300067 2111.01-.04 Flashcards
Billings
A billing is a periodic interim invoicing for progress payments on long-term contracts. It is a contra asset (construction in process) account, netted against the construction in process asset account and recorded as either an asset (construction costs in excess of billings) or as a liability (billings in excess of construction costs).
Current Assets
Current assets are cash and other assets that can be expected to be used, sold, or converted to cash during the current business cycle, generally one year.
Examples of current assets include cash, raw materials, trade accounts receivable, and marketable securities.
Long-Term Contracts
A long-term contract is a contract for the construction of a specific project over an extended period of time (more than one accounting period), such as ships, airplanes, bridges, roads, and buildings. Accounting issues include revenue/profit recognition and valuation of construction-in-process. There are two alternative GAAP methods available: completed-contract and percentage-of-completion.
FASB ASC 605-35-05-5
2111.01
2111.01
An example of the comparative balance sheet for Tiger Co., prepared in the account form (assets on the left, equities on the right), is presented as follows as of December 31, 20X1, and December 31, 20X2.
The following major categories typically appear on corporate balance sheets.
Assets:
Definition (SFAC 6): Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Subcategories: Current assets; Investments; Property, plant, and equipment; Intangible assets; Other
Liabilities:
Definition (SFAC 6): Probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services to other entities as a result of past transactions
Subcategories: Current; Noncurrent
Equity:
Definition (SFAC 6): The residual interest in the assets of an entity that remains after deducting its liabilities. For a corporation, equity is the ownership interest (identified as “stockholders’ equity”).
Subcategories: Contributed capital (Par/stated value, Amounts in excess of par/stated value, Donated capital, Capital arising from asset revaluation); Retained earnings; Treasury stock; Accumulated other comprehensive income
2111.02
2111.02
Another form of the balance sheet, usually identified as the report form, includes the assets at the top of the statement and the equities at the bottom. An abbreviated example of this statement is as follows:
2111.03
2111.03
A third form of the balance sheet, usually identified as the financial position form, shows the net working capital (by deducting current liabilities from current assets), adds noncurrent assets, deducts noncurrent liabilities, and finally nets to the stockholders’ equity, which is presented in detail in a balancing section. An abbreviated example of this balance sheet form for Tiger Co., which is encountered infrequently in practice, is illustrated as follows.
2111.04
A general principle of accounting is that the offsetting of assets and liabilities in the balance sheet is improper except where a right of setoff exists. For example, a debtor with a payable to an entity may not offset a receivable from that same entity and display only the difference as a net payable or receivable unless the following specified conditions are met for the right of setoff to exist:
a. Each of the two parties owes the other determinable amounts.
b. The reporting party has the right to set off the amount owed with the amount owed by the other party.
c. The reporting entity intends to set off.
d. The right of setoff is enforceable at law.
The following trial balance of Mint Corp. on December 31, 20X1, has been adjusted except for income tax expense.
TRIAL BALANCE
December 31, 20X1
Debit Credit Cash $ 600,000 Accounts receivable (net) 3,500,000 Cost in excess of billings on long-term contracts 1,600,000 Billings in excess of costs on long-term contracts $ 700,000 Prepaid taxes 450,000 Property, plant, and equipment (net) 1,480,000 Note payable (noncurrent) 1,620,000 Common stock 750,000 Additional paid-in capital 2,000,000 Retained earnings (unappropriated) 900,000 Retained earnings (restricted for note payable) 160,000 Earnings from long-term contracts 6,680,000 Costs and expenses 5,180,000
$12,810,000 $12,810,000
=========== =========== Other financial data for the year ending December 31, 20X1:
Mint uses the same method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences. Mint’s tax rate is 30%.
In Mint’s December 31, 20X1, balance sheet (statement of financial position), what amount should be reported as total current assets?
$5,000,000
$5,450,000
$5,700,000
$6,150,000
Mint Corp.’s current assets on December 31, 20X1:
Cash $ 600,000
Accounts receivable (net) 3,500,000
Costs in excess of billings
on long-term contracts 1,600,000
Total current assets $5,700,000
Current assets consist of cash and other assets reasonably expected to be realized in cash or sold or consumed in operations within one year or an operating cycle, whichever is longer. It is important to note that Mint’s trial balance has not been adjusted for income taxes. Since there are no temporary or permanent differences, Mint’s taxable income (for tax purposes) and income before income taxes (for financial reporting purposes) is $1,500,000 (earnings from long-term contracts of $6,680,000 less costs and expenses of $5,180,000). Mint’s income tax expense for 20X1 is $450,000 ($1,500,000 × 30%).
Therefore, Mint will have no “prepaid taxes” once the trial balance is adjusted for income taxes. The balance in the unadjusted Prepaid Taxes account will be transferred to the Income Tax Expense account.
