CHAPTER 8

Inventory
1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory systems.
3. Identify the effects of inventory errors on the financial statements.
4. Understand the items to include as inventory cost.
5. Describe and compare the methods used to price inventories.
Classification
Inventories are:
items held for sale, or
goods to be used in the production of goods to be sold.

Businesses
o Manufact
Merchan
with Inventory
r urer
diser

Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in is debited to Inventory. Purchase returns and allowances and
purchase discounts are credited to Inventory.
3. Cost of goods sold is debited and Inventory is credited for each sale.
4. Subsidiary records show quantity and cost of each type of inventory on hand.
The perpetual inventory system provides a continuous record of Inventory and Cost
of Goods Sold.
Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory
$ 100,000

Purchases, net
800,000
Goods available for sale 900,000
Ending inventory 125,000
Cost of goods sold $ 775,000
Valuation requires determining
The physical goods (goods on hand, goods in transit, consigned goods,
special sales agreements).
The costs to include (product vs. period costs).
The cost flow assumption (specific Identification, average cost, FIFO, retail,
etc.).

Effect of Inventory Errors

Ending Inventory Misstated

The effect of an error on net income in one year (2010) will be counterbalanced in
the next (2011), however the income statement will be misstated for both years.
Purchases and Inventory Misstated

The understatement does not affect cost of goods sold and net income because the
errors offset one another.
Costs Included in Inventory
Product Costs - costs directly connected with bringing the goods to the
buyers place of business and converting such goods to a salable condition.
Period Costs generally selling, general, and administrative expenses.
Treatment of Purchase Discounts Gross vs. Net Method
Cost Flow Assumption Adopted does not need to equal Physical Movement of Goods
Method adopted should be one that most clearly reflects periodic income.

Chapter 9
Additional Inventory Valuation
1. Describe and apply the lower-of-cost-or-net realizable value rule.
2. Explain when companies value inventories at net realizable value.
3. Explain when companies use the relative sales value method to value
inventories.
4. Discuss accounting issues related to purchase commitments.
5. Determine ending inventory by applying the gross profit method.
6. Determine ending inventory by applying the retail inventory method.
7. Explain how to report and analyze inventory.
A. LCNRV A company abandons the historical cost principle when the future
utility (revenue-producing ability) of the asset drops below its original cost.
Estimated selling price in the normal course of business less estimated costs to
complete and estimated costs to make a sale.

Methods of Applying LCNRV

In most situations, companies price inventory on an item-by-item basis.
Tax rules in some countries require that companies use an individual-item
basis.
Individual-item approach gives the lowest valuation for statement of financial
position purposes.
Method should be applied consistently from one period to another.
1. Recording Net Realizable Value Instead of Cost
Cost of goods sold (before adj. to NRV)
Ending inventory (cost) 82,000
Ending inventory (at NRV)
70,000

Loss
Loss
Method
Method
COGS
COGS
Method
Method

$ 108,000

Loss due to decline to NRV

Inventory
12,000
Cost12,000
of goods sold
Inventory
12,000
12,000

2. Use of an Allowance
Instead of crediting the Inventory account for net realizable value
adjustments, companies generally use an allowance account.

Loss
Loss
Method
Method

Loss due to decline to NRV

Allowance to reduce
inventory to NRV
12,000
12,000

3. Recovery of Inventory Loss

a. Amount of write-down is reversed.
b. Reversal limited to amount of original write-down.
Continuing the Ricardo example, assume the net realizable value increases to
$74,000 (an increase of $4,000). Ricardo makes the following entry, using the
loss method.

Allowance to reduce inventory to NRV

4,000
Evaluation of LCM Rule
Some Deficiencies:
Decreases in the value of the asset and the charge to expense are recognized
in the period in which the loss in utility occursnot in the period of sale.
Increases in the value of the asset (in excess of original cost) recognized only
at the point of sale.
Inconsistency because a company may value inventory at cost in one year
and at net realizable value in the next year.
LCNRV values inventory conservatively. Net income for the year in which a
company takes the loss is definitely lower. Net income of the subsequent
period may be higher than normal if the expected reductions in sales price do
not materialize.
B. Special Valuation Situations
Departure from LCNRV rule may be justified in situations when
cost is difficult to determine,
items are readily marketable at quoted market prices, and
units of product are interchangeable.
Two common situations in which NRV is the general rule:
Agricultural assets
Commodities held by broker-traders.

C. Agricultural Inventory
Biological asset (classified as a non-current asset) is a living animal or plant, such as
sheep, cows, fruit trees, or cotton plants.
Biological assets are measured on initial recognition and at the end of
each reporting period at fair value less costs to sell (NRV).
Companies record gain or loss due to changes in NRV of biological
assets in income when it arises.

Biological AssetMilking Cows 33,800

Unrealized Holding Gain or LossIncome

33,800

Reported in statement of financial position reports the Biological Asset

Milking Cows as a non-current asset at fair value less costs to sell (net realizable
value).
Reported as Other income and expense on the income statement.
Illustration: Bancroft makes the following summary entry to record the milk
harvested for the month of January.
Milk Inventory
36,000
Unrealized Holding Gain or LossIncome
36,000
Assuming the milk harvested in January was sold to a local cheese-maker for
38,500, Bancroft records the sale as follows.
Cash

38,500
Sales
38,500
Cost of Goods Sold 36,000
Milk Inventory
36,000
Commodity Broker-Traders
Generally measure their inventories at fair value less costs to sell (NRV), with
changes in NRV recognized in income in the period of the change.
Buy or sell commodities (such as harvested corn, wheat, precious
metals, heating oil).
Primary purpose is to sell the commodities in the near term and
generate a profit from fluctuations in price.
Valuation Using Relative Sales Value
Permitted by GAAP under the following conditions:
(1) a controlled market with a quoted price applicable to all quantities, and

(2) no significant costs of disposal (rare metals and agricultural products)

or
(3)

too difficult to obtain cost figures (meatpacking).

Used when buying varying units in a single lump-sum purchase.

Purchase CommitmentsA Special Problem

Generally seller retains title to the merchandise.
Buyer recognizes no asset or liability.
If material, the buyer should disclose contract details in footnote.
If the contract price is greater than the market price, and the buyer
expects that losses will occur when the purchase is effected, the buyer
should recognize a liability and a corresponding loss in the period during
which such declines in market prices take place.
Illustration: St. Regis Paper Co. signed timber-cutting contracts to be executed in
2013 at a price of $10,000,000. Assume further that the market price of the timber
cutting rights on December 31, 2012, dropped to $7,000,000. St. Regis would make
the following entry on December 31, 2012.

Unrealized Holding Gain or LossIncome

3,000,000
Purchase Commitment Liability
3,000,000

Other income and expense in the Income statement.

Current liabilities on the statement of financial position.
Illustration: When St. Regis cuts the timber at a cost of $10 million, it would make
the following entry.
Purchases (Inventory)
7,000,000
Purchase Commitment Liability 3,000,000
Cash
10,000,000
Assume the government permitted St. Regis to reduce its contract price and
therefore its commitment by $1,000,000.
Purchase Commitment Liability 1,000,000
Unrealized Holding Gain or LossIncome

1,000,000

Substitute Measure to Approximate Inventory

Relies on Three Assumptions:
(1) Beginning inventory plus purchases equal total goods to be accounted for.
(2) Goods not sold must be on hand.
(3)
The sales, reduced to cost, deducted from the sum of the opening inventory
plus purchases, equal ending inventory.

E9-14 (Solution):

(b) Compute the estimated inventory assuming gross profit is 25% of cost.

25%
= 20% of sales
100% + 25%

Evaluation
Disadvantages:
(1) Provides an estimate of ending inventory.
(2) Uses past percentages in calculation.
(3) A blanket gross profit rate may not be representative.
(4) Normally unacceptable for financial reporting purposes. IFRS requires a
physical inventory as additional verification.
A method used by retailers, to value inventory without a physical count, by
converting retail prices to cost.
Requires retailers to keep:
(1) Total cost and retail value of goods purchased.
(2) Total cost and retail value of the goods available for sale.
(3) Sales for the period.

Conventional Method or Cost Method

(based on LCNRV)

Chapter 10

ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT

1. Describe property, plant, and equipment.
2. Identify the costs to include in initial valuation of property, plant, and
equipment.
3. Describe the accounting problems associated with self-constructed assets.
4. Describe the accounting problems associated with interest capitalization.
5. Understand accounting issues related to acquiring and valuing plant assets.
6. Describe the accounting treatment for costs subsequent to acquisition.
7. Describe the accounting treatment for the disposal of property, plant, and
equipment.
Property, plant, and equipment is defined as tangible assets that are held for
use in production or supply of goods and services, for rentals to others, or for
administrative purposes; they are expected to be used during more than one
period.
Used in operations and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Historical cost measures the cash or cash equivalent price of obtaining the asset
and bringing it to the location and condition necessary for its intended use.
Companies value property, plant, and equipment in subsequent periods using either
the
cost method or
fair value (revaluation) method.
A Cost of Land
Includes all costs to acquire land and ready it for use. Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorneys fees, and recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on the property; and
(5) additional land improvements that have an indefinite life.
Improvements with limited lives, such as private driveways, walks, fences, and
parking lots, are recorded as Land Improvements and depreciated.
Land acquired and held for speculation is classified as an investment.
Land held by a real estate concern for resale should be classified as
inventory.
D. Cost of Buildings
Includes all costs related directly to acquisition or construction. Cost typically
include:
(1) materials, labor, and overhead costs incurred during construction and
(2) professional fees and building permits.

E. Cost of Equipment
Include all costs incurred in acquiring the equipment and preparing it for use. Costs
typically include:
(1) purchase price,
(2) freight and handling charges
(3) insurance on the equipment while in transit,
(4) cost of special foundations if required,
(5) assembling and installation costs, and
(6) costs of conducting trial runs.
F. Self-Constructed Assets
Costs typically include:
(1) Materials and direct labor
(2) Overhead can be handled in two ways:
1. Assign no fixed overhead
2. Assign a portion of all overhead to the construction process.
Companies use the second method extensively.
G. Interest Costs During Construction
Three approaches have been suggested to account for the interest incurred in
financing the construction.
Increase to Cost
$
$
of Asset
Capitaliz
Capita
0
?
Capitalize
e no
lize all
actual costs
interest
costs
incurred
during
of
during
construc
funds
construction
tion
(with

IF
R
modification)
S

IFRS requires capitalizing actual interest (with modification).

Consistent with historical cost.
Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.
H. Qualifying Assets
Require a substantial period of time to get them ready for their intended use.

Two types of assets:

Assets under construction for a companys own use.
Assets intended for sale or lease that are constructed or produced as
discrete projects.
I. Capitalization Period
Begins when:
1. Expenditures for the asset have been made.
2. Activities for readying the asset are in progress .
3. Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for use.
Amount to Capitalize
Capitalize the lesser of:
1. Actual interest costs
2. Avoidable interest - the amount of interest that could have been avoided if
expenditures for the asset had not been made.
Step 1 - Determine which assets qualify for capitalization of interest.
Special purpose equipment qualifies because it requires a period of time to get
ready and it will be used in the companys operations.
Step 2 - Determine the capitalization period.
The capitalization period is from Jan. 1, 2011 through Dec. 31, 2011, because
expenditures are being made and interest costs are being incurred during this
period while construction is taking place.
Step 3 - Compute weighted-average accumulated expenditures.

A company weights the construction expenditures by the amount of time (fraction

of a year or accounting period) that it can incur interest cost on the expenditure.
Step 4 - Compute the Actual and Avoidable Interest.
Selecting Appropriate Interest Rate:
1. For the portion of weighted-average accumulated expenditures that is less
than or equal to any amounts borrowed specifically to finance construction of
the assets, use the interest rate incurred on the specific borrowings.
2. For the portion of weighted-average accumulated expenditures that is greater
than any debt incurred specifically to finance construction of the assets, use

a weighted average of interest rates incurred on all other

outstanding debt during the period.

Actual
Interes
t

Weightedaverage
interest
$100,
rate on
000general
$800,debt
000

Avoida
ble
Interest

Step 5 Capitalize the lesser of Avoidable interest or Actual interest.

Avoidable
interest
Actual interest

30.250
124.000

Journal entry to Capitalize Interest:

Equipment 30,250
Interest expense
30,250
Special Issues Related to Interest Capitalization
1. Expenditures for land.
Interest costs capitalized are part of the cost of the plant, not the land.
2. Interest revenue.
Interest revenue should be offset against interest cost when
determining the amount of interest to capitalized.
Companies should record property, plant, and equipment:
at the fair value of what they give up or
at the fair value of the asset received,
whichever is more clearly evident.
Cash Discounts Whether taken or not generally considered a reduction in the
cost of the asset.
Deferred-Payment Contracts Assets, purchased through long term credit, are
recorded at the present value of the consideration exchanged.

Lump-Sum Purchases Allocate the total cost among the various assets on the
basis of their fair market values.
Issuance of Shares The market value of the shares issued is a fair indication of
the cost of the property acquired.
Exchanges of Nonmonetary Assets
Ordinarily accounted for on the basis of:
the fair value of the asset given up or
the fair value of the asset received,
whichever is clearly more evident.
Companies should recognize immediately any gains or losses on the exchange
when the transaction has commercial substance.
Meaning of Commercial Substance
Exchange has commercial substance if the future cash flows change as a result of
the transaction.
That is, if the two parties economic positions change, the transaction has
commercial substance.

Exchanges - Loss Situation

Companies recognize a loss immediately whether the exchange has commercial
substance or not.
Rationale: Companies should not value assets at more than their cash equivalent
price; if the loss were deferred, assets would be overstated.
Exchanges - Gain Situation
Has Commercial Substance. Company usually records the cost of a nonmonetary
asset acquired in exchange for another nonmonetary asset at the fair value of the
asset given up, and immediately recognizes a gain.
Exchanges - Gain Situation
Lacks Commercial Substance.
Now assume that Interstate Transportation Company exchange lacks commercial
substance. That is, the economic position of Interstate did not change significantly
as a result of this exchange. In this case, Interstate defers the gain of $7,000 and
reduces the basis of the semi-truck.
Summary of Gain and Loss Recognition on Exchanges of Non-Monetary
Assets

Disclosure include:
nature of the transaction(s),
method of accounting for the assets exchanged, and
gains or losses recognized on the exchanges.
Costs Subsequent to Acquisition
Recognize costs subsequent to acquisition as an asset when the costs can be
measured reliably and
it is probable that the company will obtain future economic
benefits.
Future economic benefit would include
increases in
1. useful life,
2. quantity of product produced, and
3. quality of product produced.

A company may retire plant assets voluntarily or dispose of them by

sale,
exchange,

 involuntary conversion, or
abandonment.
Depreciation must be taken up to the date of disposition.

CHAPTER 11
DEPRECIATION, IMPAIRMENTS,

AND DEPLETION

1. Explain the concept of depreciation.

2. Identify the factors involved in the depreciation process.
3. Compare activity, straight-line, and diminishing-charge methods of
depreciation.
4. Explain component depreciation.
5. Explain the accounting issues related to asset impairment.
6. Explain the accounting procedures for depletion of mineral resources.
7. Explain the accounting for revaluations.
8. Explain how to report and analyze property, plant, equipment, and mineral
resources.
A Deppreciation
Depreciation is the accounting process of allocating the cost of tangible assets
to expense in a systematic and rational manner to those periods expected to
benefit from the use of the asset.
Allocating costs of long-term assets:
Long-lived assets = Depreciation expense
Intangibles = Amortization expense
Mineral resources = Depletion expense
J.

Factors Involved in the Depreciation Process

Three basic questions:

(1) What depreciable base is to be used?
(2) What is the assets useful life?
(3) What method of cost apportionment is best?

Estimation of Service Lifes

Service life often differs from physical life.
Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of physical life)
2. Economic factors (inadequacy, supersession, and obsolescence).
K. Methods of Depreciation

The profession requires the method employed be systematic and rational.

Examples include:
(1) Activity method (units of use or production).
(2) Straight-line method.
(3) Diminishing (accelerated)-charge methods:
a) Sum-of-the-years-digits.
b) Declining-balance method.
1. Activity method

2. Straight-Line Method

3. Diminishing-Charge Methods Sum-of-the-Years-Digits

Alternate sum-of-theyears calculation

n(n+1)
2

= 5(5+1)
2

=1
5

4. Diminishing-Charge Methods Declining-Balance Method.

Utilizes a depreciation rate (%) that is some multiple of the straightline method.
Does not deduct the residual value in computing the depreciation base.

Component Depreciation
IFRS requires that each part of an item of property, plant, and equipment that is
significant to the total cost of the asset must be depreciated separately.

Depreciation journal entry for 2011.

Depreciation Expense 8,600,000
Accumulated DepreciationAirplane
8,600,000
Special Depreciation Issues
(1) How should companies compute depreciation for partial periods?
(2) Does depreciation provide for the replacement of assets?
(3) How should companies handle revisions in depreciation rates?
Depreciation and Replacement of PP&E
Depreciation
Does not involve a current cash outflow.
Funds for the replacement of the assets come from the revenues.
Revision of Depreciation Rates
Accounted for in the current and prospective periods.
Not handled retrospectively
Not considered errors or extraordinary items

Equipment cost

First,
First,
establish
establishNBV
NBV
$510,000
at
atdate
dateof
of
Salvage value
x 7change
years in
=in
change
estimate.
$350,000
estimate.
- 10,000
Balance Sheet (Dec.
Depreciable
base
31, 2009)
Equipm
$510,0
Accumulated
ent
00
Net book value
$160,0
500,000depreciation
350,00
(NBV)
00
0
Useful life
(original)
10 years
Annual depreciation
$ 50,000

Net book value

$160,000
Salvage value (new)

Depreciation
Depreciation
Expense
Expense
calculation
calculation
for
for2010.
2010.

Journal entry
5,000
for 2010
Depreciable
base expense 19,375
Depreciation
Accumulated depreciation

155,000
19,375
Useful life remaining
8 years
Annual depreciation
$ 19,375

Recognizing Impairments
A long-lived tangible asset is impaired when a company is not able to recover the
assets carrying amount either through using it or by selling it.
On an annual basis, companies review the asset for indicators of impairments
that is, a decline in the assets cash-generating ability through use or sale.
If impairment indicators are present, then an impairment test must be conducted.

No Impairment

CHAPTER 12
INTANGIBLE ASSETS
1. Describe the characteristics of intangible assets.
2. Identify the costs to include in the initial valuation of intangible assets.
3. Explain the procedure for amortizing intangible assets.
4. Describe the types of intangible assets.
5. Explain the conceptual issues related to goodwill.
6. Describe the accounting procedures for recording goodwill.
7. Explain the accounting issues related to intangible asset impairments.
8. Identify the conceptual issues related to research and development costs.
9. Describe the accounting for research and development and similar costs.
10.Indicate the presentation of intangible assets and related items.
Three Main Characteristics:
(1) Identifiable,
(2) Lack physical existence.
(3) Not monetary assets.
Normally classified as non-current asset.

Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible asset ready for its
intended use.
Typical costs include:
Purchase price.
Legal fees.

 Other incidental expenses.

Internally Created Intangibles:

Companies expense all research phase costs and some development
phase costs.
Certain development costs are capitalized once economic viability
criteria are met.
IFRS identifies several specific criteria that must be met before
development costs are capitalized.
Internally Created Intangibles

Amortization of Intangibles

Limited-Life Intangibles:
Amortize by systematic charge to expense over useful life.
Credit asset account or accumulated amortization.
Useful life should reflect the periods over which the asset will
contribute to cash flows.
Amortization should be cost less residual value.
IFRS requires companies to assess the residual values and useful lives
of intangible assets at least annually.
Indefinite-Life Intangibles:

 No foreseeable limit on time the asset is expected to provide cash

flows.
No amortization.
Must test indefinite-life intangibles for impairment at least annually.

Six Major Categories:

(1) Marketing-related.

Examples:
Trademarks or trade names, newspaper mastheads, Internet domain
names, and non-competition agreements.
In the United States trademark or trade name has legal protection for
indefinite number of 10 year renewal periods.
Capitalize acquisition costs.
No amortization.

(2) Customer-related.
Examples:
Customer lists, order or production backlogs, and both contractual and
non-contractual customer relationships.

 Capitalize acquisition costs.

Amortized to expense over useful life.

(3) Artistic-related.
and

Examples:
Plays, literary works, musical works, pictures, photographs, and video
and audiovisual material.
Copyright granted for the life of the creator plus 70 years.
Capitalize costs of acquiring and defending.
Amortized to expense over useful life.

(4) Contract-related.

Examples:
Franchise and licensing agreements, construction permits, broadcast
rights, and service or supply contracts.
Franchise (or license) with a limited life should be amortized to expense over
the life of the franchise.
Franchise with an indefinite life should be carried at cost and not amortized.

(5) Technology-related.

 Examples:
Patented technology and trade secrets granted by a governmental
body.
Patent gives holder exclusive use for a period of 20 years.
Capitalize costs of purchasing a patent.
Expense any R&D costs in developing a patent.
Amortize over legal life or useful life, whichever is shorter.

(6) Goodwill.
Conceptually, represents the future economic benefits arising from the other assets
acquired in a business combination that are not individually identified and
separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
cost of the purchase over the FMV of the identifiable net assets purchased.
Internally created goodwill should not be capitalized.

Property, Plant, and Equipment 205,000

Patents

18,000

Inventories 122,000
Receivables 35,000
Cash 25,000
Goodwill

50,000

Liabilities
Cash

55,000
400,000

Goodwill Write-of
Goodwill considered to have an indefinite life.
Should not be amortized.
Only adjust carrying value when goodwill is impaired.

Bargain Purchase
Purchase price less than the fair value of net assets acquired.
Amount is recorded as a gain by the purchaser.

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets in Chapter 11.

Entry to record the impairment loss.

Loss on Impairment

3,000,000

Patents

3,000,000

Reversal of Impairment Loss

Patents ($1,750,000-$1,600,000)

150,000

Loss on Impairment

150,000

Impairment of Indefinite-Life Intangibles Other than Goodwill

Should be tested for impairment at least annually.
Impairment test is the same as that for limited-life intangibles. That is,
compare the recoverable amount of the intangible asset with the
assets carrying value.
If the recoverable amount is less than the carrying amount, the
company recognizes an impairment.

Impairment of Goodwill
Companies must test goodwill at least annually.

 Impairment test is conducted based on the cash-generating unit to which

the goodwill is assigned.
Because there is rarely a market for cash-generating units, estimation of the
recoverable amount for goodwill impairments is usually based on value-inuse estimates.

Research and development (R&D) costs are not in themselves intangible

assets.
Frequently results in something that a company patents or copyrights such as:
new product,
process,
idea,
formula,
composition, or
aliterary work.
Research costs must be expensed as incurred.
Development costs may or may not be expensed as incurred.
Capitalization begins when the project is far enough along in the process such
that the
economic benefits of the R&D
project will flow to the company
(the project is
economically
viable).
Other Costs Similar to R & D Costs
Start-up costs for a new operation.
should expensed as incurred.
Initial operating losses.
Should not be capitalized.
Advertising costs.
Should expensed as incurred.

Presentation of Intangible Assets

Statement of Financial Position
Intangible assets shown as a separate item.
Reporting is similar to the reporting of property, plant, and equipment.
Contra accounts may not be shown for intangibles.
Companies should report as a separate item all intangible assets other
than goodwill.
Income Statement
Amortization expense.
Impairment losses and reversals other than goodwill separately
(usually in the operating section).

CHAPTER 13
Liabilitas
1. Kewajiban saat ini
2. Akibat transaksi masa lalu
3. Mengakibatkan penyelesaian di masa datang
Three essential characteristics:
1. Present obligation.
2. Arises from past events.
3. Results in an outflow of resources (cash, goods, services).
Current liability is reported if one of two conditions exists:
1.
Liability is expected to be settled within its normal operating cycle; or
2.
Liability is expected to be settled within 12 months after the reporting
date.
The operating cycle is the period of time elapsing between the acquisition of goods
and services and the final cash realization resulting from sales and subsequent
collections.
Siklus operasi yang normal adalah periode dimana uang ka situ berubah kembali
menjadi uang kas. Kalo kita mengambil siklus operasi yang normal, notes payable
jangka pendek, utang gaji, utang pajak,
Typical Current Liabilities:
Accounts payable.
Notes payable.
Current maturities of long-term debt.
Short-term obligations expected to be refinanced.
Dividends payable.
Customer advances and deposits.
Unearned revenues.
Sales taxes payable.
Income taxes payable.
Employee-related liabilities.
L. Accounts Payable (trade accounts payable) Balances owed to others for
goods, supplies, or services purchased on open account.
Time lag between the receipt of services or acquisition of title to assets and
the payment for them.
Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of
extended credit, commonly 30 to 60 days.
M. Notes Payable Written promises to pay a certain sum of money on a specified
future date.
Arise from purchases, financing, or other transactions.
Notes classified as short-term or long-term.
Notes may be interest-bearing or zero-interest-bearing.
5. Interest-Bearing Note Issued
Illustration: Castle National Bank agrees to lend $100,000 on March 1, 2011, to
Landscape Co. if Landscape signs a $100,000, 6 percent, four-month note.
Landscape records the cash received on March 1 as follows:
Cash 100,000
Notes Payable
100,000

If Landscape prepares financial statements semiannually, it makes the following

adjusting entry to recognize interest expense and interest payable at June 30:
Interest calculation =($100,000 x 6% x 4/12) = $2,000
Interest expense 2,000
Interest payable
2,000
At maturity (July 1), Landscape records payment of the note and accrued interest as
follows.
Notes payable
100,000
Interest payable
2,000
Cash
102,000
6. Zero-Bearing Note Issued
Illustration: On March 1, Landscape issues a $102,000, four-month, zero-interestbearing note to Castle National Bank. The present value of the note is $100,000.
Landscape records this transaction as follows.
Tanda tangan wesel sebesar 102.000 yang diterima kas hanya 100.000, sehinggat
selama periode utang terdapat bunga terdapat bunga sebesar 2.000
Cash 100,000
Notes payable
100,000
If Landscape prepares financial statements semiannually, it makes the following
adjusting entry to recognize interest expense and the increase in the note payable
of $2,000 at June 30.
Interest expense 2,000
Notes payable
2,000
At maturity (July 1), Landscape must pay the note, as follows.
Notes payable
102,000
Cash
102,000
N. Current Maturities of Long-Term Debt
Portion of bonds, mortgage notes, and other long-term indebtedness that matures
within the next fiscal year.
Exclude long-term debts maturing currently if they are to be:
1. Retired by assets accumulated that have not been shown as current
assets,
2. Refinanced, or retired from the proceeds of a new debt issue, or
3. Converted into ordinary shares.
Short-Term Obligations Expected to Be Refinanced
Exclude from current liabilities if both of the following conditions are met:
1. Must intend to refinance the obligation on a long-term basis.
2. Must have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting date.
O. Dividends Payable
Amount owed by a corporation to its stockholders as a result of board of directors
authorization.
Generally paid within three months.
Undeclared dividends on cumulative preference shares not recognized
as a liability.
Dividends payable in the form of additional shares are not recognized
as a liability. Reported in equity.
Tiga tahap dalam dividen,

1.
2.
3.
P.

Pengumuman dalam RUPS

Pendaftaran (tidak ada jurnal)
Pembayaran
Customer Advances and Deposits ; Returnable cash deposits received from
customers and employees.
May be classified as current or non-current liabilities.
Selama barang atau jasa belum diserahkan, penerima kas akan dianggap sebagai
utang. Bisa dikategorikan sebagai current atau non current
Q. Unearned Revenues Payment received before delivering goods or rendering
services?
R. Payment received before delivering goods or rendering services?
Retailers must collect sales taxes or value-added taxes (VAT) from customers on
transfers of tangible personal property and on certain services and then remit to the
proper governmental authority.
S. Income Tax Payable
Businesses must prepare an income tax return and compute the income tax
payable.
Taxes payable are a current liability.
Corporations must make periodic tax payments.
Differences between taxable income and accounting income sometimes
occur (Chapter 19).
T. Employee-Related Liabilities
Amounts owed to employees for salaries or wages are reported as a current liability.
Current liabilities may include:
Payroll deductions.
Taxes:
Social Security Taxes
Income Tax Withholding
Compensated absences.
Bonuses.
BPJS Kesehatan 5% (1% dibayar oleh karywan, 4% dibayar perusahaan)
BPJS Ketenagakerjaan
- JHT
- JKK
- JKM
- Jaminan Pensiun
Yang ditanggung perusahaan dianggap sebagai beban oleh perushaan dan
dianggap penghasilan oleh karyawan.
U. Compensated Absences
Paid absences for vacation, illness and maternity, paternity, and jury leaves.
Vested rights - employer has an obligation to make payment to an employee even
after terminating his or her employment.

Accumulated rights - employees can carry forward to future periods if not used in
the period in which earned.
Non-accumulating rights - do not carry forward; they lapse if not used.

PROVISI
Provision is a liability of uncertain timing or amount.
Reported either as current or non-current liability.
Common types are
Obligations related to litigation.
Warrantees or product guarantees.
Business restructurings.
Environmental damage.
Uncertainty about the timing or amount of the future expenditure required
to settle the obligation.
Companies accrue an expense and related liability for a provision only if the
following three conditions are met:
1. Warrantees or product guarantees.
2. Probable that an outflow of resources will be required to settle the
obligation; and
3. A reliable estimate can be made.
Management must use judgment, based on past or similar transactions,
discussions with experts, and any other pertinent information.
Common Types:
1. Lawsuits
2. Warranties
3. Premiums
4. Environmental
5. Onerous contracts
6. Restructuring
IFRS requires extensive disclosure related to provisions in the notes to the
financial statements, however companies do not record or report in the notes
general risk contingencies inherent in business operations (e.g., the possibility of
war, strike, uninsurable catastrophes, or a business recession).
CONTINGENT LIABILITIES (KEWAJIBAN BERSYARAT)
Contingent liabilities are not recognized in the financial statements because they
are
1. A possible obligation (not yet confirmed),
2. A present obligation for which it is not probable that payment will be
made, or
3. A present obligation for which a reliable estimate of the obligation
cannot be made.
Tidak dicatat dalam laporan keuangan tapi disampaikan dalam disclosure. Dianggap
kontijen jika dibawah 50%

Penyajian item yang ada dalam laporan keuangan sudah berbasis IFRS, tapi
penyajian di neraca masih menyajikan sesuai FASB dimana penyusunannya
berdasarkan nilai yang paling besar.

Chapter 14
Non-current liabilities (long-term debt) consist of an expected outflow of
resources arising from present obligations that are not payable within a year or
the operating cycle of the company, whichever is longer.
Examples:
Bonds payable
Long-term notes payable
Mortgages payable
Pension liabilities
Lease liabilities
Bond contract known as a bond indenture.
Represents a promise to pay:
(1) sum of money at designated maturity date, plus
(2) periodic interest at a specified rate on the maturity amount (face
value).
Paper certificate, typically a $1,000 face value.
Interest payments usually made semiannually.
Used when the amount of capital needed is too large for one lender to supply.
Common types found in practice:
Secured and Unsecured (debenture) bonds.
Term, Serial, and Callable bonds.
Convertible, Commodity-Backed, Deep-Discount bonds.
Registered and Bearer (Coupon) bonds.
Income and Revenue bonds.

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Issuance and marketing of bonds to the public:

 Usually takes weeks or months.

Issuing company must
Arrange for underwriters.
Obtain regulatory approval of the bond issue, undergo audits,
and issue a prospectus.
Have bond certificates printed.
Selling price of a bond issue is set by the
supply and demand of buyers and sellers,
relative risk,
market conditions, and
state of the economy.
Investment community values a bond at the present value of its expected
future cash flows, which consist of (1) interest and (2) principal.
Interest Rate
Stated, coupon, or nominal rate = Rate written in the terms of the
bond indenture.
Bond issuer sets this rate.
Stated as a percentage of bond face value (par).
Market rate or efective yield = Rate that provides an acceptable
return commensurate with the issuers risk.
Rate of interest actually earned by the bondholders.
How do you calculate the amount of interest that is actually paid to the bondholder
each period?
(Stated rate x Face Value of the bond)
How do you calculate the amount of interest that is actually recorded as interest
expense by the issuer of the bonds?