Account 242 – Prepaid expenses

1. Rules for accounting

a) This account is used to record expenses actually incurred but they are related to operation output of many accounting period and the transfer of these expenses to operating expenses of subsequent accounting periods.

b) Types of prepaid expenses include:

- Prepaid expenses of infrastructure lease or fixed assets operating lease (land use rights, factories, warehouses, offices, shops and other fixed assets) to serve operation in several accounting periods.

- Enterprise foundation expenses or advertising expenses incurred in before-operation stage shall be is allocated for within 3 years;

- Expenses incurred from insurance purchase (conflagration and explosive insurance, owner‘s transport facilities civil liability insurance, car body insurance, assets insurance), and charges which the enterprise buys and pays lump sum for many accounting periods.

- Tools and supplies, reusable packaging materials or instruments for renting relating to operation activities in many accounting periods;

- Prepaid loan‘s expenses, such as loan‘s prepaid interests or prepaid bond‘s interest at issuance time;

- Fixed assets major repairs expenses incurring one time which are not prepaid but allocated gradually for within 3 years;

- Negative difference between selling price and residual value of leased back fixed assets which is financial lease;

- Negative difference between selling price and residual value of leased back fixed assets which operating lease;

- In case business combination does not lead to parent company – subsidiaries relationship which creates goodwill or equitization of state-owned enterprise creates goodwill;

- Other prepaid expenses serving the operation of many accounting periods.

Research expenses and expenses incurred from development stage which is not recorded to intangible fixed asset or prepaid expenses shall be recorded to operating expenses.

c) The calculation and allocation of prepaid expenses to operating expenses for each accounting period must be based on nature and extent of each type of expenses to select appropriate method and criteria.

d) Each prepaid expense incurred shall be kept records in details, and allocated to objects subject to expenses of each accounting period and residual expenses, which have not been allocated to expenses.

dd) With regard to prepaid expenses in foreign currencies, at the report-preparing time, if it is evident that the seller is unable to provide goods or services and the enterprise shall definitely receive prepaid expenses in foreign currencies, they shall be considered accounts derived from foreign currencies and subject to re-evaluation according to the actual exchange rates at the reporting time (buying rate of the commercial bank where the enterprise regularly enters into transactions).

1. Structure and contents of account 242 – Prepaid expenses

Debit: Prepaid expenses incurred during a period.

Credit: Prepaid expenses included in operating expenses during a period.

Debit balance: Prepaid expenses not included in operating expenses during a period.

3. Method of accounting for several major transactions

a) When incurring prepaid expenses, which must be allocated gradually to operating expenses for many accounting periods, the following accounts shall be recorded:

Dr 242 – Prepaid expenses

Dr 133 – Deductible VAT (if any)

Cr 111, 112, 153, 331, 334, 338, etc.

When allocating prepaid expenses to operating expenses periodically, the following accounts shall be recorded:

Dr 623, 627, 635, 641, 642

Cr 242 – Prepaid expenses.

b) When prepaying fixed assets rent and infrastructure rent under operating lease, which used for operation for many accounting periods, the following accounts shall be recorded:

Dr 242 – Prepaid expenses

Dr 133 – Deductible VAT (if any)

Cr 111, 112, etc.

- If the input VAT is not deductible, the prepaid expenses shall include VAT.

c) With regard to tools and supplies, reusable packaging materials or instruments for renting related to operation in many accounting periods, when dispatching them for use or lease, the following accounts shall be recorded:

- When dispatching them for use or lease, the following accounts shall be recorded:

Dr 242 – Prepaid expenses

Cr 153—Tools and supplies.

- Periodically, the value of tools and supplies, reusable packaging materials or instruments for renting shall be dispatched from inventory according to appropriate criteria. The expenses are allocated for every accounting period according to useful life or volume of tools and supplies, reusable packaging materials or instruments for renting put into operation in every accounting period. When allocating, the following accounts shall be recorded:

Dr 623, 627, 641, 642, etc.

Cr 242 – Prepaid expenses.

d) Purchase of fixed assets and investment property under deferred or installment payment:

- When buying tangible or intangible fixed assets or investment property under deferred payment or installment payment, and putting them into operation, or held to capital appreciation or for operating lease, the following accounts shall be recorded:

Dr 211, 213, 217 (historical cost – according to cash price)

Dr 133 – Deductible VAT (if any)

Dr 242 - Prepaid expenses (deferred interests shall equal (=) total payment minus (-) cash price minus (-) VAT (if any))

Cr 331 – Trade payables (total payment)

- Periodically, when paying to the seller, the following accounts shall be recorded:

Dr 331 – Trade payables

Cr 111, 112 (periodical payables include principal and interests paid under deferred or instalment payment).

- Periodically, deferred interests or installment interests payables are charged to expenses as follows:

Dr 635 – Financial expenses

Cr 242 – Prepaid expenses.

dd) In case expenses incur from major repairs of fixed assets and the enterprise does not prepay such expenses, they shall be allocated gradually for many accounting periods when the major repairs are completed:

- When transferring expenses incurred from repair of fixed asset to prepaid expenses, the following accounts shall be recorded:

Dr 242 – Prepaid expenses.

Cr 241 – Construction in progress (2413).

- Periodically, when allocating expenses incurred from repair of fixed asset to operating expenses during a period, the following accounts shall be recorded:

Dr 623, 627, 641, 642, etc.

Cr 242 – Prepaid expenses.

e) The enterprise prepays interests to the lender:

- When prepaying interests, the following accounts shall be recorded:

Dr 242 – Prepaid expenses

Cr 111, 112.

- Periodically, when allocating interests under schedule to financial expenses or capitalizing such interests to the value of assets in progress, the following accounts shall be recorded:

Dr 635 – Financial expenses (if borrowings expenses are recorded to operating expenses during a period).

Dr 241 – Construction in progress (if borrowings expenses are capitalized to the value of assets in progress)

Dr 627 – Construction in progress (if borrowings expenses are capitalized to the value of assets in progress)

Cr 242 – Prepaid expenses.

g) When the enterprise issues bond at par value to mobilize loan capital, if business prepays bond‘s interests on issue date, the borrowing expenses shall be recorded to Dr 242 (prepaid bond interests in details), and allocated to expenses accounts.

- On the bond issue date, the following accounts shall be recorded:

Dr 111, 112 (total amounts of money collected)

Dr 242 – Prepaid expenses (prepaid bond interests in details)

Cr 34311 – Par value of bonds.

- Periodically, when allocating prepaid bond interests to borrowings expenses of each accounting period, the following accounts shall be recorded:

Dr 635 – Financial expenses (if borrowings expenses are recorded to financial expenses during a period).

Dr 241 – Construction in progress (if borrowings expenses are recorded to value of construction in progress)

Dr 627 – Factory overheads (if borrowings expenses are capitalized to assets in progress)

Cr 242 – Prepaid expenses (prepaid bond interests in details) (bond interests allocated during a period).

h) With regard to business combination does not lead to parent company – subsidiaries relationship (buying net asset) and their goodwill is created on the purchase date:

- If the trading in business combination is paid in cash by or cash equivalents, the following accounts shall be recorded:

Dr 131, 138, 152, 153, 155, 156, 211, 213, 217, etc (according to fair value of purchased assets)

Dr 242 – Prepaid expenses (goodwill in details)

Cr 331, 3411, etc (according to fair value of liabilities and potential debts)

Cr 111, 112, 121 (amounts of cash or cash equivalents paid by the purchaser).

- If the trading in business combination is carried out by the bond issuance of the buyer, the following accounts shall be recorded:

Dr 131, 138, 152, 153, 155, 156, 211, 213, 217, etc (according to fair value of purchased assets)

Dr 242 – Prepaid expenses (goodwill in details)

Dr 4112 – Capital surplus (the issue price is smaller than face price)

Cr 4111 – Owner's invested equity (according to face value)

Cr 331, 3411…, etc (according to fair value of liabilities and potential debts)

Cr 4112 – Capital surplus (the issue price is greater than the face price).

i) If the exchange difference losses are not fully allocated in the before-operation stage, the total accumulated losses shall be transferred from account 242 to account 635 – Financial expenses to determine the operation output during a period and the following accounts shall be recorded:

Dr 635 – Financial expenses

Cr 242 – Prepaid expenses.

k) When the assets are undergone physical inventory count at the time in which the enterprise is evaluated for equitization of wholly-state-owned enterprise, if the prepaid land rents not meet recognition of intangible fixed asset criteria, an increase in state capital shall be recorded as follows:

Dr 242 – Prepaid expenses

Cr 411 – Owner's invested equity.

1. l) When the assets are undergone physical inventory count at the time in which the enterprise is evaluated for equitization of wholly-state-owned enterprise, if the actual value of state capital is greater than their book value, the difference between them shall be recorded to goodwill as follows:

Dr 242 – Prepaid expenses

Cr 411 – Owner's invested equity.

m) The goodwill creating when equitization of state-owned enterprise is carried out shall be recorded to account 242 and allocated for within 3 years and the following accounts shall be recorded:

Dr 642 – General administration expenses

Cr 242 – Prepaid expenses.

Source: Circular 200