SCROLL DOWN PAST CHAPTER 8 Notes Payable, Prepaid Expenses, and Adjusting Entries TO VIEW THE NEW LESSON FOR APRIL 20, 2020.
April 1, 2020 CHAPTER 8, Notes Payable
Read in your electronic textbook 8-1 Notes Payable
INTEREST BEARING NOTES:
Remember in 8th grade when ou learned to calculate interest on a loan: PRT
The interest is added to the principal of the loan to determine the maturity value of the loan.
Paid cash for the maturity value of the March 8 note: principal, $25,000, plus interest, $986.30; total, $25,986.30 . Check No. 667.
If a non-interest bearing note is signed for $36,500, the borrower would receive the maturity value minus the interest. The amount the borrower receives is called the Proceeds. The note was a 60-day note.
36,500 x 8% x 60/365 = $480 interest
Proceeds = $36,500 – 480.00 = $36,020 This is the amount that the borrower will receive. The borrower will pay back the $36,500.
A Line of Credit is an amount that the bank allows a customer to have access to. The borrower does not take it all out at one time. The borrower can take it as he needs it and pays interest on the amount he has withdrawn.
Complete Work Together 8-1-practice mode; Own Your Own 8-1 (counts toward grade with the red dot)
Now complete Application Problem 8-1. You can do the practice mode first and check your answers. Then you can complete the 8-1 (counts toward grade with the red dot).
APRIL 6, 2020 CHAPTER 8, PREPAID EXPENSES (A future expense which has been paid for in advance)
Some businesses record supplies purchased as an asset–this is the way you learned to record supplies in Accounting I. Other businesses chose to record an asset that will be converted to an expense as an expense when it is bought. For example: We, the company, paid cash for supplies, $200. DR Supplies Expense and CR Cash $200. We know that we will use the supplies so why not just first record the purchase as an expense.
At the end of the fiscal period, we must still create an adjusting entry. This time instead of moving used assets to an expense, we will move UNUSED SUPPLIES TO AN ASSET in our adjusting entry. This leaves only the used supplies as the balance in the Supplies Expense account. The supplies that still have value (unused) are temporarily moved to the asset account Supplies. Why temporarily??? BECAUSE of this rule: Adjusting Entries that create a balance in an asset (Supplies) must be reversed at the beginning of the new fiscal period.
Step 1: We purchased supplies for cash $200: Debit Supplies Expense; Credit cash. $200. Check 11
Step 2: It’s December 31 and time for Adjusting Entries: Take an inventory of supplies that are left (unused). Total unused supplies = $50.
Step 3: Move unused supplies from Supplies Expense to the asset Supplies. Adjusting Entry– DR Supplies $50 CR Supplies Expense for unused supplies $50.
Step 4: Closing Entries: All expenses are reset to 0 (including Supplies Expense). You will not journalize Closing Entries in this problem.
Step 5: January 1, Reverse the December 31 Adjusting Entry: DR Supplies Expense with leftover supplies, $50. CR Supplies for the leftover supplies, $50. This $50 will represent an amount of supplies purchased last year which we will use (supplies expense) in the current year.
Follow the same procedure for Prepaid Insurance. DR Prepaid Insurance for the current value of the policy-what has NOT expired. CR Insurance Expense for unexpired insurance.
PREPAID ADVERTISING: WE ARE GOING TO PAY IN ADVANCE FOR ADVERTISING. So when we actually use the advertising, we will convert the used amount to Advertising Expense.
Step 1: Paid cash for Advertising $6,000.00 Debit Prepaid Advertising $6,000 CR Cash $6,000.00
Step 2: December 31, Adjusting Entry: Move used advertising from the asset (Prepaid Advertising) to Advertising Expense. DR Advertising Expense $300.00 (used) CR Prepaid Advertising $300.00.
*NO reversing entry is required for this adjusting entry.
Now complete 8-2 Work Together Practice Mode, 8-2 On Your Own Practice Mode, 8-2 On Your Own- red dot (graded)
Now complete Application Problem 8-2. You can do the practice mode first and check your answers. Then you can complete the 8-2 (counts toward grade with the red dot).
CHAPTER 9, ADJUSTING ENTRIES
SECTION 9-1 Unearned Revenue (The company has received a payment before the goods or services have been provided.) Therefore, the revenue dollars have not been earned.
REMEMBER: A SALE IS RECORDED WHEN IT IS MADE, NOT WHEN IT IS PAID! So if a customer prepays for goods or services that we sale, we must record the sale (revenue) when the sale is made. We do not wait until the customer pays for the goods or services.
Cash received for goods or services which have not been provided is called unearned revenue.
Unearned revenue is also known as deferred revenue: the payments that a business receives in advance for goods or services that haven’t yet been delivered or provided. We still OWE them to the customer, so this is a LIABILITY.
PAST PRESENT FUTURE
- Seller receives payment – Seller OWES goods or services – Seller provides goods or services
- December 1: The customer pays for 3 month’s rent in advance. – The use of the apartment is owed to the customer for 3 months.. – The customer uses the apartment during the future days in the month of December–The owner still owes the customer 2 more months of rent access to the apartment. The 2 months which have already been paid for AND NOT USED is UNEARNED RENT. We need to record an adjusting entry for the Unearned Rent Income.
- December 31: DEBIT: Rent Income CREDIT: Unearned Rent See Example in the Electronic Textbook.
RULE: Any adjusting entry that creates a balance in an asset or liability must be reversed at the beginning of the new fiscal period. Unearned rent is a liability, so the adjusting entry must be reversed.
- January 1: DEBIT: Unearned rent CREDIT: Rent Income JUST DO IT!
Next, the company has made loans to customers that will earn interest on the amount the customer owes the company. These loans are called–Notes Receivable (the opposite of Notes Payable). The Interest earned on the note will not be received until the customer pays the maturity value of the loan we have made to the customer. This may be a date in the next fiscal period. Interest earned during the current fiscal period must be calculated and recorded in an adjusting entry.
- On November 22 of the current year, we made a loan to one of our charge customers. $6,000 at 8% interest rate for 60 days
- How many days in the current fiscal period did the loan earn interest? 30 days in November – Nov. 22 = 8 days of interest earned in Nov + 31 days in December = 39 days
- Now calculate the interest earned for 39 days: $6,000 x 8% x 39/365 days = $51.29
- Next, journalize the adjusting entry: DEBIT: Interest Receivable (We have not been paid, but expect to receive the payment later.) CREDIT: Interest Income (revenue)
- We have just created a balance in an asset with the ajusting entry, so remember the RULE. The adjusting entry must be reversed on the 1st of the new fiscal period.
- REVERSING ENTRY: DEBIT: Interest Income CREDIT: Interest Receivable
Now, Complete: WORK TOGETHER 9-1: Practice Mode (add the Interest from both loans for one adjusting entry.) ON YOUR OWN 9-1 Practice Mode and OWN YOUR OWN WITH THE RED DOT.
Application Problem 9-1: Practice Mode and Application Problem 9-1 RED DOT
WEEK OF APRIL 20, 2020 CHAPTER 10 CAPITAL STOCK
SELECT PART 3 CORPORATION ACCOUNTING
- Very important reading follows:
- Today I am going to talk to you about the biggest change when moving from a sole proprietorship to a corporation in accounting records. The main difference is that we no longer have an account for OWNER’S EQUITY. We will change the Equity classification to STOCKHOLDER’S EQUITY. So, now the accounting equation looks like this:
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
What are the accounts in Stockholders’ Equity? There are 4 accounts:
CAPITAL STOCK – This is the dollar value of the shares of ownership (stock) that we sell to the investors and the public to increase the company’s Equity.
PAID IN CAPITAL IN EXCESS OF PAR or PAID IN CAPITAL IN EXCESS OF STATED VALUE-both accounts are journalized the same way. This is the amount that we sold the stock for above its STATED value or PAR value (BASICALLY THE SAME). We can only record CAPITAL STOCK in the accounting books as its stated value, so any amount over the stated value is credited to another account–paid in capital in excess of par or paid in capital in excess of stated value.
RETAINED EARNINGS – These are the dollars we earn (Net Income)and keep in this Equity Account.
DIVIDENDS: These are the dollars we set aside to give to our investors as a reward for investing in our company. Depending upon our net income for the fiscal period, we may choose to share part of our profit with our investors (shareholders) or we may not be able to if our profit is low. Dividends is similar to the sole proprietorship’s Drawing account in that Dividends has a normal Debit balance and Dividends reduces stockholders’ equity.
Each corporation has an elected Board of Directors which makes decisions for the company’s operations. There are three steps to be followed when the Board of Directors decides to share a part of the net income with the company’s stockholders. The example follows:
Our company’s Board of Directors decides to share a portion of the net income with our stockholders. The dividend will be paid in four payments (quarterly) of $.05 per share that each investor owns. We have sold 75,000 shares of stock. To calculate the total of the entire dividend, multiply the number of shares sold (outstanding shares) times the 5 cents per share = $3,750. So every 3 months the company will pay a total of $3,750 to be shared among our stockholders depending on the number of shares each stockholder owns. There are 3 steps to make this happen in our accounting records:
Step 1: The Board of Directors must DECLARE A DIVIDEND (DIVIDENDS ARE NORMALLY DECLARED ON ONE DATE AND PAID ON A LATER DATE)
Transaction: December 15 – Debit DIVIDENDS Credit DIVIDENDS PAYABLE (an amount we owe)
Step 2: Because stockholders can buy and sell their stock among themselves, our company must find out who the current owners are and will receive the dividend. So the Board chooses one day in order to take ROLL. So on December 31, we find out who the owners of our stock are on THAT DAY. This is the list of the investors who will receive the dividend. This does not require a transaction in our accounting books. The list is given to our bank which acts as our trustee for the dividend. The bank then issues the checks to the owners of the stock from the roll date (Dec. 31).
Step 3: The company then records the payment of the dividend in the Cash Payments Journal. Debit the liability: Dividends Payable ($3,750) Credit Cash ($3,750).
OK, NOW THAT IS OUT OF THE WAY, LET’S SELL SOME CAPITAL STOCK TO SOME INVESTORS.
April 20 Our company sold 500 shares of $1.00 Par Value Capital stock for $5.00 a share. Cash Received: $2,500.00 DR Cash $2,500 Ok so far so good? Next, remember we can only CREDIT CAPITAL STOCK FOR THE VALUE OF THE STOCK AT PAR VALUE.
Journalize the transaction using each of the following assumptions regarding the common stock:
par-value common stock. CREDIT CAPITAL STOCK FOR $500 X $1.00 = $500-value at par value. NOW CREDIT PAID IN CAPITAL IN EXCESS OF PAR FOR THE OVERAGE $2,000 and your credits and debits equal.
No-par-value common stock. If there is no par or stated value, just CREDIT CAPITAL STOCK FOR $2,500 and DEBIT CASH FOR $2,500.
stated-value common stock. CREDIT CAPITAL STOCK FOR $500 X $1.00 = $500-value at STATED value. NOW CREDIT PAID IN CAPITAL IN EXCESS OF STATED VALUE FOR THE OVERAGE $2,000 and your credits and debits equal.NOW – In your Cengage software complete Work Together 10-1 and On Your Own 10-1: Practice Mode and On Your Own 10-1: Red dot.
NEXT WEEK WE WILL CONTINUE WORKING WITH CAPITAL STOCK!