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Accounting Principles 2a      Professor Jose Cintron, MBA         http://mba4help.comhttp://www.linkedin.com/in/josecintron
Plant assetsPlan Assets are resources that have three characteristics: Physicalsubstance, Used in the operations of a busi...
Property plan and Equipment The cost principle requires that companies record plant assets at cost.The cost of factory mac...
LandCompany acquires real estate at a cash cost of $100,000. The propertycontains an old warehouse that is razed at a net ...
Delivery truckAssume that ABC purchases a delivery truck for $15,000 cash, plus salestaxes of $900 and delivery costs of $...
Delivery Truck solutionThe first four payments ($15,000, $900, $500, and $200) areexpenditures necessary to make the truck...
DepreciationDepreciation is the process of allocating to expense the costof a plant asset over its useful (service) life. ...
Computing Depreciation1. Cost. Recall that companies record plant assets at cost, in accordancewith the cost principle.2. ...
Computing Depreciation www.mba4help.com
Depreciation MethodsDepreciation is generally computed using one of the following methods:1. Straight-line2. Units-of-acti...
Depreciation MethodsOnce a company chooses a method, it should apply it consistently overthe useful life of the asset. Con...
Straight-line methodUnder the straight-line method, companies expense the same amount ofdepreciation for each year of the ...
Straight-line method www.mba4help.com
Units-of-ActivityUnder the units-of-activity method, useful life is expressed in terms ofthe total units of production or ...
Units-of-Activity www.mba4help.com
Comparison of Methods  www.mba4help.com
Depreciation and Income TaxesThe Internal Revenue Service (IRS) allows corporatetaxpayers to deduct depreciation expense w...
Individual workStraight-Line DepreciationOn January 1, 2010, ABC Corp. purchased a new snow-groomingmachine for $50,000. T...
SolutionThe entry to record the first years depreciation would be:Dec. 31 Depreciation Expense 4,800   Accumulated Depreci...
Plant Asset DisposalsCompanies dispose of plant assets in three ways—retirement, sale, orexchange—Whatever the method, at ...
Retirement of Plant AssetsRetirement of plant assets, assume that Hobart Enterprises retires itscomputer printers, which c...
Loss on disposalIf a company retires a plant asset before it is fully depreciated, and nocash is received for scrap or sal...
Gain on DisposalOn July 1, 2010, ABC co. sells office furniture for $16,000 cash. Theoffice furniture originally cost $60,...
Gain on DisposalJuly 1 Cash                                      16,000 Accumulated Depreciation—Office Furniture 49,000  ...
Loss on DisposalAssume that instead of selling the office furniture for $16,000, ABC sellsit for $9,000. In this case, ABC...
Individual workPlant Asset DisposalABC Trucking has an old truck that cost $30,000, and it has accumulateddepreciation of ...
Solution(A)Cash (sale at gain)                17,000Accumulated Depreciation—Truck        16,000Truck                     ...
Intangible assetsAre rights, privileges, and competitive advantages that result from theownership of long-lived assets tha...
Accounting for IntangibleCompanies record intangible assets at cost. Intangibles are categorized ashaving either a limited...
AmortizationAmortization is to intangibles what depreciation is to plant assets anddepletion is to natural resources.To re...
AmortizationIntangible assets are typically amortized on a straight-line basis.Companies amortize the cost of a patent ove...
PatentA patent is an exclusive right issued by the U.S. Patent Office thatenables the recipient to manufacture, sell, or o...
CopyrithtThe federal government grants copyrights which give the owner theexclusive right to reproduce and sell an artisti...
TrademarkA Trademark or trade name is a word, phrase, jingle, or symbol thatidentifies a particular enterprise or product....
FranchiseA franchise is a contractual arrangement between a franchisor and afranchisee. The franchisor grants the franchis...
FranchiseWhen a company can identify costs with the purchase of a franchise orlicense, it should recognize an intangible a...
GoodwillUsually, the largest intangible asset that appears on a companys balancesheet is goodwill. Goodwill represents the...
GoodwillCompanies record goodwill only when an entire business is purchased.In that case, goodwill is the excess of cost o...
Individual work Match the statement with the term most directly associated with it.Copyright- Depletion- Intangible asset-...
Current Liabilityis a debt with two key features: (1) The company reasonably expects topay the debt from existing current ...
Current liabilities to                           Current assetsCompanies must carefully monitor the relationship of curren...
Current LiabilitiesCurrent liabilities include notes payable, accounts payable, and unearnedrevenues. They also include ac...
Notes payableare often used instead of accounts payable because they give the lenderformal proof of the obligation in case...
Notes PayableABC signs a $100,000, 12%, four-month note. With an interest-bearingpromissory note, the amount of assets rec...
Record interest PayableABC makes an adjusting entry as follows:June 30 Interest Expense 4,000                Interest Paya...
Repayment for the noteAt maturity (July 1, 2010), ABC inc. must pay the face value of the note($100,000) plus $4,000 inter...
Sales Taxes PayableUnder most state sales tax laws, the selling company must ring upseparately on the cash register the am...
Unearned Revenues1. When a company receives the advance payment, it debits Cash, andcredits a current liability account id...
Record RevenueAs the school completes each of the five home games, it earns one-fifth of the revenue. The following entry ...
Unearned Revenues  www.mba4help.com
Analysis- LiquidityUse of current and noncurrent classifications makes it possible to analyzea companys liquidity. Liquidi...
Analysis- Liquidity www.mba4help.com
Current RatioThe excess of current assets over current liabilities is working capitalThe current ratio permits us to compa...
PayrollPayroll and related fringe benefits often make up a large percentage ofcurrent liabilities. Employee compensation i...
Salaries and wagesThe term “payroll” pertains to both salaries and wages. Managerial,administrative, and sales personnel a...
Professionals FeesThe term “payroll” does not apply to payments made for services ofprofessionals such as certified public...
Gross earningsGross earnings is the total compensation earned by an employee. Itconsists of wages or salaries, plus any bo...
Payroll deductionsAs anyone who has received a paycheck knows, gross earnings areusually very different from the amount ac...
FICAFICA Taxes. In 1937 Congress enacted the Federal InsuranceContribution Act (FICA). FICA taxes are designed to provide ...
When FICA taxesWhen FICA taxes were first imposed 1937, the rate was 1% on the first$3,000 of gross earnings, or a maximum...
Income TaxesUnder the U.S. pay-as-you-go system of federal income taxes, employersare required to withhold income taxes fr...
Other DeductionsOther Deductions. Employees may voluntarily authorize withholdingsfor charitable, retirement, and other pu...
Net payABC determines net pay by subtracting payroll deductions from grossearnings. Illustration shows the computation of ...
Freedom DayIn 2008, Americans worked 74 days to afford their federal taxes and 39more days to afford state and local taxes...
Employee Earning RecordsTo comply with state and federal laws, an employer must keep acumulative record of each employees ...
Payroll registerPayroll register. This record accumulates the gross earnings, deductions,and net pay by employee for each ...
Recognizing Payroll                       Expenses and LiabilitiesFrom the payroll register in ABC co. makes a journal ent...
Recording Payment                         of the PayrollEach paycheck is usually accompanied by a detachable statement ofe...
Payment of the payrollFollowing payment of the payroll, the company enters the checknumbers in the payroll register. ABC c...
Group workIn January, gross earnings in Ramirez Company were $20,000. Allearnings are subject to 8% FICA taxes. Federal in...
Solutions   Net pay: $20,000 - (8% × $20,000) - $4500 - $500 = $13,400Salaries and Wages Expense 20,000FICA Taxes Payable ...
Employer Payroll TaxesPayroll tax expense for businesses results from three taxes thatgovernmental agencies levy on employ...
FICA TaxesEach employee must pay FICA taxes. In addition, employers must matcheach employees FICA contribution. The matchi...
Federal Unemployment                     Tax Act (FUTA)The Federal Unemployment Tax Act (FUTA) is another feature of thefe...
State unemployment(suta)All states have unemployment compensation programs under stateunemployment tax acts (SUTA). Like f...
Employer Payroll Taxes   www.mba4help.com
Employer payroll taxesCompanies usually record employer payroll taxes at the same time theyrecord the payroll.Jan. 14 Payr...
Filing and Remitting                            Payroll TaxesFor purposes of reporting and remitting to the IRS, the compa...
(Form W-2)Employers also must provide each employee with a Wage and TaxStatement (Form W-2) by January 31                 ...
Partnership form of                            organizationA partnership is an association of two or more persons to carry...
Partnership and taxesThe net income of a partnership is not taxed as a separate entity. But, apartnership must file an inf...
Mutual AgencyMutual agency means that each partner acts on behalf of the partnershipwhen engaging in partnership business....
Limited LifeA partnership may be ended voluntarily at any time through theacceptance of a new partner or the withdrawal of...
Unlimited LiabilityEach partner is personally and individually liable for all partnershipliabilities. Creditors claims att...
Co-Ownership of PropertyPartners jointly own partnership assets. If the partnership is dissolved,each partner has a claim ...
Share Income or lossPartnership net income (or net loss) is also co-owned. If the partnershipcontract does not specify to ...
Limited partnership                          “Ltd.,” or “LP”In a limited partnership, one or more partners have unlimited ...
Limited Liability Partnership  In an LLP, all partners have limited liability. No general partners.The LLP is designed to ...
Limited Liability CompaniesA hybrid form of business organization with certain features like acorporation and others like ...
www.mba4help.com
Advantages & DisadvantagesOne major advantage of a partnership is to combine the skills andresources of two or more indivi...
The Partnership AgreementThe partnership agreement contains such basic information as the nameand principal location of th...
Partners initial investmentEach partners initial investment in a partnership is entered in thepartnership records. The par...
The partnership records                            the investmentsInvestment of A. RolfeCash                            8,...
Dividing Net Income                           or Net LossPartners equally share partnership net income or net loss unless ...
Closing EntriesAs in the case of a proprietorship, a partnership must make four entriesin preparing closing entries. The e...
First two entriesThe first two entries are the same as in a proprietorship. The last twoentries are different because (1) ...
The last two closing                             entries are:AB Company has net income of $32,000 for 2010. The partners, ...
Capital and drawing Acct.Assume that the beginning capital balance is $47,000 for Arbor and$36,000 for Barnett. After post...
Salaries to partners and                         interest on partnersSalaries to partners and interest on partners capital...
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Accounting Principles 2a Partnership

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Plan assets,Property plan and equipment, depreciation, computing depreciation, depreciation method, straight line,plant assets disposal, amortization, patent, copyright, trademark, franshice, goodwill,notes payables, salaries, payroll, fica, partnership, limited partnership, LLC, partnership agreement, jose cintron, advance business consulting, mba4help.com

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Accounting Principles 2a Partnership

  1. 1. Accounting Principles 2a Professor Jose Cintron, MBA http://mba4help.comhttp://www.linkedin.com/in/josecintron
  2. 2. Plant assetsPlan Assets are resources that have three characteristics: Physicalsubstance, Used in the operations of a business, Not intended for sale tocustomers. Also called property, plant, and equipment; plant andequipment; and fixed assets. These assets are expected to provideservices to the company for a number of years www.mba4help.com
  3. 3. Property plan and Equipment The cost principle requires that companies record plant assets at cost.The cost of factory machinery includes the purchase price, freight costspaid by the purchaser, and installation costs. Once cost is established, thecompany uses that amount as the basis of accounting for the plant assetover its useful life. www.mba4help.com
  4. 4. LandCompany acquires real estate at a cash cost of $100,000. The propertycontains an old warehouse that is razed at a net cost of $6,000 ($7,500 incosts less $1,500 proceeds from salvaged materials). Additionalexpenditures are the attorneys fee, $1,000, and the real estate brokerscommission, $8,000. Cost of the land is $115,000, computed as follows www.mba4help.com
  5. 5. Delivery truckAssume that ABC purchases a delivery truck for $15,000 cash, plus salestaxes of $900 and delivery costs of $500. The buyer also pays $200 forpainting and lettering, $600 for an annual insurance policy, and $80 for amotor vehicle license. Explain how each of these costs would beaccounted for. www.mba4help.com
  6. 6. Delivery Truck solutionThe first four payments ($15,000, $900, $500, and $200) areexpenditures necessary to make the truck ready for its intended use.Thus, the cost of the truck is $16,600. The payments for insurance andthe license are operating costs and therefore are expensed. www.mba4help.com
  7. 7. DepreciationDepreciation is the process of allocating to expense the costof a plant asset over its useful (service) life. Cost allocationenables companies to properly match expenses with revenues.It is important to understand that depreciation is a process ofcost allocation. It is not a process of asset valuation. www.mba4help.com
  8. 8. Computing Depreciation1. Cost. Recall that companies record plant assets at cost, in accordancewith the cost principle.2. Useful life. Useful life is an estimate of the expected productive life,also called service life, of the asset. Useful life may be expressed interms of time, units of activity or units of output.3. Salvage value. Salvage value is an estimate of the assets value at theend of its useful life. www.mba4help.com
  9. 9. Computing Depreciation www.mba4help.com
  10. 10. Depreciation MethodsDepreciation is generally computed using one of the following methods:1. Straight-line2. Units-of-activity3. Declining-balance www.mba4help.com
  11. 11. Depreciation MethodsOnce a company chooses a method, it should apply it consistently overthe useful life of the asset. Consistency enhances the comparability offinancial statements. Depreciation affects the balance sheet throughaccumulated depreciation and the income statement through depreciationexpense. www.mba4help.com
  12. 12. Straight-line methodUnder the straight-line method, companies expense the same amount ofdepreciation for each year of the assets useful life. It is measured solelyby the passage of time. Depreciable cost is the cost of the asset less its salvage value www.mba4help.com
  13. 13. Straight-line method www.mba4help.com
  14. 14. Units-of-ActivityUnder the units-of-activity method, useful life is expressed in terms ofthe total units of production or use expected from the asset, rather than asa time period. The units-of-activity method is ideally suited to factorymachinery. www.mba4help.com
  15. 15. Units-of-Activity www.mba4help.com
  16. 16. Comparison of Methods www.mba4help.com
  17. 17. Depreciation and Income TaxesThe Internal Revenue Service (IRS) allows corporatetaxpayers to deduct depreciation expense when they computetaxable income. However, the IRS does not require thetaxpayer to use the same depreciation method on the tax returnthat is used in preparing financial statements.Taxpayers most likely use a special accelerated-depreciationmethod called the Modified Accelerated Cost RecoverySystem (MACRS) www.mba4help.com
  18. 18. Individual workStraight-Line DepreciationOn January 1, 2010, ABC Corp. purchased a new snow-groomingmachine for $50,000. The machine is estimated to have a 10-year lifewith a $2,000 salvage value. What journal entry would ABC Corp. makeat December 31, 2010, if it uses the straight-line method of depreciation? www.mba4help.com
  19. 19. SolutionThe entry to record the first years depreciation would be:Dec. 31 Depreciation Expense 4,800 Accumulated Depreciation 4,800 (To record annual depreciation on snow-grooming machine) www.mba4help.com
  20. 20. Plant Asset DisposalsCompanies dispose of plant assets in three ways—retirement, sale, orexchange—Whatever the method, at the time of disposal the companymust determine the book value of the plant asset. As noted earlier, bookvalue is the difference between the cost of a plant asset and theaccumulated depreciation to date.1.Retirement2.Sale3.Exchange www.mba4help.com
  21. 21. Retirement of Plant AssetsRetirement of plant assets, assume that Hobart Enterprises retires itscomputer printers, which cost $32,000. The accumulated depreciation onthese printers is $32,000. The equipment, therefore, is fully depreciated(zero book value). The entry to record this retirement is as follows.Accumulated Depreciation—Printing Equipment 32,000Printing Equipment 32,000(To record retirement of fully depreciated equipment) www.mba4help.com
  22. 22. Loss on disposalIf a company retires a plant asset before it is fully depreciated, and nocash is received for scrap or salvage value, a loss on disposal occurs. Forexample, assume that ABC co. discards delivery equipment that cost$18,000 and has accumulated depreciation of $14,000. The entry is.Accumulated DepreciationDelivery Equipment 14,000Loss on Disposal 4,000Delivery Equipment 18,000(To record retirement of delivery equipment at a loss) www.mba4help.com
  23. 23. Gain on DisposalOn July 1, 2010, ABC co. sells office furniture for $16,000 cash. Theoffice furniture originally cost $60,000. As of January 1, 2010, it hadaccumulated depreciation of $41,000. Depreciation for the first sixmonths of 2010 is $8,000. ABC records depreciation expense andupdates accumulated depreciation to July 1 with the following. July 1 Depreciation Expense 8,000 Accumulated Depreciation—Office Furniture 8,000 (To record depreciation expense for the first 6 months of 2010) www.mba4help.com
  24. 24. Gain on DisposalJuly 1 Cash 16,000 Accumulated Depreciation—Office Furniture 49,000 Office Furniture 60,000 Gain on Disposal 5,000 (To record sale of office furniture at a gain) www.mba4help.com
  25. 25. Loss on DisposalAssume that instead of selling the office furniture for $16,000, ABC sellsit for $9,000. In this case, ABC computes a loss of $2,000 as followsJuly 1 Cash 9,000 Accumulated Depreciation—Office Furniture 49,000 Loss on Disposal 2,000 Office Furniture 60,000 (To record sale of office furniture at a loss) www.mba4help.com
  26. 26. Individual workPlant Asset DisposalABC Trucking has an old truck that cost $30,000, and it has accumulateddepreciation of $16,000 on this truck. ABC has decided to sell the truck. (a) What entry would ABC Trucking make to record the sale of thetruck for $17,000 cash?(b) What entry would ABC trucking make to record the sale of the truckfor $10,000 cash? www.mba4help.com
  27. 27. Solution(A)Cash (sale at gain) 17,000Accumulated Depreciation—Truck 16,000Truck 30,000Gain on Disposal [$17,000 - ($30,000 - $16,000)] 3,000(To record sale of truck at a gain)(B)Cash (sale at loss) 10,000Loss on Disposal [$10,000 - ($30,000 - $16,000)] 4,000Accumulated Depreciation—Truck 16,000Truck 30,000(To record sale of truck at a loss) www.mba4help.com
  28. 28. Intangible assetsAre rights, privileges, and competitive advantages that result from theownership of long-lived assets that do not possess physical substance.1. Patents, copyrights, and trademarks.2. Acquisition of another business, in which the purchase price includesa payment for the companys favorable attributes (called goodwill).3. Private monopolistic arrangements arising from contractualagreements, such as franchises and leases. www.mba4help.com
  29. 29. Accounting for IntangibleCompanies record intangible assets at cost. Intangibles are categorized ashaving either a limited life or an indefinite life. If an intangible has alimited life, the company allocates its cost over the assets useful lifeusing a process similar to depreciation. The process of allocating the costof intangibles is referred to as amortization. www.mba4help.com
  30. 30. AmortizationAmortization is to intangibles what depreciation is to plant assets anddepletion is to natural resources.To record amortization of an intangible asset, a company increases(debits) Amortization Expense, and decreases (credits) the specificintangible asset.Cost for an intangible asset includes only the purchase price.Companies expense any costs incurred indeveloping an intangible asset. www.mba4help.com
  31. 31. AmortizationIntangible assets are typically amortized on a straight-line basis.Companies amortize the cost of a patent over its 20-year life or its usefullife, whichever is shorter.Assume that ABC purchases a patent at a cost of $60,000. If ABCestimates the useful life of the patent to be eight years, the annualamortization expense is $7,500 ($60,000 ÷ 8). Dec. 31 Amortization Expense—Patent 7,500 Patent 7,500 (To record patent amortization) www.mba4help.com
  32. 32. PatentA patent is an exclusive right issued by the U.S. Patent Office thatenables the recipient to manufacture, sell, or otherwise control aninvention for a period of 20 years from the date of the grant. A patent isnonrenewable. The initial cost of a patent is the cash or cash equivalentprice paid to acquire the patent. www.mba4help.com
  33. 33. CopyrithtThe federal government grants copyrights which give the owner theexclusive right to reproduce and sell an artistic or published work.Copyrights extend for the life of the creator plus 70 years.The useful life of a copyright generally is significantly shorter than itslegal life. Therefore, copyrights usually are amortized over a relativelyshort period of time. www.mba4help.com
  34. 34. TrademarkA Trademark or trade name is a word, phrase, jingle, or symbol thatidentifies a particular enterprise or product.The creator or original user may obtain exclusive legal right to thetrademark or trade name by registering it with the U.S. Patent Office.Such registration provides 20 years of protection. The registration maybe renewed indefinitely as long as the trademark or trade name is in use. www.mba4help.com
  35. 35. FranchiseA franchise is a contractual arrangement between a franchisor and afranchisee. The franchisor grants the franchisee the right to sell certainproducts, provide specific services, or use certain trademarks or tradenames, usually within a designated geographical area. www.mba4help.com
  36. 36. FranchiseWhen a company can identify costs with the purchase of a franchise orlicense, it should recognize an intangible asset. Companies shouldamortize the cost of a limited-life franchise (or license) over its usefullife. If the life is indefinite, the cost is not amortized. Annual paymentsmade under a franchise agreement are recorded as operating expenses. www.mba4help.com
  37. 37. GoodwillUsually, the largest intangible asset that appears on a companys balancesheet is goodwill. Goodwill represents the value of all favorableattributes that relate to a company. These include exceptionalmanagement, desirable location, good customer relations, skilledemployees, high-quality products. www.mba4help.com
  38. 38. GoodwillCompanies record goodwill only when an entire business is purchased.In that case, goodwill is the excess of cost over the fair market value ofthe net assets (assets less liabilities) acquired.In recording the purchase of a business, the company debits (increases)the net assets at their fair market values, credits (decreases) cash for thepurchase price, and debits goodwill for the difference. www.mba4help.com
  39. 39. Individual work Match the statement with the term most directly associated with it.Copyright- Depletion- Intangible asset- Franchise- Depreciation-R/D-Amortization- Plant assets- Trade mark- Patent www.mba4help.com
  40. 40. Current Liabilityis a debt with two key features: (1) The company reasonably expects topay the debt from existing current assets or through the creation ofother current liabilities. (2) The company will pay the debt within oneyear or the operating cycle, whichever is longer. www.mba4help.com
  41. 41. Current liabilities to Current assetsCompanies must carefully monitor the relationship of current liabilitiesto current assets. This relationship is critical in evaluating a companysshort-term debt-paying ability.A company that has more current liabilities than current assets may notbe able to meet its current obligations when they become due. www.mba4help.com
  42. 42. Current LiabilitiesCurrent liabilities include notes payable, accounts payable, and unearnedrevenues. They also include accrued liabilities such as taxes, salaries andwages, and interest payable. www.mba4help.com
  43. 43. Notes payableare often used instead of accounts payable because they give the lenderformal proof of the obligation in case legal remedies are needed tocollect the debt. Notes payable usually require the borrower to payinterest. Companies frequently issue them to meet short-term financingneeds. www.mba4help.com
  44. 44. Notes PayableABC signs a $100,000, 12%, four-month note. With an interest-bearingpromissory note, the amount of assets received upon issuance of the notegenerally equals the notes face value. ABC. therefore will receive$100,000 cash and will make the following journal entry.Mar. 1 Cash 100,000 Notes Payable 100,000 (To record issuance of 12%, 4-month note to First National Bank) www.mba4help.com
  45. 45. Record interest PayableABC makes an adjusting entry as follows:June 30 Interest Expense 4,000 Interest Payable 4,000 (To accrue interest for 4 months on First National Banknote) www.mba4help.com
  46. 46. Repayment for the noteAt maturity (July 1, 2010), ABC inc. must pay the face value of the note($100,000) plus $4,000 interest ($100,000 × 12% × 4/12). It recordspayment of the note and accrued interest as shown below.July 1 Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 (To record payment of First National Bank interest-bearing note andaccrued interest at maturity) www.mba4help.com
  47. 47. Sales Taxes PayableUnder most state sales tax laws, the selling company must ring upseparately on the cash register the amount of the sale and the amount ofthe sales tax collected. Mar. 25 Cash 10,600 Sales 10,000 Sales Taxes Payable 600 (To record daily sales and sales taxes) www.mba4help.com
  48. 48. Unearned Revenues1. When a company receives the advance payment, it debits Cash, andcredits a current liability account identifying the source .2. When the company earns the revenue, it debits the UnearnedRevenue account, and credits an earned revenue account.Sells10,000 season football tickets at $50 each for its five-game home Aug. 6 Cash 500,000 Unearned Football Ticket Revenue 500,000 (To record sale of 10,000 season tickets) www.mba4help.com
  49. 49. Record RevenueAs the school completes each of the five home games, it earns one-fifth of the revenue. The following entry records the revenueearned.Sept. 7 Unearned Football Ticket Revenue 100,000 Football Ticket Revenue 100,000 (To record football ticket revenue earned) www.mba4help.com
  50. 50. Unearned Revenues www.mba4help.com
  51. 51. Analysis- LiquidityUse of current and noncurrent classifications makes it possible to analyzea companys liquidity. Liquidity refers to the ability to pay maturingobligations and meet unexpected needs for cash.The excess of current assets over current liabilities is working capital www.mba4help.com
  52. 52. Analysis- Liquidity www.mba4help.com
  53. 53. Current RatioThe excess of current assets over current liabilities is working capitalThe current ratio permits us to compare the liquidity of different-sizedcompanies and of a single company at different times. www.mba4help.com
  54. 54. PayrollPayroll and related fringe benefits often make up a large percentage ofcurrent liabilities. Employee compensation is often the most significantexpense that a company incurs. For example, Costco recently reportedtotal employees of 103,000 and labor and fringe benefits costs whichapproximated 70% of the companys total cost of operations. www.mba4help.com
  55. 55. Salaries and wagesThe term “payroll” pertains to both salaries and wages. Managerial,administrative, and sales personnel are generally paid salaries. Salariesare often expressed in terms of a specified amount per month or per yearrather than an hourly rate. Store clerks, factory employees, and manuallaborers are normally paid wages. Wages are based on a rate per hour. www.mba4help.com
  56. 56. Professionals FeesThe term “payroll” does not apply to payments made for services ofprofessionals such as certified public accountants, attorneys, andarchitects. Such professionals are independent contractors rather thansalaried employees. Payments to them are called fees. www.mba4help.com
  57. 57. Gross earningsGross earnings is the total compensation earned by an employee. Itconsists of wages or salaries, plus any bonuses and commissions.Jose, an employee of ABC, worked 44 hours for the weekly pay periodending January 14. His regular wage is $12 per hour. For any hours inexcess of 40, the company pays at one-and-a-half times. www.mba4help.com
  58. 58. Payroll deductionsAs anyone who has received a paycheck knows, gross earnings areusually very different from the amount actually received. The differenceis due to payroll deductions. www.mba4help.com
  59. 59. FICAFICA Taxes. In 1937 Congress enacted the Federal InsuranceContribution Act (FICA). FICA taxes are designed to provide workerswith supplemental retirement, employment disability, and medicalbenefits. The benefits are financed by a tax levied on employeesearnings. www.mba4help.com
  60. 60. When FICA taxesWhen FICA taxes were first imposed 1937, the rate was 1% on the first$3,000 of gross earnings, or a maximum of $30 per year. The rate andbase have changed dramatically since that time!In 2008, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare)on the first $102,000 of gross earnings for each employee. www.mba4help.com
  61. 61. Income TaxesUnder the U.S. pay-as-you-go system of federal income taxes, employersare required to withhold income taxes from employees each pay period.Three variables determine the amount to be withheld: (1) the employeesgross earnings; (2) the number of allowances claimed by the employee;and (3) the length of the pay period. www.mba4help.com
  62. 62. Other DeductionsOther Deductions. Employees may voluntarily authorize withholdingsfor charitable, retirement, and other purposes. All voluntary deductionsfrom gross earnings should be authorized in writing by the employee. www.mba4help.com
  63. 63. Net payABC determines net pay by subtracting payroll deductions from grossearnings. Illustration shows the computation of Joses net pay for the payperiod. www.mba4help.com
  64. 64. Freedom DayIn 2008, Americans worked 74 days to afford their federal taxes and 39more days to afford state and local taxes.It takes 113 (74 + 39) days to pay your taxes. Thus, April 23 is TaxFreedom Day. For the past 26 years Tax Freedom Day has occurred inApril, except for the year 2000 when it occurred in May. www.mba4help.com
  65. 65. Employee Earning RecordsTo comply with state and federal laws, an employer must keep acumulative record of each employees gross earnings, deductions, and netpay. www.mba4help.com
  66. 66. Payroll registerPayroll register. This record accumulates the gross earnings, deductions,and net pay by employee for each pay period www.mba4help.com
  67. 67. Recognizing Payroll Expenses and LiabilitiesFrom the payroll register in ABC co. makes a journal entry to record thepayroll. For the week ending January 14 the entry is:Jan. 14 Office Salaries Expense 5,200.00 Wages Expense 12,010.00 FICA Taxes Payable 1,376.80 Federal Income Taxes Payable 3,490.00 State Income Taxes Payable 344.20 United Way Payable 421.50 Union Dues Payable 115.00 Salaries and Wages Payable 11,462.50 (To record payroll for the week ending January 14) www.mba4help.com
  68. 68. Recording Payment of the PayrollEach paycheck is usually accompanied by a detachable statement ofearnings document www.mba4help.com
  69. 69. Payment of the payrollFollowing payment of the payroll, the company enters the checknumbers in the payroll register. ABC co. records payment of the payroll.Jan. 14 Salaries and Wages Payable 11,462.50 Cash 11,462.50 (To record payment of payroll) www.mba4help.com
  70. 70. Group workIn January, gross earnings in Ramirez Company were $20,000. Allearnings are subject to 8% FICA taxes. Federal income tax withheld was$4,500, and state income tax withheld was $500. (a) Calculate net payfor January, and (b) record the payroll.Record gross earnings as Salaries and Wages Expense, record payrolldeduction as liabilities, and record net pay as Salaries and Wages payable www.mba4help.com
  71. 71. Solutions Net pay: $20,000 - (8% × $20,000) - $4500 - $500 = $13,400Salaries and Wages Expense 20,000FICA Taxes Payable 1,600Federal Income Taxes Payable 4,500State Income Taxes Payable 500Salaries and Wages Payable 13,400(To record payroll) www.mba4help.com
  72. 72. Employer Payroll TaxesPayroll tax expense for businesses results from three taxes thatgovernmental agencies levy on employers. These taxes are: (1) FICA, (2)federal unemployment tax, and (3) state unemployment tax. These taxesplus such items as paid vacations and pensions are collectively referredto as fringe benefits. www.mba4help.com
  73. 73. FICA TaxesEach employee must pay FICA taxes. In addition, employers must matcheach employees FICA contribution. The matching contribution results inpayroll tax expense to the employer. The employers tax is subject to thesame rate and maximum earnings as the employees. www.mba4help.com
  74. 74. Federal Unemployment Tax Act (FUTA)The Federal Unemployment Tax Act (FUTA) is another feature of thefederal Social Security program. Federal unemployment taxes providebenefits for a limited period of time to employees who lose their jobsthrough no fault of their own. The FUTA tax rate is 6.2% of taxablewages. The taxable wage base is the first $7,000 of wages paid to eachemployee in a calendar year. www.mba4help.com
  75. 75. State unemployment(suta)All states have unemployment compensation programs under stateunemployment tax acts (SUTA). Like federal unemployment taxes, stateunemployment taxes provide benefits to employees who lose their jobs.These taxes are levied on employers. www.mba4help.com
  76. 76. Employer Payroll Taxes www.mba4help.com
  77. 77. Employer payroll taxesCompanies usually record employer payroll taxes at the same time theyrecord the payroll.Jan. 14 Payroll Tax Expense 2,443.82 FICA Taxes Payable 1,376.80 Federal Unemployment Taxes Payable 137.68 State Unemployment Taxes Payable 929.34 (To record employers payroll taxes on January 14 payroll) www.mba4help.com
  78. 78. Filing and Remitting Payroll TaxesFor purposes of reporting and remitting to the IRS, the companycombines the FICA taxes and federal income taxes that it withheld.Companies must report the taxes quarterly, no later than one monthfollowing the close of each quarter. The remitting requirements dependon the amount of taxes withheld and the length of the pay period.Companies generally file and remit federal unemployment taxes annuallyon or before January 31 of the subsequent year. www.mba4help.com
  79. 79. (Form W-2)Employers also must provide each employee with a Wage and TaxStatement (Form W-2) by January 31 www.mba4help.com
  80. 80. Partnership form of organizationA partnership is an association of two or more persons to carry on as co-owners of a business for profit.Partnerships are fairly easy to form. People form partnerships simply bya verbal agreement (less than a year), or by written agreement.A partnership is a legal entity. A partnership can own property (land,buildings, equipment), and can sue or be sued. A partnership also is anaccounting entity. www.mba4help.com
  81. 81. Partnership and taxesThe net income of a partnership is not taxed as a separate entity. But, apartnership must file an information tax return showing partnership netincome and each partners share of that net income. Each partners shareis taxable at personal tax rates, regardless of the amount of net incomeeach withdraws from the business during the year. www.mba4help.com
  82. 82. Mutual AgencyMutual agency means that each partner acts on behalf of the partnershipwhen engaging in partnership business. The act of any partner is bindingon all other partners. This is true even when partners act beyond thescope of their authority, so long as the act appears to be appropriate forthe partnership. www.mba4help.com
  83. 83. Limited LifeA partnership may be ended voluntarily at any time through theacceptance of a new partner or the withdrawal of a partner. Partnershipdissolution occurs whenever a partner withdraws or a new partner isadmitted. Dissolution does not necessarily mean that the business ends.If the continuing partners agree, operations can continue withoutinterruption by forming a new partnership. www.mba4help.com
  84. 84. Unlimited LiabilityEach partner is personally and individually liable for all partnershipliabilities. Creditors claims attach first to partnership assets. If these areinsufficient, the claims then attach to the personal resources of anypartner, irrespective of that partners equity in the partnership. Becauseeach partner is responsible for all the debts of the partnership, eachpartner is said to have unlimited liability www.mba4help.com
  85. 85. Co-Ownership of PropertyPartners jointly own partnership assets. If the partnership is dissolved,each partner has a claim on total assets equal to the balance in his or herrespective capital account. This claim does not attach to specific assetsthat an individual partner contributed to the firm. www.mba4help.com
  86. 86. Share Income or lossPartnership net income (or net loss) is also co-owned. If the partnershipcontract does not specify to the contrary, all net income or net loss isshared equally by the partners. As you will see later, though, partnersmay agree to unequal sharing of net income or net loss. www.mba4help.com
  87. 87. Limited partnership “Ltd.,” or “LP”In a limited partnership, one or more partners have unlimited liability andone or more partners have limited liability for the debts of the firm.Those with unlimited liability are general partners. Those with limitedliability are limited partners.Limited partners does not get involved in management. www.mba4help.com
  88. 88. Limited Liability Partnership In an LLP, all partners have limited liability. No general partners.The LLP is designed to protect innocent partners from malpractice ornegligence claims resulting from the acts of another partner.These professional partnerships vary in size from a medical/Lawyerpartnership of three to five doctors, up to couple hundred partners. www.mba4help.com
  89. 89. Limited Liability CompaniesA hybrid form of business organization with certain features like acorporation and others like a limited partnership is the limited liabilitycompany, or “LLC.” An LLC usually has a limited life. The owners,called members, have limited liability like owners of a corporation. themembers of a limited liability company (LLC) can assume an activemanagement role.Income tax purposes, the IRS usually classifies an LLC as a partnership. www.mba4help.com
  90. 90. www.mba4help.com
  91. 91. Advantages & DisadvantagesOne major advantage of a partnership is to combine the skills andresources of two or more individuals.Partnerships are easily formed and are relatively free from governmentregulations and restrictions.Partners generally can make decisions quickly on substantive businessmatters without having to consult a board of directors. www.mba4help.com
  92. 92. The Partnership AgreementThe partnership agreement contains such basic information as the nameand principal location of the firm, the purpose of the business.1. Names and capital contributions of partners.2. Rights and duties of partners.3. Basis for sharing net income or net loss.4. Provision for withdrawals of assets.5. Procedures for submitting disputes to arbitration.6. Procedures for the withdrawal or addition of a partner.7. Rights and duties of surviving partners in the event of a partnersdeath. www.mba4help.com
  93. 93. Partners initial investmentEach partners initial investment in a partnership is entered in thepartnership records. The partnership should record these investments atthe fair market value of the assets at the date of their transfer to thepartnership. All partners must agree to the values assigned. www.mba4help.com
  94. 94. The partnership records the investmentsInvestment of A. RolfeCash 8,000Office Equipment 4,000A. Rolfe, Capital 12,000(To record investment of Rolfe)Investment of T. SheaCash 9,000Accounts Receivable 4,000Allowance for Doubtful Accounts 1,000T. Shea, Capital 12,000(To record investment of Shea) www.mba4help.com
  95. 95. Dividing Net Income or Net LossPartners equally share partnership net income or net loss unless thepartnership contract indicates otherwise. The same basis of divisionusually applies to both net income and net loss. www.mba4help.com
  96. 96. Closing EntriesAs in the case of a proprietorship, a partnership must make four entriesin preparing closing entries. The entries are: 1. Debit each revenue account for its balance, and credit IncomeSummary for total revenues. 2. Debit Income Summary for total expenses, and credit each expenseaccount for its balance. 3. Debit Income Summary for its balance, and credit each partnerscapital account for his or her share of net income. Or, credit IncomeSummary, and debit each partners capital account for his or her share ofnet loss. 4. Debit each partners capital account for the balance in that partnersdrawing account, and credit each partners drawing account for the sameamount. www.mba4help.com
  97. 97. First two entriesThe first two entries are the same as in a proprietorship. The last twoentries are different because (1) there are two or more owners capitaland drawing accounts, and (2) it is necessary to divide net income (or netloss) among the partners. www.mba4help.com
  98. 98. The last two closing entries are:AB Company has net income of $32,000 for 2010. The partners, L.Arbor and D. Barnett, share net income and net loss equally. Drawingsfor the year were Arbor $8,000 and Barnett $6,000.Dec. 31 Income Summary 32,000 L. Arbor, Capital ($32,000 × 50%) 16,000 D. Barnett, Capital ($32,000 × 50%) 16,000Dec. 31 L. Arbor, Capital 8,000 D. Barnett, Capital 6,000 L. Arbor, Drawing 8,000 D. Barnett, Drawing 6,000 (To close drawing accounts to capital accounts) www.mba4help.com
  99. 99. Capital and drawing Acct.Assume that the beginning capital balance is $47,000 for Arbor and$36,000 for Barnett. After posting the closing entries, the capital anddrawing accounts will appear as shown www.mba4help.com
  100. 100. Salaries to partners and interest on partnersSalaries to partners and interest on partners capital are not expenses ofthe partnership. Therefore, these items do not enter into the matching ofexpenses with revenues and the determination of net income or net loss.For a partnership, as for other entities, salaries expense pertains to thecost of services performed by employees.When the partnership agreement permits the partners to make monthlywithdrawals of cash based on their “salary,” the partnership debits thesewithdrawals to the partners drawing account End part 1 www.mba4help.com

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