2.  Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.  Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements. INTANGIBLE ASSETS

3.  In general, accounting for intangible assets parallels the accounting for capital assets.  Intangible assets are: 1. recorded at cost; 2. written off over useful life in a rational and systematic manner; 3. at disposal, book value is eliminated and gain or loss, if any, is recorded. ACCOUNTING FOR INTANGIBLE ASSETS

4.  Differences between the accounting for intangible assets and the accounting for capital assets include: To record amortization, Amortization Expense is debited and the specific intangible asset is credited. The amortization period is the shorter of its useful life and its legal life. In no case can the amortization period exceed 40 years. Amortization is typically computed on a straight-line basis. ACCOUNTING FOR INTANGIBLE ASSETS

5.  A patent is an exclusive right issued by the Federal Government that enables the recipient to manufacture, sell, or otherwise control his or her invention for a period of 20 years from the date of filing the application.  The initial cost of a patent is the cash or cash equivalent price paid when the patent is acquired.  Legal costs incurred in successfully defending the patent are added to the Patent account and amortized over the remaining useful life of the patent.  The cost of the patent should be amortized over its 20-year legal life or its useful life, whichever is shorter. PATENTSPATENTS

6. RECORDING PATENTS National Labs purchases a patent at a cost of $60,000 with a remaining legal life of the patent of 12 years. If the useful life of the patent is eight years, the annual amortization expense is $7,500 ($60,000 ÷ 8). Patent Expense is classified as an operating expense in the income statement. The entry to record the annual patent amortization is: 7,500 7,500

7.  Copyrights are granted by the federal government, giving the owner the exclusive right to reproduce and sell an artistic or published work.  Copyrights extend for the life of the creator plus 50 years or useful life, whichever is shorter.  The cost of a copyright consists of the cost of acquiring and defending it. COPYRIGHTSCOPYRIGHTS

8.  A trademark or trade name is a word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.  If the trademark or trade name is purchased, the cost is the purchase price.  If it is developed by a company, the cost includes legal fees, registration fees, design costs, and successful legal defence fees.  Intangible assets with indefinite useful lives are not amortized. TRADEMARKS AND TRADE NAMES

9.  A franchise is a contractual arrangement under which the franchiser grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names, usually within a designated geographical area.  Another type of franchise, commonly referred to as a license or permit, is entered into between a governmental body and a business enterprise and permits the enterprise to use public property in performing its services. FRANCHISES AND LICENSES

10.  Goodwill is the value of all favourable attributes that relate to a business enterprise.  These attributes may include exceptional management, desirable location, good customer relations, and skilled employees.  Goodwill cannot be sold individually in the marketplace; it can be identified only with the business as a whole. GOODWILLGOODWILL

11.  Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business..  When an entire business is purchased, goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired.  Goodwill is not written off as it has an unlimited useful life. It must be tested regularly for impairment. GOODWILLGOODWILL

12.  Research and development costs pertain to expenditures incurred to develop new products and processes.  Research costs should be expensed when incurred.  Development costs with reasonably assured future benefits may be capitalized, otherwise, they too are expensed. RESEARCH AND DEVELOPMENT COSTS

13.  In the balance sheet, property, plant and equipment, natural resources, and intangible assets are often combined under the heading Capital Assets.  There should be disclosure of the balances in the major classes of assets and accumulated amortization of major classes of assets or of assets in total.  The amortization methods used should be described and the amount of amortization expense for the period disclosed. FINANCIAL STATEMENT PRESENTATION

14. PRESENTATION OF CAPITAL ASSETS The capital assets of Andres Wines Ltd at March 31, 2000 is summarized in the balance sheet and detailed in Note 3 to the financial statements: ANDRES WINES LTD. 3. Capital Assets (thousands of dollars) The notes to the financial statements reports that amortization is calculated on the straight-line basis using the following rates and useful lives: Buildings, 2.5 percent per year, manufacturing machinery and equipment, 7.5 percent per year, other equipment 10-20 percent per year and goodwill, 15 years. Accumulated Cost Amortization Net Land 2,349 0 2,349 Vineyards5,93705,937 Buildings17,1814,97112,210 Machinery and equipment 38,91421,74417,170 Goodwill 25,0002,90622,094 89,381 29,62159,760

15. CURRENT ASSETS

16.  The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.  Three major classes of receivables are: 1. Accounts Receivable 2. Notes Receivable 3. Other Receivables RECEIVABLESRECEIVABLES

17. The three primary accounting problems associated with accounts receivable are: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. ACCOUNTS RECEIVABLE

18. July 1 1,000 To record sales on account. 1,000 GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Accounts Receivable - Adorable Junior Sales RECOGNIZING ACCOUNTS RECEIVABLE When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.

19. 100 RECOGNIZING ACCOUNTS RECEIVABLE When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 5Sales Returns and Allowances Accounts Receivable - Adorable 100 To record merchandise returned.

20. 900 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Cash ($1,000 - $100) Accounts Receivable - Adorable 900 To record collection of account. When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited.

21. 13.50 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Accounts Receivable - Adorable Interest Revenue 13.50 To record interest on amount due. When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.

22.  To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value.  Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect. VALUING ACCOUNTS RECEIVABLE

23. Two methods of accounting for uncollectible accounts are: 1. Allowance method 2. Direct write-off method VALUING ACCOUNTS RECEIVABLE

24.  Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense.  No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet. DIRECT WRITE-OFF METHOD

25. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Jan. 12Bad Debts Expense Accounts Receivable — E. Schaefer For write-off of E. Schaefer account. DIRECT WRITE-OFF METHOD Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles. 200 200

26.  The allowance method is required when bad debts are deemed to be material in amount.  Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred. THE ALLOWANCE METHOD

27. Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period. THE ALLOWANCE METHOD

28. ADORABLE JUNIOR GARMET Balance Sheet (partial) Current assets Cash $ 14,800 Accounts receivable$200,000 Less: Allowance for doubtful accounts 24,000 188,000 Net Realizable Value

29. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 1Allowance for Doubtful Accounts Accounts Receivable — Nadeau Write-off of Nadeau account. Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. THE ALLOWANCE METHOD 500 500

30. When there is recovery of an account that has been written off: 1. reverse the entry made to write off the account and... THE ALLOWANCE METHOD GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 1Accounts Receivable — Nadeau Allowance for Doubtful Accounts To reverse write-off of Nadeau account. 500 500

31. THE ALLOWANCE METHOD GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 1Cash Accounts Receivable —Nadeau To record collection from Nadeau. 500 500 2. Record the collection in the usual manner.

32.  Companies use either of two methods in the estimation of uncollectible accounts: 1. Percentage of sales 2. Percentage of receivables  Both bases are GAAP; the choice is a management decision. BASES USED FOR THE ALLOWANCE METHOD

33. COMPARISON OF BASES OF ESTIMATING UNCOLLECTIBLES Percentage of Sales Percentage of Receivables Net Realizable Value Allowance Accountsfor ReceivableDoubtful Accounts Emphasis on Income Statement Relationships Emphasis on Balance Sheet Relationships

34.  In the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts.  Expected bad debt losses are determined by applying the percentage to the sales base of the current period.  This basis better matches expenses with revenues. PERCENTAGE OF SALES BASIS

35.  Under the percentage of receivables basis, management establishes a percentage relationship between the amount of accounts receivable and the required balance in the allowance account.  This percentage can be applied to the total accounts receivable balance, or to individual accounts receivable balances stratified by age. PERCENTAGE OF RECEIVABLES BASIS

36. The required balance in the allowance account is determined by applying the percentage to the accounts receivable balance at the end of the current period. The amount of the adjusting entry to record expected bad debt losses for the current period is the difference between the required balance and the existing balance in the allowance account. This basis produces the better estimate of net realizable value of receivables. PERCENTAGE OF RECEIVABLES BASIS

37. To accelerate the receipt of cash from receivables, owners frequently: 1. sell to a factor, such as a finance company or a bank, and 2. make credit card sales. DISPOSING OF ACCOUNTS RECEIVABLE

38.  A factor buys receivables from businesses for a fee and collects the payments directly from customers.  Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit.  Retailers can receive cash more quickly from the credit card issuer. DISPOSING OF ACCOUNTS RECEIVABLE

39.  Three parties are involved when credit cards are used in making retail sales: 1. the credit card issuer, 2. the retailer, and 3. the customer.  The retailer pays the credit card issuer a percentage fee of the invoice price for its services.  From an accounting standpoint, sales from bank cards (e.g., Visa and MasterCard) are treated differently than sales from non-bank cars (e.g., American Express). CREDIT CARD SALES

40. BANK CARD SALES  Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailer.  These cards are issued by banks.  Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.

41. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Cash Credit Card Expense ($1,000 x 3.5%) Sales To record VISA credit card sales. BANK CARD SALES Anita Ferreri purchases a number of compact discs for her restaurant from Karen Kerr Music Co. for $1,000 using her Royal Bank VISA card. The service fee that the Royal charges is 3.5 percent. 965 35 1,000

42. NON-BANK CARD SALES  Sales using American Express and other non-bank cards are reported as credit sales, not cash sales.  Conversion into cash does not occur until American Express remits the net amount to the seller.

43. NON-BANK CARD SALES Kerr Music Co. accepts an AMERICAN EXPRESS card for a $500 sale. The service fee that AMERICAN EXPRESS charges is 5 percent. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Accounts Receivable Credit Card Expense ($500 x 5%) Sales To record American Express credit card sales. 475 25 500

44.  A promissory note is a written promise to pay a specified amount of money on demand or at a definite time.  The party making the promise is the maker.  The party to whom payment is made is called the payee. NOTES RECEIVABLE

45. The basic formula for calculating interest on an interest-bearing note is: The interest rate specified on the note is an annual rate of interest. ILLUSTRATION 9-8 FORMULA FOR CALCULATING INTEREST Face Value of Note Annual Interest Rate Time in Terms of One Year Interest X X =

46. RECOGNIZING NOTES RECEIVABLE Wilma Company receives a $1,000, 6% promissory note, due in two months (July 31) from Brent Company to settle an open account. 1,000

47.  Like accounts receivable, short-term notes receivable are reported at their net realizable value.  The notes receivable allowance account is Allowance for Doubtful Notes. VALUING NOTES RECEIVABLE

48. HONOUR OF NOTES RECEIVABLE A note is honoured when it is paid in full at its maturity date. Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4.5% interest-bearing note, due in 4 months, on September 30. Wolder collects the maturity value of the note from Higley on September 30.

49. DISHONOUR OF NOTES RECEIVABLE A dishonoured note is a note that is not paid in full at maturity. A dishonoured note receivable is no longer negotiable. Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable.

50. BALANCE SHEET PRESENTATION OF RECEIVABLES Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements. In the balance sheet, short-term receivables are reported within the current assets section below cash and temporary investments. Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

51.  Cash includes coins, currency, cheques, money orders, and money on hand or on deposit at a bank or similar depository.  Internal control over cash is imperative in order to safeguard cash and assure the accuracy of the accounting records for cash. CASHCASH

52.  Only designated personnel should be authorized to handle or have access to cash receipts.  Different individuals should: 1. receive cash 2. record cash receipt transactions 3. have custody of cash CONTROL OVER CASH RECEIPTS

53.  Documents should include: 1. remittance advices 2. cash register tapes 3. deposit slips  Cash should be stored in safes and bank vaults.  Access to storage areas should be limited to authorized personnel.  Cash registers should be used in executing over-the-counter receipts. CONTROL OVER CASH RECEIPTS

54.  Daily cash counts and daily comparisons of total receipts should be made.  All personnel who handle cash receipts should be bonded and required to take vacations.  An important tool in control of over-the- counter receipts is cash registers that are visible to customers. CONTROL OVER CASH RECEIPTS

55.  Payments are made by cheque rather than by cash, except for petty cash transactions.  Only specified individuals should be authorized to sign cheques.  Different departments or individuals should be assigned the duties of approving an item for payment and paying it. CONTROL OVER CASH DISBURSEMENTS

56.  Prenumbered cheques should be used and each cheque should be supported by an approved invoice or other document.  Blank cheques should be stored in a safe. 1. Access should be restricted to authorized personnel. 2. A cheque writer machine should be used to imprint the amount on the cheque in indelible ink. CONTROL OVER CASH DISBURSEMENTS

57.  Each cheque should be compared with the approved invoice before it is issued.  Following payment, the approved invoice should be stamped PAID. Paid CONTROL OVER CASH DISBURSEMENTS

58.  A petty cash fund is used to pay relatively small amounts.  Operation of the fund, often called an imprest system, involves 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund.  Accounting entries are required when 1. the fund is established, 2. the fund is replenished, and 3. the amount of the fund is changed. PETTY CASH FUND

59. ESTABLISHING THE FUND When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount. 100 100

60. REPLENISHING THE FUND On March 15 the petty cash custodian requests a cheque for $87. The fund contains $13 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 15Postage Expense Freight Out Miscellaneous Expense Cash To replenish petty cash fund. 44 38 5 87

61. REPLENISHING THE FUND On March 15 the petty cash custodian requests a cheque for $88. The fund contains $12 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 15Postage Expense Freight Out Miscellaneous Expense Cash Over and Short Cash To replenish petty cash fund/ 44 38 5 1 88

62.  The use of a bank minimizes the amount of currency that must be kept on hand and contributes significantly to good internal control over cash.  A company can safeguard its cash by using a bank as a depository and clearing house for cheques received and cheques written. USE OF A BANK

63. BANK STATEMENTS ACCOUNTW. A. LEE COMPANYStatement Date/Credit STATEMENT500 QUEEN STREETLine Closing Date FREDERICTON, NB, E3B 5C2April 30, 2003 457923 ACCOUNT NUMBER BalanceDeposits and CreditsCheques and DebitsBalance Last StatementNo.Total Amount This Statement 13,256.902034,805.102632,154.5515,907.45 DEPOSITS AND CHEQUES AND DEBITSCREDITSDAILY BALANCE DateNo.AmountDateAmountDateAmount 4-2435644.954-24,276.854-216,888.80 4-54363,260.004-32,137.504-318,249.65 4-44371,185.794-51,350.474-417,063.86 4-3438776.654-7982.464-515,154.33 4-84391,781.704-81,320.284-714,648.89 4-74401,487.904-9 CM1,036.004-811,767.47 4-84412,420.004-112,720.004-912,802.47 4-114421,585.604-12757.414-1113,936.87 4-124431,226.004-131,218.564-1213,468.28 ============================================ 4-29NSF425.604-271,545.574-2713,005.45 4-294591,080.304-292,929.454-2914,429.00 4-30DM30.004-302,128.604-3015,907.45 4-30461620.15 Symbols:CMCredit MemoECError CorrectionNSFNot Sufficient FundsReconcile Your DMDebit MemoINTInterest EarnedSCService ChargeAccount Promptly A bank statement shows: 1. cheques paid and other debits charged against the account 2. deposits and other credits made to the account 3. account balance after each day’s transactions A bank statement shows: 1. cheques paid and other debits charged against the account 2. deposits and other credits made to the account 3. account balance after each day’s transactions

64. RECONCILING THE BANK ACCOUNT  Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors.  A bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

65. Terms  Deposits in transit Deposits recorded by depositor that have not been recorded by bank  Outstanding cheques Cheques written (issued) and recorded by company that have not been presented to/paid by bank  Adjusted balance Reconciled or correct cash balance

66. Terms  Debit memoranda Charges against depositor’s account (e.g. service charges, RC (returned)/NSF (insufficient funds) cheques)  Credit memoranda Amounts that increase depositor’s account (e.g., interest earned)

67. Bank Reconciliation Procedures $ Per Bank Statement -outstanding cheques +deposits in transit +/- bank errors = correct cash amount $ Per Books -NSF cheques -cheque printing or other service charges +notes collected by bank +/- book errors = correct cash amount Illustration 8-11

68. Reconciling Journal Entries  Books Each reconciling item in determining the adjusted balance per books MUST be journalized and posted  Bank Do NOT journalize any entries on bank side

69.  Cash reported on the Balance Sheet includes: 1. Cash on hand 2. Cash in banks 3. Petty cash  Cash is listed first in the balance sheet because it is the most liquid asset. REPORTING CASH

70.  Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, that can be converted into a specific amount of cash.  Examples include money market funds, short-term notes, and treasury bills. CASH EQUIVALENTS

71. USING THE INFORMATION IN THE FINANCIAL STATEMENTS Most important asset Pervasive impact Vulnerable to theft or misuse Balancing act needed to ensure sufficient, but not excess, quantity

72. USING THE INFORMATION IN THE FINANCIAL STATEMENTS  Cash Flow Statement : shows where cash came from and what is was used for.  Management report: states management’s responsibility for internal controls.