This page is designed to pass on some tricks and tips I have learned over years of experience with this class and the topic in general.  Most will be focused on helping you finish assignments.  Some will be designed to help you prepare for exams.

Accrual Adjustments

A common confusion around accrual basis income statements, as we teach them, centers around the inventory adjustment.  The question posed is: I am a bit confused with the inventories. How do you determine what is a positive and what is negative? Is the difference in head/AP/Accrued Interest what we need to put down (example the difference in cows is 20 head) or the entire heard multiplied by the dollar per unit? (sorry if this is confusing to explain in an email). 

Inventory adjustments are a tough idea to wrap your mind around.  My first suggestion is to make sure you read the chapter and watch the lecture.  Pay particular attention to slide 28.  Remember the logic is to align the revenue with when it was created, and to align the expenses it took to create the value. So yes mechanically (End # – Beginning #) x $value.  As an aside,(End # – Beginning #) x $value = $value x End# – $value x Beginning#.

The PDF at the link below has some scenarios I hope you find helpful when you have questions about accrual adjustments.

inventory_adjustments

Depreciation

Depreciation is a fun topic.  And it can be confusing.

Common questions include:

To calculate the value of the asset for the Jan 2019 Balance sheet we can simply use the 2018 ending book value correct? Or am I missing something between how this new value is a Mkt Value and the assignment calls for Cost value?  Or When an asset is sold within the year, do we account for the partial year depreciation of that year when calculating gain/loss?

For our purposes, the only change in book value will occur on December 31.

Why are principal payments not an expense!?!?

So this is where the depreciation we are learning this week comes into play. Principal payments can be thought of as a shuffle of money.

Let us say you purchase a tractor. $200k today. It gets delivered, $185k. You use it for 2 years, $150k. Then you trade it in. How much did that tractor cost you to own? If you expensed principal payments, it would be whatever principal was paid, but that has very little to do with your use of the tractor. If you expensed the entire purchase and the sale of it when you traded it, you would look like a terrible manager in the purchase year and an awesome manager in the sale year. So we expense capital assets through depreciation. If you are thinking money left my account! There is another statement for that. Remember the income statement is about the value created by the business.

Quick question. For our depreciation schedules are we calculating a 4 yr or 8 yr depreciation method? Also do we use the $14,000 salvage value for each method, except for when we change it to $30,000? Thanks for any help!

I am going to answer your question with questions :-).

 For our depreciation schedules are we calculating a 4 yr or 8 yr depreciation method?

Which is the useful life?  What does the financing have to do with useful life?

Also do we use the $14,000 salvage value for each method, except for when we change it to $30,000?

The scenario where Fran sells the trailer for $30k does not change the salvage value.  You need the correct book value to make that gain or loss calculation.

As I am starting assignment #4 I came across a few questions. I want to make sure that I am doing this right before I do the three methods of depreciation with the wrong numbers. Is the purchase price for this situation NUMBER, since you have to subtract the current price with the NUMBER dollars paid in cash? Also would my salvage value be $NUMBER? Also I don’t understand what I would need to do for the percentage of interest being 6.75% in each method? Thanks for your help!

Thinking about the lecture and the reading, what does the financing have to do with depreciation?

Loan Payment Schedules

Loan payment schedules are one of my favorite topics.

Oh my.  How do I get started?

I would start with a table.  Then I would put your beginning principal.  Remember that the bank always gets theirs first!  So, no matter the payment schedule, interest due gets paid first.

n=number of payments

i = interest rate

Equal Principal Payment

  • Date Int. Pmt. Principal Pmt (PPMT) Total Pmt Remaining Principal Optional Jan 1 Accrued
    10/15/16 beginning\:balance\:=\:\alpha
    10/15/17 i \times \alpha \\= ipmt_{17} \alpha \div n \\=ppmt_{17} ipmt_{17}+ ppmt_{17} \\ = tpmt_{17} \alpha - ppmt_{17}= \beta ipmt_{17} \times (2.5 \div 12)
    10/15/18 i \times \beta \\= ipmt_{18} \alpha \div n \\=ppmt_{18} ipmt_{18}+ ppmt_{18} \\ = tpmt_{18} \beta - ppmt_{18} = \gamma ipmt_{18} \times (2.5 \div 12)
    10/15/19 and so on….

    Equal Total Payment

    Date Int. Pmt. Principal Pmt (PPMT) Total Pmt Remaining Principal Optional Jan 1 Accrued
    10/15/16 beginning\:balance\:=\:\alpha
    10/15/17 i \times \alpha \\= ipmt_{17} tpmt_{17}-ipmt_{17} \\= ppmt_{17} use \ excel's \ pmt \ fn \\ = tpmt_{17} \alpha - ppmt_{17}= \beta ipmt_{17} \times (2.5 \div 12)
    10/15/18 i \times \beta \\= ipmt_{18} tpmt_{18}-ipmt_{18} \\= ppmt_{18} use \ excel's \ pmt \ fn \\ = tpmt_{18} \beta - ppmt_{18} = \gamma ipmt_{18} \times (2.5 \div 12)
    10/15/19 and so on….

    Okay.  So what?  What am I doing with this?

    If I were in your position I would think first about what we have on each of these statements.  I would then build a skeleton to keep track of my thoughts.  My skeleton here is by no means all-inclusive, so be sure you know what you need.

    Much of what you need is already done.  Just reference or adjust the appropriate values.

    Balance Sheet
    Liabilitities
    Current Liabilitiies
    Accrued Interest formula
    Non-Current Liabilities
    Principal Balance number or reference

    How do I find accrued interest for Jan 1, 2020?  How did you find interest for Jan 1, 2017?

    We need the interest that has accrued since the last payment (10/15/19) on Jan 1.  The interest that is due to be paid on 10/15/20 started accruing on 10/16/19 (the day after the last payment).

    What about the income statement?  

    Let’s see the income statement is a summary statement across a period of time.  So you will be able to find that.  Half of the work for the change in accrued interest is already done.

    Income Statement
    Expenses
    Interest Expense number
    Chg. in Accrued Int. formula
    Total Int. Exp formula

    I guess I’m a little confused?? When trying to figure accrued interest as of January 1, 2017 on the 6 year equal payment and equal principle loan, and the loan starts on October 15, 2016, we have not even made our first annual payment, so how do we figure that, or am i not looking at this correctly???

    Interest starts accruing as the ink on the note is drying.  So loan was originated on October 15 and interest started accruing that day.  So on January 1 Juan owes the bank money for interest.

    I could use some guidance on assignment 5. Everything has been going smoothly, until I got to the part of the assignment where it asks me to equal total monthly payment schedule. For some reason I can’t get it to come out to 0 in the end. I’ve double and triple checked everything, and would really appreciate some tips! 

    Typically, when I see this happening there are a few places I check.

    1. Make sure you are dividing the interest rate by 12 to get the monthly rate in both the payment formula and in the calculation for the interest payment.
    2. Make sure that you are only subtracting principal payments when determining the remaining principal balance.
    3. Make sure the principal payment is only what is left after interest is paid.
    4. Make sure that your formulas are consistent.  I would make sure my top row of formulas (so the row with the first payment) was rock solid with absolute and relative references where they need to be and then copy that down to the end.
    5. If all else fails delete the formula and rewrite it. You’d be surprised how often you read past mistakes.