Prepaid Sales ...

This is an image of the yet to be released, iPhone7.

Imagine you are the manager of 'Just Phones'.

Lots of customers are excited about the yet to be released iPhone7 ... so excited that 10 of them are prepared to pay the full price (assume $900 plus GST with a cost price of $500 plus GST) BEFORE the stock is available.

So the business has just received $9 000 plus $900 GST.  How should we record this?

$9 900 cash has been received so it would be recorded in the Cash Receipts Journal.
Under 'Details' you would record Prepaid Sales.  $9 900 would be recorded in 'Bank' $9000 would go in 'Sundry' and $900 would go in 'GST'.

How would you classify 'Prepaid Sales'?

It sounds like Sales or Revenue ... but it is a current liability!!  Remember that.

Why?  The business has received the money from its customers but has not supplied any stock ... yet.  Thus it has an obligation to its customers.  Thus, a current liability.  They expect to meet this obligation in the short term (less than 12 months).

Now assume stock of iPhone7 arrives.  50 units, each at $500 plus GST.  Invoice 46.
This would be recorded in the Purchases Journal (or Cash Payments Journal if it was a cash purchase of stock) as well as the iPhone7 stock card in the IN column.

The business would then ring/contact/email/text the customers who have already paid for the iPhone7s.  "Come and get your new iPhone7".

The customers arrive and collect their iPhone7s.  They leave happy.

How is this recorded?
The stock card would record 10 units going OUT.
The Prepaid Sales must be converted to Sales so ...

General Journal
Debit:  Prepaid Sales $9 000 (this cancels out the current liability)
Credit:  Sales $9 000 (this counts the sale)
Debit:  Cost of sales $5 000
Credit:  Stock Control $5 000.

Next SAC ...

It is week 3 as I type this and with the last section of Outcome 1 about to start, I estimate the next SAC will be in week 5 or early week 6.

60 minute SAC.  Manual.  50 marks.

Topics:

• Purchases and sales returns.
• Credit purchase of non current assets.  Includes definition of cost of NCA and concept of sundry creditors.
• Disposal of NCAs.  Cash disposal and trade-ins using sundry creditor.  Reason for profit or loss on disposal.
• Reducing balance depreciation.
• Product costing (new) versus period costing (old).
• NRV and stock write downs.  This includes the lower of cost and NRV rule due to Conservatism.
• Prepaid revenue (service activity like tattooing), prepaid sales and accrued revenue.

Following the Outcome 1 SAC (above) the next SACs are:

• Budgeting SAC.  VCAA directs that this is done on the computer (Excel). Probably 3rd last week of term 3.
• KPIs SAC.  We use Quia to do this.  FIrst week of term 4.

That's it ... until the exam on November 6th.

Stock Write Down ...

The original Microsoft Surface Tablet was a disaster and led to massive stock write downs.  Without the stock write downs, the Microsoft data would be over optimistic for stakeholders.  Profit would be overstated.  Assets (particularly stock) would be overstated.  The stock write down, an expense, ensures expenses are not understated and profit and assets are not overstated. (the latest Surface is very successful, but not the original)

http://thenextweb.com/microsoft/2013/07/31/with-just-853m-in-revenue-microsofts-surface-experiment-is-officially-a-financial-failure/

Test 4

Have a go at test 4 in the Red Book.  Good SAC preparation.

Seek!

If there is one thing I have learned over the journey it is that ...
"success does not come knocking ... you have to seek it out"!

Women's Agenda ...

An interesting website for career minded women.  Check it out.
http://www.womensagenda.com.au/

One women!

Check out this photo.  It was taken today at the Australian Heads of Governments meeting.  The Prime Minister and the Premiers of the States.  Problem.  Only one woman.  You can change that in the future.

Melbourne Career Expo ...

This event may be of interest to some of you.  It is this weekend.

http://www.careerexpo.com.au/

Nanos

Make a commitment this semester:  do every Nano!  Some of you should do them twice! 

Reducing Balance Depreciation ...

The only thing that changes is how to calculate the depreciation ... the rate, which is always given, is applied to the carrying-value rather than the historical cost ... except in the first reporting period when the rate is applied to the historical cost as well.

Using reducing balance depreciation means periodic depreciation expense decreases each reporting period.  Why?  This is important.  Because it is assumed that NCA is contributing less to revenue over which each new reporting period hence the depreciation expense should match that declining revenue to better match the revenue generated by the NCA to its depreciation expense.  MATCH, MATCH, MATCH, MATCH, MATCH.  That is a word that examiners like in this context.  Matching the revenue generated by the NCA to its depreciation expense to provide stakeholders with more relevant information for the reporting period.

Key Accounts ...

The Stock Control account is now complete.  (we have not done stock write down yet ... soon).  Learn these debits and credits.  Know which each entry means and the source journal.

Debtors Control

Creditors Control

GST Clearing

Capital  ... this one shows net profit.  

Disposal of NCA ... this one is for cash and shows a loss on disposal.

Disposal of NCA ... this one is a trade-in and shows a profit on disposal.

This term ...

Lesson 4 ... the last one!

Lesson 4

The trade-in of a non current asset (NCA) which leads to a profit on the disposal.

Example.  
The old Boardroom Table at 30/6/17:
Boardroom Table     $12 000
less Accum. Deprec. $8 500    $3 500

The owner has picked out a new boardroom table which has a price of $18 000 plus GST.  The vendor, Ace Traders, has agreed on a trade-in allowance of $5 000 on the old boardroom table.

The $5 000 trade-in allowance is $1 500 more than the carrying value of $3 500 on the old boardroom table, thus this $1 500 is a profit on disposal.

Recording:
General Journal entries

Dr:  Disposal Boardroom Table  $12 000
Cr:  Boardroom Table $12 000
... transfer of historical cost to disposal account

Dr:  Accum Depreciation Boardroom Table  $8 500
Cr:  Disposal Boardroom Table $8 500
 ... transfer of accum depreciation to disposal account

Dr:  Disposal Boardroom Table $1 500
Cr:  Profit on disposal boardroom table $1 500
... profit on disposal of boardroom table

Dr:  Sundry creditor/Ace Traders $5 000
Cr:  Disposal Boardroom Table $5 000
... trade-in allowance on old boardroom table

Dr:  Boardroom Table $18 000
Dr:  GST Clearing $1 800
Cr:  Sundry creditor/Ace Traders $19 800
... purchase of new boardroom table from Ace Traders


Key Accounts
                                                                  
                                                                 Disposal Boardroom Table
1/7/17  Boardroom table                $12 000       1/7/17  Accum Deprec BRTable  $8 500
              Profit disposal                    $1 500                        Sundry creditor/Ace        $5 000
                                                                                                
                                                            $13 500                                                                    $13 500

                                                           Sundry Creditor:  Ace Traders
1/7/17  Disposal BRTable              $5 000         1/7/17    BRTable/GST Clr.          $19 800
                                                                                                                                                                     
                                                                     Boardroom Table
1/7/17  Balance                                $12 000       1/7/17    Disposal BRTable             $12 000
             Sundry Creditor Ace         $18 000

Reporting

Cash Flow Statement 
No impact!

Income Statement
Add Other Revenue
Profit Disposal Boardroom Table $1 500

Balance Sheet (accounting equation)
Assets:
Increase in new Boardroom Table $18 000
Decrease in carrying-value of old boardroom table $3 500
thus net increase $14 500

Liabilities
Decrease GST clearing $1 800
Increase Sundry Creditor:  Ace $19 800
Decrease Sundry Creditors (allowance):  Ace $5 000
Thus net increase $13 000

Owner's Equity
Increase $1 500 due to profit on disposal boardroom table.

Thus the net change in equities, increase of $14 500, equals the increase in net assets.

Summary
What caused the profit on disposal $1 500?
1.  The proceeds of disposal, $5 000 was more than the carrying-value of $3 500.
2.  The boardroom table was over-depreciated over its useful life due to under-estimating the scrap value and/or the estimated useful life.

We have now covered the four scenarios:
1.  Sell NCA for cash which leads to a loss on disposal
2.  Sell NCA for cash which leads to a profit on disposal
3.  Trade-in old NCA for a new NCA which leads to a loss on disposal
4.  Trade-in old NCA for a new NCA which leads to a profit on disposal

You should also appreciate what causes ...
a profit on disposal of a NCA ... and/or
a loss on disposal of a NCA

Lesson 3

I hope you are enjoying your holidays.  

Here is lesson 3.  Trading in an old NCA for a new one ... that results in a loss on disposal.

Details about the old delivery van at 1/7/17:
Historical cost   $35 000
Accum Deprec   $28 000  $7 000

The new delivery van is $50 000 plus GST and will be purchased from Ace Motor Traders ... they have offered a trade-in allowance of $5 000 on the old van.
Thus the proceeds of disposal, $5 000 is less than the carrying-value of $7 000,  hence a loss of $2 000 occurs on the disposal of the old delivery van.

Records
Recording in the General Journal:

Dr:  Disposal of Delivery Van $35 000
Cr:  Delivery Van $35 000
... that transfers the historical cost of the delivery van to the Disposal Account


Dr:  Accumulated Depreciation Delivery Van $28 000
Cr:  Disposal of Delivery Van $28 000
... that transfers the accum deprec of the delivery van to the Disposal Account

Dr:  Sundry Creditor:  Ace Motor Traders $5 000
Cr:  Disposal Delivery Van $5 000
... that is the trade-in allowance given on the old delivery van by Ace Motor Traders

Dr:  Loss on Disposal Delivery Van $2 000
Cr:  Disposal Delivery Van $2 000
... that transfers the loss on disposal of the delivery van to the expense account, loss on disposal of delivery van.

Dr:  Delivery van $50 000
Dr:  GST clearing $5 000
Cr:  Sundry creditor:  Ace Motor Traders $55 000
... that is the credit purchase of the new delivery van

Key Accounts
                                                                  
                                                                 Disposal Delivery Van
1/7/17  Delivery Van                       $35 000       1/7/17  Accum Deprec Del. Va     $28 000
                                                                                                 Sundry creditor/Ace        $5 000
                                                                                                 Loss on disposal DV        $2 000
                                                            $35 000                                                                   $35 000

                                                           Sundry Creditor:  Ace Motor
1/7/17  Disposal DV                        $5 000         1/7/17    Delivery Van/GST Clr.    $55 000
                                                                                                                                                                     
                                                                     Delivery Van
1/7/17  Balance                                $35 000       1/7/17    Disposal DV                     $35 000
              Sundry Creditor Ace         $50 000

Reporting

Cash Flow Statement 
No impact!

Income Statement
Less Other Expenses
Loss Disposal Delivery Van $2 000

Balance Sheet (accounting equation)
Assets:
Increase in Delivery Van $50 000
Decrease in carrying-value of old delivery van $7 000
Thus net decrease $43 000

Liabilities
Decrease GST clearing $5 000
Increase Sundry Creditor:  Ace $55 000
Decrease Sundry Creditors (allowance):  Ace $5 000
Thus net increase $45 000

Owner's Equity
Decrease $2 000 due to loss on disposal delivery van.

Thus the net change in equities, decrease of $43 000, equals the decrease in net assets.

Summary
What caused the loss on disposal $2 000?
1.  The proceeds of disposal, $5 000 was less than the carrying-value of $7 000.
2.  The delivery van was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life.

Stay tuned for lesson 4 in a few days!

Greece is in arrears!

Put simply (and to sort of tie it into the VCE course), Greece has an accrued expense.  It is owing to the European Union.  Or, the European Union has accrued revenue.  

Profit on disposal of a NCA ...

Lesson 2

Assume you want to sell an old computer.  At 30th June 2024 the following is provided:
                                                        $             $
Computer                                  4 700
-Accumulated depreciation   2 300      2 400

$2 400 is the carrying-value.  Assume you sell the computer, on 30/6/24, for cash and receive $3 000 (market value).  The proceeds of disposal, $3 000, is more than the carrying-value, $2 400, so a profit on disposal of $600 occurs. 

Recording

The $3 000 (market value) is recorded in the Cash Receipts Journal as 'Disposal of Computer'.  There is no GST on the sale on the VCA course.  Remember that. At the end of the month the $3 000 would be posted to the credit side of the Disposal of Computer account, the cross reference is 'Bank'.

General Journal entries

Dr:  Disposal of Computer $4 700
Cr:  Computer                       $4 700

Dr:  Accum Deprec Computer $2 300
Cr:  Disposal Computer            $2 300

Dr:  Disposal Computer            $600
Cr:  Profit Disposal Computer $600

Of course these entries would then be posted to the ledger.

The Disposal of Computer account would appear (sort of)
                                                                   
                                                                     Disposal Computer
30/6/24  Computer                            $4 700        30/6/24  Accum Deprec Computer $2 300
                  Profit disposal computer $600                             Bank                                      $3 000
                                                                $5 300                                                                          $5 300

Reporting

Cash Flow Statement 
Investing Activities
Proceeds Disposal Computer $3 000

Income Statement
Add Other Revenue
Profit Disposal Computer $600

Balance Sheet (accounting equation)
Assets:
Increase in Bank $3 000
Decrease in carrying-value of computer $2 400
Thus net increase $600.
Liabilities
No impact
Owner's Equity
Increase $600 due to profit on disposal computer.

Summary
What caused the profit on disposal $600?
1.  The proceeds of disposal, $3 000 was more than the carrying-value of $2 400.
2.  The computer was over-depreciated over its useful life due to under estimating the scrap value and/or the estimated useful life. 

Stay tuned for lesson 3 in a few days!

Footy!

This is why we all missed Accounting on that last Thursday of term 2.

Some of the team at BDO ...

Some of the team at BDO recently.  That is My-Linh on the right, Class of 2013.  Find her name in the Red Book!  Thanks to Amanda for photo.