COST ACCTG.
STANDARDS
1. IMA
2. SMA
3. CASB (legally
binding)
COST OBJECT
TMC = DM+DL+FOH
PC = DM+DL
CC = DL+FOH
Abnormal data points = outliers
METHODS OF SEPARATING SEMI-VARIABLE COST INTO THEIR FIXED & VARIABLE
ELEMENT
A. HIGH-LOW METHOD
=
C. METHOD OF LEAST SQUARE
METHOD
()()
2 ()2
=
=
= + ( )
= + ()
= + ()
B. SCATTERGRAPH (SCATTERPLOT)
METHOD
=
= + ()
Cost Acctg.
Acctg. 7
Acctg.11
Job order
Process Costing
Joint & By Products
Activity Based Costing
Backflush Costing
COST ACCOUNTING:
Installment Sales
Franchise Acctg.
Construction Contract
Home Office & Branch
FOREX
Derivative
Corporate Liquidation
Business Combination
Joint Venture
NPO
(MANUFACTURING (COST))
Applied FOH
=
=
Direct Costing = or Variable Costing
Absorption Costing = or Conventional or
Full Costing
Responsibility Accounting:
Activity Level to Use:
1.
2.
3.
4.
Normal Capacity
Expected Capacity
Practical Capacity
Theoretical Capacity
Plant Wide/Blanket Rate= (Only
one rate)
Departmentalized Rates= (Many
rates)
JOB ORDER COSTING SYSTEM
Accounting for Production Losses in a Job Order Cost System
Accounting for Scrap Sales
1. Scrap Sale or Other Income
2. Cost of Goods Sold (credited)
3. FOH Control (credited)
4. WIP-materials (credited)
-if traceable to the job.
Accounting for Spoiled Goods
Estimated Loss
xxx
2
Recoverable Cost(x10)
(xxx)
Unrecoverable Cost
xxx
Fault of Customer
Fault of Management
FG
xxx
Spoiled Good Invty. X10
WIP #
xxx
Cash inflow
FOH Control
xxx
Spoiled Goods Invty. x10
WIP #
Loss on Spoilage
xxx
Spoiled Goods Invty. x10
WIP #
Recoverable
Cost
xxx
xxx
Accounting for Rework
Fault of the Customer
WIP #
xxx
Materials
Accrued Payroll
Applied FOH
FG
Fault of Management
FOH Control
xxx
Materials
Accrued Payroll
Applied FOH
xxx
xxx
xxx
xxx
WIP #
FG
xxx
xxx
xxx
xxx
xxx
WIP
xxx
NOTE: When it is fault of the
customer it is chargeable to WIP, if
not it is chargeable to FOH Control.
PROCESS COSTING SYSTEM
P- Physical Units:
E- Equivalent Units of Production:
C- Cost to Account for:
U- Unit Cost:
A- Assign Cost to:
Assign Cost to:
Units started & completed & Ending Inventory
Normal Spoilage
Abnormal Spoilage
Accounting for Production Losses & or Spoilages
CONTINUOUS
DISCRETE
0 If only normal loss is present, it will
be absorbed by the remaining units
by using the Method of Neglect.
0 If only normal loss is present,
it should be absorbed by the
remaining units, if or for the
condition that the units
remaining are good units. If
the ending are not, the cost
should be allocated to the
units started & completed &
transferred to the next
department.
0 However when normal & abnormal
spoilage existed in the process that
were recognized, we have to put
an EUP to the whole numberof units
considered as abnormal in order for
us to separate cost to this product.
(-FOH)
Method of Neglect also can be
used in this scenario.
NOTE: Good Units are goods
considered as good quantity & passed
the inspection point.
4
Methods of Accounting Joint Cost
ACCOUNTING for JOINT PRODUCT COST &
BY PRODUCTS
1. Market or Sales Value Method
A. 1. Sales Value at Split-Off - Note: to use this method, all
joint product must be marketable @ split-off point.
A. 2. Hypothetical Market Value Approximate Net Realizable Value
at split-off point. Hypothetical MV is equal to selling
price minus cost to complete and cost to sell.
2. Average Unit Cost Method (Uniform [more or less])
Average Unit Cost =
Joint Cost
Total Units
Allocated Joint Cost = average Unit Cost x Units
3. Predetermined Index of Production Method
(differ in terms of manufacturing requirement)
Units
Produce
Product
X
Product
Y
Product Z
# Points Per
Unit
Weighted
Units
xxx
xx
xxx
xxx
xx
xxx
xxx
xx
4. Quantitative Method
Units
S
Produce
U
N
Product X
xxx
K
Product Y
xxx
C
Product Z
xxx
O
S
T
Ratio x Joint
Cost
Allocated
JC
=
xxx
xxx
xxx
xxx
___
xxx
xxx
xxx
Total
Pounds
Pounds
Per
Unit
xx
xxx
xxx
xx
xxx
xxx
xx
xxx
xxx
Ratio x JC
xxx
______
Allocated
JC
xxx
xxx
xxx
SUNK & JOINT COST
ACCOUNTING FOR BY-PRODUCTS
A. Methods that do not allocate joint cost to by-products
Method 1: Revenue from by-products is treated as:
A.
B.
C.
D.
Other Income
Additional Sale Revenue
Deduction from CGS of the Main Product
Deduction from the total production cost of Main Product
Method 2: Revenue from sales reduced by additional processing cost & cost to sell is
shown on the as indicated in method 1 above. Net Revenue Method
Method 3: Replacement Cost Method
B. Methods that allocates joint cost to by-products
Method 4: Market Value or Reversal Cost Method
Sales
Further Process Cost
Est. Cost to Sell
Est. Profit
xxx
(xxx)
(xxx)
(xxx)
Allocated Joint Cost
xxx
ACTIVITY BASED-COSTING (ABC)
Cost Allocation Rate for Activity = Estimated total Indirect Cost of Activity
Estimated total Quantity of Cost Alloc. Base
Allocated Activity Cost = Cost Allocation Rate
for Activity
X ACTUAL quantity of
Cost Allocation based
used by cost object
RIP (to FG)
BACKFLUSH COSTING
u CGS
beg.
end.
Material
amount backflushed from xxx
RIP to FG
FG
u RIP & CC Accts
from suppliers
Note: Raw Materials Cost Backflush from
RIP to Finished Goods & from FG to Cost of
Goods Sold.
FG (to CGS)
end.
beg.
Common Journal Entries:
Purchase of Raw Materials
RIP
xxx
A/P
xxx
Record Closed of Indirect Material
FOH Control
xxx
Supplies
xxx
Factory OH Cost
FOH Control xxx
Cash
xxx
Acc. Dep.
xxx
Direct and Indirect Labor
CGS
xxx
FOH Control xxx
Accrued Payroll xxx
OH to CGS
CGS
xxx
FOH Control
xxx
Material Cost from RIP to FG
FG
xxx
RIP
xxx
material backflush from
RIP
Amount backflush from FG to
CGS
CGS
RM [Backflush] xxx
Direct Labor
xxx
FOH Control
xxx
xxx
FOH Control
Indirect Labor xxx
Conversion Cost by and Changes
RIP
xxx
xxx
F/G
xxx
xxx
RIP xxx
CGS xxx
FG xxx
CGS xxx
CGS xxx
FG xxx
7
Installment Sales-Revenue Recognition
Record Installment Sales
Cash
xxx
Installment Contract Receivable
Installment Sales
xxx
xxx
Record the Cost of Installment Sales
COS IS*
Merchandise Inventory
xxx
xxx
Collection of Installment Contract Receivable
Cash
xxx
Installment Contract Receivable
Interest Income
xxx
xxx
Adjusting Entry
Accrued Interest Receivable
Interest Income
xxx
Installment Sales
Cost of Installment Sales
xxx
xxx
xxx
Realized Gross Profit
Deferred Gross Profit
Realized Gross Profit
xxx
Realized Gross Profit
Income and Expense Summary
xxx
xxx
xxx
Formula:
Installment Sales
Less: COS
Gross Profit
Installment Accounts Receivable
Beg.
xxx
Ending
xxx
Sales xxx
Collection
xxx
Repossession xxx
xxx
xxx
xxx
Deferred Gross Profit
Ending
Write-off
xxx
xxx
Beg.
DGP
xxx
xxx
Repossessions: (Defaults)
Unrecorded Cost = (NRV or MV) whichever is lower.
Unrecovered Cost = equal to defaulted amount of Accounts Receivable multiplied by the
cost percentage
Defaulted Accounts Receivable
Market Value (NRV)
X Cost ratio
Estimated resale price
xxx
Unrecovered
Cost
Less: Reconditioning Cost xxx
Cost to sell
xxx
MV or NRV(date of repossession)
(xxx)
xxx
Unrecovered Cost
Market Value of
Asset Recovered
Loss on Repossession
Journal Entry
MI- repossessions
xxx
DGP
xxx
Loss on Repossession
xxx
Installment Accounts Receivable
xxx
TRADE IN:
(NRV) Market Value is greater then Allowed Trade-In
Under allowance in Trade In & Added to SP (Selling Price)
Over allowance of the MV & Deducted to SP (Selling Price) if MV is lesser than
Allow. Trade-In
9
xxx
xx%
xxx
xxx
xxx
xxx
Notes: Trade In should be recorded at their Market Value
a) Instalment Receivable
Mdse. Inventory Trade In
Instalment Sales
xxx
xxx
b) Mdse. Inventory Trade In
Cash
xxx
xxx
Allowed Trade In Value
xxx
MV or NRV of Trade In
(xxx)
xxx
Unde allowance or
Overallowance
xxx
FRANCHISE ACCOUNTING
Note: It is assumed that substantial performance occur when the franchisee actually commence
the operation of the Franchise.
Note:
Down Payment - Non Refundable is recognized as revenue.
Direct Cost is deferred.
Indirect is outright expense.
10
Methods of Accounting of Initial Franchise Fee
ACCRUAL (Reasonably Assured)
INSTALMENT (uncertain w/ regards to
Collectability)
1. Cash
xxx
NR
xxx
Deferred Franchise Fee Revenue xxx
Cash
xxx
NR
xxx
Deferred Franchise Fee Revenue
xxx
2. Direct Cost and Indirect
Deferred Cost of Franchise Fee xxx
Franchise Expense
xxx
Cash
xxx
Deferred Cost of Franchise Fee
xxx
Franchise Expense
xxx
Cash
3. Upon Substantial Performance DC
Deferred Franchise Fee Revenue xxx
Franchise Fee Revenue
xxx
Collection
Cash
N/R
xxx
xxx
4. Direct Cost of Franchise Fee
Cost of Franchise Fee
Cash
xxx
xxx
11
xxx
ADJUSTING ENTRY INSTALLMENT METHOD
[Close Revenue, Cost of Revenue, & Set up DGP]
Franchise Fee Revenue
xxx
Cost of Franchise Fee Revenue
Deferred Gross Profit
xxx
xxx
Deferred Gross Profit
Realized Gross Profit
xxx
xxx
COMPUTATIONS:
DP
Add: Collection
Total Collection
Multiplied by GP
Restricted RGP
Cash
xxx
xxx
xxx
%
xxx
xxx
Deferred FF Rev.
Equipment/Assets
Deferred FFC
Gain on Sale
xxx
xxx
xxx
xxx
Tangible Assets Included in the Initial Franchise Fee
Note: The portion of Initial Franchise Fee must be allocated to such property (Income right away) at its
Fair Market Value. Recognized as revenue when title to such property passes to the franchisee even
though substantial performance has not occurred.
Options to Purchase: [present]
Note: Initial Franchise Fee is not taken up as revenue but is deferred (until the property is purchased
Investment) upon the exercise of the option it is treated as the reduction in the Franchisor Investment in
the acquired outlet.
Bargain Purchase:
Note: The portion of Initial Franchise Fee should be deferred and accounted for as an adjustment of
selling price of the equipment/supplies. Amount to be deferred is equal to:
The difference between the SP to other customer and the bargain price granted to customer
(franchise)
Regular Price/MP
Less: Bargain Purchase Price
Deferred Amount
xxx
xxx
xxx
12
CONSTRUCTION CONTRACT (PAS 11)
1. Cost Recovery
2. Percentage of Completion Method
a. Different Ways of Determining the Stage of Completion
i. Cost to Cost Method
Accountant
ii. Efforts Expended Method
Engineer
iii. Output Measures
Accountant
Note:
1. CR - Contract Revenue for the year/CP Contract Price is equal to percentage of completion
current year
2. Contract Cost Incurred to Date
Total Estimated Contract Cost
Account Title:
CIP Construction in Progress
Construction Cost
xxx
Income Recognized
xxx
Accounts Receivable for Progress Billings
Debited
Periodic Billings to Customers
Progress Billings
Credited
Contract Retention
Journal Entries
1. Cost Incurred:
CIP (Construction In Progress)
Cash (Materials, FOH, Payroll, etc.)
2. Record Billings
A/R from PB
Progress Billings
3. Collections
Cash
A/R from PB
13
xxx
xxx
xxx
xxx
xxx
xxx
4. GP Earned
CIP (Construction In Progress GP earned)
xxx
Construction Cost (Actual Cost)
xxx
Contract Revenue (Percentage of Completion x CP)
5. Anticipated Loss
Construction Cost (Actual Cost)
xxx
CIP (Construction In Progress Loss Total)
Contract Revenue (% Completed x CP)
xxx
xxx
xxx
Note: This Journal Entry is prepared upon completion of the product.
ANTICIPTED LOSS ON LONGTERM CONSTRUCTION CONTRACT
Cost Incurred to Date
xxx
Contract Revenue
xxx
Add: Est. Cost to Complete
xxx
Less: Contract Cost / Total
xxx
xxx
(Loss) Estimated Loss
xxx
Less: Prior Period Profit
xxx
Total Est. Cost
Total Loss to be Credited to CIP xxx
Cost Incurred to Date
%
Total Estimated Cost
14
Contract Revenue
xxx
Less: Total Estimated Cost
xxx
Price during the Construction Period is
Gross Profit
xxx
treated as change in Accounting
Multiply: % of Completion
Note: Modification on the Original Contract
Gross Profit to Date
xxx
Less: Previous Profit End
xxx
Current EP End
xxx
Estimates. (affect only the amount of
future periods)
HOME OFFICE & BRANCH ACCOUNTING
Investment in branch
Shipments to branch (Merchandise)
Dr.
Cr.
Home Office Current
Shipments from Home Office
Cr.
Dr.
HOME OFFICE BOOK
Investment in Branch xxx
Shipments to Branch
At Cost
BRANCH BOOK
Shipments from Home Office
Home Office Current
xxx
Investment in Branch xxx
Shipment to Branch
xxx
Allow. For Mark-up on BI xxx
Above Cost
Shipments from Home Office
Home Office Current
*To adjust the allowance to its correct ending
balance:
Allowance for Mark-up on BI
Branch Net Proceeds
xxx
xxx
15
xxx
xxx
xxx
xxx
*Balance of Allowance is deducted in
Investment in Branch account in the Home
Office Balance Sheet.
1. Branch Inventory Acquired from Home Office:
Mdse. At billed price
Divided by billing price
Add: Invty. Acquired fr. Outsiders
Branch Inventory at Cost
2. Computation of Current Branch Profit:
Branch Profit (loss) as reported
Add: Realized Mark-up on BI
True Branch Profit (NI)
xxx
%
xxx
xxx
xxx
Allow. For Mark-Up
xxx
xxx
xxx
INTERBRANCH TRANSFER OF MERCHANDISE
HOME OFFICE
ANOTHER BRANCH (TAC)
1.
Branch Current Tac
xxx
Shipments to Branch
xxx
Cash
xxx
Shipment fr. H.O.
xxx
Freight In
xxx
Home Office Current
16
xxx
BRANCH (CEBU)
Home Office Current
xxx
Shipments fr. H.O.
xxx
Freight In
xxx
Shipments fr. H.O.
xxx
Freight In
xxx
Home Office Current xxx
Cash
xxx
Note:
1. Informed the H.O.
Other Expense:
1.Branch Current-Cebu xxx
Excess of Freight in
Shipment
xxx
Branch Current-Tac xxx
Expense on the part of the
Home Office based on the
concept of (logic) efficiency
and effectiveness of
administration since it is an
obligation of an administration.
2.Shipment to Branch-Tac xxx
Shipment to BranchCebu
xxx
FOREIGN EXCHANGE RATES (PAS 21)
Exchange Rate (Income Statement) Difference
1. Direct Quotation ($1 = P?) 1 dollar to peso equivalent
2. Indirect Quotation ($? = P1) 1 peso to dollar equivalent
FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION
Method known as Current Rate Method, Net Investment Method or more popularly recognized
in IAS as Closing Rate Method.
17
Assets and Liabilities Closing Rate
Income and Expenses - Exchange Rates at the date of transactions or Average
Exchange Rates
SHE Historical Cost
Note: Differences shall be recognized at a separate component of [entity] equity section.
Foreign Currency Transaction is a transaction that is denominated or requires ______________ foreign
currency
Foreign Transaction transaction between countries or between enterprises in different countries
Notes:
Transaction Date
B/S
Settlement Date
Spot Rate
Spot Rate
Spot Rate
FOREX Difference
FOREX Difference
(gain/loss)
(gain/loss)
Historical Cost HS (PAS 29) For Reporting Hyperinflationary Economy
1. Monetary Items are not restated
2. Assets and Liabilities linked by agreement to changes in prices should be adjusted in
accordance with the agreement
3. Assets and Liabilities NRV or MV
Non-monetary Assets and Liabilities restated
Derivative Instrument - (PAS 39) Financial Instrument
Types of Derivatives
1. Option Based Derivatives (One-sided Expense) options and caps and flows
2. Forward Based Derivatives (____________________) Two-sided Expense
Forward - produce or sell specific quality of a financial instrument, commodity, of
foreign currency at a specified price determined at the outset, with the delivery or
settlement at a specified (ratio) future date
18
Accounting for FOREIGN Currency Derivatives and Hedging Activities
Hedging Operations Forward Contract (the usual way of avoiding risks)
Hedging (Accounting) designating a derivative forward instrument as an offset in the net profit a loss in
whole or in part, to the change in Fair Value or cash flow of hedged item (__________________)
hedge effectiveness.
Categories of Hedges
1. Fair Value Hedge (P & L)
2. Cash Flow Hedge (OCI)
Measurement
SWAPS
MEASUREMENT
1. Completion of Contract
=0
2. Reporting Date
= Difference in MR of Interest
Reported at Equity Component Other Revenue
Derivative Instrument - (PAS 39) Financial Instrument
Types of Derivatives
3. Option Based Derivatives (One-sided Expense) options and caps and flows
4. Forward Based Derivatives (____________________) Two-sided Expense
Forward - produce or sell specific quality of a financial instrument, commodity, of
foreign currency at a specified price determined at the outset, with the delivery or
settlement at a specified (ratio) future date
Accounting for FOREIGN Currency Derivatives and Hedging Activities
Hedging Operations Forward Contract (the usual way of avoiding risks)
Hedging (Accounting) designating a derivative forward instrument as an offset in the net profit a loss in
whole or in part, to the change in Fair Value or cash flow of hedged item (__________________)
hedge effectiveness.
Categories of Hedges
3. Fair Value Hedge (P & L)
4. Cash Flow Hedge (OCI)
19
Measurement
SWAPS
MEASUREMENT
3. Completion of Contract
=0
4. Reporting Date
= Difference in MR of Interest
Reported at Equity Component Other Revenue
FORWARD CONTRACT
1. Completion or Date of Contract = - 0 2. On Financial Reporting Date = _____________
3. On Settlement Date = Difference
Reported in Profit/Loss
Options
Written received/payment/consideration
Purchase payment to purchase
1. On Initial Recognition = FV of _____________
2. Financial Reporting Date = ______________ @ FV (Differences Reported at Profit/Loss)
3. On Settlement Date = FV of Option P/L
FORWARD CONTRACT
4. Completion or Date of Contract = - 0 5. On Financial Reporting Date = _____________
6. On Settlement Date = Difference
Reported in Profit/Loss
Options
Written received/payment/consideration
Purchase payment to purchase
4. On Initial Recognition = FV of _____________
5. Financial Reporting Date = ______________ @ FV (Differences Reported at Profit/Loss)
6. On Settlement Date = FV of Option P/L
20
FORWARD CONTRACTS
Transaction
B/S
Settlement
Foreign
Currency
Transaction
Import
Export
Spot
Spot
Spot
The future sale or
purchase of foreign
currency at a specified
rate
Transaction
(Transact
Settlement
Date)
B/S
Settlement
(B/S
Settlement
Spot Rate
Date)
Forward
Contracts
(period of
FC)
Forward Contracts are entered into for the following purposes:
1. To speculate in foreign currency exchange price movements.
2. To designate as a Fair Value Hedge
a. To hedge an expense foreign currency Asset or Liability.
b. To hedge an unrecognized firm commitment.
c. To hedge a net investment in Foreign Currency
To designate as a Cash Flow Hedge: to hedge foreign currency Forecasted Transaction
FORWARD CONTRACT FOR SPECULATION
1. Acquire premium or discount
2. Value the contract to market value
3. Foreign exchange gain/losses the income statement
21
Hedging
Options
Transaction Date:
Forward contract receivable
Forward Contract Payable
Budget Date:
Forward Contract Receivable
Foreign exchange gain
Foreign Exchange Gain
Forward Contract Payable
xxx
xxx
xxx
xxx
xxx
xxx
Settlement Date:
Received of Cash:
Cash($)
xxx
Forward Contract of Receivable
xxx
Forward Contract Payable
xxx
Cash (P)
xxx
Foreign Exchange Gain/loss
xxx
DERIVATIVES
Is a contract
1. Forward- To buy or to sell
Buy- LONG POSITION- Obligated to buy
Sell- SHORT POSITION- Obligated to sell
2. Filters- Exchange Market (Stock exchange), liquidity
3. Option
a. Call Option(Option Based Derivatives)
-Right to buy, no obligation to buy
-Option Price
b. Put Option(one sided expensed)
-Right to sell, no obligation to sell
4. Swaps- Interest Rate Swap
22
SWAPS- INTEREST RATE SWAP
National Amount
Variable Rate
Fixed Rate
Contract
5M
5M
A. Does no want to pay Variable Rate however want to pay fixed.
B. Does not want to pay fixed rather wants to pay variable.
RECEIVE VARIABLE, PAY FIXED
IR%
VR%
Net Excess
xxx%
Multiply by FV xxx
FV Amount of xxx
Multiply by PV xxx%
xxx%
- Fixed Rate
- Current Rate
- Advantage/Disadvantage
- Disadvantage/Advantage
- Derivative Asset/ Liability
fixed- IR
CR
Net Advantage/Disadvantage
Multiply by Fair Value
Multiply by Present Value
Asset or Liability
xxx - the day or the current rate upon the contract of interest rate
(xxx%) - rate for the year
xxx
xxx
xxx%
xxx -Derivative asset or liability for the period
DERIVATIVES continuation P1 & P2
INTEREST RATE SWAP AGREEMENT
(Received variable, pay fixed)
(Cash flow hedge)
Entity on Obligation on loan
Cash
xxx
Loans Payable xxx
23
Payment of Interest
Interest expense xxx
Cash
xxx
Entity into Agreement of Interest Rate SWAP (Disclose/memo entry)
First year
UL ON IRS
xxx
IRS Payable xxx
IRS Receivable xxx
UG on IRS
xxx
Payment of interest
Second Year
Interest expense xxx
Cash
xxx
Base on variable current rate
Interest rate swap payable xxx
IRS
xxx
Cash
xxx
Interest expense
UL on IRS
xxx
xxx
2 year
500
Company
Variable
interest rate
Fixed rate
B1 5,000
B2
24
FUTURE CONTRACT
Strike Price
xxx
Market price
(xxx)
Advantage/disadvantage xxx
Multiply by
xxx Quantity to be purchased
UL/UG on FC
xxx
Entry: UL on FC
xxx
Accounts Payable xxx
Accounts receivable
UG on FC
xxx
xxx
OPTIONS
To buy option
Call option
xxx
Cash
xxx
Call option
xxx
UG on Call option
xxx
RISK (DERIVATIVES &HEDGING ACTIVITIES)
Underlings
Hedging Activities
Foreign currency
Commodity
interest
Financial
instrument
Hedging Instrument
Exposed asset/Investment
liabilityfor trading
- Not a hedge account - IS
Commitment
- hedge account
FC - IS
CFA - OCI
Forecasted
- hedging activities CFH- OCI
Speculation
- not a hedging activities - IS
AFS
Net Investment
- CFH OCI
25
National amount
FORWARD CONTRACT TO EXPOSED ASSET OR LIABILITY
Foreign Currency Transaction
Forward Contract
T/S - ( Transaction Date)
T/S - (Transaction Date)
Purchases xxx
A/R
xxx
A/R
xxx
Sales
xxx
* Forward Contract Receivable xxx
Forward Contract Payable
xxx
B/S
B/S
* Foreign exchange Rec. xxx
Forward contract Rec.
xxx
A/P
xxx
Foreign exchange Gain
xxx
S/P
S/P
* Cash
xxx
Forward contract Rec.
xxx
* Forward Contract Pay xxx
Cash
xxx
A/P
xxx
Cash
xxx
Foreign exchange Gain
xxx
FORWARD CONTRACT TO HEDGE AN UNRECOGNIZED FIRM COMMITMENT
1.
* Forward Contract Rec. xxx
Forward Contract Pay
xxx
2. Forex Firm Commitment
Forex Gain
3. Purchases
Cash
xxx
xxx
* Forex Loss
xxx
Forward Contract Receivable xxx
xxx
* Forward Contract Payable
Cash
xxx
26
xxx
xxx
Purchases
xxx
Forex Firm Commitment
* Cash
ForEx Loss
Forward Contract Rec.
xxx
xxx
xxx
xxx
Forward Contract to Hedge of Foreign Currency Denominated Forecasted Transaction
(Cash Flow Hedge)
Foreign Currency Transaction
1.
-02. 12/31/201X
Forward Contract
Forward Contract Receivable ($) xxx
Forward Contract Payable
xxx
Deferred Forex Loss
xxx
Forward Contract Receivable ($) xxx
-0-
3. ( Actual Purchase Transaction Took Place)
Purchases
xxx
Cash ($)
xxx
Forward Contract Payable
xxx
Cash
xxx
Cash ($)
xxx
Deferred ForEx Loss
xxx
Forward Contract Receivable
xxx
4. Cash/ Accounts Receivable xxx
Sales
xxx
COS
xxx
Inventory
xxx
Deferred Forex Loss
xxx
Change to CGS it to the related
industry or equipment is sold or
depreciated
Corporate Liquidation
1. Statements of Affairs
Assets
o Asset Pledge with fully secured creditors
o Asset Pledge with partly secured creditors
o Free Assets
Liabilities
o Unsecured creditors with priority
o Fully secured creditors
o Partly secured creditors
27
o Unsecured creditors without priority
SHE
o All the SHE Accounts
2. Statement of Realization and Liquidation
Assets (Non-cash)
Liabilities
Revenue and Expenses
(Note: supporting Schedule of Cash and Owners Equity/SHE)
Cash
SHE
Forms of Business Combination
A. Acquisition of Net Assets ( Purchase Method)
1. Merger
2. Consolidation
B. Stock Acquisition ( Cost Method or Equity Method)
Business Integration Forms
1. Horizontal
2. Vertical
3. Conglomerates
Accounting Method
Ownership Interest
Amount Used
Fair Value / Cost Method
1%- 19%
-0-
28
Equity Method
20%-50%
Investments in Associates
Equity Method & Consolidation
Procedures
50%-100%
Investment in Subsidiaries
Consolidated F/S
Subsequent to Date of Acquisition
Equity Method
1. E, Income for Subsidiary
Dividend Subsidiary
Investment in Subsidiary
2. E, O/S Subsidiary Beg
S/P - Sub.
Beg
R.E Sub.
Beg
Investment in Subsidiary
MINA
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
3. Allocate the difference to the specific assets
assets & liabilities of the subsidiary. (Unamortized balance)
4. Amortized the allocated difference.
5. Recognize the share of the minority or non-controlling interest in the net income or loss of
subsidiary & dividends for the current year.
6. Eliminate other reciprocal accounts such as intercompany payables & receivables.
7. Combined non reciprocal accounts on a line by line basis.
Cost Method
1. Adjust the carrying amount of investment account to the equity method balance at the beginning
of the current year.
2. E. Dividend Income
xxx
Dividend Subsidiary xxx
3. E, O/S Subsidiary Beg
S/P - Sub.
Beg
R.E Sub.
Beg
Investment in Subsidiary
MINA
xxx
xxx
xxx
xxx
xxx
4. Allocate the difference to the specific assets & liabilities of the subsidiary. (Unamortized
Balance).
29
5. Amortized the allocated difference.
6. Recognized the share of the minority interest on net income or loss of subsidiary & dividends for
the current year.
7. Eliminate other reciprocal accounts such as intercompany payables & receivables.
8. Combined nonreciprocal accounts on a line by line basis.
Intercompany Sale of Inventory
Additional consolidation procedures are as follows:
a. Recognized the intercompany profit or beg. Inventory.
Downstream
1. Investment in Subsidiary
COS
xxx
xxx
Upstream
1. Investment in Subsidiary
MINA
COS
xxx
xxx
xxx
b. Intercompany Sales & Purchases
Sales
xxx
COS
xxx
c. Eliminate unrealized profit in ending inventory
COS
xxx
Inventories
xxx
Downstream Sales
a. Net Income of Subsidiary
Amortization of Allocated Excess
Adjusted Net Income
% of an Ownership Interest
Share in NI of Subsidiary
Realized Profit on Beg. Invty.
Unrealized Profit in Ending Invty
Income for Subsidiary
xxx
(xxx)
xxx x %MI= MINI
_%_
xxx
xxx
(xxx)
xxx
30
b. SHE ( Unadjusted) end of the year
Unamortized balance of
Adjusted SHE
% Minority interest
MINA, end of the year
xxx
xxx
xxx
_%_
xxx
Upstream Sales
a. Net Income of Subsidiary
Amortization of Allocated Excess
Realized Profit in Beg. Invty.
Unrealized Profit in Ending Invty.
Adjusted NI Subsidiary
% of Ownership
Income from Subsidiary
xxx
(xxx)
xxx
(xxx)
xxx % MI= MINI
_%__
xxx
b. SHE ( Unadjusted) end of the year
Unamortized balance of
Unrealized profit on Ending
Adjusted SHE
% Minority interest
MINA, end of the year
xxx
xxx
(xxx)
xxx
_%_
xxx
Intercompany Sale of Non- Depreciable Assets
1. Year of Sale
Gain on Sale
xxx
Land / Building
2. Subsequent Year
Downstream
a. Investment in Sub. xxx
Acc. Depn
Land / Building
b. Acc. Depn
Depn
xxx
xxx
xxx
xxx
xxx
Upstream
a. Investment in Sub. xxx
MINA
xxx
Acc. Depn
xxx
Land
xxx
b. Acc. Depn
Depn
xxx
xxx
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Additional Elimination
a. Refuse the carrying value of the asset to its original book value at the beginning of the gain &
eliminate the unrealized gain or less in the sale of interest.
b. Recognize realized gain by reducing the depreciation expense & the realized accumulated
depreciation to reflect the original book value of the asset.
Year & Subsequent Sale of PPE & Inventory
Downstream
Net Income of Subsidiary
Amortization of allocated excess
Adjusted NI
% Parents Ownership
NI
Realized Profit on Beg. Inventory
Unrealized Profit on Ending Inventory
Gain on Sale of Land & PPE
Piecemeal Realization of Gain on Sale PPE
Income from Subsidiary
xxx
(xxx)
xxx % MI = MINI
%
xxx
xxx
(xxx)
(xxx)
xxx
xxx
Upstream
Net Income of Subsidiary
Amortization of allocated excess
Realized Profit in Beg. Inventory
Unrealized Profit in End. Inventory
Gain on Sale of PPE & Land
Piecemeal Realization of Gain on Sale of PPE
Adjusted NI of Subsidiary
Parents Ownership Interest
Income from Subsidiary
xxx
(xxx)
xxx
(xxx)
(xxx)
xxx
xxx
%
xxx
MINA
Shee of the Subsidiary, end of the year
Unamortized Balance of Undervalued Assets
Adjusted SHE
% Minority Interest Percentage
MINA, end of the year
xxx (Unadjusted)
xxx
xxx
%
xxx
She of the Subsidiary, end of the year
Unamortized Balance of Undervalued Assets
Unrealized Profit on End. Inventory
Unrealized gain on Sale of PPE
xxx
xxx
(xxx)
(xxx)
32
* MI% = MINI
Adjusted SHE
% MINA,
MINA, end of the year
xxx
%
xxx
INTEREST AND JOINT VENTURE
Forms of joint venture
1. Jointly Controlled Operations
2. Jointly Controlled Assets
3. Jointly Controlled Entities
A.
Separate Set of Books is Maintained for the Joint venture:
Investment Joint Venture
1 beg
xxx
2. additional investment xxx
3. services rendered
xxx
4. share in JV profits
xxx
B.
xxx
xxx
xxx
withdrawals 5.
share in losses 6.
end cash settlement 7.
JOINT VENTURE
1 Merchandise Contribution Merchandise withdrawals
8
2 Purchase
Merchandise return
9
3 Freight-In
Purchase return & allowances
10
4 Sales Return & Allowances
Purchase Discount
11
5 Sales Discount
Sales
12
6 Expenses
Other Income
13
NL ?
Types of Derivatives
1. Option based derivatives
Options contracts
Interest rate
Interest rate floors
2. Forward base derivatives
Forward
Future
Swap
Hedging means of minimizing risks
33
NI ?
PAS 39 : Types of hedge
Fair value hedge
Cash flow hedge
Hedge of net investment
Forward contracts
a. Hedge
Foreign currency transactions
Unrecognized firm commitment
3. Foreign Currency Denominated
- Forecasted transaction (cash flow hedge)
- Highly probable
4. Net investment in foreign operations (translation adjustment)
b. Speculation
Discount/premium the difference between the two rates is referred to as a discount/premium if forward
rate is less (greater then) the spot rate.
Options Contracts:
Right
Option contract
Buyer
Seller
Foreign Currency Option Contract
Contractual agreement giving the holder the right to buy or sell a given amount among at a
specified price (the exercise price or strike price) for a period of time or a point in time.
Call (buy)
SMP = ESP
SMP > ESP
SMP < ESP
5=5
6>5
5<6
At the money
In the money
Out the money
34
Put (sell)
At the money
Out the money
In the money
Call option to buy
Put option to sell
Holder party who has the right to buy or sell
Purchased Option
Written
grants
the holder this contractual right
written option perspective of the seller
ACCOUNTING FOR FOREIGN CURRENCY OPTION PREMIUMS
Time value (the entire premium) Prepaid Insurance Premium
Intrinsic Value [inception] Foreign Currency Option in the money
Spot Market Price
Exercise Strike Price
Intrinsic Value
XXX
XXX
_________
XXX
*Note: It depends on what positions
you holding whether you and me
BUYER or SELLER.
FUTURE CONTRACT
Is the same thing with forward contract excepts that instead of being negotiated between two
parties, the contract is a standard one that is sponsored by an organized exchange. With and future
contract, the exchange handles the cash settlements between the two parties to the contract. ( Never
directly contact me another)
35
