The costs of installation and the installed equipment are amortized over the period the equipment is expected to generate revenue. If customers normally can purchase the equipment in a separate transaction, the installation fee is part of a product transaction that is accounted for separately as such.
EXAMPLE
Vintner Corporation has invented a nitrogen injection device for resealing opened wine bottles, which it calls NitroSeal. The device is especially useful for restaurants, which can seal wine bottles opened for customers who want to take home unfinished wine. Because the NitroSeal device is massive, Vintner pays a third party to install each unit for a fixed fee of $200, charging restaurants a $300 nonrefundable installation fee plus a monthly fee for a 20-month cancelable contract. The initial entries to record an installation charge from a supplier and related installation billing to a customer are:
Installation asset200Accounts payable200Accounts receivable300Unearned installation fees (liability)300
Vintner recognizes the installation revenue and associated installation expense for each installation in 1/20 increments to match the contract length, each with this entry:
Unearned installation fees15Installation revenue15Installation expense10Installation asset10
A customer cancels its contract with Vintner after 5 months. As a result, Vintner accelerates all remaining amortization on the installation asset and recognizes all remaining unearned installation fees at once, using the next entries.
Unearned installation fees225Installation revenue225Installation expense150Installation asset150
If the service contract had included a clause for a refundable installation fee, then cancelation after five months would still have resulted in immediate acceleration of amortization on the installation asset. However, the unearned installation revenue could not be recognized. Instead, this entry would have recorded the return of the installation fee:
Unearned installation fees225Cash225
What Recognition Methods Can I Use for Service Billings?
Once a transaction is determined to be a service transaction, one of four methods is used to recognize revenue. The method chosen is to be based on the nature and extent of the service(s) to be performed.
1. Specific performance method. This method is used when performance consists of the execution of a single act. Revenue is recognized at the time the act takes place. For example, a stockbroker records sales commissions as revenue upon the sale of a client’s investment.
2. Proportional performance method. This method is used when performance consists of a number of identical or similar acts.
a. If the service transaction involves a specified number of identical or similar acts, an equal amount of revenue is recorded for each act performed.
b. If the service transaction involves a specified number of defined but not identical or similar acts, the revenue recognized for each act is based on this formula:
c. If the service transaction involves an unspecified number of acts over a fixed time period for performance, revenue is recognized over the period during which the acts will be performed by using the straight-line method unless a better method of relating revenue and performance is appropriate.
EXAMPLE
The Cheyenne Snow Removal Company enters into a contract with the Western Office Tower to plow its parking lot. The contract states that Cheyenne will receive a fixed payment of $500 to clear Western’s central parking lot whenever snowfall exceeds two inches. Following an unusually snowy winter, Western elects to cap its snow removal costs by tying Cheyenne into an annual $18,000 fixed price for snow removal, no matter how many snowstorms occur. Snowfall is not predictable by month and can occur over as much as a six-month period. Western pays the full amount in advance, resulting in the next entry by Cheyenne.
Cash18,000Customer advances18,000
Although Cheyenne could recognize revenue on a straight-line basis through the contract period, it chooses to tie recognition more closely to actual performance with the proportional performance method. Its total estimated direct cost through the contract period is likely to be $12,600, based on its average costs in previous years. There is one snowstorm in October, which costs Cheyenne $350 for snow removal under the Western contract. Cheyenne’s revenue recognition calculation in October is
Thus, Cheyenne recognizes a gross margin of $150 during the month. By the end of February, Cheyenne has conducted snow removal 28 times at the same margin, resulting in revenue recognition of $14,000 and a gross margin of $4,200. Cheyenne’s cumulative entry for all performance under the Western contract to date is:
Customer advances14,000Direct labor expense9,800Revenue14,000Cash9,800
In March, Cheyenne removes snow 12 more times at a cost of $4,200. Its initial revenue recognition calculation during this month is
However, this would result in total revenue recognition of $20,000, which exceeds the contract fixed fee by $2,000. Accordingly, Cheyenne only recognizes sufficient revenue to maximize the contract cap, resulting in a loss of $200 for the month.
Customer advances4,000Direct labor expense4,200Revenue4,000Cash4,200
3. Completed performance method. This method is used when more than one act must be performed and when the final act is so significant to the entire transaction taken as a whole that performance cannot be considered to have taken place until the performance of that final act occurs.
4. Collection method. This method is used in circumstances when there is a significant degree of uncertainty surrounding the collection of service revenue. Under this method, revenue is not recognized until the cash is collected.
How Do I Record Revenue for Franchise Sales?
Revenue is recognized, with a provision for bad debts, when the franchisor has substantially performed all material services or conditions. Only when revenue is collected over an extended period of time and collectibility cannot be predicted in advance would the use of the installment method of revenue recognition be appropriate. Substantial performance means:
• The franchisor has no remaining obligation to either refund cash or forgive any unpaid balance due.
• Substantially all initial services required by the agreement have been performed.
• No material obligations or conditions remain.
If initial franchise fees are large compared to services rendered and continuing franchise fees are small compared to services to be rendered, a portion of the initial fee is deferred in an amount sufficient to cover the costs of future services plus a reasonable profit, after considering the impact of the continuing franchise fee.
EXAMPLE
Shanghai Oriental Cuisine sells a Quack’s Roast Duck franchise to Toledo Restaurants. The franchise is renewable after two years. The initial franchise fee is $50,000, plus a fixed fee of $500 per month. In exchange, Shanghai provides staff training, vendor relations support, and site selection consulting. Each month thereafter, Shanghai provides $1,000 of free local advertising. Shanghai’s typical gross margin on franchise start-up sales is 25%.
Because the monthly fee does not cover the cost of monthly services provided, Shanghai defers a portion of the initial franchise fee and amortizes it over the two-year life of the franchise agreement, using the next calculation.
Cost of monthly services provided $1000 × 24 months÷ Markup to equal standard 25% gross marginLess: Monthly billing to franchise $500 × 24 months
Shanghai’s entry to record the franchise fee deferral follows.
Franchise fee revenue20,000Unearned franchise fees (liability)20,000
Shanghai recognizes 1/24 of the unearned franchise fee liability during each month of the franchise period on a straight-line basis, which amounts to $833.33 per month.
CHAPTER 2
INVESTMENT ACCOUNTING
Which Securities Are Designated as Marketable Equity Securities?
Marketable securities are investments that can be easily liquidated through an organized exchange, such as the New York Stock Exchange. If a company also holds securities that are intended for the control of another entity, these securities should be segregated as a long-term investment. Marketable securities must be grouped into one of three categories at the time of purchase and reevaluated periodically to see if they still belong in the designated categories:
1. Available for sale. This category includes both debt and equity securities. It contains those securities that do not readily fall into either of the next two categories. It can include investments in other companies that comprise less than 20% of total ownership.
2. Held to maturity. This category includes only debt securities for which the company has both the intent and the ability to hold them until their time of maturity.
3. Trading securities. This category includes both debt and equity securities that the company intends to sell in the short term for a profit. It can include investments in other companies comprising less than 20% of total ownership.
What Is the Accounting for Marketable Equity Securities?
Available-for-sale securities are reported on the balance sheet at their fair value, while unrealized gains and losses are charged to an equity account and reported in other comprehensive income in the current period. The balance in the equity account is eliminated only upon sale of the underlying securities. If a permanent reduction in the value of an individual security occurs, the unrealized loss is charged against earnings, resulting in a new and lower cost basis in the remaining investment. Any subsequent increase in the value of such an investment above the new cost basis cannot be formally recognized in earnings until the related security is sold, and so the interim gains will be temporarily parked in the unrealized gains account in the equity section of the balance sheet.
All interest, realized gains or losses, and debt amortization for available-for-sale securities are recognized within the continuing operations section of the income statement. The listing of these securities on the balance sheet under either current or long-term assets is dependent on their ability to be liquidated in the short term and to be available for disposition within that time frame, unencumbered by any obligations.
The amortized cost of held-to-maturity securities is recorded on the balance sheet. These securities are likely to be listed on the balance sheet as long-term assets. If marketable securities are shifted into the held-to-maturity category from debt securities in the available-for-sale category, their unrealized holding gain or loss should continue to be stored in the equity section while being gradually amortized down to zero over the remaining life of each security.
Trading securities are recorded on the balance sheet at their fair value. This type of security is always positioned in the balance sheet as a current asset.
EXAMPLE
AVAILABLE-FOR-SALE TRANSACTIONS
The Arabian Knights Security Company has purchased $100,000 of equity securities, which it does not intend to sell in the short term for profit, and therefore designates as available for sale. Its initial entry to record the transaction is:
DebitCreditInvestments—available for sale$100,000Cash$100,000
After a month, the fair market value of the securities drops by $15,000, but management considers the loss to be a temporary decline, and so does not record a loss in current earnings. However, it must still alter the value of the investment on the balance sheet to show its fair value, and report the loss in Other Comprehensive Income, which requires this entry:
DebitCreditUnrealized loss on security investment (reported in Other Comprehensive Income)$15,000Investments—available for sale$15,000
Management then obtains additional information indicating that the loss is likely to be a permanent one, so it then recognizes the loss with this entry:
DebitCreditLoss on equity securities$15,000Unrealized loss on security investment (reported in Other Comprehensive Income)$15,000
Another month passes by and the fair value of the investment rises by $3,500. Since this gain exceeds the value of the newly written-down investment, management cannot recognize it, even though the new value of the investment would still be less than its original amount. Instead, this entry is used to adjust the investment value on the balance sheet:
DebitCreditInvestments—available for sale$3,500Unrealized gain on security investment (recorded in Other Comprehensive Income)$3,500
EXAMPLE
TRADING TRANSACTIONS
The Arabian Knights Security Company purchases $50,000 of equity securities that it intends to trade for a profit in the short term. Given its intentions, these securities are added to the corporate portfolio of trading securities with this entry:
DebitCreditInvestments—held for trading$50,000Cash$50,000
After two months, the fair value of these trading securities declines by $3,500. The company recognizes the change in current earnings with this entry:
DebitCreditLoss on security investment$3,500Investments—held for trading$3,500
Later in the year, the fair value of the securities experiences a sudden surge, resulting in a value increase of $5,750. The company records the change with this entry:
DebitCreditInvestments—held for trading$5,750Gain on security investments$5,750
What Is the Accounting for Transfers between Available-for-Sale and Trading Investments?
An investment designated as a trading security can be shifted into the available for sale portfolio of investments with no recognition of a gain or loss on the value of the investment, since this type of investment should have been adjusted to its fair value in each reporting period already. If a gain or loss has arisen since the last adjustment to fair value, this amount should be recognized at the time of the designation change.
If an investment designated as an available-for-sale security is shifted into the trading portfolio of investments, any gain or loss required to immediately adjust its value to fair value should be made at once. This entry should include an adjustment from any prior write-down in value that may have occurred when securities were classified as available for sale.
EXAMPLE
TRANSFER FROM THE TRADING PORTFOLIO TO THE AVAILABLE-FOR-SALE PORTFOLIO
The Arabian Knights Security Company owns $17,500 of equity securities that it had originally intended to sell for a profit in the short term and so had classified the investment in its trading portfolio. Its intent has now changed, and it wishes to hold the securities for a considerably longer period, so it must shift the securities into the available-for-sale account. It had marked the securities to market one month previously, but now the securities have lost $350 of value. The company records the next entry to reclassify the security and recognize the additional loss:
DebitCreditInvestments—available for sale$17,150Loss on equity securities350Investments—held for trading$17,500
EXAMPLE
TRANSFER FROM THE AVAILABLE-FOR-SALE PORTFOLIO TO THE TRADING PORTFOLIO
The Arabian Knights Security Company finds that it must liquidate $250,000 of its available-for-sale portfolio in the short term. This investment had previously been marked down to $250,000 from an initial investment value of $275,000, and its value has since risen by $12,000. The incremental gain must now be recognized in current income. The entry is:
DebitCreditInvestments—held for trading$262,000Investments—available for sale$250,000Gain on security investments12,000
What Is the Accounting for Investments in Debt Securities?
A debt security can be classified as held for trading or available for sale, or as held to maturity. The held-to-maturity portfolio is intended for any debt securities for which a company has the intent and ability to retain the security for its full term until maturity is reached. An investment held in the held-to-maturity portfolio is recorded at its historical cost, which is not changed at any time during the holding period, unless it is shifted into a different investment portfolio. The only two exceptions to this rule are:
1. The periodic amortization of any discount or premium from the face value of a debt instrument, depending on the initial purchase price; and
2. Clear evidence of a permanent reduction in the value of the investment.
EXAMPLE
The Arabian Knights Security Company purchases $82,000 of debt securities at face value. The company has both the intent and ability to hold the securities to maturity. Given its intentions, these securities are added to the corporate portfolio of held-to-maturity securities with this entry:
DebitCreditInvestment in debt securities—held to maturity$82,000Cash$82,000
The fair value of the investment subsequently declines by $11,000. There is no entry to be made, since the investment is recorded at its historical cost. However, the company receives additional information that the debt issuer has filed for bankruptcy and intends to repay debt holders at 50 cents on the dollar. Since management considers this to be a permanent reduction, a charge of $41,000 is recorded in current income with this entry:
DebitCreditLoss on debt investment$41,000Investment in debt securities—held to maturity$41,000
The company subsequently learns that the debt issuer is instead able to pay 75 cents on the dollar. This increase in value of $20,500 is not recorded in a journal entry, since it is a recovery of value, but is instead recorded in a footnote accompanying the financial statements.
What Is the Accounting for Debt Securities among Portfolios?
The accounting for transfers among debt securities portfolios varies based on the portfolio from which the accounts are being shifted, with the basic principle being that transfers are recorded at the fair market value of the security on the date of the transfer. The treatment of gains or losses on all possible transfers is noted in Exhibit 2.1.
The offsetting entry for any gain or loss reported in the Other Comprehensive Income section of the income statement goes to a contra account, which is used to offset the investment account on the balance sheet, thereby revealing the extent of changes in the trading securities from their purchased cost.
Exhibit 2.1 ACCOUNTING TREATMENT OF DEBT TRANSFERS BETWEEN PORTFOLIOS
“From” Portfolio“To” PortfolioAccounting TreatmentTradingAvailable for SaleNo entry (assumes gains and losses have already been recorded)TradingHeld to MaturityNo entry (assumes gains and losses have already been recorded)Available for saleTradingShift any previously recorded gain or loss shown in Other Comprehensive Income to operating income.Available for saleHeld to maturityAmortize to income over the remaining period to debt maturity any previously recorded gain or loss shown in Other Comprehensive Income, using the effective interest method.Held to maturityTradingRecord the unrealized gain or loss in operating income.Held to maturityAvailable for saleRecord the unrealized gain or loss in the Other Comprehensive Income section of the income statement.
How Are Deferred Tax Effects Recognized for Changes in Investment Valuation?
A deferred tax benefit or tax liability should be recognized alongside the recognition of any change in the fair value of an investment listed in either a trading or available-for-sale portfolio or of a permanent decline in the value of a debt security being held to maturity. The tax impact varies by investment type, and is noted as:
• Gains or losses on the trading portfolio. The deferred tax effect is recognized in the income statement. If there is a loss in value, debit the Deferred Tax Benefit account and credit the Provision for Income Taxes account. If there is a gain in value, debit the Provision for Income Taxes account and credit the Deferred Tax Liability account.
