The Financial Understanding of Different Financial Situations - Essay Example

Introduction The following in part solutions are the financial understanding of different financial situations occurring at a different period with different level company working area. In this paper, an idea of investment in other companies, importance of short-term investments, lease accounting, amortization schedule, revenue recognition at different points of recognizing, and company accounts are explained with the help of journal entries and amortization schedule. Part1 Investment in other companies Investments by the companies, give them a chance of increase their other income that will result in company’s growth. Other companies can reside their head offices in other foreign countries. Therefore, the investment in other companies can be beneficial for the company in a manner that, the interest rate paid on the investment can be higher than the company home place. In questions below, we will record the accounting impact of investments in other companies with the help of double general journal entries (Cespa, 2002). Q#1 Clarity Corporation Journal Entries: Anytime when a business does financial transactions, they record it with the help of a journal entry posted in the general journal under specific account heads of the transaction (Peavler, 2015). They are very important for keeping the records of the daily transactions done under the specific account head of the business. With the help of journal entries, the basic financial standing of the account head can be figured out. They also help the companies to monitor their cash-flow from the receivables and payables. They help business in accumulating a number of expenses done in a transaction. If the journal entries are not maintained, the finance department or the outside audit companies can be lost during the search of financial data to assert the income and its tax. Required#1: Journal entries Date Account heads Amount of $     Debit Credit 16-Feb Common stock 22,400     Brokerage fee 400     Cash   22,800   Narration: Purchased 800 shares at a price of $28 with $400 brokerage fee.             2-Mar Cash 760     Dividend receivable   760   Narration: Received $0.95 per share dividend.             28-Mar Cash 6,200     Brokerage fee   150   Common Stock   6,050   Narration: sales of 200 shares at $31 less $150 brokerage fee.             30-Jun Un-gained return on stocks 800     Common stock   800   Common stock 800     Un-gained return on stock   800   Narration to record the difference face in values of common stock due to the price change of shares.     Required#2: Short term investments are the part of current assets on the balance sheet as short-term investments are the part of the debt or equity. These investments are the investments made in deposit certificates, interest based bonds and high-value bonds. They are recorded at cost and are cost adjusted with respect to change in their market prices (Needles, Powers, & Crosson, 2012). They can easily be liquidated. Therefore with high level of liquidity, the short term investments can save the Clarity Corporation from being dissolvent i.e. they will be an un-gained income for the company and while calculating the total income, they will have a strong cash position with respect to their rivals in the market. With the strong cash position, the corporation can invest in those stocks and bonds that earn a high level of interest income from normal bonds and stocks. With higher interest incomes, company’s profit before tax increases exponentially. This will help the companies to grow and increase their overall operations at a better level as compared to earlier. Selecting and going with a correct short term investment strategy can also help the company in generating high revenues. These investments have a positive impact on the earnings of company i.e. earnings will be increased by the huge amount in a very short period in comparison of long-term investments. Question#2: Sydney Inc developed a major impact on Melbourne Inc. by purchasing their shares. The detail of purchase is explained in following entries. The following entries will simplify the cash flow of cash for the transactions done. Required: Journal entries Date Account heads Amount in $     Debit Credit 1/1/2014 purchase of outstanding stock 81,000     cash   81,000   Narration: to purchase the outstanding stock             6/15/2014 Retained earnings 36,000     Dividend payable   36,000   Dividend payable 36,000     cash   36,000   Narration: to record cash dividend paid             12/31/2014 Cash 85,000     Net income   85,000   Narration to record net income     Part 2 Lease Accounting: Lease accounting is done for measuring the impact of a legal document of renting an asset by one party (lessor) to other party (lessee) where lessor is the owner of asset and lessee obtain the right to use that asset (ACCA Global, 2015) In the question below, we generate the regular payment of lease and will develop an amortization table from it. In the end, some journal entries will be written to record inception of the lease, first and the third payment of the lease. Generally speaking, there are two types of the lease, capital lease, and operational lease. In a capital lease is the lease developed for leasing a capital asset. At the completion of the capital lease period, the ownership of the asset is transferred to the lessee (Scott, 2014). In operating lease, only the asset using rights are transferred to the lessee and at the end of the lease period, the ownership of the asset is not transferred. In the following question, the capital lease pattern is followed for lease accounting purposes. For solving the question, we first calculate the regular annual payments of Q#1 Diablo Company Required#1 Determine the amount of each lease payment The amount of each lease payment is $5275950. Required#2 Amortization Schedule An amortization schedule is a schedule that keeps a record of your loan payments. It shows the loan installment amount, the due date of the installment, payment amount breakdown, and balance of payments remaining after the loan installment is paid. Amortization Table Year Loan Installment Loan at beginning of year Interest on loan Principal repayment Principle outstanding at the end of year 1 4,796,318 20,000,000 - 4,796,318 15,203,682 2 4,796,318 15,203,682 1,520,368 3,275,950 11,927,733 3 4,796,318 11,927,733 1,192,773 3,603,545 8,324,188 4 4,796,318 8,324,188 832,419 3,963,899 4,360,289 5 4,796,318 4,360,289 436,029 4,360,289 0 Required#3 Journal entry at inception of lease Journal entry at time of inception of lease fixed asset 20,000,000   Lease liability   4,796,318 Cash   15,203,682 Required#4 Journal entry for first lease payment   Debit Credit Lease liability 4,796,318   Interest -   Cash   4,796,318 Narration: to record first installment of the lease. Required#5 Adjusting entries at the first-year end of lease   Debit Credit Rent expense 4,796,318   Rent Liability   4,796,318       Rent liability 4,796,318   Cash   4,796,318 Part 3 Revenue Recognition Revenue recognition in accounting is the conditions that specify the period for realizing the revenue. By doing revenue recognition, the company might be safe from the excessive cost or revenues. Q#1 Foster Company Required#1 Journal entries of 2013 and 2014 Point of delivery revenue recognition Date Account heads Amount in $     Debit Credit July 1 2013 cash 300,000     inventory sales   300,000 Required#2 Journal entries of 2013 and 2014 Installment sales method Date Account heads Amount in $     Debit Credit July 1 2013 Account receivable 300,000     Inventory sales   300,000   To record sales on account     July 1 2014 Down payment 75,000     First installment 75,000     Account receivable   150,000   To record, first installment was done     July 1, 2015 Second installment 75,000     Account receivable   75,000   To record second installment     July 1, 2016 Final installment 75,000     Account receivable   75,000   Narration: To record third and final installment     Required#3 Journal entries for the year 2013 and 2014 The cost recovery method. Date Account head amount in $     Debit Credit July 1, 2013 inventory 120,000     Cash   120,000   To purchase an inventory on cash       cash 300,000     inventory sales 300,000   sale of inventory on cash     July 1, 2014 profit or loss account 180,000     Retained earning   180,000   Narration: to record cost recovery and profit earned     Part 4 Company Accounting Company accounting is that branch of accounts which deals with the account of the company on the whole. Company accounting helps any person that is using the books of the company for grasping a first impression of the company’s current doings (Reid, & Myddelton, 1988). Company accounting also helps the Securities and Exchange Commission (SEC) of the country to calculate its worth and bring that company under the suitable tax head. Company accounting also helps the federal board of revenue for concerning the company as working company or dissolvent. Question#1 Required#1 Journal entries to record treasury stock transaction Stockholder equity Date Account Head Amount in $ 1-Mar Treasury Stock 170000 Cash 170000 Narration: purchased shares in cash 5-May Cash 64000 Treasury Stock sales 64000 Narration: to record sales 4000 shares at $16 per share 12-Oct Cash 36000 Treasury Stock sales 36000 To record sales of 2000 treasury stock Required#2 Stockholder Equity Stock Holder Equity Account heads Amount in $ Common Stock 4,000,000 Additional paid-in capital 1,200,000 Retained earning 1,600,000 Treasury stock (1,600,000) Stockholder equity 5,200,000 Question#2 Sand Corporation Required#1 Journal entries Date Account heads Amount in AED 1-Jan Cash 1,320,000 Common Stock 1,320,000 Narration: 40,000 shares of no par issued for cash. 10-Feb Building 600,000 Common stock 600,000 Narration: 10000 shares at par at $60 exchanged for a building. 20-Apr Service expense 66,000 Common stock 66,000 Narration: To record the lawyers service charges paid by issuing shares. 10-May Cash 1,200,000 Common stock 1,200,000 Narration: Issued 15,000 preferred shares at par for AED 60 Required#2 Company’s total contributed capital Contributed capital ($) 1,320,000 600,000 66,000 1,200,000     3,186,000 Conclusion This study helps in revising the concepts of general journal entries along with some other main concepts of accounting such as lease accounting and company accounting. In the conclusion of this study, it can be said that posting of journal entries for every financial transaction made in business is very important. Because, if the journal entries are not maintained, the finance department or the outside audit companies can be lost during the search of financial data for assert the income and its tax. The journal entries were recorded for the transactions done in the capital stocks of two companies. After that, Lease accounting was elaborated with respect to a lease of an asset. In leasing, the amount of regular payment was calculated, and after that a schedule showing the amortization of data was developed which describes the details of amortization of lease. In concluding the lease part, some journal entries were posted to record first and third payment of the lease. In the third part of the study, three methods of revenue recognition were elaborated by the help of posting journal entries, according to each recognition method. In fourth and final part of the study, company accounts were elaborated thoroughly with the help of journal entries, table of stockholder equities, and the T- account. References ACCA Global. (2015). Accounting For Leases. Retrieved June 8, 2015 from http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/accounting-for-leases.html Cespa, G. (2002). Short-term investment and equilibrium multiplicity. European Economic Review, 46(9), 1645-1670. Needles, B., Powers, M., & Crosson, S. (2012). Principles of accounting. Cengage Learning. Peavler, R. (2015). Accounting Journal Entries. Biz Finance, Retrieved June 8, 2015 from http://bizfinance.about.com/od/bookkeepingessentials/a/Accounting_Journal_Entries.htm Reid, W., & Myddelton, D. R. (1988). The meaning of company accounts (p. 351). Aldershot: Gower. Scott, W. R. (2014). Financial accounting theory. Pearson Education Canada. Read More