FFA Lecture Part C.pptx

FR111
Fundamentals of
Financial Accounting
Session 1

Part-C: Accounting for Assets [WEIGHT 20%]
C1. Accounting for current assets [60%]
C2. Accounting for non-current assets [40%]
• Discussion Topics_ C1:
8.1 Introduction
8.2 Accounting for inventory
8.3 Accounting for account receivables
8.4 Accounting for notes receivables
8.5 Bank reconciliation statement

Current Assets
• Current assets are the liquid assets and can be converted into cash
within short period of time.
• Current assets are assets that are: [IAS 1.66]
oexpected to be realized in the entity's normal operating cycle
oheld primarily for the purpose of trading
oexpected to be realized within 12 months after the reporting period
ocash and cash equivalents (unless restricted).
Examples of current assets are:
Cash in hand, cash at bank, trade/accounts receivable, notes
receivable, short-term investment in share and bond, inventories (raw
materials, work-in-process, finished goods, supplies), prepayments.

Accounting for Inventories [IAS-2]
• Inventories include assets held for:
I. sale in the ordinary course of business (finished goods),
II. assets in the production process for sale in the ordinary course of business
(work in process), and
III. materials and supplies that are consumed in production (raw materials).
• Details of IAS 2 can be accessed at:
https://www.iasplus.com/en/standards/ias/ias2

Measurement of Inventories
• Inventories cost should include all:
I. costs of purchase (including taxes, transport, and handling) net of trade discounts
received
II. costs of conversion (including fixed and variable manufacturing overheads) and
III. other costs incurred in bringing the inventories to their present location and
condition
• Inventory cost should not include: [IAS 2.16 and 2.18]
o abnormal waste
o storage costs
o administrative overheads unrelated to production
o selling costs
o foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
o interest cost when inventories are purchased with deferred settlement terms.

Measurement of Inventories
• IAS 2 outlines acceptable methods of determining cost:
1. specific identification (inventory items that are not interchangeable),
2. first-in first-out (FIFO) [For items that are interchangeable] or
3. weighted average cost [For items that are interchangeable]
Note that the LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer
allowed.
Also note that the same cost formula should be used for all inventories with similar characteristics as to
their nature and use to the entity. For groups of inventories that have different characteristics, different
cost formulas may be justified.
• IAS 2 requires inventories to be measured/reported at the lower of cost
and (market) net realizable value (NRV).
• NRV is the estimated selling price in the ordinary course of business, less the estimated cost of
completion and the estimated costs necessary to make the sale.

Inventory system
• Selection of an inventory recording system such as:
1. Periodic Inventory System
2. Perpetual Inventory System
Transaction Periodic Perpetual
Purchase of goods Purchase A/C Dr.
Trade or Accounts payable/cash Cr.
Inventories A/C Dr.
Trade or Accounts payable/cash Cr.
Freight/Transportation costs Transportation in Dr.
Accounts payable/cash Cr.
Inventories Dr.
Accounts payable/cash Cr.
Purchase return and discount Accounts Payable Dr.
Purchase return Cr.
Accounts Payable Dr.
Inventories Cr.
Sales of goods/inventory Trade or Accounts Receivable Dr.
Sales revenue Cr.
(1) Trade or Accounts Receivable Dr.
Sales revenue Cr.
(2) Cost of Goods Sold Dr.
Inventories Cr.
Sales return and allowance Sales return and allowance Dr.
Accounts Receivable Cr.
Sales return and allowance Dr.
Sales discount Sales discount Dr.
Sales discount Dr.

Note that IAS 2 suggests
• When inventories are sold and revenue is recognized, the carrying
amount of those inventories is recognized as an expense (often called
cost-of-goods-sold). Any write-down to NRV and any inventory losses
are also recognized as an expense when they occur.
• So, perpetual inventory system is preferable to periodic inventory
system.

Cost Flow Methods
Specific identification method:
• This method is applicable where the size of a single unit of inventory is huge
and highly valuable/costly. They can easily be counted and costs records for
each unit is available conveniently and economically.
• For example, suppose that an automobile dealer has three trucks in stock.
Every detail about the trucks is identical with the exception on the serial
numbers which are 1001,1002 and 1003 respectively. The dealer incurred
the following cost for each truck: 1001: $30,000; 1002: $32,000; 1003:
$35,000. A customer enters the dealership and offers $34,000 for one of
the trucks. Depending on which truck the dealer sells, the dealer could
recognize net income of $4,000, $2,000 or a loss of $1,000.
• The ability to manipulate net income is a theoretical fault of the specific
identification approach.

First in First out (FIFO) Costing Method
• To compute cost of goods sold: Multiply the quantity of goods sold by
the cost of inventory starting with the oldest cost.
• To compute ending inventory value: Multiply the quantity of ending
inventory by the cost of inventory starting with the most recent cost.
Weighted average cost method
Determine the average cost of each unit by dividing the total costs of
inventory by the total quantity of inventories hold during the period.
COGS: Unit sold multiplied by weighted average cost
Ending inventory: Units on hand multiplied by weighted average cost.

• Cost of goods sold under specific identification method:
• March 5: [(1100 × 0.60) + (1100× 0.65)]= $1375
• March 30: [ (450 × 0.60)+ (550 × 0.65)+ (2900 × 0.72)+ (1100 × 0.80)]= $ 3595.50
• Cost of goods sold under FIFO method = (2000 × 0.60) + (2500 × 0.65) +
(2700 × 0.72) =
Ending inventory = (1300 × 0.72) + (2,500 × 0.80) =

Accounts Receivable/Trade Receivables
 Receivables are claims against customers and others for goods sold on
credit, or services rendered on credit, or money lent to customers and others.
Receivables may arise either from trade or non-trade transactions.
 Trade receivables or accounts receivables arise/emerge from trade or sales
of goods on account/ on credit.
 Non-trade receivables arise/emerge from transactions other than sales of
goods or services including advances to employees, travel advances etc.

Methods of recoding Receivable expense/ uncollectible/bad and
doubtful debt/irrecoverable debt [Expected credit loss]
Bad debts/ uncollectible/doubtful debt/ irrecoverable debts represent the portion of receivables that
cannot be collected within a stipulated long-term period usually 3 years. There are two methods of
recording uncollectible:
Methods of recording uncollectible
Direct write-off method Allowance method
Percentage on sales
A fixed-percentage
Percentage on Receivables
Aging schedule

Direct write-off vs. Allowance method
• In direct write-off method, bad debts are recorded as and when the name of a receivable is written
off from the books of accounts after waiting for a certain periods usually 3 years. This method is
recommended by tax authority. The journal entry to record such transaction would be:
Receivable expense/Bad debt expense Dr.
Trade/Accounts Receivable-Mr. X/Y/Z Cr.
However, this method violates the matching or expense recognition principle in the sense that
corresponding/related expenses are recognized in a period different from the revenue recognition
period.
• In contrast, Allowance/Provision method recognizes bad debt in the period in which the sales are
made by estimating a certain percentage of credit sales or outstanding receivables. An allowance or
provision is created for the doubtful portion of receivables or credit sales [now-a-days known as
expected credit loss-ECL]. When the receivables are truly become uncollectible, the accumulated
allowance is used to write-off such receivables. This method is recommended in the IAS/IFRS in the
presentation of financial statements.

Rules of recording uncollectible/bad debt under Allowance
Method
Debit Credit
(i) To estimate doubtful debt/ to create allowance or provision for doubtful debt
(%):
Receivable expense/Bad debt expense…. Dr.
Allowance for doubtful debt……………….Cr.
100,000
100,000
(ii) To write-off uncollectible/ bad debt when management decides:
Allowance for doubtful debt………Dr.
Accounts receivable-Mr. X/Co……………………….Cr.
68,000
68,000
(iii) To record the recovery of bad debts previously written off:
a) Accounts receivable-Mr. X/Co………Dr.
b) Cash………………….Dr.
Accounts receivable………………………Cr.

Application of allowance method: % of credit sales and receivables
Illustration 1:
The accounts receivable of ST Ltd is Tk 600,000; credit sales Tk 1,000,000 and
credit balance in allowance for doubtful account is Tk 32,000 at December 31, 2020
before any year end adjustment.
Requirements:
i) Prepare journal entry to record the uncollectible if the company wants to
make a allowance/provision for doubtful debt of 2% of credit sales.
ii) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 8% of accounts receivable.
iii) Previously written off bad debts amounting to Tk 15,000 were collected
during the period.

Debit Credit
(i)
Bad debt expense…. Dr. (1,000,000×2%) =
20,000
20,000
(ii)
Bad debt expense…. Dr. (600,000×8%) = (48,000-
32,000)=
16,000
16,000
(iii)
a) Accounts receivable………Dr.
a) Cash………………….Dr.
Accounts receivable………………………Cr.
15,000
15,000
15,000
15,000

Now try to solve the following problem
Problem 1:
The accounts receivable of ST Ltd is Tk 700,000; credit sales Tk
5,000,000 and debit balance in allowance for doubtful account is Tk
20,000 at December 31, 2019 before any year end adjustment.
Requirements:
i) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 1% of credit sales.
ii) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 5% of accounts receivable.

Debit Credit
(i) Bad debt expense…. Dr. (5,000,000×1%) =
50,000
50,000
(ii) Bad debt expense…. Dr. (700,000×5%) = (35,000+20,000)=
55,000
55,000

Allowance for Doubtful Debt
Dr. Cr.
Balance b/d 100,000
ACCOUNT RECEIVABLE – MR X 130,000
Balance c/d 200,000 Bad debt expense 230,000
330,000 330,000

Aging Schedule and allowance for doubtful debt
XZ Company operates in an industry that has a high rate of bad debts. Before any year-end
adjustments, the balance in XZ’S accounts receivable account was Tk 470,000 and the allowance
for doubtful accounts had a credit balance of Tk 40,000. The year-end balance reported in the
balance sheet for the allowance for doubtful accounts will be based on the aging schedule shown
below:
Days Account Outstanding Amount Probability of Collection
Less than 16 days Tk 100,000 0.96
Between 16 and 30 days Tk 90,000 0.91
Over 75 days Tk 30,000 .00
Requirements:
i. What is the appropriate balance for the allowance for doubtful accounts at year-end?
ii. Pass the necessary journal entries.
iii. Show how accounts receivable would be presented on the balance sheet.
iv. Analyze the effect of the year-end bad debt adjustment on the before-tax income.

Sample answer
Requirement (i): Schedule showing year-end balance of Allowance for doubtful debt
Days Account
Outstanding
Amount Estimated
uncollectible (%)
Estimated
uncollectible (Tk)
Less than 16 days Tk 100,000 0.04 4,000
Between 16 and 30 days Tk 90,000 0.09 8,100
Year end allowance for doubtful accounts 104,100

Allowance for Doubtful Debt
Dr. Cr.
Balance b/d 40,000
ACCOUNT RECEIVABLE – MR X 30,000
Balance c/d 104,100 Bad debt expense 94,100
134,100 134,100

Requirement (ii):
Debit Credit
(i) Allowance for doubtful debt………Dr.
Accounts receivable……………………….Cr.
30,000
30,000
(ii) Bad debt expense…. Dr. (40,000-30,000-104100)=
94,100
94,100
Requirement (iii):
Tk Tk
Accounts receivable 470,000
Less: Bad debts written off (30,000)
Less: Allowance for doubtful debts (104,100)
NRV (net realizable value) 335,900
Requirement (iv):
Before-tax income will decrease by (40,000-30,000-104100) = Tk 94,100 as a result of year-end
bad debt adjustment.

Notes receivables
• A promissory note which is usually accepted by the seller from the buyer in the
event of failure to make payment of dues within the stipulated time. It usually
bears interest on balance due for the period for which the note is issued.
• Example: On July 17, 2021, received a Tk 12,000, 90-day, 10% note on account
from Adams Co. Here, due date for the note should be October 15 (July 14 days
+ August 31 days + September 30 days + October 15 days). Interest earned
during the term of the note should be Tk300 (Tk 12,000 x .10 x 90 days/360
days). Maturity value of the note should be Tk 12,300 (principal + interest).
• Journal entries if the note is honored on the maturity date:
Debit Cash 12,300
Credit Notes receivable 12,000
Credit Interest receivable 300
• Journal entries if the note is dishonored on the maturity date:
Debit Account receivable 12,300
Credit Notes receivable 12,000
Credit Interest receivable 300

Bank Reconciliation Statement
• At the end of each month, the bank with which a company/business
maintains account usually sends a bank statement that shows the
beginning balance, transactions during the month, and month-end
balance. If the accountants of the business finds disagreement between
the month-end balance displayed in its cash book/account’s balance and
bank statement's balance, a bank reconciliation statement is prepared by
the business to find the reasons for such disagreement.
• Purposes of Bank Reconciliation Statement:
1. To judge the accuracy of the cash book/accounts balances
2. To judge the accuracy of bank statement
3. To find out transactions recorded by bank but not recorded by the business and
vice versa

Reasons for disagreement between cash book balance and bank
statement balance
• Outstanding check: Check written by the company (and therefore recorded
in the company’s book) but not presented to the bank for clearance
• Deposit-in-transit: Deposit recorded by the company but not presented to
the bank until the end of the month
• Bank charge: Various fees and charges deducted by the bank from the
depositor’s accounts
• Bank interest: Interest given by the bank on the balances of accounts
• Payments collected by the banks without the knowledge of the business
• Errors made by either parties
• NSF Check: Non-sufficient funds check received from customers/ A/R

• On 10 January 2021:
Cash Dr. 31,200
Note receivable Cr. 30,000
Interest Receivable Cr. 1,100
Interest Revenue Cr. 100
Rules for Bank reconciliation statement:
1. The party that did not record the transaction will record now
2. The party that did the mistakes/errors has to rectify now

Bank reconciliation statement (Both balance correction method)
Particulars TK Particulars TK
Balance as per cash/bank/company account 570 Balance as per bank statement (446)
Add: Errors of overstatement of payment 9 Less: Outstanding check (1,555)
Less: Subscription paid by the bank but not
recorded by the company
(60) Add: Check-in-transit/ Deposit-in-transit 2520
519 519

Dr. Cr.
January
31
Cash/bank Dr.
Accounts payable Cr.
9
9
Subscription expense Dr
Cash/Bank …………..Cr.
60
60

C2. Accounting for non-current assets [40%]
[Assets acquired and held for use in operation]
Non-current
assets
Tangible Assets
Property, plant
and equipment
Natural
resources
Intangible
Assets
Identifiable
Unidentifiable

Property, plant and equipment [IAS-16]
• Property, plant and equipment (also known as plant assets, fixed assets,
and tangible non-current assets) have the following three characteristics:
i) They have physical substance which implies that they have a definite
shape, size and can be seen (visible) and touched (tangible);
ii)They are long-term in nature and usually subject to depreciation
(except land whose value is expected to increase i.e., appreciation);
and
iii)They are held for use in operation, and not for sale.

Accounting for
Non-current
Assets
Acquisition Use
Retirement/Disposal

Acquisition can take any of the following forms:
i) Purchase (cash or installment)
ii) Lease
iii) Self-construction (Capitalization)
iv) Exchange
v) Donation

Purchase of PPE
• Property (Land and building):
• Land: Costs of land include the following:
i) Purchase price or costs of acquisition or cash paid
ii) Registration and recording costs/ attorney fees
iii) Costs of draining, filling, grading
iv) Net removal costs
v) Assumptions of any lien or mortgage
vi) Tree plantation permanent in nature
• Land improvement (with limited or definite life and subject to depreciation):
i) Parking lots
ii) Fences around the property
iii) Private driveways

Purchase/self-construction
• Building:
i) Costs of work permit such as RAJUK permission
ii) Costs of design/ architects fees
iii) Costs of material (bricks, cements, sands), labor and overhead
iv) Interest costs incurred during the construction specifically for the building
• Plant and Equipment:
i) Purchase price
ii) Freight
iii) Sales tax or VAT
iv) Installation
v) Painting and lettering
vi) Insurance during transit
vii) Interest cost on funds exclusively used for the construction of a plant assets

• Exercise 1: (Acquisition of PPE)
• XYZ Ltd. is the supplier of furniture. To improve the services to customers, the company purchases four equipments
on March 1, 2020. The terms of acquisition of the equipment are described below.
i) Equipment-1 has a list price of Tk 2,000,000 and is acquired for cash Tk 1,850,000.
ii) Equipment-2 has a list price of Tk 1,000,000 and is acquired in exchange for 8,000 shares of XYZ Ltd. The face
value of each share is Tk 10 and market value at the date of acquisition is Tk 120.
iii) Equipment-3 has a list price of Tk 1,000,000. It is acquired in exchange for 2,000 units of furniture (carried as
inventories by XYZ Ltd) whose cost to XYZ Ltd was Tk 700,000 and market value was Tk 890,000.
iv) Equipment-4 has a list price of Tk 3,005,000 and is acquired for a down payment of Tk 1,005,000 cash and a
non-interest bearing note with a face amount of Tk 2,000,000. The note is due March 1, 2021. The company
normally has to pay interest at a rate of 13% for such a borrowing, and the dealership has an incremental
borrowing rate of 14%.
v) Equipment-5 has a list price of Tk 200,000. It is acquired in exchange for 2,000 shares of ABC Ltd. These shares
are held by XYZ as investment. The face value of each share was Tk10 and market value at the date of
acquisition was Tk 90. The shares were originally purchased by XYZ Ltd 3 months ago @ Tk 80.
Requirement: Prepare the appropriate journal entries for the above transactions for XYZ Ltd.

Debit Credit
(i) Equipment 1 Dr.
Cash……………….Cr.
1,850,000
1,850,000
(ii) Equipment 2 Dr. (8,000×120)
Share capital/Common stock…………………….Cr. (8,000×10)
Share premium/Additional paid in capital.. Cr. (8,000×110)
960,000
80,000
880,000
(iii) a) Equipment 3 Dr.
Sales Revenue…….Cr.
a) Cost of goods sold Dr.
Inventories ………………Cr.
890,000
700,000
890,000
700,000
(iv) Equipment 4 Dr. [1,005,000+(2,000,000/1.13)]
Interest expense Dr.
Notes payable………………………Cr.
Cash…………………………………….Cr.
2,774,912
230,088
2,000,000
1,005,000
(v) a) Investment in shares of ABC Ltd Dr. [2000×(90-80)]
Gain (revaluation) ………………………..Cr.
b)Equipment 5 Dr. (2,000×90)
Investment in shares of ABC Ltd……………….Cr
20,000
180,000
20,000
180,000

Allocation/Depreciation (use) of PPE
• Depreciation is the allocation of depreciable costs of a non-current
tangible assets over the effective or useful life of the asset.

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