+------------------------------------------------------+---------------+
|                                                      | **Page No.**  |
+------------------------------------------------------+---------------+
| **BORROWED FUNDS**                                   | **5**         |
+------------------------------------------------------+---------------+
| > ***NOTES PAYABLE***                                | **5**         |
+------------------------------------------------------+---------------+
| **Notes Payable-Other**                              | **5**         |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***5***       |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***6***       |
+------------------------------------------------------+---------------+
| ***Subsidiary of General Ledger Account***           | ***6***       |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***6***       |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***6***       |
+------------------------------------------------------+---------------+
| > ***CERTIFICATES OF INDEBTEDNESS***                 | **6**         |
+------------------------------------------------------+---------------+
| > ***PROMISSORY NOTES***                             | **6**         |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***7***       |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***7***       |
+------------------------------------------------------+---------------+
| > ***MORTGAGES PAYABLE***                            | **7**         |
+------------------------------------------------------+---------------+
| **Mortgage Notes Payable**                           | **7**         |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***7***       |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***7***       |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***7***       |
+------------------------------------------------------+---------------+
| > ***OBLIGATIONS UNDER CAPITAL LEASES***             | **7**         |
+------------------------------------------------------+---------------+
| > ***FEDERAL FUNDS PAYABLE***                        | **8**         |
+------------------------------------------------------+---------------+
| **Federal Funds Purchased**                          | **8**         |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***8***       |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***8***       |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***8***       |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***8***       |
+------------------------------------------------------+---------------+
| > ***LETTERS OF CREDIT***                            | **8**         |
+------------------------------------------------------+---------------+
| > ***REVERSE-REPURCHASE AGREEMENTS***                | **8**         |
+------------------------------------------------------+---------------+
|                                                      |               |
+------------------------------------------------------+---------------+
| **ACCRUED INTEREST PAYABLE**                         | **8**         |
+------------------------------------------------------+---------------+
| **Dividends Payable**                                | **9**         |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***9***       |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***9***       |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***10***      |
+------------------------------------------------------+---------------+
| ***Dividend Calculation Methods***                   | ***10***      |
+------------------------------------------------------+---------------+
| ***Dividend Periods***                               | ***12***      |
+------------------------------------------------------+---------------+
| ***Dividend Declaration Dates***                     | ***13***      |
+------------------------------------------------------+---------------+
| ***Compounding Periods***                            | ***13***      |
+------------------------------------------------------+---------------+
| ***Crediting Periods***                              | ***14***      |
+------------------------------------------------------+---------------+
| ***Dividend Distribution Dates***                    | ***14***      |
+------------------------------------------------------+---------------+
| ***Daily Rates***                                    | ***14***      |
+------------------------------------------------------+---------------+
| ***Dividend Credit Determination Dates (When a       | ***14***      |
| Share***                                             |               |
|                                                      |               |
| ***Purchase Begins Earning Dividend Credit)***       |               |
+------------------------------------------------------+---------------+
| ***Minimum Balances Associated with Dividends***     | ***15***      |
+------------------------------------------------------+---------------+
| ***Dividend Reductions and Penalties***              | ***16***      |
+------------------------------------------------------+---------------+
| ***Dividend Entitlement on Closed Accounts***        | ***16***      |
+------------------------------------------------------+---------------+
| ***Withdrawal of Funds***                            | ***17***      |
+------------------------------------------------------+---------------+
| ***Dividend Accrual***                               | ***17***      |
+------------------------------------------------------+---------------+
| ***Term Share Account Dividend Rate***               | ***17***      |
+------------------------------------------------------+---------------+
| ***Determining Maximum Dividend Rate***              | ***18***      |
+------------------------------------------------------+---------------+
| ***Methods of Distribution and Use of Dividend       | ***18***      |
| Record for***                                        |               |
|                                                      |               |
| ***Hand Posted Credit Unions***                      |               |
+------------------------------------------------------+---------------+
| ***Reporting Dividends to Internal Revenue           | ***19***      |
| Service***                                           |               |
+------------------------------------------------------+---------------+
| ***Annual Percentage Yield (APY)***                  | ***19***      |
+------------------------------------------------------+---------------+
| ***Dividend Formulas in Determining Dividends Using  | ***19***      |
| the***                                               |               |
|                                                      |               |
| ***APY Calculation***                                |               |
+------------------------------------------------------+---------------+
| ***Examples of Dividend Calculations in              | ***20***      |
| Determining***                                       |               |
|                                                      |               |
| ***Dividends Used in the APY Calculation***          |               |
+------------------------------------------------------+---------------+
| ***Rounding Rules for Dividends Used in the APY***   | ***23***      |
|                                                      |               |
| ***Calculation***                                    |               |
+------------------------------------------------------+---------------+
| ***APY Formula***                                    | ***23***      |
+------------------------------------------------------+---------------+
| ***APY Calculation***                                | ***23***      |
+------------------------------------------------------+---------------+
| ***APY Calculation for a Non-Term Share Account***   | ***24***      |
+------------------------------------------------------+---------------+
| ***APY Calculation for a Term Share Account***       | ***24***      |
+------------------------------------------------------+---------------+
| ***Short-Cuts to the APY Calculation***              | ***25***      |
+------------------------------------------------------+---------------+
| ***APY Calculation for a Stepped Rate Account***     | ***26***      |
+------------------------------------------------------+---------------+
| ***APY Calculation for a Tiered Rate Account***      | ***28***      |
+------------------------------------------------------+---------------+
| ***APY Calculation for a Non-compounding             | ***29***      |
| Multi-Year***                                        |               |
|                                                      |               |
| ***Term Share Account***                             |               |
+------------------------------------------------------+---------------+
| ***Rounding and Accuracy Rules for the APY***        | ***30***      |
+------------------------------------------------------+---------------+
| ***Annual Percentage Yield Earned (APYE)***          | ***30***      |
+------------------------------------------------------+---------------+
| ***Rounding Rules for Dividends Used in the APYE***  | ***31***      |
|                                                      |               |
| ***Calculation***                                    |               |
+------------------------------------------------------+---------------+
| ***APYE Formula***                                   | ***31***      |
+------------------------------------------------------+---------------+
| ***Average Daily Balance Calculation***              | ***31***      |
+------------------------------------------------------+---------------+
| ***APYE Calculation***                               | ***32***      |
+------------------------------------------------------+---------------+
| ***Special APYE Formula***                           | ***33***      |
+------------------------------------------------------+---------------+
| ***Special APY Calculation***                        | ***34***      |
+------------------------------------------------------+---------------+
| ***Dividend Period Length Versus Statement Period    | ***35***      |
| Length***                                            |               |
|                                                      |               |
| ***For the APYE***                                   |               |
+------------------------------------------------------+---------------+
| ***APYE Requirements When the Collected Balance***   | ***36***      |
|                                                      |               |
| ***Method is Used to Accrue and Pay Dividends***     |               |
+------------------------------------------------------+---------------+
| ***APYE on Closed Accounts***                        | ***36***      |
+------------------------------------------------------+---------------+
| ***Rounding and Accuracy Rules for the APYE***       | ***36***      |
+------------------------------------------------------+---------------+
| **Interest Refunds Payable**                         | **37**        |
+------------------------------------------------------+---------------+
| ***Computation and Distribution of Interest          | ***37***      |
| Refunds***                                           |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***38***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***38***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***38***      |
+------------------------------------------------------+---------------+
| **Alternative Interest Refund Procedures**           | **38**        |
+------------------------------------------------------+---------------+
| ***First Alternative***                              | ***39***      |
+------------------------------------------------------+---------------+
| ***Second Alternative***                             | ***39***      |
+------------------------------------------------------+---------------+
| **Accrued Interest Payable (on Borrowed Funds)**     | **39**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***39***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***39***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***39***      |
+------------------------------------------------------+---------------+
|                                                      |               |
+------------------------------------------------------+---------------+
| **ACCRUED EXPENSES AND OTHER LIABILITIES**           | **40**        |
+------------------------------------------------------+---------------+
| > ***ACCOUNTS PAYABLE***                             | **40**        |
+------------------------------------------------------+---------------+
| #######  Accounts Payable                            | **40**        |
+------------------------------------------------------+---------------+
| ###                                                  | ***40***      |
|   Invoices for Which Prompt Payment Will Not Be Made |               |
+------------------------------------------------------+---------------+
| ***Cash Advances***                                  | ***40***      |
+------------------------------------------------------+---------------+
| ###  Unpresented Checks                              | ***40***      |
+------------------------------------------------------+---------------+
| ***Accounts of Deceased or Terminated Members***     | ***40***      |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***41***      |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***41***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***41***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***41***      |
+------------------------------------------------------+---------------+
| **Accounts Payable - Traveler's Checks And Money     | **41**        |
| Orders Sold**                                        |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***41***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***41***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-Undistributed Payments**          | **42**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***42***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***42***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***42***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-Undistributed Payroll Deductions  | **43**        |
| or Allotments**                                      |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***43***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***43***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***43***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-Check Transmittal Service**       | **43**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***43***      |
+------------------------------------------------------+---------------+
| ***Subsidiary Accounts Payable Record***             | ***43***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***44***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***44***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-Drafts Authorized**               | **44**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***44***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***44***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-Installment Payments on US        | **44**        |
| Bonds**                                              |               |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***45***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***45***      |
+------------------------------------------------------+---------------+
| **Accounts Payable-U.S. Savings Bond Remittances**   | **45**        |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***45***      |
+------------------------------------------------------+---------------+
| **Notes Payable Commitment Fees**                    | **46**        |
+------------------------------------------------------+---------------+
| **Taxes Payable**                                    | **46**        |
|                                                      |               |
| **Federal Withholding Taxes Payable**                | **46**        |
|                                                      |               |
| **State Withholding Taxes Payable**                  | **46**        |
|                                                      |               |
| **City Withholding Taxes Payable**                   | **46**        |
+------------------------------------------------------+---------------+
| ###  Employee Withholding Exemption Certificate      | ***46***      |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***46***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***46***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***47***      |
+------------------------------------------------------+---------------+
| **Social Security Taxes Payable**                    | **47**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***47***      |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***47***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***47***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***48***      |
+------------------------------------------------------+---------------+
| **Federal Unemployment Compensation Tax Payable and  | **48**        |
| State Unemployment Compensation Tax Payable**        |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***48***      |
+------------------------------------------------------+---------------+
| ***Posting to the General Ledger***                  | ***49***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***49***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***49***      |
+------------------------------------------------------+---------------+
| **Other Taxes Payable**                              | **49**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***49***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***49***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***49***      |
+------------------------------------------------------+---------------+
| > ***ACCRUED EXPENSES***                             | **50**        |
+------------------------------------------------------+---------------+
| **Accrued Salaries**                                 | **50**        |
+------------------------------------------------------+---------------+
| **Accrued Employee Benefits**                        | **50**        |
+------------------------------------------------------+---------------+
| ***Accounting for Compensated Absence***             | ***50***      |
+------------------------------------------------------+---------------+
| **Accrued Cost of Space Occupied**                   | **50**        |
+------------------------------------------------------+---------------+
| **Accrued Dividends Payable**                        | **50**        |
+------------------------------------------------------+---------------+
| **Accrued Accounting Service Cost**                  | **50**        |
+------------------------------------------------------+---------------+
| **Other Accrued Expenses**                           | **51**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***51***      |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***51***      |
+------------------------------------------------------+---------------+
| ***Detailed Transactions***                          | ***51***      |
+------------------------------------------------------+---------------+
| > ***BORROWERS' TAXES AND INSURANCE ESCROWS***       | **51**        |
+------------------------------------------------------+---------------+
| **Escrow Accounts**                                  | **51**        |
+------------------------------------------------------+---------------+
| > ***OTHER LIABILITIES***                            | **52**        |
+------------------------------------------------------+---------------+
| **Other Liabilities**                                | **52**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***52***      |
+------------------------------------------------------+---------------+
| ###  Postings to the General Ledger                  | ***52***      |
+------------------------------------------------------+---------------+
| **Liability Under Pension Cost**                     | **52**        |
+------------------------------------------------------+---------------+
| **Undisbursed Loan Proceeds**                        | **52**        |
+------------------------------------------------------+---------------+
| **Subordinated CDCU Debt**                           | **52**        |
+------------------------------------------------------+---------------+
| ***Illustrative Entries***                           | ***52***      |
+------------------------------------------------------+---------------+
| > ***DEFERRED CREDITS***                             | **54**        |
+------------------------------------------------------+---------------+
| **Unearned Interest on Loans**                       | **54**        |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***54***      |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***54***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***54***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***54***      |
+------------------------------------------------------+---------------+
| **Deferred Credits---Insurance Premium Rebate**      | **55**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***55***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***55***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***55***      |
+------------------------------------------------------+---------------+
| **Unamortized Discount on Sale of Assets**           | **56**        |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***56***      |
+------------------------------------------------------+---------------+
| **Deferred Credits-Insurance Premium Stabilization   | **57**        |
| Reserve**                                            |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***57***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***57***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***57***      |
+------------------------------------------------------+---------------+
| **Other Deferred Credits**                           | **58**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***58***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***58***      |
+------------------------------------------------------+---------------+
| **Deferred Credits-Net Origination Fees              | **58**        |
| (Costs)-Lines of Credit to Members**                 |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***58***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***58***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***58***      |
+------------------------------------------------------+---------------+
| **Deferred Credits-Net Origination Fees (Costs)-Home | **59**        |
| Equity Lines of Credit**                             |               |
+------------------------------------------------------+---------------+
| **Deferred Credits-Net Commitment Fees (Costs)-Lines | **59**        |
| of Credit to Members**                               |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***59***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***59***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***60***      |
+------------------------------------------------------+---------------+
| **Deferred Credits-Net Commitment Fees (Costs)-Loans | **60**        |
| to Members**                                         |               |
+------------------------------------------------------+---------------+
| > ***SUSPENSE ACCOUNTS***                            | **60**        |
+------------------------------------------------------+---------------+
| **Unapplied Data Processing Exceptions**             | **60**        |
+------------------------------------------------------+---------------+
| **Unapplied Data Processing Exceptions (Receipts)**  | **60**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***61***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***61***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***61***      |
+------------------------------------------------------+---------------+
| **Unapplied Data Processing Exceptions               | **61**        |
| (Disbursements)**                                    |               |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***61***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***61***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***61***      |
+------------------------------------------------------+---------------+
|                                                      |               |
+------------------------------------------------------+---------------+
| **COMMITMENTS AND CONTINGENT LIABILITIES**           | **62**        |
+------------------------------------------------------+---------------+
| **Accrued Loss Contingencies**                       | **62**        |
+------------------------------------------------------+---------------+
| ###  Entries in the Journal and Cash Record          | ***62***      |
+------------------------------------------------------+---------------+
| ###  Illustrative Entries                            | ***62***      |
+------------------------------------------------------+---------------+
| ###  Detailed Transactions                           | ***62***      |
+------------------------------------------------------+---------------+

**LIABILITY ACCOUNTS**

Every liability account should be supported by subsidiary ledgers for
each payable item in the accounts. These subsidiary ledgers should
reflect the initial credit to the account, date established, periodic
debits and the remaining balance of each item in the particular General
Ledger control accounts. These subsidiary ledgers need to be totaled and
balanced to the respective General Ledger control accounts each month.
For example, assume that \"Accrued Expenses\" has a month-end balance of
\$4,300 due to the accrual of salary expense not yet paid and employee
benefits not yet paid. The subsidiary ledger balance for \"Accrued
Salaries\" totals \$2,600 and the subsidiary ledger for \"Accrued
Employee Benefits\" (including sick leave, annual leave, etc.) total
\$1,700. These subsidiary ledgers, when totaled, balance to the General
Ledger control for \"Accrued Expenses\".

**BORROWED FUNDS**

***NOTES PAYABLE***

**Notes Payable-Other**

This account reflects the liability of the credit union for funds
borrowed. Such borrowings must be in accordance with the Federal Credit
Union Act.

## **Entries in the Journal and Cash Record**

This account is credited as a \"Miscellaneous-Credit" with the amount of
notes payable which have been executed and delivered to creditors,
including notes to other credit unions. The account is debited as a
\"Miscellaneous-Debit\" when the liability is wholly or partially
liquidated.

## **Posting to the General Ledger**

The debit and credit items to this account entered as \"Miscellaneous\"
in the Journal and Cash Record are posted individually to the General
Ledger. Each note and any payments thereon should be specifically
identified in the \"Explanatory Remarks\" column.

## **Subsidiary of General Ledger Account**

If the credit union borrows funds from two or more sources, it should
maintain subsidiary records that clearly identify transactions for each
Note Payable. If subsidiary records are maintained, it will not be
necessary to complete the \"Explanatory Remarks\" column of the General
Ledger account.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When the credit union executes and delivers a note payable to
    others:

  ---------- ------------------------------------- ---------- ------------------
  Dr.-Cash                                         \$3,000    

             Cr.-Notes Payable-Other                          \$3,000
  ---------- ------------------------------------- ---------- ------------------

b)  To record principal and interest payments made to liquidate notes
    payable:

+---+--------------------------------------+--------+------------------+
| D |                                      | \      |                  |
| r |                                      | $1,000 |                  |
| . |                                      |        |                  |
| - |                                      |        |                  |
| N |                                      |        |                  |
| o |                                      |        |                  |
| t |                                      |        |                  |
| e |                                      |        |                  |
| s |                                      |        |                  |
| P |                                      |        |                  |
| a |                                      |        |                  |
| y |                                      |        |                  |
| a |                                      |        |                  |
| b |                                      |        |                  |
| l |                                      |        |                  |
| e |                                      |        |                  |
| - |                                      |        |                  |
| O |                                      |        |                  |
| t |                                      |        |                  |
| h |                                      |        |                  |
| e |                                      |        |                  |
| r |                                      |        |                  |
+---+--------------------------------------+--------+------------------+
| D |                                      | 30     |                  |
| r |                                      |        |                  |
| . |                                      |        |                  |
| - |                                      |        |                  |
| I |                                      |        |                  |
| n |                                      |        |                  |
| t |                                      |        |                  |
| e |                                      |        |                  |
| r |                                      |        |                  |
| e |                                      |        |                  |
| s |                                      |        |                  |
| t |                                      |        |                  |
| o |                                      |        |                  |
| n |                                      |        |                  |
| B |                                      |        |                  |
| o |                                      |        |                  |
| r |                                      |        |                  |
| r |                                      |        |                  |
| o |                                      |        |                  |
| w |                                      |        |                  |
| e |                                      |        |                  |
| d |                                      |        |                  |
|   |                                      |        |                  |
| M |                                      |        |                  |
| o |                                      |        |                  |
| n |                                      |        |                  |
| e |                                      |        |                  |
| y |                                      |        |                  |
+---+--------------------------------------+--------+------------------+
|   | Cr.-Cash                             |        | \$1,030          |
+---+--------------------------------------+--------+------------------+

c)  When the credit union borrows money on its note and interest is
    deducted in advance by the creditor (1-year note at 10 percent):

+---+---------------------------------------+------+------------------+
| D |                                       | \    |                  |
| r |                                       | $900 |                  |
| . |                                       |      |                  |
| - |                                       |      |                  |
| C |                                       |      |                  |
| a |                                       |      |                  |
| s |                                       |      |                  |
| h |                                       |      |                  |
+---+---------------------------------------+------+------------------+
| D |                                       | >    |                  |
| r |                                       |  100 |                  |
| . |                                       |      |                  |
| - |                                       |      |                  |
| I |                                       |      |                  |
| n |                                       |      |                  |
| t |                                       |      |                  |
| e |                                       |      |                  |
| r |                                       |      |                  |
| e |                                       |      |                  |
| s |                                       |      |                  |
| t |                                       |      |                  |
| o |                                       |      |                  |
| n |                                       |      |                  |
| B |                                       |      |                  |
| o |                                       |      |                  |
| r |                                       |      |                  |
| r |                                       |      |                  |
| o |                                       |      |                  |
| w |                                       |      |                  |
| e |                                       |      |                  |
| d |                                       |      |                  |
|   |                                       |      |                  |
| M |                                       |      |                  |
| o |                                       |      |                  |
| n |                                       |      |                  |
| e |                                       |      |                  |
| y |                                       |      |                  |
+---+---------------------------------------+------+------------------+
|   | Cr.- Notes Payable-Other              |      | \$1,000          |
+---+---------------------------------------+------+------------------+
|   |                                       |      |                  |
+---+---------------------------------------+------+------------------+

***Detailed Transactions***

Credit:

a)  With principal amounts of notes payable issued.

Debit:

a.  With principal repayments made to liquidate notes payable.

***CERTIFICATES OF INDEBTEDNESS***

#### PROMISSORY NOTES

Some credit unions borrow money from members or nonmembers and issue
promissory notes, formerly called certificates of indebtedness or a
similar name. Issuance of promissory notes is governed by Section 701.38
of the NCUA Rules and Regulations. The offering of promissory notes will
necessitate the maintenance of a subsidiary ledger. If the note provides
for payment of interest less frequently than the credit union\'s
accounting period, consideration should be given to accruing the
interest not less frequently than the end of each accounting period so
that the cost of the borrowed money can be allocated to the periods
during which the expense is incurred. The accruals should be recorded as
\"Accrued Interest Payable\". Among the items to be considered for
inclusion on the note are:

-   Certificate number, pre-numbered for control purposes.

-   Date of issue.

-   Credit union name and location, and name and address of lender.

-   Amount of the certificate or space to record the amount.

-   Interest rate and method and time of payment of interest. Also,
    whether there would be any penalty for early redemption and whether
    interest will continue to accrue after maturity.

-   Maturity date. Conditions for early redemption, including but not
    limited to where and how it may be redeemed.

-   Provisions for signature of the treasurer and countersignature of
    the president.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When the credit union executes and delivers a promissory note
    payable to others:

  ---------- ------------------------------- --------------- --------------------
  Dr.-Cash                                   \$25,000        

             Cr.-Notes Payable- Promissory                   \$25,000
             Note Payable                                    
  ---------- ------------------------------- --------------- --------------------

b)  To record principal and interest payments made to liquidate a
    promissory note payable:

+---+--------------------------------------+--------+------------------+
| D |                                      | \$400  |                  |
| r |                                      |        |                  |
| . |                                      |        |                  |
| - |                                      |        |                  |
| N |                                      |        |                  |
| o |                                      |        |                  |
| t |                                      |        |                  |
| e |                                      |        |                  |
| s |                                      |        |                  |
| P |                                      |        |                  |
| a |                                      |        |                  |
| y |                                      |        |                  |
| a |                                      |        |                  |
| b |                                      |        |                  |
| l |                                      |        |                  |
| e |                                      |        |                  |
| - |                                      |        |                  |
|   |                                      |        |                  |
| P |                                      |        |                  |
| r |                                      |        |                  |
| o |                                      |        |                  |
| m |                                      |        |                  |
| i |                                      |        |                  |
| s |                                      |        |                  |
| s |                                      |        |                  |
| o |                                      |        |                  |
| r |                                      |        |                  |
| y |                                      |        |                  |
| N |                                      |        |                  |
| o |                                      |        |                  |
| t |                                      |        |                  |
| e |                                      |        |                  |
| P |                                      |        |                  |
| a |                                      |        |                  |
| y |                                      |        |                  |
| a |                                      |        |                  |
| b |                                      |        |                  |
| l |                                      |        |                  |
| e |                                      |        |                  |
+---+--------------------------------------+--------+------------------+
| D |                                      | 84     |                  |
| r |                                      |        |                  |
| . |                                      |        |                  |
| - |                                      |        |                  |
| I |                                      |        |                  |
| n |                                      |        |                  |
| t |                                      |        |                  |
| e |                                      |        |                  |
| r |                                      |        |                  |
| e |                                      |        |                  |
| s |                                      |        |                  |
| t |                                      |        |                  |
| o |                                      |        |                  |
| n |                                      |        |                  |
| B |                                      |        |                  |
| o |                                      |        |                  |
| r |                                      |        |                  |
| r |                                      |        |                  |
| o |                                      |        |                  |
| w |                                      |        |                  |
| e |                                      |        |                  |
| d |                                      |        |                  |
|   |                                      |        |                  |
| M |                                      |        |                  |
| o |                                      |        |                  |
| n |                                      |        |                  |
| e |                                      |        |                  |
| y |                                      |        |                  |
+---+--------------------------------------+--------+------------------+
|   | Cr.-Cash                             |        | \$484            |
+---+--------------------------------------+--------+------------------+
|   |                                      |        |                  |
+---+--------------------------------------+--------+------------------+

***Detailed Transactions***

Credit:

a)  With principal amounts of promissory notes payable issued.

Debit:

a)  With principal repayments made to liquidate promissory notes
    payable.

#### MORTGAGES PAYABLE

**Mortgage Notes Payable**

This account reflects the unpaid principal balance of mortgage loans
owed by the credit union and secured by real estate owned by the credit
union.

Upon acquisition of real estate, the amount of any mortgage loan should
be recorded in this account. As periodic payments are made, this account
should be debited for the principal amounts paid.

***Entries in the Journal and Cash Record***

All entries affecting this account should be entered as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When real estate is acquired subject to a mortgage loan. Assume the
    purchase of real estate for \$60,000, with land value at \$15,000,
    cash paid of \$20,000, and mortgage note payable of \$40,000:

  -------------- ------------------------------- ----------------- -----------------
  Dr.-Land                                       \$15,000          

  Dr.-Building                                   45,000            

                 Cr.-Cash                                          \$20,000

                 Cr.-Mortgage Notes Payable                        40,000
  -------------- ------------------------------- ----------------- -----------------

b)  When monthly payments are made in settlement of each mortgage
    installment:

  -------------- ----------------------------------------- ---------- ---------------
  Dr.-Interest                                             \$275.00   
  on Borrowed                                                         
  Money                                                               

  Dr.-Mortgage                                             83.33      
  Note Payable                                                        

                 Cr.-Cash                                             \$358.33

                                                                      
  -------------- ----------------------------------------- ---------- ---------------

***Detailed Transactions***

Credit:

a)  With principal amount of mortgage notes payable when the liability
    is incurred.

Debit:

a)  With amounts of principal payments to reduce (liquidate) the
    liability recorded in this account.

***OBLIGATIONS UNDER CAPITAL LEASES***

This account is used to record the liability that arises from a lease
that is classified as a capital lease. In general, a lease that
transfers substantially all the benefits and risks inherent in the
ownership of property qualifies as a capital lease. Such leases should
be accounted for by the lessee as the acquisition of an asset and the
incurrence of a liability. For additional guidance and accounting
procedures for \"Capital Leases\", consult an independent accountant.

***FEDERAL FUNDS PAYABLE***

**Federal Funds Purchased**

This account is used to record borrowed Federal Funds. Federal funds
purchased generally consist of 1-day loans that are in the form of
balances at (or checks drawn on) Federal Reserve banks. They are loans
of superior money or bank reserves, as compared to the ordinary money or
deposits at commercial banks. A credit union\'s management must be
willing, however, to meet the interest rates determined each day by the
Federal Funds market.

Total borrowings must not exceed 50 percent of the federal credit
union\'s paid-in and unimpaired capital (Section 107(9) of the Federal
Credit Union Act).

***Entries in the Journal and Cash Record***

This account is credited as \"Miscellaneous-Credit\" with the amount of
notes payable which have been executed and delivered to creditors,
including notes to other credit unions. The account is debited in as
\"Miscellaneous-Debit\" when the liability is wholly or partially
liquidated.

## **Posting to the General Ledger**

The debit and credit items to this account entered as \"Miscellaneous\"
in the Journal and Cash Record are posted individually to the General
Ledger. Each borrowing and any payments thereon should be specifically
identified in the \"Explanatory Remarks\".

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record borrowed Fed Funds:

  ---------- ---------------------------- ------------------ --------------------
  Dr.-Cash                                \$50,000           

             Cr.-Fed Funds Payable                           \$50,000
  ---------- ---------------------------- ------------------ --------------------

b)  To record the repayment of borrowed Fed Funds and one day's interest
    @ 10%:

+---+---------------------------------+-----------+-------------------+
| D |                                 | \$        |                   |
| r |                                 | 50,000.00 |                   |
| . |                                 |           |                   |
| - |                                 |           |                   |
| F |                                 |           |                   |
| e |                                 |           |                   |
| d |                                 |           |                   |
| F |                                 |           |                   |
| u |                                 |           |                   |
| n |                                 |           |                   |
| d |                                 |           |                   |
| s |                                 |           |                   |
| P |                                 |           |                   |
| a |                                 |           |                   |
| y |                                 |           |                   |
| a |                                 |           |                   |
| b |                                 |           |                   |
| l |                                 |           |                   |
| e |                                 |           |                   |
+---+---------------------------------+-----------+-------------------+
| D |                                 | 13.70     |                   |
| r |                                 |           |                   |
| . |                                 |           |                   |
| - |                                 |           |                   |
| O |                                 |           |                   |
| t |                                 |           |                   |
| h |                                 |           |                   |
| e |                                 |           |                   |
| r |                                 |           |                   |
| I |                                 |           |                   |
| n |                                 |           |                   |
| t |                                 |           |                   |
| e |                                 |           |                   |
| r |                                 |           |                   |
| e |                                 |           |                   |
| s |                                 |           |                   |
| t |                                 |           |                   |
| o |                                 |           |                   |
| n |                                 |           |                   |
|   |                                 |           |                   |
| B |                                 |           |                   |
| o |                                 |           |                   |
| r |                                 |           |                   |
| r |                                 |           |                   |
| o |                                 |           |                   |
| w |                                 |           |                   |
| e |                                 |           |                   |
| d |                                 |           |                   |
| M |                                 |           |                   |
| o |                                 |           |                   |
| n |                                 |           |                   |
| e |                                 |           |                   |
| y |                                 |           |                   |
+---+---------------------------------+-----------+-------------------+
|   | Cr.-Cash                        |           | \$50,013.70       |
+---+---------------------------------+-----------+-------------------+
|   |                                 |           |                   |
+---+---------------------------------+-----------+-------------------+

***Detailed Transactions***

Credit:

a)  With principal amounts of notes payable issued.

Debit:

a)  With principal repayments made to liquidate notes payable.

***LETTERS OF CREDIT***

Letters of credit (often referred to as "standby credits") are versatile
instruments commonly used as a type of guarantee. They are often used in
lieu of surety-ship contracts and arrangements that call for some
guarantee of performance or payment. Further discussion of this topic is
outside the scope of this manual. Credit unions involved in issuing
letters of credit should seek the guidance of an independent accountant.

***REVERSE REPURCHASE AGREEMENTS***

Reverse repurchase agreements are agreements to sell and repurchase
identical securities within a specified time at a specified price. This
agreement represents an uninsured borrowing. Refer to the "Investments"
section of this manual for further

explanation and illustrative entries.

**ACCRUED INTEREST PAYABLE**

Accrued interest payable is often a significant liability in the
financial statements of credit unions unless interest is paid on the
financial statement date. Federal law and some state statutes, prohibit
declaring interest until the end of the dividend period. A liability for
interest earned by the share account holders should be recognized at
each financial statement date.

**Dividends Payable**

Under Article XII, Dividends, of the standard Federal Credit Union
Bylaws, the board of directors is authorized to establish dividend
periods and declare dividends permitted by the Federal Credit Union Act,
as amended. The dividend periods must be established so that the last
dividend period in any calendar year ends on December 31, unless the
cost of dividends is accrued by debiting \"Dividends\" and crediting
\"Accrued Dividends Payable\". Dividends may be declared by the board
for an established dividend period, from Earnings available after
provision for reserves required by the Act and regulations, and after
eliminating any existing deficit in Undivided Earnings. Dividends may be
declared only during the last month of the dividend period or the first
month following the close of the period. However, if the dividend period
is monthly, dividends may be declared during the month. If the dividend
period is more frequent than monthly, the board may declare the dividend
during the previous month.

All dividend declarations shall include the establishment of a date on
which such declared dividends will be distributed or posted to the
accounts of the members.

Under the requirement that dividends be shown as an element of expense
in Statements of Income, it is most important that dividends be recorded
as current charges of the fiscal period to which they apply. Thus, when
dividends are declared by the board during the first month following the
close of the dividend period, they should be recorded as of the close of
the applicable dividend period by a debit to \"Dividends\" and a credit
to this account "Dividends Payable". Also, of course, dividends declared
in the last month of the dividend period should be recorded in the same
manner. The dividends will thus be shown on the Statement of Income
prepared for the dividend period to which they apply.

When the dividends liability credited to this account is liquidated,
this account should be debited and the offsetting credit should be to
\"Cash\" or to the share accounts.

This account should be used only at the end of dividend periods to
reflect the actual or estimated amount of a dividend which is due and
payable to the members. Credit unions which accrue dividend expenses on
a more frequent basis than the actual dividend period should record the
liability in \"Accrued Dividends Payable". For example, a credit union
which declares and pays quarterly dividends but accrues dividend expense
monthly would record the liability in account "Accrued Dividends
Payable" in between actual dividend periods. On financial statements for
those months at the end of each dividend period (March, June, September
and December) the liability should be transferred from account "Accrued
Dividends Payable" to this account (Dividends Payable) in those cases
where the dividend is not credited to members\' accounts until the month
following the end of the dividend period. Where the dividend is credited
to members\' accounts on the last day of the dividend period, the entry
should be a debit to account "Accrued Dividends Payable" and a credit to
\"Shares\" and the financial report for the end of the quarter should
have no balance in either account "Dividends Payable" or account
"Accrued Dividends Payable".

***Entries in the Journal and Cash Record***

All entries affecting these accounts should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record the estimated dividend liability for the months of July,
    August and September when the credit union is on a quarterly
    dividend period and dividends are credited to members' accounts on
    the first day of the next dividend period, assuming one class of
    shares. The following entries would be made at the end of each
    month:

+---+---------------------------------+------------+------------------+
| D |                                 | \$1,000    |                  |
| r |                                 |            |                  |
| . |                                 |            |                  |
| - |                                 |            |                  |
| D |                                 |            |                  |
| i |                                 |            |                  |
| v |                                 |            |                  |
| i |                                 |            |                  |
| d |                                 |            |                  |
| e |                                 |            |                  |
| n |                                 |            |                  |
| d |                                 |            |                  |
| E |                                 |            |                  |
| x |                                 |            |                  |
| p |                                 |            |                  |
| e |                                 |            |                  |
| n |                                 |            |                  |
| s |                                 |            |                  |
| e |                                 |            |                  |
+---+---------------------------------+------------+------------------+
|   | Cr.-Accrued Dividends           |            | \$1,000          |
|   |                                 |            |                  |
|   | Payable                         |            |                  |
+---+---------------------------------+------------+------------------+

The balance of account "Accrued Dividends Payable" would then be \$3,000
at the end of September.

b)  When the dividend is distributed to members' accounts on September
    30, and the actual amount of the dividend is \$2,900:

  ------------- ------------------------------- -------------- --------------------
  Dr.-Accrued                                   \$3,000        
  Dividends                                                    
  Payable                                                      

                Cr.-Shares                                     \$2,900

                Cr.-Dividend Expense                           100
  ------------- ------------------------------- -------------- --------------------

c)  Same example as (a.) above, except that dividends are credited to
    members' accounts on the first day following the end of the dividend
    period:

Entries for each month would be the same as (a.) above.

d)  To record the dividend payable as of September 30 for example (c.)
    above:

  ------------- ----------------------------------- ---------- --------------------
  Dr.-Accrued                                       \$3,000    
  Dividends                                                    
  Payable                                                      

                Dr.-Dividends Payable                          \$3,000
  ------------- ----------------------------------- ---------- --------------------

e)  When dividend for (c.) and (d.) above is credited to members'
    accounts on October 1, and the actual dividend amounts to \$2,900:

  --------------- ----------------------------------- ---------- --------------------
  Dr.-Dividends                                       \$3,000    
  Payable                                                        

                  Cr.-Shares                                     \$2,900

                  Cr.-Dividend Expense                           100

                                                                 
  --------------- ----------------------------------- ---------- --------------------

***Detailed Transactions***

Credit:

a)  To record the amount of dividends either declared or estimated
    during an accounting period.

b)  With the excess of actual dividends, if any, over the amount
    previously recorded.

Debit:

a)  To liquidate the amount of dividend liability upon distribution to
    the shareholder.

b)  With the amount or difference, if any, between the accrued amount
    and the actual amount of dividends payable.

### Dividend Calculation Methods

The dividend calculation method is the method by which dividends are
determined. The NCUA R&Rs Part 707, *Truth In Savings*, allows two
dividend calculation methods; 1) the daily balance method, and 2) the
average daily balance method. Section 707.2(d) and (h), *Definitions*,
defines both methods.

Examples of each method are provided using account activity for a month
based on the "end of day" balance in the account. The dividend
calculation must be based on a point in time for determining the balance
in the account; such as "beginning of day balance", "end of day
balance", and "close of business day balance".

Account Activity -- Based on End of Day Balance

  -------------------- -------------------- --- ----------- --- -------------
                                                                **BALANCE**

                                                                

  Balance:             December 31, 20X4                        \$1,000

  Deposit:             January 1, 20X5          200             1,200

  Withdrawal:          January 2, 20X5          100             1,100

  Withdrawal:          January 10, 20X5         400             700

  Deposit:             January 15, 20X5         200             900

  Withdrawal:          January 16, 20X5         1,000           -100

  Deposit:             January 18, 20X5         300             200

  Deposit:             January 21, 20X5         700             900

  Withdrawal:          January 31, 20X5         100             800
  -------------------- -------------------- --- ----------- --- -------------

[EXAMPLE 1]{.underline}

The daily balance method is the application of a daily dividend rate to
the full amount of principal in the account each day. For the days the
account is overdrawn, a zero balance should be used to calculate
dividends.

Assume a dividend rate of 5.00%, a daily rate of 1/365, a monthly
compounding period, and a monthly crediting period. The daily dividend
rate would be .00013698630 (.05\*(1/365)). (See "Daily Rates" for the
daily dividend rate formula). Dividends would be calculated as follows:

  ----------------- --- --------------------- --- ---------- --- ----------------
  BALANCE x RATE x                                DIVIDEND       
  NUMBER OF DAYS                                  AMOUNT         

  1/1/X5                \$1,200 x                 1              \$0.164383562
                        .00013698630 x                           

  1/2/X5 to 1/9/X5      1,100 x .00013698630      8              1.205479452
                        x                                        

  1/10/X5 to            700 x .00013698630 x      5              0.479452055
  1/14/X5                                                        

  1/15/X5               900 x .00013698630 x      1              0.123287671

  1/16/X5 to            0 x .00013698630 x        2              0.000000000
  1/17/X5                                                        

  1/18/X5 to            200 x .00013698630 x      3              0.082191781
  1/20/X5                                                        

  1/21/X5 to            900 x .00013698630 x      10             1.232876712
  1/30/X5                                                        

  1/31/X5               800 x .00013698630 x      1              0.109589041

  TOTAL                                           31             3.397260274
  ----------------- --- --------------------- --- ---------- --- ----------------

For the month of January, 20X5, using the daily balance method to
calculate dividends, a dividend amount of \$3.40 would be credited to
the member's account. If the compounding period was daily, there would
be 31 (the number of days in the compounding period) separate dividend
calculations performed. The first day's accrued but uncredited dividends
of \$0.164383562 would be considered in the second day's balance of
\$1,100 (and every day's balance thereafter) to determine the second
day's dividend (and every day's dividend thereafter).

[EXAMPLE 2:]{.underline}

The average daily balance method is the applica-tion of a periodic
dividend rate to the average daily balance in the account for the
period. The average daily balance is determined by adding the full
amount of principal in the account for each day of the period and
dividing that figure by the number of days in the period.

Assume a dividend rate of 5.00%, a daily rate of 1/365, a monthly
compounding period, and a monthly crediting period. The periodic
dividend rate would be .00424657534 ((.05\*(1/365))\*31). (See "Daily
Rates" for the periodic dividend rate formula). Dividends would be
calculated as follows:

  ------------------------ ------------ ------------- ------ --- -----------
  BALANCE x NUMBER OF DAYS              ACCUMULATED              
                                        BALANCE                  

  1/1/X5                                \$1,200 x     1          \$1,200

  1/2/X5 to 1/9/X5                      1,100 x       8          8,800

  1/10/X5 to 1/14/X5                    700 x         5          3,500

  1/15/X5                               900 x         1          900

  1/16/X5 to 1/17/X5                    0 x           2          0

  1/18/X5 to 1/20/X5                    200 x         3          600

  1/21/X5 to 1/30/X5                    900 x         10         9,000

  1/31/X5                               800 x         1          800

  TOTAL                                                          24,800
  ------------------------ ------------ ------------- ------ --- -----------

Dividing the accumulated "end of day" balances of \$24,800 by 31 (the
total number of days in the divi-

dend period), the average daily balance is \$800.00000.

The average daily balance should be rounded to five or more decimals. As
an example, an average daily balance of \$800.12345678 would be rounded
to no less than \$800.12346. The fifth decimal place should be rounded
up if the sixth decimal place is five or more. The sixth decimal place
of \$800.12345678 is a "6", thereby the fifth decimal place would be
rounded up from "5" to "6".

The periodic dividend rate times the average daily balance results in a
dividend amount of \$4.497260274. For the month of January, 20X5, using
the average daily balance method to calculate dividends, a dividend
amount of \$3.40 would be credited to the member's account.

If the compounding period was daily, there would be 31 (the number of
days in the compounding period) separate dividend calculations
performed. However, a daily dividend rate instead of the periodic
dividend rate would be used to calculate each

day's dividend. The first day's accrued but uncredited dividends of
\$0.109589041 ((.05\*(1/365))\*\$800) would be considered in the second
day's average daily balance of \$800 (and every day's balance
thereafter) to determine the second day's dividend (and every day's
dividend thereafter). Although daily compounding is not commonly used
when the average daily balance dividend calculation method is used, it
is permissible. The NCUA R&Rs Part 707, *Truth In Savings*, allows any
frequency of compounding to be used (regardless of the dividend
calculation method used).

##### Dividend Periods

The dividend period is the span of time established by the board of
directors at the end of which shares in a member's account earn dividend
credit. In other words, a dividend period is the frequency with which
accrued but uncredited dividends are earned by the member. As an
example, assume dividend rates are declared quarterly and the board of
directors has established the dividend period as monthly.

A member closing their account during the second month of the quarter
would be entitled to the first month's accrued but uncredited dividends
but not to the second month's accrued but uncredited dividends. If the
board of directors had established the dividend period as quarterly, the
member would not be entitled to any accrued but uncredited dividends.
Although a dividend period is commonly established at the same frequency
with which dividends are credited or at the frequency with which
dividend rates are declared by the board of directors, a dividend period
may be at any frequency; i.e., daily, weekly, bi-weekly, monthly,
semi-monthly, quarterly, semi-annually, annually, etc. The dividend
period may be different for each type of share account but each type of
share account must have a dividend period.

Dividend periods need not agree with calendar periods. As an example; a
monthly dividend period could begin March 15 and end April 14. However,
if the last dividend period in any calendar year does not end on
December 31, the cost of the dividends accrued but uncredited must be
reflected on the financial statements; by debiting "Dividends Expense"
and crediting a payable.

##### Dividend Declaration Dates

The dividend declaration date is the date that the board of directors
declares a dividend for the preceding dividend period. For credit unions
with bi-monthly or longer dividend periods (such as quarterly,
semiannually, or annually) the dividend rate must be determined: 1)
during the last month of the dividend period, or 2) during the first
month following the close of the dividend period. If the dividend rate
is determined prior to the end of the dividend period (during the last
month of the dividend period), the dividend rate is not declared but
rather anticipated (projected or prospective) contingent upon current
income and available earnings, after required transfers to statutory
reserves. Upon the board of directors determining that current income
and available earnings exist after required transfers to statutory
reserves, the board of directors should ratify the dividend rate(s)
(more than likely the anticipated (projected or prospective) dividend
rate(s)). The day the dividend rate is ratified is the dividend
declaration date.

If a credit union has established dividend periods which are monthly or
more frequently (such as daily or weekly dividend periods) the board of
directors may determine the dividend rate: 1) during the preceding
month, 2) during the last month of the dividend period, or 3) during the
month following the month in which the dividend period(s) ended. Again,
if the dividend rate is determined prior to the end of the dividend
period (during the preceding month or during the last month of the
dividend period), the dividend rate is not declared but rather
anticipated (projected or prospective) contingent upon current income
and available earnings, after required transfers to statutory reserves.
The board of directors must ratify a dividend rate once current income
and available earnings, after required transfers to statutory reserves,
are determined to exist.

An anticipated (projected or prospective) dividend rate contingent upon
current income and available earnings after required transfers to
statutory reserves should be disclosed as such and not as the dividend
rate for the last dividend declaration date.

If the board of directors does not declare a dividend for certain
dividend periods (perhaps because of the lack of sufficient earnings),
it may not, at a later date, declare a dividend for the dividend periods
missed. Alternatives in this situation might be to establish a lengthier
dividend period (by a change-in-terms notice under Section 707.5(a)) in
anticipation that sufficient earnings could be generated to pay a
dividend for the extended dividend period or to declare an extraordinary
dividend. Extraordinary dividends are most commonly referred to as
"bonus dividends". NCUA R&Rs Part 707.2(m), *Definitions*, defines
*extraordinary dividends* as a non-repetitive dividend paid at an
irregular time from funds legally available for such distribution.

##### Compounding Periods

The compounding period is the frequency that earned dividends are added
to the principal in the account on which dividends then accrue. The
compounding period can be based on any frequency; i.e., daily (a.k.a.
"continuously"), weekly, bi-weekly, monthly, semi-monthly, quarterly,
semi-annually, annually, none ("no compounding" or "at maturity"), etc.
The compounding period may be different for each type of share account
but each type of share account must have a compounding period.

##### Crediting Periods

The crediting period is the frequency that earned dividends are posted
or paid to the account, or provided to the member by check or transfer
to another account. The crediting period can be based on any frequency;
i.e., daily, weekly, bi-weekly, monthly, semi-monthly, quarterly,
semi-annually, annually, at maturity, etc. The crediting period may be
different for each type of share account but each type of share account
must have a crediting period. Only declared dividends may be posted to
an account, not anticipated (projected or prospective) dividends.

##### Dividend Distribution Dates

The dividend distribution date is the date the dividend is made
available by credit to the account, or provided to the member by check
or transfer to another account. The dividend distribution date for
non-term share accounts is usually the last day of or the day following
the crediting period. As an example, if the crediting period is monthly,
January 31st could be the dividend distribution date (last day of) or
February 1st could be the dividend distribution date (the day
following). For term share accounts, the dividend distribution date may
be on the anniversary dates (such as the 17th of each month). The
dividend distribution date may be different for each type of share
account but each type of share account must have a dividend distribution
date. Regardless of the dividend distribution date, the date dividends
are posted or paid is the date dividends must be available to the
members. As an example, a dividend cannot be posted to a member's
account on December 31st if it cannot be withdrawn until January 1st.

#####  Daily Rates

Permissible daily rates for a 365-day year are 1/360 and 1/365.
Permissible daily rates for a 366-day year (leap year) are 1/360, 1/365,
and 1/366. If a daily rate of 1/366 is used, the account must earn
dividends for February 29. The daily rate may be different for each type
of share account but each type of share account must have a daily rate.
The daily rate is used in the daily dividend rate formula, the periodic
rate formula, and the periodic dividend rate formula. Each formula is as
follows:

> Daily Dividend Rate = Daily Rate x Nominal Rate
>
> Periodic Rate = Daily Rate x Number of Days in the Compounding Period.
>
> Periodic Dividend Rate = Periodic Rate (Daily Rate = Number of Days in
> the Compounding Period) x Nominal Rate

The nominal rate is the dividend rate (expressed as a percent) divided
by 100 or the dividend rate expressed as a decimal. As an example, the
nominal rate is .0525 for a dividend rate of 5.25%.

A credit union should round the daily rate to five or more decimals. A
1/365 daily rate of .002739726 would be rounded to no less than .00274.
The fifth decimal place should be rounded up if the sixth decimal place
is five or more. The sixth decimal place of .002739726 is a "9", thereby
the fifth decimal place would be rounded up from "3" to "4".

##### Dividend Credit Determination Dates (When a Share Purchase Begins Earning Dividend Credit)

The dividend credit determination date is the date dividends begin to
accrue. Section 707.7(c) of the NCUA Rules and Regulations requires
dividends to begin accruing no later than the day specified in section
606 of the *Expedited Funds Availability Act* and its implementing
*Regulation CC.* Therefore, a credit union could use either the
collected balance method or the ledger balance method.

*An illustration of the collected balance method is as follows:* Assume
a member makes a \$5,100 non local check deposit on April 7, 20X5. When
the collected balance method is used to accrue or pay dividends, the
time frames as to when funds are available for withdrawal by the member
are different than the time frames for accruing dividends. Based on the
availability for withdrawal by the member, the first \$100 must be made
available the next day (April 8, 20X5). At least \$4,900 must be made
available no later than the fifth business day following the banking day
on which funds were deposited (April 12, 20X5). Due to the deposit being
over \$5,000 (a large deposit) an extension of up to six business days
(April 18, 20X5) may be placed on the remaining \$100. See *Regulation
CC, Notice of Exception,* if no longer extensions are allowed by the
credit union's policy.

Section 229.14, *Payment of Interest in Regulation CC* requires
dividends to begin accruing on dividend-bearing accounts no later than
the day on which the credit union receives credit for the funds
deposited. It may be difficult for a credit union to track which day it
receives credit for specific checks in order to accrue dividends
properly on the account to which the check is deposited. Therefore, for
the purpose of the dividend-accrual requirement, a credit union may rely
on an availability schedule from its correspondent to determine when it
receives credit. As an example, if a credit union receives credit on 20
percent of the funds deposited in the credit union by check as of the
business day of deposit, 70 percent as of the business day following
deposit, and 10 percent on the second business day following deposit,
the credit union can apply these percentages to determine the day
dividends must begin to accrue on check deposits to all dividend-bearing
accounts.

*An illustration of the ledger balance method is as follows*: dividends
would begin to accrue on the full \$5,100 the date of deposit (April 7,
20X5). Assume the board of directors established that dividends would be
accrued and paid based on a "close of business day" balance, i.e., 3:00
p.m. If the deposit was made after 3:00 p.m., dividends would begin to
accrue on the full \$5,100 the day following the date of deposit (April
8, 20X5).

Dividends must begin to accrue on payroll deductions share deposits when
the member is entitled to receive the funds. When a credit union
receives the detailed distribution of share payments, a member's account
must be credited immediately and dividends begin to accrue. If a
crediting delay occurs for any reason other than not having the detailed
distribution of share payments, the credit union should ensure dividends
begin to accrue based on when the member was entitled to receive the
funds.

##### Minimum Balances Associated With Dividends

A minimum balance can be required before an account earns dividends. The
method used to determine the minimum balance to earn dividends must be
the same method used to determine the balance on which dividends are
calculated. As an example, if the daily balance method is used to
determine dividends, then the daily balance method must also be used to
determine the minimum balance. An alternative method may be used if it
is unequivocally beneficial to the member. As an example, a credit union
using the daily balance method to calculate dividends and requiring a
\$500 minimum daily balance could choose to pay dividends on the account
for those days of the month that did not meet the \$500 minimum daily
balance provided the member maintained an average daily balance
throughout the month of \$400. Other minimum balance requirements, such
as to open an account, to avoid a fee, etc., can be based on any method.

Section 707.7, *Payment of Dividends,* identifies several restrictions
regarding minimum balances to earn dividends:

-   A credit union cannot require that both a daily minimum balance and
    an average daily balance be maintained to earn dividends.

-   A credit union cannot pay dividends only on the balance portion over
    the minimum balance. As an example, if the member has \$500 and the
    required minimum balance is \$200, dividends cannot be paid only on
    \$300 (the amount over the minimum balance of \$200).

-   A credit union cannot require a minimum balance to be maintained for
    the entire period to earn dividends for that period.

##### Dividend Reductions and Penalties

Penalties may be issued by the board of directors according to its
prescribed policies. The board of directors may impose a penalty on any
share account or term share account for failure of the member to comply
with any terms or conditions of the account. One of the most common
penalties used is the early withdrawal penalty. An early withdrawal
penalty can be assessed when the member withdraws his/her funds from an
account prior to the account's maturity. There are no requirements as to
the method in which an early withdrawal penalty can be determined. The
most commonly used early withdrawal penalties are: 1) the forfeiture of
accrued dividends, or 2) a percentage of the amount withdrawn. NCUA R&Rs
Part 707, also considers a withdrawal of some funds to trigger a change
in the account's dividend rate and APY that is paid, or a change in the
compounding or crediting frequency that those terms must be disclosed as
early withdrawal penalties.

Early withdrawal penalties are most often associated with term share
accounts. Term share accounts are most commonly referred to as "share
certificates" or "certificates of deposit". Section 707.2(x),
*Definitions,* defines term share accounts as being any share
certificate, certificate of deposit, or other account with a maturity of
at least seven days in which the member generally does not have the
right to make withdrawals for six days after the account is opened, or
the account is subject to an early withdrawal penalty of at least seven
days dividends on amounts withdrawn. A term share account could also
include a club account; such as Christmas Club Account, Vacation Club
Account, Youth Club Account, etc. If the terms of the club account meet
the definition of a term share account (even if the account does not
have a stated maturity but instead has a disbursement date), the club
account must be treated as a term share account. Any early withdrawal
penalties must be disclosed as such, and subsequent disclosure
requirements would have to be followed.

##### Dividend Entitlement on Closed Accounts

NCUA R&Rs Part 707, *Truth In Savings*, permits accrued but uncredited
dividends to be forfeited if the account is closed. If this is permitted
by the credit union's policy, Section 707.4, *Account Disclosures*,
requires the forfeiture of dividends to be disclosed.

Members who close their accounts prior to the dividend distribution date
(or the end of the crediting period) are entitled to dividends up until
the end of the last dividend period. However, the credit union may delay
the payment of these dividends until the scheduled dividend distribution
date. The following examples are based on dividend periods which are
monthly or more frequently. (See "Dividend Declaration Dates" for
determining dividend rates (anticipated (projected or prospective) or
declared) based on the length of the dividend period). Example 1
typifies the situation when the dividend rate is anticipated (projected
or prospective) during the preceding month and would be ratified by the
board of directors at the close of the dividend period contingent upon
current income and available earnings, after required transfers to
statutory reserves. Example 2 typifies the situation when the dividend
rate is declared during the month following the month in which the
dividend period ended.

[EXAMPLE 1]{.underline}:

Assume the board of directors credits dividends monthly and the dividend
period is semimonthly. The dividend rate for the semi-monthly periods
are anticipated (projected or prospective) during the preceding month.
If a member closes his/her account on January 22, 20X5, he/she would be
entitled to dividends for 7 days (the days after the last dividend
period of January 15, 20X5). On January 22, the amount of dividends due
this former member may be paid to him/her, or remain (in the form of a
credit union liability) as a dividend payable to a former member. Since
the dividend rate is anticipated (projected or prospective) in the
preceding month it may, with proper wording in the account disclosures,
be posted to the account at the time the account is closed. When the
dividend rate is anticipated (projected or prospective) in the preceding
month, the credit union's policy should require that written projections
be on file to illustrate the existence of current income, undivided
earnings, and required transfers to reserves to the end of the month for
which the dividend rate is anticipated (projected or prospective). This
is necessary to comply with the provision for the required transfers to
statutory reserves. In other words, the projected information will
support that funds are/will be available to meet the reserve transfer
requirement and pay the anticipated (projected or prospective) dividend
(that which the board of directors will ratify at the close of the
dividend period); closing the books prior to the dividend distribution
date will fulfill the "projection" requirement.

[EXAMPLE 2]{.underline}:

Assume the board of directors credits dividends quarterly and the
dividend period is monthly. The dividend rate for the monthly periods
are declared during the month (on the 5th) following the month in which
the dividend period(s) ended. If a member on January 22, 19X5 closes
his/her account of \$5,000 with accrued but uncredited dividends of
\$15.07, on January 22 the credit union can disburse the member's
principal of \$5,000, but cannot post or disburse the accrued but
uncredited dividends of \$15.07 until the board of directors declares on
February 5th the dividend rate for the month of January.

No dividend can be paid in excess of available current income and prior
earnings without the written approval of the NCUA Board.

##### Withdrawal of Funds

Dividends must accrue up to the day funds are withdrawn. As an example,
assume dividends are accrued and paid based on the ledger balance method
and the "end of day" balance. (See "Dividend Credit Determination Date"
for discussion on the ledger balance method). The ending balance of
January 1, 20X5 is \$1,000. A withdrawal of \$500 is made on January 5,
20X5, a deposit of \$200 is made on January 7, 20X5, and no other
withdrawals or deposits are made for the month. Dividends must be
accrued on \$1,000 from January 1, 20X5 to January 4, 20X5 (4 days), on
\$500 from January 5, 20X5 to January 6, 20X5 (2 days), and on \$700
from January 7, 20X5 to January 31, 20X5 (25 days).

Instead, assume the member closed the account on January 10, 20X5 and
accrued but uncredited dividends are not forfeited. Dividends would
accrue the same as above up until January 6, 20X5. From January 7, 20X5
to January 9, 20X5 (3 days) dividends would accrue on \$700. Also, the
average daily balance used in the APYE formula would be based only on
the number of days the account was open (9 days).

##### Dividend Accrual

Whenever a dividend rate on any type of account is specified in advance
(whether the dividend rate is as of the last dividend declaration date
or an anticipated (projected or prospective) dividend rate for non-term
share accounts, or within the most recent seven calendar days for term
share accounts), dividend expense should be accrued monthly or at the
end of the shortest dividend period if all dividend periods are longer
than monthly. Dividend accruals may be based on either the collected
balance method or the ledger balance method. Illustrations of the
collected balance method and ledger balance are contained in "Dividend
Credit Determination Dates". The balance method used in dividend
accruals should be the balance method used in paying dividends. If the
collected balance method is used, see "*Dividend Period Length Versus
Statement Period Length for the APYE*" for information regarding the
average daily balance used in the APYE formula.

##### Term Share Account Dividend Rate

A federal credit union may make, in advance, an agreement to pay a
specific dividend rate on a term share account. Since a federal credit
union cannot honor a dividend rate promised in advance if current income
and available earnings are insufficient, it is recommended that
officials exercise extreme caution before making an agreement to pay a
specific dividend rate. Any agreed upon rate should be evidenced by a
signed written contract between the federal credit union and the member.

Agreeing to pay a dividend rate which cannot be met can cause members to
lose faith in their credit union as well as civil liability for implied
contracts. When credibility is lost, an outflow of shares is almost a
certainty. For this reason, it is recommended that agreed upon dividend
rates be restricted to term share accounts. Advance agreement for a
dividend rate does not eliminate the need for a formal declaration of
dividends by the board of directors.

##### Determining Maximum Dividend Rate

The maximum dividend rate can be determined by:

a.  Dividing the amount available for dividends by the total shares for
    all members that are eligible for the dividend amount; then

b.  Multiplying the above result by the number of periods in a year. The
    number of periods in a year are determined by the number of periods
    the divided amount is available for, i.e., a month, a quarter, etc.

As an example, assume the amount available for dividends for the period
is \$3,280. The total of shares for all members that are eligible for
the \$3,280 dividend amount is \$384,000. Dividing \$3,280 by \$384,000
equals .008541667. Multiply .008541667 by 12 (if the period is monthly)
and by 4 (if the period is quarterly) to determine the maximum dividend
rate. The maximum dividend rate which would be paid for a monthly period
is 10.25% annually and for a quarterly period is 3.42%.

##### Methods of Distribution and Use of Dividend Record for Hand Posted Credit Unions

*Credit of dividends to the share accounts of the members:* Under this
method the amount need not be entered in "Posted to Share Ledger" column
of the *Dividend Record* form since a record of the amount has already
been entered in the "Amt. of Dividend" column. A check mark is placed in
the "Posted to Shares Ledger" column as each share account is posted for
the dividend. A check mark or the poster's initials should also be
placed in the "Posted to Passbook" column when the amounts are posted to
the passbooks of the members. This column should be left blank by those
credit unions using statements of account in lieu of passbooks. The last
column shows passbooks in which dividends have not been recorded. The
date reflecting the posting to the individual account and the passbooks
should be the date on which the dividend is payable. This date is
established by the board of directors.

*Payment by individual check to each member*: The name of the member is
entered in the "Name" column of the *Dividend Record* form and the
number of each check issued in the "Number" column under the "Payment by
Check" section. The amount of each check need not be entered unless
dividends are paid to some members by check and to others by credit to
shares. The return of checks by the bank when paid may be noted in the
"Check Mark" column of the Record. If dividends are paid by check to
each member, no entries are made in the Individual Share Loan Ledgers
and the passbooks or statements of account.

Payment may not be made in cash or by drawing one check for the entire
amount and disbursing the amounts due members in cash.

*Payment in part by check and in part by credit to share accounts of the
members*: This procedure may be followed, for example, when the credit
union desires to avoid writing checks of less than \$1.00 and therefore
decides to credit all dividends of less than \$1.00 to the share
accounts and to issue individual checks to members for dividends of
\$1.00 or more. When this procedure is followed, the member's name is
entered in the "Name" column of the *Dividend Record* for each check
issued. The check number and the amount of each check are entered in the
"Number" and "Amount" columns, respectively. When the credits to shares
are posted to the members' accounts in the Individual Share and Loan
Ledger as of the date established by the directors, the amounts are
checked in the "Check Mark" column.

As indicated for the first method, the "Posted to Passbook" column is
either initialed or checked when the members passbook is posted, as of
the established date, with the amount of the dividend credited to
shares. The total of the "Amount" column in the "Payment by Check"
section and the amounts in the "Posted to Shares Ledger" column should
agree with the total of the "Amt. of Dividend" column.

##### Reporting Dividends to Internal Revenue Service

The required forms to report dividends paid and some bonuses to members
on non-term share accounts and term share accounts are available from
the Internal Revenue Service or a local supplier. Any questions about
the reporting requirements or procedures should be directed to the local
Director of Internal Revenue.

##### Annual Percentage Yield (APY)

NCUA R&Rs Appendix A, Part I of Part 707, *Truth In Savings,* provides
the APY formula that is to be used in account disclosures and for
advertising purposes. The APY is based on a hypothetical situation and
does not take into consideration fluctuations during the period, such as
deposits and withdrawals.

##### Dividend Formulas in Determining Dividends Using the APY Calculation

There are two simple dividend formulas that can be used to determine
dividends on an account. These two formulas should provide the same
result as a credit union's automated system. The formulas and examples
of dividend calculations are provided to assist in calculating the APY.

[FORMULA 1]{.underline}:

Dividends = Principal \* \[(1 + Nominal Rate/Compounding Period)
^(Compounding\ Periods\ in\ Term)^ - 1\]

-   *Nominal rate* is determined by dividing the dividend rate (not
    expressed as a percent) by 100 or the dividend rate expressed as a
    decimal.

-   *Compounding Period* stands for compounding period. Use the
    following based on the compounding period: Daily - 360, 365, and 366
    in a leap year if dividends will be earned February 29; Weekly - 52;
    Bi-Weekly - 26; Semi-Monthly - 24; Monthly - 12; Quarterly - 4;
    Semi-annually - 2; Annually - 1.

-   *Compounding Periods in Term* stands for compounding periods in
    term. If a daily compounding period is used; the term is expressed
    in the number of days. If a compounding period other than daily is
    used, the term is expressed as the same number that was expressed
    for the compounding period: Weekly - 52; Bi-Weekly - 26;
    Semi-Monthly - 24; Monthly - 12; Quarterly - 4; Semi-annually - 2;
    Annually - 1.

-   Principal is the amount of funds assumed to have been deposited at
    the beginning of the account.

    [FORMULA 2]{.underline}:

    Dividends = Principal \* Daily Dividend Rate \* Days in Term

-   *Principal* is the amount of funds assumed to have been deposited at
    the beginning the account.

-   *Daily Dividend Rate* is the nominal rate (dividend rate (not
    expressed as a percent) divided by 100 or the dividend rate
    expressed as a decimal) times the daily rate of 1/360, 1/365, or
    1/366 for a 366 day year (leap years) if the account will earn
    dividends for February 29th. A daily rate of 1/360 has to be applied
    to 365 days a year and 366 days a year for leap years.

-   *Days in Term* is the number of days in the compounding period.

##### Examples of Dividend Calculations in Determining Dividends Used in the APY Calculation {#examples-of-dividend-calculations-in-determining-dividends-used-in-the-apy-calculation .unnumbered}

The dividend amounts from the examples provided in this section have
been used in the APY calculation examples provided in "APY Calculation".
The dividend calculation examples are based on a non-term share account
and a term share account.

[EXAMPLE 1]{.underline} - Using Dividend Calculation Formula 1:

Assume the account is a non-term share account; a regular share account
with no stated maturity. Principal is \$1,000. The credit union
compounds monthly. The dividend rate is 5.00%. The daily rate is 1/365.
Placing the numbers in Formula 1 of the dividend calculation, the
dividend amount for the year is \$51.16190. (See "*APY Calculation for a
Non-Term Share Account*" for the APY calculation).

Dividends = Principal \* \[(1 + Nominal Rate/Compounding Period)
^(Compounding\ Periods\ in\ Term)^ - 1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          5.00 divided by 100          Result:       .05

  Step 2:          .05 divided by 12            Result:       .004166667

  Step 3:          .004166667 plus 1            Result:       1.004166667

  Step 4:          1.004166667 raised to        Result:       1.051161898
                   the                                        

                   exponent of 12                             

  Step 5:          1.051161898 minus 1          Result:       .051161898

  Step 6:          .051161898 times \$1,000     Result:       \$51.161898

  Step 7:          Round \$51.161898            Result:       \$51.16190
  ------------ --- ------------------------ --- --------- --- --------------

(See "Rounding Rules for Dividends Used in the APY Calculation\" for
rounding rules for the dividend amount).

Formula 2 of the dividend calculation method could also be used for this
example. However, to calculate the yearly dividend amount, the dividend
amount for each compounding period in a year will have to be calculated.
In this example, the number of compounding periods in a year is 12.
Therefore, the dividend amount will have to be calculated 12 times. Each
dividend amount will need to be added to the principal to arrive at the
next month's principal. If two conditions are met, the APY calculation
based on a single compounding period could be used. (See "Short-Cuts to
the APY Calculation", Short-Cut Illustration 2).

[EXAMPLE 2]{.underline} - Using Dividend Calculation Formula 2:

Assume the account is a term share account; a 6 month share certificate
for \$1,000. The credit union compounds monthly. The actual number of
days in the share certificate is 184 (from March 1, 19X5 to August 31,
20X5). The number of days for any actual sequence of 6 months ranges
from 181 to 184. The dividend rate is 5.00%. The daily rate is 1/365.
Placing the numbers in Formula 2 of the dividend calculation, the
dividend amount for the year is \$25.47167. (See "*APY Calculation for a
Term Share Account*" for the APY calculation).

Dividends = Principal \* Daily Dividend Rate \* Days in Term

Month of March, 20X5

  ------------ --- ------------------------ --- --------- ----- ---------------
  Step 1:          5.00 divided by 100          Result:         .05

  Step 2:          .05 times 1/365              Result:         .000136986

  Step 3:          .000136986 times 31          Result:         .004246575

  Step 4:          .004246575 times \$1,000     Result:         \$4.246575342

  Step 5:          Round \$4.246575342          Result:         \$4.24658

  Step 6:          \$4.24658 plus \$1,000       Result:         \$1,004.24658
  ------------ --- ------------------------ --- --------- ----- ---------------

Month of April, 20X5

  ------------ --- ------------------------ --- --------- ---- ---------------
  Step 1:          5.00 divided by 100          Result:        .05

  Step 2:          .05 times 1/365              Result:        .000136986

  Step 3:          .000136986 times 30          Result:        .004109589

  Step 4:          .004109589 times                            

                   \$1,004.24658                Result:        \$4.127040740

  Step 5:          Round \$4.127040740          Result:        \$4.12704

  Step 6:          \$4.12704 plus                              

                   \$1,004.24658                Result:        \$1,008.37362
  ------------ --- ------------------------ --- --------- ---- ---------------

Month of May, 20X5

  ------------ --- ------------------------ --- --------- ---- ---------------
  Step 1:          5.00 divided by 100          Result:        .05

  Step 2:          .05 times 1/365              Result:        .000136986

  Step 3:          .000136986 times 31          Result:        .004246575

  Step 4:          .00446575 times                             

                   \$1,008.37362                Result:        \$4.282134551

  Step 5:          Round \$4.282134551          Result:        \$4.28213

  Step 6:          \$4.28213 plus                              

                   \$1,008.37362                Result:        \$1,012.65575
  ------------ --- ------------------------ --- --------- ---- ---------------

Month of June, 20X5

  ------------ --- ------------------------ --- --------- ---- ---------------
  Step 1:          5.00 divided by 100          Result:        .05

  Step 2:          .05 times 1/365              Result:        .000136986

  Step 3:          .000136986 times 30          Result:        .004109589

  Step 4:          .004109589 times                            

                   \$1,012.65575                Result:        \$4.161598973

  Step 5:          Round \$4.161598973          Result:        \$4.16160

  Step 6:          \$4.16160 plus                              

                   \$1,012.65575                Result:        \$1,016.81735
  ------------ --- ------------------------ --- --------- ---- ---------------

Month of July, 20X5

  ------------ --- ------------------------ --- --------- ---- ---------------
  Step 1:          5.00 divided by 100          Result:        .05

  Step 2:          .05 times 1/365              Result:        .000136986

  Step 3:          .000136986 times 31          Result:        .004246575

  Step 4:          .004246575 times                            

                   \$1,016.81735                Result:        \$4.317991486

  Step 5:          Round \$4.317991486          Result:        \$4.31799

  Step 6:          \$4.31799 plus                              

                   \$1,016.81735                Result:        \$1,021.13534
  ------------ --- ------------------------ --- --------- ---- ---------------

Month of August, 20X5

  ------------ --- ------------------------ --- --------- --- ---------------
  Step 1:          5.00 divided by 100          Result:       .05

  Step 2:          .05 times 1/365              Result:       .000136986

  Step 3:          .000136986 times 31          Result:       .004246575

  Step 4:          .004246575 times                           

                   \$1,021.13534                Result:       \$4.336328156

  Step 5:          Round \$4.336328156          Result:       \$4.33633

  Step 6:          \$4.33633 plus                             

                   \$1,021.13534                Result:       \$1,025.47167
  ------------ --- ------------------------ --- --------- --- ---------------

(See "Rounding Rules for Dividends Used in the APY Calculation: for
rounding rules for the dividend amounts).

Another way of calculating dividends on this 6- month share certificate
is by assuming each compounding period has an equal number of days,
except the last period which has enough days to account for the
remaining term of the share certificate. As an example, assume month 1
through month 5 has 30 days (for a total of 150 days) and month 6 has 34
days (the actual number of days of 184 minus 150). If two conditions are
met, the APY calculation based on a single compounding period could be
used. (See "*Short-Cuts to the APY Calculation*", Short-Cut Illustration
2).

Formula 1 of the dividend calculation method could not be used for this
example. Using Formula 1 of the dividend calculation method would result
in an erroneous APY since the compounding period for this example is
monthly and the term is less than a year. *Formula 1 of the dividend
calculation method for term share accounts less than a year can only be
used when the compounding period is daily*.

[EXAMPLE 3]{.underline} - Using Dividend Calculation Formula 2:

Assume the same facts in Example 1 of this section: the account is a
regular share account with no stated maturity. Principal is \$1,000. The
credit union compounds monthly. The dividend rate is 5.00%. The daily
rate is 1/365. The days in the month are 31 days. Placing the numbers in
Formula 2 of the dividend calculation, the dividend amount for a single
month in the year is \$4.24658. (See "*Short-Cuts to the APY
Calculation*", Short-Cut Illustration 2, Example 1 for the APY
calculation).

Dividends = Principal \* Daily Dividend Rate \* Days in Term

Month with 31 days

  ------------ --- ------------------------ --- --------- --- ---------------
  Step 1:          5.00 divided by 100          Result:       .05

  Step 2:          .05 times 1/365              Result:       .000136986

  Step 3:          .000136986 times 31          Result:       .004246575

  Step 4:          .004246575 times                           

                   \$1,000                      Result:       \$4.246575342

  Step 5:          Round \$4.246575342          Result:       \$4.24658
  ------------ --- ------------------------ --- --------- --- ---------------

[EXAMPLE 4]{.underline} - Using Dividend Calculation Formula 2:

Assume the same facts in Example 2 of this section: a 6 month share
certificate for \$1,000. The credit union compounds monthly. The
dividend rate is 5.00%. The days in the month are 31 days. Placing the
numbers in Formula 2 of the dividend calculation, the dividend amount
for a single month in the 6-month term share certificate is \$4.24658
(as in Example 3 of this section). (See "*Short-Cuts to the APY
Calculation*", Short-Cut Illustration 2, Example 1 for the APY
calculation).

##### Rounding Rules for Dividends Used in the APY Calculation

A credit union should round dividends to five or more decimals. As an
example, yearly dividends earned of \$51.161897920 (5.00% for a 1/365
daily rate on \$1,000, compounded monthly) would be rounded to no less
than \$51.16190 in determining the APY calculation. The fifth decimal
place should be rounded up if the sixth decimal place is five or more.
To illustrate, the sixth decimal place of \$51.161897920 is a "7",
thereby the fourth and fifth decimal place were rounded up from "89" to
"90".

The dividend amount of \$51.16190 would be used in calculating the APY.
(See "Examples of Dividend Calculations in Determining Dividends Used in
the APY Calculation", Example 1, and the example in "APY Calculation for
a Non-Term Share Account" for the use of this dividend amount).

##### APY Formula

Section 707.2(c), *Definitions*, defines the APY as a percentage rate
that reflects the total amount of dividends paid on an account, based on
the dividend rate and frequency of compounding for a 365-day period and
calculated according to the rules in Appendix A, Part I of Part 707,
*Truth In Savings*. The APY formula is as follows:

APY = 100\[(1 + Dividends/Principal)^(365/Days\ in\ Term)^ -1\]

-   *Dividends* are the total dollar amount of dividends earned on the
    Principal for the term of the account.

-   *Principal* is the amount of funds assumed to have been deposited at
    the beginning of the account.

-   *Days in Term* are the actual number of days in the term of the
    account.

##### APY Calculation {#apy-calculation .unnumbered}

The dividend amounts from the examples provided in "*Examples of
Dividend Calculations in Determining Dividends Used in the APY
Calculation*" have been used in the APY examples provided in this
section. APY examples have been provided for a non-term share account, a
term share account, a stepped-rate account, a tiered-rate account, and a
non-compounding multi-year term share account. Also provided are
illustrations and examples of APY short-cuts.

##### APY Calculation for a Non-Term Share Account {#apy-calculation-for-a-non-term-share-account .unnumbered}

[EXAMPLE]{.underline}:

Assume the same facts of Example 1, i.e., the account is a regular share
account with no stated maturity. Principal is \$1,000. The credit union
compounds monthly. The dividend rate is 5.00%. Dividend amount for the
year is \$51.16190. (See "*Examples of Dividend Calculations in
Determining Dividends Used in the APY Calculation*", Example 1 for the
dividend calculation.) Placing the numbers in the APY formula, the APY
is 5.12%.

APY = 100\[(1 + Dividends/Principal)^(365/Days\ in\ Term)^ -1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          \$51.16190 divided by                      

                   \$1,000                      Result:       .05116190

  Step 2:          .05116190 plus 1             Result:       1.05116190

  Step 3:          1.05116190 raised to the                   

                   exponent of 365                            

                   divided by 365               Result:       1.05116190

  Step 4:          1.05116190 minus 1           Result:       .05116190

  Step 5:          .05116190 times 100          Result:       5.116190

  Step 6:          Round 5.116190               Result:       5.12%
  ------------ --- ------------------------ --- --------- --- --------------

Step 3 may be omitted if the "Days in Term" are 365. In other words, if
the term is one year or the account has not stated maturity; such as
regular shares, share drafts, etc., step 3 may be omitted. If step 3 is
required, the calculating equipment, i.e., calculator, must have an
exponent function as illustrated below. (See Rounding and Accuracy Rules
for the APY" for rounding rules for APY).

EXPONENT FUNCTION: Y^x^

The APY reflects only dividends and does not include the value of any
bonus and it excludes any amounts that are determined by circumstances
that may or may not occur. The APY can be calculated using an
anticipated (projected or prospective) dividend rate or the dividend
rate at the last dividend declaration date. If an APY is based on
anticipated (projected or prospective) dividends, this must be disclosed
as such in the account disclosures and advertisements.

##### APY Calculation for a Term Share Account

The APY for term share accounts may be based on either the actual number
of days during the applicable period, or the number of days that would
occur for any actual sequence of that many calendar months. However, the
same number of days, "Days in Term", used to calculate the dividend
amount must also be used to calculate the APY.

EXAMPLE:

Assume the same facts of Example 2, i.e., a 6-month share certificate
for \$1,000. The credit union compounds monthly. The actual number of
days in the share certificate is 184 (from March 1, 20X5 to August 31,
20X5). The number of days for any actual sequence of 6 months ranges
from 181 to 184. The dividend rate is 5.00%. The dividend amount for 6
months on 184 days (actual number of days) is \$25.47167. (See
"*Examples of Dividend Calculations in Determining Dividends Used in the
APY Calculation*", Example 3 for the dividend calculation.) Placing the
numbers in the APY formula, the APY is 5.12%.

APY = 100\[(1 + Dividends/Principal)^(365/Days\ in\ Term)^-1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          \$25.47267 divided by                      

                   \$1,000                      Result:       ..02547167

  Step 2:          .02547167 plus 1             Result:       1.02547167

  Step 3:          1.02547167 raised to the                   

                   exponent of 365                            

                   divided by 184               Result:       1.051160979

  Step 4:          1.051160979 minus 1          Result:       .051160979

  Step 5:          .051160979 times 100         Result:       5.1160979

  Step 6:          Round 5.1160979              Result:       5.12%
  ------------ --- ------------------------ --- --------- --- --------------

In step 3, 365 is divided by 184 (actual number of days) versus 181,
182, or 183 (the number of days for actual sequence of 6 months) because
the dividend amount of \$25.47 is based on 184 days. If the dividend
amount was based on 181 days, step 3 would be 365 divided by 181. (See
"Rounding and Accuracy Rules for the APY" for rounding rules for the
APY).

The illustrations above are shown per the definition of the APY;
dividends are based on the term of the account. The term for the regular
share account, in "*APY Calculation for a Non-Term Share Account*" is
365 days since non-term share accounts are assigned a "term" of 365. The
term for the 6-month share certificate, in the example of this section
can be 181, 182, 183, or 184 days. However, since both examples were of
monthly compounding, the APY results were the same: 5.12%.

##### Short-Cuts to the APY Calculation

[Short-Cut Illustration 1]{.underline}:

A short-cut for calculating the APY without first calculating the
dividend amount can be used on accounts with a single dividend rate (no
stepped-rate accounts or pure/split-rate tiered-rate accounts) and a
365-day term or no term, i.e., regular share accounts and share draft
accounts. This short-cut formula cannot be used in a leap year.

The short-cut is Formula 1 of the dividend calculation method with one
difference: "Principal" is replaced by 100 in the formula. (See "*APY
Formula*" for Formula 1 of the dividend calculation method).

APY = 100 \* \[(1 + (Comp'ding Periods
Term)^(Nominal\ Rate/Comp'ding\ Period)^-1\]

-   *Nominal rate* is determined by dividing the dividend rate (not
    expressed as a percentage) by 100 or the dividend rate expressed as
    a decimal.

-   *Comp'ding Period* stands for a compounding period. Use the
    following based on the compounding period: Daily - 360 or 365,
    Weekly - 52, Bi-Weekly - 26, Semi-Monthly - 24, Monthly - 12,
    Quarterly - 4, Semi-annually - 2, Annually - 1.

-   *Comp'ding Periods in Term* stands for compounding periods in term.
    If a daily compounding period is used, i.e., 360 or 365, the term is
    expressed in the number of days: 365. If a compounding period other
    than daily is used, the term is expressed as the same number that
    was expressed for the compounding period: Weekly - 52, Bi-Weekly -
    26, Semi-Monthly - 24, Monthly - 12, Quarterly - 4, Semi-annually -
    2, Annually - 1.

    [Short-Cut Illustration 2]{.underline}:

    A short-cut where the dividend amount used in the APY calculation
    can be based on a single compounding period within the term or year
    can be used if two conditions are met. The two conditions are: 1)
    the same dividend rate is applicable to all the periods within the
    year/step (for non-term share accounts and stepped-rate accounts),
    or within the term (for term share accounts) (no pure/split-rate
    tiered-rate accounts), and 2) if a term share account is greater
    than a year, the compounding period is other than none (no
    compounding or at maturity).

    If different dividend rates exist within a term/step or a year, or
    the compounding period is none (no compounding or at maturity) for a
    term share account that is greater than one year the APY calculation
    must be based on dividends for the full term or year of the account
    rather than on a single compounding period within the term or year
    of the account.

    This short-cut can be used when the dividend rate is 10.00% or less
    without an erroneous APY resulting. However, since the higher
    dividend rates may result in an erroneous APY when this short-cut is
    used, this short-cut should not be used when the dividend rate is
    greater than 10.00% (the APY calculation must be based on dividends
    for the full term or year of the account).

    [EXAMPLE 1]{.underline}:

    Assume the same facts of Example 1, except that the dividend amount
    is \$4.24658 which is based on a single month in the year. The days
    in the month are 31 days. (See "*Examples of Dividend Calculations
    in Determining Dividends Used in the APY Calculation*", Example 3
    for the dividend calculation). Placing the numbers in the formula,
    the APY is 5.12%.

    APY = 100\[(1 + Dividends/Principal) ^(365/Days\ in\ Term)^ -1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          \$4.24658 divided by                       

                   \$1,000                      Result:       .00424658

  Step 2:          .00424658 plus 1             Result:       1.00424658

  Step 3:          1.00424658 raised to the                   

                   exponent of 365                            

                   divided by 31                Result:       11.05119867

  Step 4:          1.051159867 minus 1          Result:       .051159867

  Step 5:          .051159867 times 100         Result:       5.1159867

  Step 6:          Round 5.1159867              Result:       5.12%
  ------------ --- ------------------------ --- --------- --- --------------

(See "Rounding and Accuracy Rules for the APY" for rounding rules for
the APY).

[EXAMPLE 2]{.underline}:

Assume the same facts of Example 2, except that the dividend amount is
\$4.24658 which is based on a single month in the 6-month share
certificate. The days in the month are 31 days. Placing the numbers in
the APY formula, the APY is 5.12%. The illustration of the APY
calculation in Example 1 of this section is the same illustration that
would be used for this example.

##### APY Calculation for a Stepped Rate Account

Section 707.2(w), *Definitions*, defines a stepped-rate account as an
account that has two or more dividend rates that take effect in a
succeeding period and are known when the account is opened. For
stepped-rate accounts a single composite APY must be disclosed.

[EXAMPLE]{.underline}:

Assume the dividend rate for the first month of a 6-month share
certificate if 5.00% and the dividend rate for the remaining 5 months is
4.75%. The compounding period is monthly. The principal amount is
\$1,000. Since both conditions of Short-Cut Illustration 2 of
"*Short-Cuts to the APY Calculation*" are met, the APY for the two steps
can be based on a single compounding period. Placing the numbers in
Formula 2 of the dividend calculation, the dividend amount for the first
step's first month of 31 days is \$4.24658 and the dividend amount for
the second step's first month of 28 days is \$3.65931.

Dividends = Principal \* Daily Dividend Rate \* Days in Term

Month with 31 days

  ------------ --- ------------------------ --- --------- --- ---------------
  Step 1:          5.00 divided by 100          Result:       .05

  Step 2:          .05 times 1/365              Result:       .000136986

  Step 3:          .000136986 times 31          Result:       .004246575

  Step 4:          .004246575 times \$1,000     Result:       \$4.246575342

  Step 5:          Round \$4.246575342          Result:       \$4.24658
  ------------ --- ------------------------ --- --------- --- ---------------

Month with 28 days

  ------------ --- ------------------------ --- --------- --- ---------------
  Step 1:          4.75 divided by 100          Result:       .0475

  Step 2:          .0475 times 1/365            Result:       .000130137

  Step 3:          .000130137 times 28          Result:       .003643836

  Step 4:          .003843836 times                           

                   \$1,004.24658                Result:       \$3.659309456

  Step 5:          Round \$3.659309456          Result:       \$3.65931
  ------------ --- ------------------------ --- --------- --- ---------------

(See "Rounding Rules for Dividends Used in the APY Calculation" for
rounding rules for the dividend amounts).

Placing the numbers in the APY formula, the composite APY is 4.99%.

APY = 100\[(1 + Dividends/Principal)^(365/Days\ in\ Term)^-1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          \$4.24658 + \$3.65931        Result:       \$7.90589

  Step 2:          .00790589 + 1                Result:       1.00790589

  Step 3:          1.00790589 raised to the                   

                   exponent of 365                            

                   divided by 59                Result:       1.04988522

  Step 4:          1.04988522 minus 1           Result:       04988522

  Step 5:          .04988522 times 100          Result:       4.988522

  Step 6:          Round to 2 decimal           Result:       4.99
                   places                                     
  ------------ --- ------------------------ --- --------- --- --------------

(See "Rounding and Accuracy Rules for the APY" for rounding rules for
the APYs).

##### APY Calculation for Tiered Rate Account

Section 707.2(y), *Definitions*, defines a tiered-rate account as an
account that has two or more dividend rates that are applicable to
specific balances. There are two types of tiered-rate accounts:
pure/split-rate and the hybrid/plateau tiered-rate account. Example 1 is
based on a pure/split-rate tiered-rate account where the dividend rate
is paid only on the portion of the share account balance that falls
within each tier. Example 2 is a hybrid/plateau tiered-rate account
where a dividend rate is paid based on the entire amount in the account.

[EXAMPLE 2]{.underline}: Pure/Split-rate Tiered-rate Account

Assume the dividend rate for amounts from \$0.1 to \$2,500 is 5.00%, for
amounts from \$2,500.01 to \$10,000 is 5.25%, and for amounts from
\$10,000.01 and greater is 5.50%. If a member has \$11,000 on deposit; a
dividend rate of 5.00% would be applied to \$2,500, a dividend rate of
5.25% would be applied to \$1,000 (\$11,000 minus \$10,000). For
pure/split-rate tiered-rate accounts, two APYs must be disclosed for
each tier except for the first tier. Therefore a total of five APYs
would be disclosed; one APY for the first tier (dividend rate of 5.00%),
two APYs for the second tier (dividend rate of 5.25%), and two APYs for
the third tier (dividend rate of 5.50%). The two APYs disclosed in the
second and third tiers are based on the tier's lower limit (\$2,500.01
for the second tier and \$10,000.01 for the third tier) and the tier's
higher limit (\$10,000 for the second tier and \$100,000 for the third
tier). If the board of directors has not determined a maximum amount for
the third tier's higher limit, it is recommended that the insured limit
of \$100,000 be used.

The APY for the first tier would be based on a principal amount of
\$2,500 at 5.00%. The APYs for the second and third tiers are based on
two different principal amounts; a principal amount that meets the
tier's lower limit and a principal amount that meets the tier's higher
limit. Illustrations of the principal amounts and the dividend
calculations are as follows:

Second Tier's:

-   Lower Limit - Principal amount is \$2,500.01. Multiply \$2,500 by
    5.00% and multiply \$.01 by 5.25%. Add up the two dividend amounts
    and place it in the APY formula. The result will be the APY for the
    second tier's lower limit.

-   Higher Limit - Principal amount is \$10,000. Multiply \$2,500 by
    5.00% and multiply \$7,500 (\$10,000 minus \$2,500) by 5.25%. Add up
    the two dividend amounts and place it in the APY formula. The result
    will be the APY for the second tier's higher limit.

    Third Tier's:

-   Lower Limit - Principal amount is 10,000.01. Multiply \$2,500 by
    5.00%, multiply \$7,500 (\$10,000 minus \$2,500) by 5.25%, and
    multiply \$.01 by 5.50%. Add up the three dividend amounts and place
    it in the APY formula. The result will be the APY for the third
    tier's lower limit.

-   Higher Limit - Principal amount is \$100,000. Multiply \$2,500 by
    5.00%, multiply \$7,500 by 5.25%, and multiply \$90,000 by 5.50%.
    Add up the three dividend amounts and place it in the APY formula.
    The result will be the APY for the third tier's higher limit.

    [EXAMPLE 1]{.underline}: Hybrid/Plateau Tiered-rate Account

    Assume the same facts of Example 1 of this section: the dividend for
    amounts from \$.01 to \$2,500 is 5.00%, for amounts from \$2,500.01
    to \$10,000 is 5.25%, and for amounts from \$10,000.01 and greater
    is 5.50%. If a member has \$5,050.00 on deposit, a dividend rate of
    5.25% would be applied to \$5,050.00. If a member has \$11,000 on
    deposit, a dividend rate of 5.50% would be applied to \$11,000.

##### APY Calculation for a Non-compounding Multi-Year Term Share Account {#apy-calculation-for-a-non-compounding-multi-year-term-share-account .unnumbered}

This section provides guidance on calculating the APY on term share
accounts with a maturity greater than one year. Term share accounts with
a maturity greater than one year that do not compound "no compounding or
at maturity" will result in an APY that seems anomalous. For term share
accounts with terms less than one year, the APY formula results in a
rate greater than the dividend rate, even for accounts that do not
compound. That's because the formula assumes that dividends are
compounded at maturity, and the results are "annualized". As can be
illustrated, the APY for a non-compounding term share account with terms
less than one year is the same APY that would result if the term was
equated to a compounding period. The APY for a 3-month non-compounding
share certificate at a 5% dividend rate is 5.09%. The APY for a
12-month, quarterly compounding share certificate at a 5% dividend rate
is 5.09%. Equating the 3-month term to quarterly compounding, the APY
result is the same.

For term share accounts with maturities longer than one year that do not
compound at least annually, the APY is less than the dividend rate.
That's because these accounts are also annualized.

[EXAMPLE 1]{.underline}:

Assume a two-year (730-day) non-compounding share certificate for
\$1,000. The dividend rate is 5.00%. The daily rate is 1/365. The
dividend amount over the two year term is \$100 (.05\*(1/365)\*\$1,000).
Placing the numbers in the APY formula, the APY is 4.88%.

APY = 100\[(1 + Dividends/Principal)^(365/Days\ in\ Term)^-1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          \$100 divided by \$1,000     Result:       .1

  Step 2:          .1 plus 1                    Result:       1.1

  Step 3:          1.1 raised to the                          
                   exponent of                                

                   365 divided by 730           Result:       1.048808848

  Step 4:          1.04880884 minus 1           Result:       .048808848

  Step 5:          .048808848 times 100         Result:       4.8808848

  Step 6:          Round 4.8808848              Result:       4.88%
  ------------ --- ------------------------ --- --------- --- --------------

(See "Rounding and Accuracy Rules for the APY" for rounding rules for
the APY).

[EXAMPLE 2]{.underline}:

To understand how the APY on a two-year (730-day) non-compounding share
certificate is less than the dividend rate of 5.00%, assume the
following: a member opened a one-year annual compounding share
certificate with a dividend rate of 4.88088% (should be expressed to
five decimal places) and then rolled the principal and dividends into
another identical one-year annual compounding share certificate with a
dividend rate of 4.88088% (When expressed to five decimal places). The
dividend amount for the two years is the same: \$100.00

  ------------ --- ------------------------ --- --------- --- ------------------
  **Year One**                                                

  Step 1:          4.88088 divided by 100       Result:       .0488088

  Step 2:          \$1,000 times .0488088       Result:       \$48.8088

  Step 3:          Round \$48.8088              Result:       \$48.81

                                                              

  **Year Two**                                                

  Step 4:          \$1,000 plus \$48.81         Result:       \$1,048.81

  Step 5:          \$1,048.81 times             Result:       \$51.191157528
                   .0488088                                   

  Step 6:          \$51.191157528 plus                        

                   \$1,048.81                   Result:       \$1,100.00115753

  Step 7:          \$1,100.001157543                          

                   minus \$1,000                Result:       \$100.00115753

  Step 8:          Round \$100.0015753          Result:       \$100.00
  ------------ --- ------------------------ --- --------- --- ------------------

Thereby, terms being equal, the dividend rate of an annual compounding
term share account is equivalent to the APY of a multi-year
non-compounding term share account. (See "Rounding Rules for Dividends
Used in the APY Calculation" for rounding rules for the dividend
amount.)

##### Rounding and Accuracy Rules for the APY

Section 707.3, General Disclosure Requirements, outlines the rounding
and accuracy requirements for the APY.

Rounding rules require APYs to be rounded to the nearest 1/100 of 1%
(.01% or .0001) and expressed to two decimal places. As an example, an
APY of 5.116% would be rounded to 5.12%. The second decimal place should
be rounded up if the third decimal place is five or more. To illustrate,
the third decimal place of 5.11[6]{.underline} is "6", thereby the
second decimal place would be rounded up from a "1" to a "2".

The tolerance rate for APY accuracy is not more than 1/20 of 1% (.05% or
.0005) above or below the APY as determined in Appendix A, Part I of
Part 707, *Truth In Savings*.

#####  Annual Percentage Yield Earned (APYE)

Appendix A, Part II of Part 707, *Truth In Savings*, provides the APYE
formula that is to be used in periodic statements. Section 707.2(t),
Definitions, defines periodic statements as statements that set forth
information about an account (other than a term share account or
passbook account) and are provided to a member on a regular basis four
or more times a year. Regulation E identifies when statements must be
provided and when they need not be provided if certain conditions are
met. There are no APYE disclosure requirements for passbook accounts or
term share accounts. Section 707.2(s), Definitions, defines passbook
accounts as accounts in which the member retains a book or other
document in which the credit union records transactions on the account.
Section 707.2, Definitions, defines term share accounts as being any
share certificate, certificate of deposit, or other account with a
maturity of at least seven days in which the member generally does not
have the right to make withdrawals for six days after the account is
opened, or the account is subject to an early withdrawal penalty of at
least seven days dividends on amounts withdrawn. A term share account
could also include a club account, i.e., Christmas Club Account,
Vacation Club Account, Youth Club Account, etc., if the terms of the
club account meet the definition of a term share account.

The APYE is member specific and thereby takes into account an account's
fluctuations during the period, such as deposits and withdrawals. The
APYE is similar to the APY in that both calculations show the
relationship of dividends to a balance, for purposes of comparing an
account's yield. However, the two calculations are different; among the
differences are:

-   The APYE looks backward instead of forward. The APYE formula uses
    dividends actually earned, not dividends projected to be earned.

-   The APYE uses the average daily balance of an account during the
    period, instead of an initial principal amount, i.e., \$1,000.

    Because of these differences, an APYE disclosed on a member's
    periodic statement will not necessarily equal the APY that was
    disclosed to the member when the account was opened, even if the
    dividend rate remains the same over that period.

##### Rounding Rules for Dividends Used in the APYE Calculation {#rounding-rules-for-dividends-used-in-the-apye-calculation .unnumbered}

Dividends should be rounded to two decimals for calculating the APYE.
For boards of directors that elect to disclose an anticipated (projected
or prospective) dividend amount and APYE on statements sent more
frequently than the crediting period, the credit union does not have to
round accrued anticipated (projected or prospective) dividends to two
decimals for calculating the anticipated (projected or prospective) APYE
on the statements that are sent more frequently than the crediting
period. However, for the statement that is sent at the end of the
crediting period, the dividend earned figure must reflect the amount
actually paid. As an example, if dividends earned for the statement,
that is sent at the end of the crediting period, is \$15.08717 and the
credit union pays the member \$15.09, the credit union must use \$15.09
(not \$15.08717) to calculate the APYE.

##### APYE Formula {#apye-formula .unnumbered}

The APYE formula is in Appendix A, Part II of Part 707, Truth In
Savings. The APYE formula is as follows:

APY = 100\[(1 + Dividends earned/Balance)^(365/Days\ in\ Term)^-1\]

-   *Dividends* earned is the actual amount of dividends accrued or paid
    and credited to the account for the period.

-   *Balance* is the average daily balance in the account for the
    period.

-   *Days in Period* is the actual number of days over which the
    dividends disclosed on the statement were earned.

    Fees, bonuses, interest refunds, and extraordinary dividends are not
    included in the dividend figure for the APYE calculation. If an
    extraordinary dividend is declared, a separate dividend amount must
    be calculated and disclosed. An APYE based on the extraordinary
    dividends may be calculated and disclosed.

##### Average Daily Balance Calculation {#average-daily-balance-calculation .unnumbered}

The "balance" in the APYE calculation is defined as the average daily
balance in the account for the period. The following illustration of a
member's account activity for a month is from "Dividend Calculation
Methods":

  -------------------- -- -- -- ---- ---------------- ------- -- -- ----- ------------
                                                                          BALANCE

  Balance: December                                                       \$1,000
  31, 20X4                                                                

  Deposit: January 1,                                 200                 1,200
  20X5                                                                    

  Withdrawal: January                                 100                 1,100
  2, 20X5                                                                 

  Withdrawal: January                                 400                 700
  10, 20X5                                                                

  Deposit: January 15,                                200                 900
  20X5                                                                    

  Withdrawal: January                                 1,000               -100
  16, 20X5                                                                

  Deposit: January 18,                                300                 200
  20X5                                                                    

  Deposit: January 21,                                700                 900
  20X5                                                                    

  Withdrawal: January                                 100                 800
  31, 20X5                                                                
  -------------------- -- -- -- ---- ---------------- ------- -- -- ----- ------------

[EXAMPLE 1]{.underline}:

The following illustrates how the average daily balance is determined
based on the member's account activity:

  --------- -- ----- -- ------ --------------- --------------- ----- -------------
                                               BALANCE x             ACCUMULATED
                                               NUMBER OF DAYS        BALANCE

                                                                     

  1/1/X5                                       \$1,200 x 1           \$1,200

  1/2/X to                                     1,100 x 8             8,800
  1/9/X5                                                             

  1/10/X5                                      700 x 5               3,500
  to                                                                 
  1/14/X5                                                            

  1/15/X5                                      900 x 1               900

  1/16/X5                                      0 x 2                 0
  to                                                                 
  1/17/X5                                                            

  1/18/X5                                      200 x 3               600
  to                                                                 
  1/20/X5                                                            

  1/21/X5                                      900 x 10              9,000
  to                                                                 
  1/30/X5                                                            

  1/31/X5                                      800 x 1               800

  TOTAL                                        31                    24,800
  --------- -- ----- -- ------ --------------- --------------- ----- -------------

Dividing the accumulated "end of day" balances of \$24,800 by 31 (the
total number of days in the dividend period), the average daily balance
is \$800.00000. For overdrawn accounts, use zero as the balance.
Negative balances cannot be used in determining the average daily
balance.

A credit union should round the average daily balance to five or more
decimals. An average daily balance of \$800.12345678 would be rounded to
no less than \$800.12346. The fifth decimal place should be rounded up
if the sixth decimal place is five or more. The sixth decimal place of
\$800.12345678 is a "6", thereby the fifth decimal place would be
rounded up from "5" to "6".

##### 

##### APYE Calculations

[EXAMPLE 1]{.underline}:

Assume that \$3.40 of dividends is earned during the period using the
daily balance method. The dividend rate is 5.00% using a daily rate of
1/365. The compounding period is monthly. The crediting period is
monthly. The statement period is monthly. The account activity is from
"Average Daily Balance Calculation".

  --------- -- ---- -- ----- -------------- ------------------- ---- ---------------
                                            **BALANCE x RATE x       **DIVIDEND
                                            NUMBER OF DAYS**         AMOUNT**

                                                                     

  1/1/X5                                    \$1,200 x                \$0.164383562
                                            .00013698630 x 1         

  1/2/X to                                  1,100 x                  .205479452
  1/9/X5                                    .00013698630 x 8         

  1/10/X5                                   700 x .00013698630       .479452055
  to                                        x 5                      
  1/14/X5                                                            

  1/15/X5                                   900 x .00013698630       .123287671
                                            x 1                      

  1/16/X5                                   0 x .00013698630 x       0.000000000
  to                                        2                        
  1/17/X5                                                            

  1/18/X5                                   200 x .00013698630       0.082191781
  to                                        x 3                      
  1/20/X5                                                            

  1/21/X5                                   900 x .00013698630       1.232876712
  to                                        x 10                     
  1/30/X5                                                            

  1/31/X5                                   800 x .00013698630       0.109589041
                                            x 1                      

  TOTAL                                     31                       3.397260274
  --------- -- ---- -- ----- -------------- ------------------- ---- ---------------

Placing the numbers in the APYE formula, the APYE is 5.12%. The
"balance" (average daily balance) of \$800.00 is based on Example 1 of
"Average Daily Balance Calculation".

APY = 100\[(1 + Dividends earned/Balance)^(365/Days\ in\ Term)^-1\]

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          Round \$3.397260274          Result:       \$3.40

  Step 2:          \$3.40 divided by            Result:       .004250000
                   \$800.00000                                

  Step 3:          .004250000 plus 1            Result:       1.004250000

  Step 4:          1.004250000 raised to                      

                   the exponent of 365                        

                   divided by 31                Result:       1.051202017

  Step 5:          1.051202017 minus 1          Result:       .051202017

  Step 6:          .051202017 times 100         Result:       5.120201670

  Step 7:          Round 5.120201670            Result:       5.12
  ------------ --- ------------------------ --- --------- --- --------------

In this example, since the dividend earned figure is the amount actually
paid (statements are not sent more frequently than dividends are
credited or compounded), the credit union must round the dividends to
two decimals for calculating the APYE. (See "*Rounding Rules for
Dividends Used in the APYE Calculation*" for rounding rules for the
dividend amount used in the APYE formula and see "*Rounding and Accuracy
Rules for the APYE*" for rounding rules for the APYE).

##### Special APYE Formula

The special formula is used when a credit union using the daily balance
method to accrue dividends sends periodic statements more often than the
period for which dividends are compounded. As an example, an account
that receives quarterly statements (since the compounding period is
quarterly) and is subject to Regulation E's rule (calling for monthly
statements when an electronic fund transfer has occurred). A credit
union may, but need not, use this formula to calculate the APYE for the
quarterly statement when no monthly statements are issued for the
quarter. However, this special APYE formula must be used to calculate an
APYE that is disclosed on the monthly statements issued for the quarter.
Also, if the dividend period is monthly, the dividend amount and APYE
(that is based on the special APYE formula) will be "earned but
uncredited". If the dividend period is quarterly, the dividend amount
and APYE (that is based on the special APYE formula) will be an
anticipated (projected or prospective) dividend amount and APYE. The
special APYE formula in Appendix A, Part II (B) of Part 707, *Truth In
Savings* is:

  ---------------- --------------------------- ---------------------- --------------
  APYE = 100 \[{1+ Dividends earned/Balance    }^(365/Compounding)^   -1\]

                   Days in Period                                     
                   (Compounding)                                      
  ---------------- --------------------------- ---------------------- --------------

-   *Dividends earned* is the actual amount of dividends accrued or paid
    and credited to the account for the period.

-   *Balance* is the average daily balance in the account for the
    period.

-   *Days in Period* is the actual number of days over which the
    dividends disclosed on the statement were earned.

-   *Compounding* is the actual number of days in each compounding
    period.

#####  Special APYE Calculation

Assume the same facts as in "Average Daily Balance Calculation" and in
Example 1 of "APYE Calculations", except the account compounds
quarterly. Also, assume dividends are credited quarterly, this is the
first month of the quarter, there are 31 days in the fist month, and 91
days in the quarter. Placing the numbers in the special APYE formula,
the anticipated APYE is 5.09%.

  ---------------- ----------------------------- --------------------- --------------
  APYE = 100 \[{1+ [Dividends                    ^(365/Compounding)^ } -1\]
                   earned/Balance]{.underline}                         
                   Days in Period (Compounding)                        

  ---------------- ----------------------------- --------------------- --------------

  ------------ --- ------------------------ --- --------- --- --------------
  Step 1:          Round to five,               Result:       \$3.39726
                   \$3.397260274                              

  Step 2:          Round to five,               Result:       \$800.00000
                   \$800.00000                                

  Step 3:          3.39726 divided by                         

                   \$800.00000                  Result:       .004246575

  Step 4:          .004246575 divided by 31     Result:       .000136986

  Step 5:          .000136986 times 91          Result:       .012465752

  Step 6:          .012465752 plus 1            Result:       1.012465752

  Step 7:          1.012465752 raised to                      

                   the exponent of 365                        

                   divided by 91                Result:       1.050946264

  Step 8:          1.050946264 minus 1          Result:       .050946218

  Step 9:          .050946218 times 100         Result:       5.094621775

  Step 10:         Round 5.094621775            Result:       5.09%
  ------------ --- ------------------------ --- --------- --- --------------

Since the compounding and crediting period is quarterly, if a monthly
statement is sent, the credit union does not have to round accrued
dividends to two decimals for calculating the anticipated (projected or
prospective) APYE for the months that statements are sent more
frequently than dividends are compounded (the first monthly statement
and the second monthly statement issued during the quarter). However, on
the quarterly statement, the dividends earned figure used in the APYE
formula must reflect the amount actually paid. As an example, if
dividends earned for a statement period is \$15.08717 and the credit
union pays the member \$15.09, the credit union must use \$15.09 (not
\$15.08717) to calculate the APYE.

##### Dividend Period Length Versus Statement Period Length for the APYE

A credit union can choose to disclose APYEs based on the length of the
dividend period. As an example, a credit union that compounds and
credits dividends monthly but issues quarterly statements can show on
the quarterly statement a single APYE for the entire quarter, or three
APYEs (one for each crediting period in the statement period). Generally
speaking, other things being equal, the APYE will be higher (or at least
no lower) if the credit union chooses to disclose for a shorter period.

[EXAMPLE 1]{.underline}:

The following illustrates three monthly APYEs and one quarterly APYE.
The dividend calculation method is based on the average daily balance.

  ----------- -- --- ---- --------------- ---------- ----- ---------- ----- ----------
                                          January          February         March

                                                                            

  Dividend                                5.00%            5.00%            5.00%
  Rate                                                                      

  Dividends                               \$4.25           \$3.85           \$4.28

  Average                                 1,000.00         1,004.25         1,008.10
  daily                                                                     
  balance                                                                   

  Days in                                 31               28               31
  Period                                                                    

  APYE                                    5.12%            5.11%            5.11%
  ----------- -- --- ---- --------------- ---------- ----- ---------- ----- ----------

If instead, the credit union based the APYE on the entire quarter, the
result would be:

  ----------- -- --- ---- ----------------------------------------- -----------
  Dividends                                                         \$12.38

  Average                                                           1,000.00
  daily                                                             
  balance                                                           

  Days in                                                           90
  Period                                                            

  APYE                                                              5.11%
  ----------- -- --- ---- ----------------------------------------- -----------

[EXAMPLE 2]{.underline}:

Assume the same facts as in Example 1 of this section, except the
dividend rates are different for each month.

  ----------- -- --- ---- --------------- ---------- ----- ---------- ----- ----------
                                          January          February         March

                                                                            

  Dividend                                5.00%            5.25%            5.50%
  Rate                                                                      

  Dividends                               \$4.25           \$4.04           \$4.71

  Average                                 1,000.00         1,004.25         1,008.29
  daily                                                                     
  balance                                                                   

  Days in                                 31               28               31
  Period                                                                    

  APYE                                    5.12%            5.37%            5.64%
  ----------- -- --- ---- --------------- ---------- ----- ---------- ----- ----------

If instead, the credit union based the APYE on the entire quarter, the
result would be:

  ----------- -- --- ---- ----------------------------------------- -----------
  Dividends                                                         \$13.00

  Average                                                           1,000.00
  daily                                                             
  balance                                                           

  Days in                                                           90
  Period                                                            

  APYE                                                              5.38%
  ----------- -- --- ---- ----------------------------------------- -----------

##### APYE Requirements When the Collected Balance Method is Used to Accrue and Pay Dividends

Credit unions that accrue or pay dividends on non-cash items; such as
checks, must base the balance in the APYE calculation on the same
balance method used to calculate dividends. As an example, a credit
union that accrues or pays dividends on non-cash items using the
collected balance must use the collected balance to calculate the
"average daily balance" in the APYE formula.

The choice of accruing or paying dividends on the "collected" balance
versus the "ledger" balance may affect a member's dividend amount. Other
things being equal, a credit union that pays on the ledger balance will
pay more in dividends than a credit union that pays on the collected
balance (since the ledger balance is at least as large as the collected
balance). Therefore, in order to accurately reflect the APYE and provide
useful information to the member, the "balance" (average daily balance)
used to calculate the APYE must be the same balance method that was used
to calculate dividends.

##### APYE on Closed Accounts

When members close their accounts during a dividend period and
contractually forfeit their accrued dividends, those forfeited dividends
should not be included in the APYE calculation for the period nor in the
anticipated (projected or prospective) APYE calculation for the period
(where statements are sent more frequent than dividends are credited).
When members close their accounts during the dividend period and do not
forfeit their accrued dividends, and when members open an account during
the dividend period, the "balance" (average daily balance) used in the
APYE calculation should only reflect the number of days the account was
open versus the number of days in the period.

##### Rounding and Accuracy Rules for the APYE

Section 707.3, *General Disclosure Requirements*, outline the rounding
and accuracy requirements for APYE.

Rounding rules require the APYE to be rounded to the nearest 1/100 of 1%
(.01%) and expressed to two decimal places. As an example, an APYE of
5.116% would be rounded to 5.12%. The second decimal should be rounded
up if the third decimal is five or more. To illustrate, the third
decimal of 5.11[6]{.underline} is a "6", thereby the second decimal
would be rounded up from a "1" to a "2".

The tolerance range for APYE accuracy is no more than 1/20 of 1% (.05%)
above or below the APYE as determined in *Truth In Savings*, Appendix A,
Part II of Part 707.

**Interest Refunds Payable**

Section 701.24 of the NCUA\'s Rules and Regulations for federal credit
unions sets forth the authority for federal credit unions to refund
interest to members. Under the requirements of 701.24(g), interest
refunds should be shown as a reduction of interest income on the credit
union\'s books. Also, on the credit union\'s Statement of Income,
interest refunds should be recorded as current changes in the fiscal
period to which they apply. Thus, when interest refunds are declared by
the board during the first month following the close of the dividend
period, they should be recorded as of the close of the dividend period
by a debit to \"Interests Refunds\" and credit to \"Interest Refunds
Payable\".

Interest refunds declared in the last month of the dividend period
should be recorded in the same manner. The interest refunds thus will be
shown on the Statement of Income prepared at the close of the period to
which they apply. When the interest refunds liability credited to this
account is liquidated, this account should be debited and the offsetting
credit should be to \"Shares\" or \"Cash\".

### Computation and Distribution of Interest Refunds

The following is a summary of the major factors involved when an
interest refund is considered or authorized by the officials:

a)  An interest refund can be made at the end of a dividend period only
    if dividends are declared and paid for that period. Only members of
    record at the close of business on the last day of the dividend
    period will be eligible for a refund of interest.

b)  The interest refund shall be determined as a percentage of the total
    interest paid by the member. The board of directors may determine
    that certain loan categories, which have not made significant
    contributions to interest income, may be excluded from the refund.
    An exclusion of the refund on loans that are delinquent 2 or more
    months is also permitted.

The board will need to determine the rate of the refund. This should
depend on the amount of funds available as well as the reserve position
of the credit union. The interest refund percentage can be determined by
dividing the amount available for refund by the total interest paid by
eligible borrowers. For example, if \$100,000 in interest income has
been collected, and \$10,000 is available for the refund (after
consideration of dividends, other operating and non-operating expenses,
required reserve transfers, and any other additions to reserves), the
interest refund rate is 10 percent (\$10,000 divided by \$100,000 = .10
or 10 percent).

When the board determines that certain loan classifications are not
considered eligible for receiving a refund, the interest refund is
calculated by subtracting income earned by those loans from total income
earned. The same would apply when the board of directors has determined
that various loan categories will receive interest refunds at different
rates. The interest income must be broken down into categories based on
the different loan categories in order to determine the total interest
refund.

In any case, interest income should be adjusted to delete income from
borrowers who cease to be members before the close of business on the
last day of the dividend period when the refund is declared. However,
borrowers who have paid off their loans, but are still members, must be
considered in the determination of an interest refund.

c)  The refund of interest cannot be made unless it is authorized at the
    end of the period where a dividend on shares has also been declared
    and paid. But at that time, the refund can be authorized for prior
    periods where dividends were declared and paid but interest refunds
    were not declared. This prior period authorization may only be
    within the calendar year.

d)  After the procedures for refunding interest have been established
    (a. - c. above), record the total amounts of loan interest paid as
    determined from the members\' individual share and loan ledgers.
    This should include interest paid by current members who paid off a
    loan in the period included in the interest refund authorization.

e)  The amount of interest recorded is multiplied by the applicable
    interest refund rate, as approved by the board. The amount should
    either be credited to the members\' savings accounts, paid by check,
    or a combination of both. It is suggested that the interest refund
    calculation worksheet be filed with the dividend record.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record interest refunds declared:

  -------------- --------------------------------------- ---------- ---------------
  Dr.-Interest                                           \$750      
  Refunds                                                           

                 Cr.-Interest Refunds Payable                       \$750
  -------------- --------------------------------------- ---------- ---------------

b)  To record the liquidation of the interest refunds liability by
    credits to shares and by cash payments:

  -------------- ----------------------------------------- -------- ---------------
  Dr.-Interest                                             \$750    
  Refunds                                                           
  Payable                                                           

                 Cr.-Shares                                         \$625

                 Cr.-Cash                                           125

                                                                    
  -------------- ----------------------------------------- -------- ---------------

[Note]{.underline}: When the amount recorded as an interest refund
liability was based on an estimate, the difference between the total
actual amount and the estimate originally recorded will require an
adjusting entry. If the total actual distribution exceeded the estimate,
the difference should be charged as of the liquidation date to
\"Interest Refunds\" and credited to \"Interest Refunds Payable\". If
the estimate exceeded the total actual amount distributed, the reverse
entry should be made as of the liquidation date, debiting the difference
to "Interest Refunds Payable" and crediting "Interest Refunds".

***Detailed Transactions***

Credit:

a)  To record the amount of interest refunds declared.

b)  For the excess, if any, of actual interest refunds distributed at
    the authorized rate over the amount recorded in the credit entry
    above.

Debit:

a)  To record the amount of interest refunds distributed to members.

b)  For the excess, if any, of interest refunds recorded in the entry
    above, over the actual interest refunds distributed to members based
    on the authorized rate.

**Alternative Interest Refund Procedures**

Federal credit unions that pay dividends more frequently than annually
may wish to employ one of the following alternatives in recording and
paying interest refunds. Interest refunds may be authorized for a
specific regular share account dividend period, but the payment of the
interest refunds may be deferred and paid in conjunction with the
closing of a regular share account dividend period later in the year. It
is at that time that the board of directors decides whether the
anticipated interest refunds are to be authorized and paid based upon
available earnings. If so, the amount in interest refunds payable should
be cleared at this time.

A credit union paying dividends quarterly or semiannually, but wishing
to pay interest refunds only one time a year for all regular share
account dividend periods during the year, may do so by following one of
the following alternatives.

### First Alternative

At the end of each regular share account dividend period during the
year, the board of directors may authorize a refund of interest for that
dividend period to be paid later in the year. The interest refund should
be set up in the liability account, "Interest Refunds Payable". The
corresponding debit should be to "Interest Refunds" for the entire
amount of interest to be refunded. If the exact amount of interest to be
refunded is not known, an estimate can be determined by multiplying the
total interest received during the accounting period by the percentage
figure selected by the board of directors to be refunded. The result
obtained from this calculation will be the maximum amount of interest
that can be refunded and this amount should be set up in the account,
"Interest Refunds Payable". By authorizing the interest refund, the
board of directors has gone on record that an interest refund for that
dividend period will be paid. In its resolution, the board should also
designate the date upon which the interest refund is to be paid to the
members or credited to their accounts.

***Second Alternative***

The second alternative involves the anticipation of the payment of an
interest refund. For example, the board of directors may set aside
earnings at the end of a regular share account dividend period which
would be earmarked for the possible payment of interest refunds at a
later date in the year. In this case, the amount of the anticipated
interest refund would be recorded as a debit to \"Interest Refunds\" and
a credit to \"Interest Refunds Payable\".

**Accrued Interest Payable (On Borrowed Funds)**

For credit unions following the accrual basis of accounting, this
account reflects the accrued unpaid liability of the credit union for
interest on borrowed funds. The account is not required for credit
unions following the modified cash basis of accounting.

Accruals should be recorded at the close of each accrual period to
reflect the interest cost for the period on borrowed funds. When
interest payments are made, the amounts paid should be debited to this
account and credited to \"Cash\". Interest should be computed on
borrowed funds based on the loan interest rate applied to the unpaid
principal amounts of the loan liability outstanding during the accrual
period. This accrual may be accomplished by applying an appropriate
interest factor to the aggregate daily balances of principal outstanding
at each effective interest rate.

### Entries in the Journal and Cash Record

All entries affecting this account should be entered in the
\"Miscellaneous\" columns of the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To accrue interest liability at the close of each accrual period:

  -------------- -------------------------------------- ---------- ----------------
  Dr.-Interest                                          \$100      
  on Borrowed                                                      
  Money                                                            

                 Cr.-Accrued Interest Payable                      \$100
  -------------- -------------------------------------- ---------- ----------------

b)  When interest is paid:

  ------------- -------------------------------------- ---------- ----------------
  Dr.-Accrued                                          \$300      
  Interest                                                        
  Payable                                                         

                Cr.-Cash                                          \$300

                                                                  
  ------------- -------------------------------------- ---------- ----------------

***Detailed Transactions***

Credit:

a)  With interest accrued during the accrual period.

Debit:

a)  With interest payments made.

ACCRUED EXPENSES AND OTHER LIABILITIES

***ACCOUNTS PAYABLE***

Accounts payable in the financial statements of a credit union typically
relate to routine operating expenses. Accounts payable may also include
liabilities for unclaimed or dormant share accounts and unpresented
checks. State escheat laws sometimes require that these amounts be
remitted to the state after a specified period of time.

######## Accounts Payable

This account reflects the open account liabilities of the credit union.
Examples of such items are shown below. Separate accounts should be
established if there is a large number of activity relating to any one
item or if outstanding balances are material relating to any one item.
The separate accounts would be numbered so they could be individually
identified.

***Invoices For Which Prompt Payment Will not be Made***

An expense item for which prompt payment will not be made may be
credited to this account with an offsetting debit to the appropriate
expense classification of accounts.

### Cash Advances

When cash is advanced to the credit union for a specific purpose and
such advance is expected to be repaid at some future date, the amount of
this advance should be credited to this account with an offsetting debit
to \"Cash\".

***Unpresented Checks***

Checks issued by the credit union which have not been presented for
payment after a reasonable period has elapsed (90 days or more) should
be credited to this account with an offsetting debit to \"Cash\". The
amount disbursed should be retained in this account until the statutory
period prescribed for presentation of checks has expired in accordance
with state escheat or abandoned property laws except for disbursed share
withdrawals and loans. Disbursements of the latter type should be
reversed, returning the amount paid to their source accounts. It may
then be cleared by debiting this account and crediting \"Other
Miscellaneous Operating Income\". In the event, however, that state
abandoned property law provides for escheating outstanding checks, such
items should be carried in \"Accounts Payable\" until the period
provided by such law has expired, after which an amount equivalent to
the total of such checks must be turned over to the state.

Most states have enacted an escheat or abandoned property law. Under
this law, property which becomes dormant for a certain period of time
must be reported and released to the state. Dormant accounts,
unpresented checks, and other abandoned items can become escheatable
under a state law. State authorities may thus conduct limited
inspections of the credit union\'s records to determine compliance with
abandoned property laws. The value of this abandoned property should be
carried in \"Accounts Payable\" until reported and released to the
state.

### Accounts of Deceased or Terminated Members

Amounts in share accounts of deceased or terminated members are
transferred to this account. Refer to the Federal Credit Union Standard
Bylaws, Article III, Section 5(d), regarding the period of time during
which an account for a deceased or terminated member could be kept open
until transferred to this account.

### Entries in the Journal and Cash Record

This account should be credited as \"Miscellaneous-Credit\" when a
liability item is set up. It should be debited as
\"Miscellaneous-Debit\" when the item is paid or other disposition is
made.

Substantial expense items due and payable should be recorded promptly
and at least at the end of a dividend period.

***Posting to the General Ledger***

The debit and credit items for Accounts Payable in \"Miscellaneous\" are
posted individually to the General Ledger. \"Explanatory Remarks\"
should show clearly the necessary details of the entries posted to this
account, such as to whom the account is payable and the purpose. In the
case of unpresented checks, a notation should be made of the check
number, date of the check and the payee.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When an expense is incurred for purchase of supplies and payment is
    not immediately made:

  ---------------- --------------------------------------------- ------ -------------
  Dr.-Stationery                                                 \$50   
  and Supplies                                                          

                   Cr.-Accounts Payable                                 \$50
  ---------------- --------------------------------------------- ------ -------------

b)  When payment is made of liabilities previously recorded in this
    account:

  -------------- --------------------------------------------- ------ -------------
  Dr.-Accounts                                                 \$50   
  Payable                                                             

                 Cr.-Cash                                             \$50

                                                                      
  -------------- --------------------------------------------- ------ -------------

***Detailed Transactions***

Credit:

a)  With open accounts and other liabilities recorded as Accounts
    Payable.

b)  With credit union checks issued after they have been outstanding a
    reasonable period (90 days or more).

Debit:

a)  With payments made of liabilities recorded in this account.

b)  With the amount of unpresented credit union checks upon expiration
    of the statutory period for presentation of checks. Offsetting
    credit should be to \"Other Miscellaneous Operating Income\", or if
    escheat to the state as required, to \"Cash\".

**Accounts Payable - Traveler's Checks And Money Orders Sold**

This account is used when the credit union is acting as an agent for the
sale of checks or money orders for another institution or organization.
This account shows the liability to the particular vendor or other party
for checks and money orders sold. The account must be supported by
accurate subsidiary records to identify the specific items sold.
Separate accounts payable may be established for each vendor, or each
item (traveler\'s checks or money orders).

### Entries in the Journal and Cash Record

This account should be credited as \"Miscellaneous-Credit\" when checks
or money orders are sold by the credit union for a third party (an
agent). The credit union is only liable for the amount due to the agent,
which should include the face amount of the item sold plus fees owed to
the agent. Any fees collected by the credit union as part of the
transaction should be entered as \"Miscellaneous Fee Income.\"

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When a credit union sells a check acting as an agent for the vendor,
    and fees are collected which are due both to the vendor and the
    credit union:

+---+---------------------------------------+---------+---------------+
| D |                                       | \       |               |
| r |                                       | $100.50 |               |
| . |                                       |         |               |
| - |                                       |         |               |
| C |                                       |         |               |
| a |                                       |         |               |
| s |                                       |         |               |
| h |                                       |         |               |
+---+---------------------------------------+---------+---------------+
|   | Cr.-Accounts Payable - Traveler's     |         | \$100.25      |
|   | Checks and Money Orders --            |         |               |
|   |                                       |         |               |
|   | (For \$100 face amount of item sold,  |         |               |
|   | with a \$.50 fee charged, half of     |         |               |
|   | which is due to the vendor.)          |         |               |
+---+---------------------------------------+---------+---------------+
|   | Cr.-Miscellaneous Fee Income          |         | .25           |
|   |                                       |         |               |
|   | (The portion of the \$.50 fee         |         |               |
|   |                                       |         |               |
|   | collected, which is due to the        |         |               |
|   |                                       |         |               |
|   | credit union.                         |         |               |
+---+---------------------------------------+---------+---------------+

b)  When the funds collected from the sale of an item are remitted to
    the vendor, including fees due to the vendor:

+---+---------------------------------------+---------+---------------+
| D |                                       | \       |               |
| r |                                       | $100.25 |               |
| . |                                       |         |               |
| - |                                       |         |               |
| A |                                       |         |               |
| c |                                       |         |               |
| c |                                       |         |               |
| o |                                       |         |               |
| u |                                       |         |               |
| n |                                       |         |               |
| t |                                       |         |               |
| s |                                       |         |               |
| P |                                       |         |               |
| a |                                       |         |               |
| y |                                       |         |               |
| a |                                       |         |               |
| b |                                       |         |               |
| l |                                       |         |               |
| e |                                       |         |               |
| - |                                       |         |               |
|   |                                       |         |               |
| T |                                       |         |               |
| r |                                       |         |               |
| a |                                       |         |               |
| v |                                       |         |               |
| e |                                       |         |               |
| l |                                       |         |               |
| e |                                       |         |               |
| r |                                       |         |               |
| ' |                                       |         |               |
| s |                                       |         |               |
| C |                                       |         |               |
| h |                                       |         |               |
| e |                                       |         |               |
| c |                                       |         |               |
| k |                                       |         |               |
| s |                                       |         |               |
| a |                                       |         |               |
| n |                                       |         |               |
| d |                                       |         |               |
|   |                                       |         |               |
| M |                                       |         |               |
| o |                                       |         |               |
| n |                                       |         |               |
| e |                                       |         |               |
| y |                                       |         |               |
| O |                                       |         |               |
| r |                                       |         |               |
| d |                                       |         |               |
| e |                                       |         |               |
| r |                                       |         |               |
| s |                                       |         |               |
+---+---------------------------------------+---------+---------------+
|   | Cr.-Cash                              |         | \$100.25      |
+---+---------------------------------------+---------+---------------+
|   |                                       |         |               |
+---+---------------------------------------+---------+---------------+

**Accounts Payable-Undistributed Payments**

This account is provided for use by credit unions to record payments
received when a delay will occur before the amounts of the credits to
the particular accounts are determined. The account is specifically
established for those credit unions using the \"total payment vendor\"
system.

When the credit union uses a computer or other mechanical equipment to
compute interest on loans, this account should be credited with the
amount of undistributed loan payments received. When the computer output
record (generally the Transaction Register) is received showing the
distribution of loan payments to principal and interest, this account
should be debited with offsetting credits being made to loans and
interest. This account should be used similarly when the distribution of
the payments received on shares, loan principal and interest is made by
the computer.

Where the credit union\'s record keeping is performed manually and in
the event the breakdown of payments received to \"Shares\", \"Loans\",
\"Interest\", etc., is not developed in time to provide the distribution
to each General Ledger account affected, the total payments may be
credited to this account and cleared when the distribution is
determined.

***Entries in the Journal and Cash Record***

Entries affecting this account should be recorded as \"Miscellaneous\"
unless, because of the volume of these entries, the credit union
designates separate grouping for this purpose.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When loan repayments are received:

+---+---------------------------------------+------+------------------+
| D |                                       | \$   |                  |
| r |                                       | 1,52 |                  |
| . |                                       | 5.00 |                  |
| - |                                       |      |                  |
| C |                                       |      |                  |
| a |                                       |      |                  |
| s |                                       |      |                  |
| h |                                       |      |                  |
+---+---------------------------------------+------+------------------+
|   | Cr.-Accounts Payable -                |      | \$1,525.00       |
|   |                                       |      |                  |
|   | Undistributed Payments                |      |                  |
+---+---------------------------------------+------+------------------+

b)  When transaction details have been determined:

  --------------- ----------------------------------- ----------- ------------------
  Dr.-Accounts                                        \$1,525     
  Payable -                                                       
  Undistributed                                                   
  Payments                                                        

                  Cr.-Loans                                       \$1,215

                  Cr.-Interest on Loans                           200

                  Cr.-Shares                                      110

                                                                  
  --------------- ----------------------------------- ----------- ------------------

***Detailed Transactions***

Credit:

a)  With amounts of loan repayments received for which the detailed
    distribution to particular general ledger accounts has not been
    determined.

Debit:

a)  With amounts of loan repayment transactions applied to the
    appropriate general ledger accounts affected.

**Accounts Payable-Undistributed Payroll Deductions Or Allotments**

This account is to be used when the credit union receives payroll
deduction checks and the individual deductions have not yet been posted
to member accounts.

Truth in Savings (TIS) requires undistributed payroll deductions to be
considered part of a member's account balance upon which dividends will
be calculated, unless a written contract exists between the member and
the credit union. The contract must indicate, the credit union may hold
the funds without adding it to the share account balance, and by doing
so, the member may forfeit any dividends due them under TIS. If the
deduction is for a loan payment, Truth in Lending (TIL) may impact the
treatment of these accounts. To avoid any TIL violations, the deduction
should be voluntary, and the member should have access to the funds.

### Entries in the Journal and Cash Record

Entries affecting this account should be recorded as \"Miscellaneous\"
in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When collections are received representing payroll deductions or
    allotments:

+---+------------------------------+---------------+------------------+
| D |                              | \$4,000       |                  |
| r |                              |               |                  |
| . |                              |               |                  |
| - |                              |               |                  |
| C |                              |               |                  |
| a |                              |               |                  |
| s |                              |               |                  |
| h |                              |               |                  |
+---+------------------------------+---------------+------------------+
|   | Cr.-Accounts Payable-        |               | \$4,000          |
|   |                              |               |                  |
|   | Undistributed payroll        |               |                  |
|   |                              |               |                  |
|   | Deductions or Allotments     |               |                  |
+---+------------------------------+---------------+------------------+

b)  When distribution details have been determined based on computer
    processing:

  --------------- ---------------------------------- ------------- ------------------
  Dr.- Accounts                                      \$4,000       
  Payable-                                                         
  Undistributed                                                    
  payroll                                                          
  Deductions or                                                    
  Allotments                                                       

                  Cr.-Loans                                        \$3,300

                  Cr.-Interest on Loans                            300

                  Cr.-Shares                                       400

                                                                   
  --------------- ---------------------------------- ------------- ------------------

***Detailed Transactions***

Credit:

a)  With amounts of undistributed payroll deductions or allotments
    received which have been or will be sent to the computer for
    processing.

Debit:

a)  With amounts of payroll deductions or allotments processed by the
    computer and applied to appropriate other accounts affected.

**Accounts Payable-Check Transmittal Service**

This account is for use only by federal credit unions which provide
check transmittal services to their members. The balance in the account
should represent the total amount of undistributed members\' paychecks
payable by the credit union to the members\' bank accounts. This account
should be cleared by remittances to the members\' banks on the day the
funds are received by the credit union or as promptly as possible
thereafter.

***Entries in the Journal and Cash Record***

All entries affecting this account should be recorded as
\"Miscellaneous\" unless, because of volume, the credit union assigns a
separate grouping for credits to this account.

***Subsidiary Accounts Payable Record***

The credit union must establish and maintain subsidiary accounts payable
records for each depository bank to which amounts are owed.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  A member presents his paycheck for a loan payment to the credit
    union with the remainder to be transmitted to his checking account:

  ---------- ----------------------------------- ---------------- --------------
  Dr.-Cash                                       \$300            

             Cr.-Loans                                            \$45

             Cr.-Interest on Loans                                5

             Cr.-Accounts Payable- Check                          250
             Transmittal Service                                  
  ---------- ----------------------------------- ---------------- --------------

b)  A credit union sends a check to the member's bank checking account
    to forward the member's net paycheck:

  ------------- ----------------------------------- -------------- ----------------
  Dr.- Accounts                                     \$250          
  Payable-                                                         
  Check                                                            
  Transmittal                                                      
  Service                                                          

                Cr.-Cash                                           \$250

                                                                   
  ------------- ----------------------------------- -------------- ----------------

***Detailed Transactions***

Credit:

a)  With amounts due member's depository bank for portion of paychecks
    not applied to credit union accounts.

Debit:

a)  With amounts remitted to depository banks to clear this account.

**Accounts Payable-Drafts Authorized**

This account represents the liability of the credit union for drafts
authorized to be drawn on it, where it has been legally determined that
a real liability is created by the authorization. This account should
not be used where a liability for drafts authorized does not arise prior
to the actual acceptance of the draft by the credit union, since the
drafts ordinarily will be paid concurrently with acceptance.

When a legal liability exists upon authorization of drafts, this account
should be credited when authority is issued to draw drafts on the credit
union: the offsetting debit should be to the appropriate asset account,
e.g., "Loans."

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as "Miscellaneous"
in the Journal and Cash Record.

***Detailed Transactions***

Credit:

a.  With amounts of drafts authorized for which the credit union has a
    legal liability.

Debit:

a)  With amounts of authorized drafts previously recorded in this
    account when presented for payment and paid or when the
    authorization is canceled.

**Accounts Payable\--Installment Payments On U.S. Bonds**

This account reflects the federal credit union\'s liability for
installment payments received toward the purchases of U.S. Savings Bonds
pending sufficient funds being available for issuance of the bonds.

Section 121 of the Federal Credit Union Act provides that federal credit
unions may act as agents of the U.S. Treasury Department for the sale of
U.S. Savings Bonds. Only those federal credit unions that have applied
to the U.S. Treasury and have been approved as issuing and/or paying
agents may engage in savings bonds transactions.

When installment payments are received on bond purchases, this account
should be credited with the liability for the funds pending issuance of
U.S. Savings Bonds to the purchaser. When a bond is fully paid for and
is issued, the purchase cost should be cleared from this account and
transferred to \"Accounts Payable\--U.S. Savings Bond Remittance\".

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments are received on installment purchase of U.S. Savings
    Bonds:

+---+-----------------------------------+--------------+--------------+
| D |                                   | \$12.50      |              |
| r |                                   |              |              |
| . |                                   |              |              |
| - |                                   |              |              |
| C |                                   |              |              |
| a |                                   |              |              |
| s |                                   |              |              |
| h |                                   |              |              |
| o |                                   |              |              |
| r |                                   |              |              |
| C |                                   |              |              |
| a |                                   |              |              |
| s |                                   |              |              |
| h |                                   |              |              |
| - |                                   |              |              |
| U |                                   |              |              |
| . |                                   |              |              |
| S |                                   |              |              |
| . |                                   |              |              |
| B |                                   |              |              |
| o |                                   |              |              |
| n |                                   |              |              |
| d |                                   |              |              |
| I |                                   |              |              |
| n |                                   |              |              |
| s |                                   |              |              |
| t |                                   |              |              |
| a |                                   |              |              |
| l |                                   |              |              |
| l |                                   |              |              |
| m |                                   |              |              |
| e |                                   |              |              |
| n |                                   |              |              |
| t |                                   |              |              |
| P |                                   |              |              |
| a |                                   |              |              |
| y |                                   |              |              |
| m |                                   |              |              |
| e |                                   |              |              |
| n |                                   |              |              |
| t |                                   |              |              |
+---+-----------------------------------+--------------+--------------+
|   | Cr.-Accounts Payable-             |              | \$12.50      |
|   |                                   |              |              |
|   | Installment Payments on U.S.      |              |              |
|   |                                   |              |              |
|   | Bonds                             |              |              |
+---+-----------------------------------+--------------+--------------+

b)  When a bond is fully paid and is issued:

+---+---------------------------------------------+---+---------------+
| D |                                             | \ |               |
| r |                                             | $ |               |
| . |                                             | 1 |               |
| - |                                             | 5 |               |
| A |                                             | 0 |               |
| c |                                             | . |               |
| c |                                             | 0 |               |
| o |                                             | 0 |               |
| u |                                             |   |               |
| n |                                             |   |               |
| t |                                             |   |               |
| s |                                             |   |               |
| P |                                             |   |               |
| a |                                             |   |               |
| y |                                             |   |               |
| a |                                             |   |               |
| b |                                             |   |               |
| l |                                             |   |               |
| e |                                             |   |               |
| - |                                             |   |               |
| I |                                             |   |               |
| n |                                             |   |               |
| s |                                             |   |               |
| t |                                             |   |               |
| a |                                             |   |               |
| l |                                             |   |               |
| l |                                             |   |               |
| m |                                             |   |               |
| e |                                             |   |               |
| n |                                             |   |               |
| t |                                             |   |               |
| P |                                             |   |               |
| a |                                             |   |               |
| y |                                             |   |               |
| m |                                             |   |               |
| e |                                             |   |               |
| n |                                             |   |               |
| t |                                             |   |               |
| s |                                             |   |               |
| o |                                             |   |               |
| n |                                             |   |               |
| U |                                             |   |               |
| . |                                             |   |               |
| S |                                             |   |               |
| . |                                             |   |               |
| B |                                             |   |               |
| o |                                             |   |               |
| n |                                             |   |               |
| d |                                             |   |               |
| s |                                             |   |               |
+---+---------------------------------------------+---+---------------+
|   | Cr.-Accounts Payable-U.S                    |   | \$150.00      |
|   |                                             |   |               |
|   | Savings Bond Remittances                    |   |               |
+---+---------------------------------------------+---+---------------+

c)  When an authorization is canceled and a subscriber withdraws the
    balance on his installment account:

  --------------------- ----------------------------------- -------------- ---------------
  Dr.- Accounts                                             \$12.50        
  Payable-Installment                                                      
  Payments on U.S.                                                         
  Bonds                                                                    

                        Cr.- Cash or Cash-U.S. Bond                        \$12.50
                        Installment Payment                                
  --------------------- ----------------------------------- -------------- ---------------

d)  When remittance is made to the Federal Reserve Bank for bonds issued
    under the installment payment plan:

+---+-----------------------------------+------------+----------------+
| D |                                   | \$150.00   |                |
| r |                                   |            |                |
| . |                                   |            |                |
| - |                                   |            |                |
| A |                                   |            |                |
| c |                                   |            |                |
| c |                                   |            |                |
| o |                                   |            |                |
| u |                                   |            |                |
| n |                                   |            |                |
| t |                                   |            |                |
| s |                                   |            |                |
| P |                                   |            |                |
| a |                                   |            |                |
| y |                                   |            |                |
| a |                                   |            |                |
| b |                                   |            |                |
| l |                                   |            |                |
| e |                                   |            |                |
| - |                                   |            |                |
| U |                                   |            |                |
| . |                                   |            |                |
| S |                                   |            |                |
| S |                                   |            |                |
| a |                                   |            |                |
| v |                                   |            |                |
| i |                                   |            |                |
| n |                                   |            |                |
| g |                                   |            |                |
| s |                                   |            |                |
| B |                                   |            |                |
| o |                                   |            |                |
| n |                                   |            |                |
| d |                                   |            |                |
| R |                                   |            |                |
| e |                                   |            |                |
| m |                                   |            |                |
| i |                                   |            |                |
| t |                                   |            |                |
| t |                                   |            |                |
| a |                                   |            |                |
| n |                                   |            |                |
| c |                                   |            |                |
| e |                                   |            |                |
| s |                                   |            |                |
+---+-----------------------------------+------------+----------------+
|   | Cr.- Cash or Cash-U.S. Bond       |            | \$150.00       |
|   |                                   |            |                |
|   | Installment Payments              |            |                |
+---+-----------------------------------+------------+----------------+
|   |                                   |            |                |
+---+-----------------------------------+------------+----------------+

***Detailed Transactions***

Credit:

a)  With installment payments received.

Debit:

a)  With installment payments withdrawn upon cancellation of a
    subscription.

b)  With installment amounts used for bond issuances (transfer liability
    to \"Accounts Payable U.S. Savings Bond Remittances\").

**Accounts Payable-U.S. Savings Bond Remittances**

This account reflects the federal credit union\'s liability for U.S.
Savings Bonds issued pending transmittal of the funds collected to the
Federal Reserve Bank.

Section 121 of the Federal Credit Union Act provides that federal credit
unions may act as agents of the U.S. Treasury Department for the sale of
U.S. Savings Bonds. Only those federal credit unions that have applied
to the U.S. Treasury and have been approved as issuing and/or paying
agents may engage in savings bonds transactions.

This account should be credited with the cash payments received covering
the issue of all U.S. Savings Bonds issued by the credit union. When
sufficient funds are available for the issuance of a bond to installment
purchasers, the bond issue price should be transferred to this account
from \"Accounts Payable-Installment Payments on U.S. Bonds\". Likewise,
when cash is received covering the entire purchase of a U.S. Savings
Bond or note purchased by installment payments, this account should be
credited with the total amount received pending transmittal of the funds
to the Federal Reserve Bank. When proceeds from the sales of Savings
Bonds are remitted to the Federal Reserve Bank, this account should be
debited.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record the daily total cash received from the sale of Savings
    Bonds:

+---+---------------------------------+---------------+---------------+
| D |                                 | \$75          |               |
| r |                                 |               |               |
| . |                                 |               |               |
| - |                                 |               |               |
| C |                                 |               |               |
| a |                                 |               |               |
| s |                                 |               |               |
| h |                                 |               |               |
+---+---------------------------------+---------------+---------------+
|   | Cr.-Accounts Payable-U.S        |               | \$75          |
|   |                                 |               |               |
|   | Savings Bond Remittances        |               |               |
+---+---------------------------------+---------------+---------------+

b)  To record the remittance of savings bond sales to the Federal
    Reserve Bank:

  ------------- ------------------------------------ ------------- ---------------
  Dr.- Accounts                                      \$75          
  Payable-U.S                                                      
  Savings Bond                                                     
  Remittances                                                      

                Cr.-Cash                                           \$75

                                                                   
  ------------- ------------------------------------ ------------- ---------------

**Notes Payable Commitment Fees**

This account should reflect commitment fees paid on term notes. The fees
should be amortized based on the interest method. The periodic
amortization should be recorded as interest on borrowed funds. See
Assets Section 300 "*Accounting Entries, Loans and the Interest Method*"
for a detailed discussion of the interest method.

**Taxes Payable**

**Federal Withholding Taxes Payable**

**State Withholding Taxes Payable**

**City Withholding Taxes Payable**

Federal credit unions that pay salaries are subject to the withholding
provisions of the law relating to federal, state, and local income
taxes. If salaries are paid it is essential that the proper forms be
obtained from each employee and kept on file. If any taxes are required
to be withheld, the instructions issued by the Internal Revenue Service
or other taxing authority for reporting and remitting taxes should be
carefully followed. The necessary forms and instructions should be
obtained from the local Director of Internal Revenue or other taxing
authority.

Many states and cities have provisions in their tax laws for the
withholding of income taxes similar to the federal income tax law. In
these instances, forms and instructions should be obtained from the
local tax officials. Where a credit union has employees for which it
withholds state or city income taxes residing in more than one state,
additional accounts for State Withholding Taxes Payable should be
established.

Each time salaries are paid, the amount of income tax withheld from the
salary is credited to this account in the \"Miscellaneous Credit\"
column of the Journal and Cash Record. The account is debited in the
\"Miscellaneous Debit\" column when the amounts withheld are remitted in
accordance with instructions. If the credits to this account are
numerous, it is suggested that one (or more) of the blank columns of the
Journal and Cash Record or the continuation sheet be used to accumulate
these entries. If this is done the column(s) should be headed \"Federal
Withholding Taxes Payable-Cr-\" (if state or city taxes are involved the
column(s) should be appropriately labeled).

***Employees Withholding Exemption Certificate (Form W-4)***

At the time the treasurer is appointed or an employee is hired, an
Employee Withholding Exemption Certificate (Form W-4) should be
obtained. Blank copies of Form W-4 may be secured from the local
Director of Internal Revenue. This certificate, which should be signed
by the employee involved, should indicate the exemptions he is claiming.
The deductions made from his salary will be governed by his exemptions.
Employees Withholding Exemption Certificates (Form W-4) for each
employee should be retained in the files of the credit union. The
appropriate Withholding Exemption Certificate should be obtained when
state or city income taxes are withheld.

***Posting to the General Ledger***

The items entered as \"Miscellaneous\" are posted individually to the
General Ledger. In the event one (or more) of the blank Journal and Cash
Record columns is used, the total of this column(s) is posted as a
credit to the General Ledger at the end of the month.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When salaries are paid and social security and federal income taxes
    are withheld:

+---+-----------------------------------+---------------+-------------+
| D |                                   | \$100.00      |             |
| r |                                   |               |             |
| . |                                   |               |             |
| - |                                   |               |             |
| S |                                   |               |             |
| a |                                   |               |             |
| l |                                   |               |             |
| a |                                   |               |             |
| r |                                   |               |             |
| i |                                   |               |             |
| e |                                   |               |             |
| s |                                   |               |             |
+---+-----------------------------------+---------------+-------------+
|   | Cr.-Cash                          |               | \$86.37     |
+---+-----------------------------------+---------------+-------------+
|   | Cr.-Federal Withholding Taxes     |               | 10.00       |
|   |                                   |               |             |
|   | Payable                           |               |             |
+---+-----------------------------------+---------------+-------------+
|   | Cr.-Social Security Taxes         |               | 3.63        |
|   |                                   |               |             |
|   | Payable                           |               |             |
+---+-----------------------------------+---------------+-------------+

b)  When federal taxes withheld are remitted in accordance with
    instructions of the Internal Revenue Service, together with
    employer's social security tax:

+---+--------------------------------------+------------+-------------+
| D |                                      | \$30.00    |             |
| r |                                      |            |             |
| . |                                      |            |             |
| - |                                      |            |             |
| F |                                      |            |             |
| e |                                      |            |             |
| d |                                      |            |             |
| e |                                      |            |             |
| r |                                      |            |             |
| a |                                      |            |             |
| l |                                      |            |             |
| W |                                      |            |             |
| i |                                      |            |             |
| t |                                      |            |             |
| h |                                      |            |             |
| h |                                      |            |             |
| o |                                      |            |             |
| l |                                      |            |             |
| d |                                      |            |             |
| i |                                      |            |             |
| n |                                      |            |             |
| g |                                      |            |             |
| T |                                      |            |             |
| a |                                      |            |             |
| x |                                      |            |             |
| e |                                      |            |             |
| s |                                      |            |             |
| P |                                      |            |             |
| a |                                      |            |             |
| y |                                      |            |             |
| a |                                      |            |             |
| b |                                      |            |             |
| l |                                      |            |             |
| e |                                      |            |             |
+---+--------------------------------------+------------+-------------+
| D |                                      | 21.78      |             |
| r |                                      |            |             |
| . |                                      |            |             |
| - |                                      |            |             |
| S |                                      |            |             |
| o |                                      |            |             |
| c |                                      |            |             |
| i |                                      |            |             |
| a |                                      |            |             |
| l |                                      |            |             |
| S |                                      |            |             |
| e |                                      |            |             |
| c |                                      |            |             |
| u |                                      |            |             |
| r |                                      |            |             |
| i |                                      |            |             |
| t |                                      |            |             |
| y |                                      |            |             |
| T |                                      |            |             |
| a |                                      |            |             |
| x |                                      |            |             |
| e |                                      |            |             |
| s |                                      |            |             |
|   |                                      |            |             |
| P |                                      |            |             |
| a |                                      |            |             |
| y |                                      |            |             |
| a |                                      |            |             |
| b |                                      |            |             |
| l |                                      |            |             |
| e |                                      |            |             |
+---+--------------------------------------+------------+-------------+
|   | Cr.-Cash                             |            | \$51.78     |
+---+--------------------------------------+------------+-------------+
|   |                                      |            |             |
+---+--------------------------------------+------------+-------------+

### Detailed Transactions

Credit:

a)  With amount of income taxes withheld.

Debit:

a)  With amount of income taxes remitted to the federal, state or city
    tax authorities, as applicable for each account.

**Social Security Taxes Payable**

Federal credit unions are required to withhold social security taxes on
certain salaries paid. Information as to the specific requirements and
procedures, including the rates currently in effect, can be obtained
from the nearest field office of the Social Security Administration or
the local Director of Internal Revenue.

Deductions, according to the current rate, should be made from salaries
and should be accumulated in \"Social Security Taxes Payable\".
Remittances of these deductions, together with the proper amount to
cover the employer\'s (credit union\'s) tax, should be made in
accordance with the instructions. Both the employees\' deductions and
the credit union\'s tax liability should be set up in the Social
Security Taxes Payable each time salaries are paid. The credit union
should apply to the local Director of Internal Revenue for an
employer\'s identification number on Form SS-4. Forms on which to make
this application as well as report forms and instructions regarding
their use will be supplied by the local Director upon request. The
credit union must have a record of the Social Security account numbers
of its employees. Any employee who does not have a number should obtain
one by applying for the social security number on Form SS-4 at the
nearest Social Security Field Office.

A suggested form of individual payroll ledger sheet is illustrated
above. This form will help maintain control over both the employee\'s
and employer\'s social security taxes, as well as deductions or
withholdings made from the employee\'s salary for federal income tax,
savings bonds, credit union, etc.

### Entries in the Journal and Cash Record

When salaries are paid, the amount of social security tax required is
withheld from the salary due each qualifying employee and credited to
this account as a \"Miscellaneous-Credit\" in the Journal and Cash
Record. At the same time, the employer\'s (credit union\'s) social
security tax on such salaries is charged to \"Social Security Taxes
(Employer\'s Share)\" and credited to this account as a \"Miscellaneous
Credit". When the remittance is made, this account is debited as a
\"Miscellaneous-Debit\".

If the credits to this account are numerous, you may wish to identify
the entries as \"Social Security Taxes Payable-Cr.\"

***Posting to the General Ledger***

The items entered as \"Miscellaneous\" are posted individually to the
General Ledger.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When salaries are paid and social security and income taxes are
    withheld for later remittance to the Director of Internal Revenue:

+---+------------------------------------+--------------+-------------+
| D |                                    | \$100.00     |             |
| r |                                    |              |             |
| . |                                    |              |             |
| - |                                    |              |             |
| S |                                    |              |             |
| a |                                    |              |             |
| l |                                    |              |             |
| a |                                    |              |             |
| r |                                    |              |             |
| i |                                    |              |             |
| e |                                    |              |             |
| s |                                    |              |             |
+---+------------------------------------+--------------+-------------+
|   | Cr.-Cash                           |              | \$86.37     |
+---+------------------------------------+--------------+-------------+
|   | Cr.-Federal Withholding Taxes      |              | 10.00       |
|   |                                    |              |             |
|   | Payable                            |              |             |
+---+------------------------------------+--------------+-------------+
|   | Cr.-Social Security Taxes          |              | 3.63        |
|   |                                    |              |             |
|   | Payable                            |              |             |
+---+------------------------------------+--------------+-------------+

b)  When salaries are paid, liability for the credit union's portion of
    social security tax is recorded:

+---+--------------------------------------+------------+-------------+
| D |                                      | \$3.63     |             |
| r |                                      |            |             |
| . |                                      |            |             |
| - |                                      |            |             |
| S |                                      |            |             |
| o |                                      |            |             |
| c |                                      |            |             |
| i |                                      |            |             |
| a |                                      |            |             |
| l |                                      |            |             |
| S |                                      |            |             |
| e |                                      |            |             |
| c |                                      |            |             |
| u |                                      |            |             |
| r |                                      |            |             |
| i |                                      |            |             |
| t |                                      |            |             |
| y |                                      |            |             |
| T |                                      |            |             |
| a |                                      |            |             |
| x |                                      |            |             |
| e |                                      |            |             |
| s |                                      |            |             |
| ( |                                      |            |             |
| E |                                      |            |             |
| m |                                      |            |             |
| p |                                      |            |             |
| l |                                      |            |             |
| o |                                      |            |             |
| y |                                      |            |             |
| e |                                      |            |             |
| r |                                      |            |             |
| ' |                                      |            |             |
| s |                                      |            |             |
| S |                                      |            |             |
| h |                                      |            |             |
| a |                                      |            |             |
| r |                                      |            |             |
| e |                                      |            |             |
| ) |                                      |            |             |
+---+--------------------------------------+------------+-------------+
|   | Cr.- Social Security Taxes           |            | \$3.63      |
|   |                                      |            |             |
|   | Payable                              |            |             |
+---+--------------------------------------+------------+-------------+

c)  When taxes withheld from salaries are remitted to the Director of
    Internal Revenue together with employer's social security tax:

  ------------- -------------------------------------- ------------- --------------
  Dr.-Federal                                          \$30.00       
  Withholding                                                        
  Taxes Payable                                                      

  Dr.-Social                                           21.78         
  Security                                                           
  Taxes Payable                                                      

                Cr.-Cash                                             \$51.78

                                                                     
  ------------- -------------------------------------- ------------- --------------

[Note]{.underline}: When income tax withholdings affect state or city
income taxes all entries should be recorded similar to the credits and
debits to account, "Social Security Taxes Payable", as shown in the
first and third entries above, except that the appropriate account
should be credited or debited.

***Detailed Transactions***

Credit:

a)  With amounts of social security taxes withheld from employees\'
    salaries.

b)  With the credit union\'s share of social security taxes charged to
    expense \"Social Security Taxes (Employer\'s Share)\", (Account No.
    222).

Debit:

a)  With amount of social security taxes paid (Employees\' and
    Employer\'s Shares).

**Federal Unemployment Compensation Tax Payable and State Unemployment
Compensation Tax Payable**

These two accounts reflect the amounts of the credit union\'s unpaid
liabilities for federal and state unemployment compensation taxes
payable.

The Federal Unemployment Tax Act imposes a tax on employers who employ
one or more persons in covered employment based on a certain number of
weeks during the current or preceding calendar year, or who paid wages
of at least a certain dollar amount during a calendar quarter in the
current or preceding calendar year. Refer to FUTA for current
requirements.

Unemployment compensation insurance coverage is applicable to
practically all federal credit unions. Amounts paid for Unemployment
Compensation Insurance are expenses to the credit union and are recorded
when the liabilities are incurred.

In most states, the full tax is paid by the employer (credit union),
however, in a few states the employees also contribute by a deduction
from the wages. In these cases, the accounting treatment for
Unemployment Compensation Insurance will be similar to that for social
security taxes payable.

Report forms and instructions should be obtained from the State
Employment Security Agency (State Tax) and Internal Revenue Service
(Federal Tax).

### Entries in the Journal and Cash Record

Expenses for Unemployment Compensation Insurance may be recorded when
paid. However, the expense and the liability may be recorded on a
monthly basis for more accurate financial reporting. This can be done by
computing the expense monthly and charging it to \"Unemployment
Compensation Taxes\" with a corresponding credit to "Federal
Unemployment Compensation Tax Payable" or "State Unemployment
Compensation Tax Payable", as appropriate. The expense is computed by
applying the required percentage to taxable wages during this month.

### Postings to the General Ledger

The items entered as \"Miscellaneous\" are posted individually to the
General Ledger.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  At the end of the month when the liability is recorded for
    unemployment compensation taxes:

+---+------------------------------------+----------------+-----------+
| D |                                    | \$6.00         |           |
| r |                                    |                |           |
| . |                                    |                |           |
| - |                                    |                |           |
| U |                                    |                |           |
| n |                                    |                |           |
| e |                                    |                |           |
| m |                                    |                |           |
| p |                                    |                |           |
| l |                                    |                |           |
| o |                                    |                |           |
| y |                                    |                |           |
| m |                                    |                |           |
| e |                                    |                |           |
| n |                                    |                |           |
| t |                                    |                |           |
| C |                                    |                |           |
| o |                                    |                |           |
| m |                                    |                |           |
| p |                                    |                |           |
| e |                                    |                |           |
| n |                                    |                |           |
| s |                                    |                |           |
| a |                                    |                |           |
| t |                                    |                |           |
| i |                                    |                |           |
| o |                                    |                |           |
| n |                                    |                |           |
| T |                                    |                |           |
| a |                                    |                |           |
| x |                                    |                |           |
| e |                                    |                |           |
| s |                                    |                |           |
+---+------------------------------------+----------------+-----------+
|   | Cr.-Federal Unemployment           |                | \$2.00    |
|   |                                    |                |           |
|   | Compensation Tax Payable           |                |           |
+---+------------------------------------+----------------+-----------+
|   | Cr.-State Unemployment             |                | 4.00      |
|   |                                    |                |           |
|   | Compensation Tax Payable           |                |           |
+---+------------------------------------+----------------+-----------+

b)  When taxes are remitted to State Employment Security Agency:

  -------------- -------------------------------------- --------------- ------------
  Dr.- State                                            \$4.00          
  Unemployment                                                          
  Compensation                                                          
  Tax Payable                                                           

                 Cr.-Cash                                               \$4.00

                                                                        
  -------------- -------------------------------------- --------------- ------------

***Detailed Transactions***

Credit:

a)  With amount for unemployment taxes charged to \"Unemployment
    Compensation Taxes\".

Debit:

a)  With remittances made to pay the total liability for unemployment
    taxes to the respective taxing authorities.

**Other Taxes Payable**

This account reflects the current liability of the credit union for
miscellaneous taxes due but unpaid, including real estate taxes,
personal property taxes, etc.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record the liability for real estate taxes which have become due
    and payable:

  ---------- ------------------------------------ ------------- ----------------
  Dr.-Real                                        \$500         
  Estate                                                        
  Taxes                                                         

             Cr.-Other Taxes Payable                            \$500
  ---------- ------------------------------------ ------------- ----------------

b)  To record payment of taxes for which a liability has been
    established in this account:

  --------- --------------------------------------- ---------- ----------------
  Dr.-                                              \$500      
  Other                                                        
  Taxes                                                        
  Payable                                                      

            Cr.-Cash                                           \$500

                                                               
  --------- --------------------------------------- ---------- ----------------

***Detailed Transactions***

Credit:

a)  With the actual liability for miscellaneous unpaid taxes with an
    offsetting charge to the appropriate operating expense account.

Debit:

a)  With miscellaneous taxes previously credited to this account when
    paid.

#### ACCRUED EXPENSES

Amounts recorded in these accounts are not yet due but are so recorded
to allocate the expense to the period incurred. The use of the accrual
basis of accounting is preferred because it matches expenses to the
period incurred, rather than when paid, and income is recorded in the
period earned, rather than when received. Even those credit unions using
the modified cash basis of accounting should accrue for those expenses
that would significantly distort the Statement of Income if they were
recorded on the cash basis.

**Accrued Salaries**

The amount of salaries earned but not yet paid may, if material in
amount, be recorded in \"Accrued Salaries\" with offsetting charges to
the appropriate expense classifications (Salaries, Social Security
Taxes, Unemployment Compensation Taxes). This accrued liability would be
applicable, for example, where salaries are paid on a biweekly basis and
the pay period overlaps at month-end.

######## Accrued Employee Benefits

When expenses for employee benefits are material in amount, the cost may
be accrued by periodic charges to expenses each accrual period with an
offsetting credit to \"Accrued Employee Benefits\". An example might be
the cost of employee group life insurance where payments of the expense
are made at times not conforming to the accrual periods adopted by the
credit union.

### Accounting for Compensated Absences

A credit union, acting as an employer, should accrue the amount of its
liability for employees\' compensation of future absences. The accrual
need not include compensated leave that would be used in the current
calendar year. The accrual should be made when all of the following
conditions exist:

a)  The credit union is obligated for compensation that is attributable
    to services that have already been provided by its employees, such
    as an accumulation of \"annual leave\";

b)  The credit union has an obligation to make payment for the accrued
    leave or rights to compensation, even though an employee terminates;

c)  Payment of the accrued compensation is probable; and

d)  The amount can be reasonably estimated.

**Accrued Cost Of Space Occupied**

When the credit union owns it's building, the expense for real estate
taxes may be accrued periodically by charges to "Real Estate Taxes" and
credit to \"Accrued Cost of Space Occupied\". Other periodic costs
relating to space may be significant and may justify recognition as
expenses in each accrual period by periodic charges to expense and
credits to "Accrued Cost of Space Occupied".

######## Accrued Dividends Payable

The cost of funds is a material expense for credit unions and should be
accrued by periodic changes to expense each accrual period. The accrued
expense for dividends should be recorded as a debit to \"Dividends\" and
as a credit to \"Accrued Dividends Payable\". Dividends that have been
declared and are payable should be recorded by a debit to \"Accrued
Dividends Payable\" and a credit to \"Dividends Payable\". See
Illustrative Entries under account "Dividends Payable".

######## Accrued Accounting Service Cost

This account is used to record unpaid expenses for accounting services
that are provided by an outside person or firm. It should also be used
to record unpaid expenses incurred in conjunction with a jointly owned
accounting service center. The accrual may be necessary if the payment
is not remitted to the processor until the middle of the subsequent
month. It may also be used to accrue the cost of issuing members\'
quarterly statements so that the costs are evenly distributed during the
accounting period.

The illustrative entries, entries in the Journal and Cash Record, and
the detailed transactions will be similar to those for \"Other Accrued
Expenses\", therefore, reference should be made to that account.

**Other Accrued Expenses**

When a credit union has other types of unpaid expenses of material
amounts that should be spread over several accrual periods, they may be
allocated to expense in the periods to which they apply with an
offsetting credit to \"Other Accrued Expense\".

### Entries in the Journal and Cash Record

The entries to these accounts should be made as \"Miscellaneous\" in the
Journal and Cash Record. The offsetting charges to expenses when the
accruals are established should be separately designated for operating
expense debits.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To establish the accrual for salaries unpaid at period end:

  -------------- ----------------------------------- ------------ -----------------
  Dr.-Salaries                                       \$300.00     

  Dr.-Social                                         7.50         
  Security Taxes                                                  
  (Employer's                                                     
  Share)                                                          

                 Cr.-Accrued Salaries                             \$307.50
  -------------- ----------------------------------- ------------ -----------------

b)  To charge real estate taxes to expense monthly during the year based
    on an annual estimated cost of \$600.00:

+---+------------------------------------------+-----+----------------+
| D |                                          | \   |                |
| r |                                          | $50 |                |
| . |                                          | .00 |                |
| - |                                          |     |                |
| R |                                          |     |                |
| e |                                          |     |                |
| a |                                          |     |                |
| l |                                          |     |                |
| E |                                          |     |                |
| s |                                          |     |                |
| t |                                          |     |                |
| a |                                          |     |                |
| t |                                          |     |                |
| e |                                          |     |                |
| T |                                          |     |                |
| a |                                          |     |                |
| x |                                          |     |                |
| e |                                          |     |                |
| s |                                          |     |                |
+---+------------------------------------------+-----+----------------+
|   | Cr.-Accrued Cost of Space                |     | \$50.00        |
|   |                                          |     |                |
|   | Occupied                                 |     |                |
+---+------------------------------------------+-----+----------------+
|   |                                          |     |                |
+---+------------------------------------------+-----+----------------+

***Detailed Transactions***

Credit:

a)  With amounts of periodic charges to expense representing unpaid
    costs in order to allocate such costs over the period to which they
    apply.

Debit:

a)  With amounts recorded in these accounts when the actual expenses are
    paid. Adjustments to record differences between the accrual amounts
    and the actual amounts should be charged or credited, as applicable,
    to current operating expenses.

***BORROWERS' TAXES AND INSURANCE ESCROWS***

**Escrow Account**

This account is used if a nonmember assumes a member\'s real estate loan
and an escrow account is required. A subsidiary ledger should be
established for each nonmember for whom an escrow account is maintained.
An escrow account maintained for a nonmember bears interest at a rate
equal to the dividend rate paid on regular share accounts. The interest
paid on such accounts should be added to the escrow account payable at
the end of each accounting period (or more often if desired) by debiting
\"Other Miscellaneous Operating Expenses\" and crediting this account.
The interest paid should be recorded on each nonmember subsidiary ledger
and should be identified as interest.

The escrow account should provide for the accumulation of funds to pay
for 1 year\'s taxes, assessments, insurance premiums, or other charges
that could affect the credit union\'s first lien position.

At the time the account is opened, the nonmember should be asked to sign
a blanket withdrawal authorization which permits the FCU to use the
funds to make the required payments. The FCU should also arrange with
each nonmember for whom an escrow account is maintained to promptly
submit to the FCU for payment, any statements received relating to
taxes, assessments, insurance premiums and other fees which are to be
paid from the escrow account. Any disbursement made from an escrow
account should be supported by such documents. Withdrawals of amounts in
excess of the amount required to pay the fees for which the account was
established are permissible at any time. Other withdrawals, except to
pay the fees for which the account was established, should be
prohibited.

***OTHER LIABILITIES***

**Other Liabilities**

This account reflects miscellaneous liabilities of the credit union for
which no specific general ledger account is provided.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

***Postings to General Ledger***

Postings should be made currently as transactions occur to the General
Ledger Account. The nature of the liability and the identification of
the person or organization to whom the liability is owed and an
explanation of all liquidating entries should be written in
\"Explanatory Remarks\" of the General Ledger account.

**Liability Under Pension Cost**

This account is used to record an accumulated pension liability that
occurs when post service pension costs are amortized over a period that
is less than the funding period. A full discussion of pension plan
accounting is beyond the scope of this Manual -- seek the assistance of
an independent accountant who can inform you concerning accounting rules
under generally accepted accounting principles.

**Undisbursed Loan Proceeds**

This account is used to record the proceeds of loans that have been
recorded on the credit union\'s records, but not yet disbursed.

######## Subordinated CDCU Debt

This account is used to record the declining scale for its corresponding
capital account "Uninsured Secondary Capital." A regulatory accounting
position (RAP)\*\* has been taken to establish these accounts and to
recognize them as secondary capital. These accounts are subordinated
debt and the account holder does not have voting or ownership rights.
Credit unions should record the amount of secondary capital in the
equity section of the balance sheet, although any secondary capital that
has a remaining maturity of less than 5 years will be split into capital
and liability components based on the sliding scale in the Interim Final
Rule.

\*\*\-- To be consistent with generally accepted accounting principles
(GAAP), the credit union's outside auditor may recognize accounts
established as secondary capital as subordinated debt, and for financial
statement presentation purposes, may reflect the entire balance in these
accounts in the liability section of the balance sheet.

The credit union should record the secondary capital and use the new
accounts as set forth in the following examples.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

[[Example #1]{.underline}]{.smallcaps}**:** A low-income designated
credit union accepted a secondary capital account of \$100,000 with a
6-year maturity from a nonnatural person investor. The account should be
recorded:

  ------ -------------------------------- -------------- -------------------
  Dr.-                                    \$100,000      
  Cash                                                   

         Cr.-Uninsured Secondary Capital                 \$100,000
  ------ -------------------------------- -------------- -------------------

[[Example #2]{.underline}]{.smallcaps}**:** When the remaining maturity
of the above account is between 4 and 5 years the following adjusting
entry should be recorded to reflect only 80 percent of the account as
secondary capital:

  ----------- -------------------------------- -------------- -------------------
  Dr.-                                         \$20,000       
  Uninsured                                                   
  Secondary                                                   
  Capital                                                     

              Cr. - Subordinated CDCU Debt                    \$20,000

                                                              
  ----------- -------------------------------- -------------- -------------------

In the event that a low-income credit union has depleted its reserves
and undivided earnings and incurs an operating loss, the loss will be
distributed pro rata among the current secondary capital account
holders.

> For example, a credit union has 5 secondary capital investors, each
> depositing \$100,000 for total secondary capital of \$500,000. The
> credit union incurs an operating loss of \$120,000; each account will
> be debited for \$24,000. The remaining balance in each account will be
> \$76,000, with a total remaining secondary capital of \$380,000. A
> credit union that has funds split between "Uninsured Secondary
> Capital" and "Subordinated CDCU Debt" should first absorb any pro rata
> loss from "Subordinated CDCU Debt", with any remaining loss carried
> over to "Uninsured Secondary Capital".

If a secondary capital account holder wishes to withdraw the investment
at maturity, the credit union must determine losses as of the previous
month end and allocate the loss, again on a pro rata basis to all
account holders, prior to releasing the funds. Keep in mind that all
funds will continue to be at risk to cover losses that exceed reserves
and undivided earnings regardless of their capital values based on their
final maturities.

The Interim Final Rule requires that the credit union adopt a
[written]{.underline} plan for use of the funds in the accounts and
subsequent liquidity needs to meet repayment requirements upon maturity.
The credit union should consider reasonableness and with risk assessment
in mind.

The secondary capital accounts may not be established as share accounts
and, therefore, will be considered a form of subordinated debt, in
effect a borrowing. In most cases of borrowed funds, the stated interest
rate is guaranteed contrary to dividends on share deposits for credit
unions which are limited to the amount of funds available from earnings,
both current and accumulated. The credit union should consider its
ability to meet the interest payment obligation in light of its current
and accumulated earnings. Interest payable on these accounts
[must]{.underline} be accrued at least monthly. The credit union should
consider the effect on regular members' dividends when setting the
interest rate or index for these accounts.

Section 107(9) of the Federal Credit Union Act limits a credit union's
borrowing to 50 percent of its paid-in and unimpaired capital and
surplus. The amount held in secondary capital accounts held by
low-income credit unions is to be included in total borrowings for
purposes of this limitation. Secondary capital accounts, plus any other
borrowings by the low-income credit union will not exceed the 50 percent
limit.

Part 705 of the NCUA Rules and Regulations addresses the Community
Development Revolving Loan Program for Credit Unions. A credit union
participating in the program may receive up to \$300,000 in the form of
a loan. A matching requirement encourages credit unions to develop a
permanent source of *member shares* within one year of loan approval.

Accounts established as secondary capital by low-income designated
credit unions may [not]{.underline} be used as a source of matching
funds for this program. First, secondary capital is not a *member share*
and second, the regulation requires that the credit union maintain the
increase in the total amount of *share deposits* for the duration of the
loan from the program. The preamble to the Interim Final Rule clearly
states that these accounts "may not be offered as share accounts."

The Rule states that since secondary capital accounts are not share
accounts, they are not subject to Section 701.32 limitations.

#### DEFERRED CREDITS

These accounts are the counterparts to deferred charges, and
accordingly, are used to carry forward to future accounting periods such
items as income received but not yet earned and deferred gains on the
disposition of assets.

**Unearned Interest On Loans**

This account represents the balance of discounts established as deferred
income when FHA Title I Property Improvement Loans are disbursed by
credit unions if the credit union elects to follow FHA policies and
procedures in handling such loans. The account should not be used by
credit unions electing to provide for the application of an interest
rate on the unpaid balance of Title I FHA loans in the conventional
credit union manner.

Federal credit unions desiring to do so may adopt the FHA \"discount\"
or \"add-on\" method for Title I loans. Under this method, the entry to
record disbursement of the loan would be as follows (\$1,000 disbursed
on \"\$5 discount per \$100\", loan payable in 24 equal monthly
installments):

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

+---+---------------------------------+------------+------------------+
| D |                                 | \$1,101.22 |                  |
| r |                                 |            |                  |
| . |                                 |            |                  |
| - |                                 |            |                  |
| L |                                 |            |                  |
| o |                                 |            |                  |
| a |                                 |            |                  |
| n |                                 |            |                  |
| s |                                 |            |                  |
+---+---------------------------------+------------+------------------+
|   | Cr.-Cash                        |            | \$1,000.00       |
+---+---------------------------------+------------+------------------+
|   | Cr.-Unearned Interest on        |            | 101.22           |
|   |                                 |            |                  |
|   | Loans                           |            |                  |
+---+---------------------------------+------------+------------------+
|   |                                 |            |                  |
+---+---------------------------------+------------+------------------+

This account should be adjusted for the following basic conditions,
although other adjustments may be needed as circumstances dictate:

a)  Periodic transfers, generally monthly, to \"Interest on Loans\" to
    record earned interest. Any reasonable and logical method of
    recording earned interest may be used provided it is based on loan
    payments received, as opposed to loan payments that should have been
    received. It would be best if the transfer was based on a
    computation applied to each Title I loan individually, but if a
    federal credit union has numerous Title I loans, the earned interest
    may be computed by grouping all Title I loans. In such a case the
    federal credit union should keep in mind that if interest refunds
    are to be made, the earned interest should be recorded individually
    for each borrower.

b)  Prepayment of the loan. Federal credit unions must make a rebate to
    the extent of the full unearned interest.

c)  Charge off of the loan. The unearned interest should be adjusted in
    both this account and the individual loan account. The amount that
    should then be charged off will be the amount remaining in the
    individual loan account after applying the amount of the interest
    collected.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  For recording original transaction for disbursing an FHA Title I
    loan:

+---+------------------------------+---------------+------------------+
| D |                              | \$1,101.22    |                  |
| r |                              |               |                  |
| . |                              |               |                  |
| - |                              |               |                  |
| L |                              |               |                  |
| o |                              |               |                  |
| a |                              |               |                  |
| n |                              |               |                  |
| s |                              |               |                  |
+---+------------------------------+---------------+------------------+
|   | Cr.-Cash                     |               | \$1,000.00       |
+---+------------------------------+---------------+------------------+
|   | Cr.-Unearned Interest on     |               | 101.22           |
|   |                              |               |                  |
|   | Loans                        |               |                  |
+---+------------------------------+---------------+------------------+

b)  For transferring unearned interest to income as the interest is
    earned:

  ---------- ---------------------------------------- ----------- --------------
  Dr.-                                                \$10.00     
  Unearned                                                        
  Interest                                                        
  on Loans                                                        

             Cr.-Interest on Loans                                \$10.00

                                                                  
  ---------- ---------------------------------------- ----------- --------------

***Detailed Transactions***

Credit:

a)  With amounts of unearned interest on FHA loans when loans are
    disbursed.

Debit:

a)  Periodically as interest on FHA loans is earned, with amount
    transferred to \"Interest on Loans\".

b)  With refunds of unearned interest in the case on loan repayments.

c)  With unearned interest when a loan is charged off; transfer to
    \"Loans\" and charge off the net unpaid balance to \"Allowance for
    Loan Losses\".

**Deferred Credits-Insurance Premium Rebate**

This account represents the amount of dividends on life savings and
borrowers\' protection insurance applicable to future periods.

When credit union life savings and borrowers\' protection insurance
policies provide for the payment of dividends at the discretion of the
insurance company based on prior years\' premiums, the period that
benefits is the year after the dividends are earned (i.e., the year in
which the dividends are actually received). Since the entire year
benefits, it is logical to reason that each of the remaining accounting
periods benefit equally. Therefore, a credit union that receives an
insurance dividend credit in the first part of the year may distribute
this credit evenly over the remaining periods of the year. When
dividends are received by the credit union by check, the charge for the
entire amount is to \"Cash\" or to \"Other Prepaid Insurance\". Expense
accounts such as \"Life Savings Insurance\" and \"Borrowers\'
Insurance\" or \"Other Miscellaneous Operating Income\" should be
credited, as appropriate, with only one-twelfth, one-fourth or one-half
of the amount of the dividend, depending upon the frequency of accrual
periods, and the remainder of the dividend should be credited to this
account. During the subsequent accounting periods in the calendar year,
this account should be debited and expenses or other income should be
credited for the applicable proportionate parts of the deferred amount.

### Entries in Journal and Cash Record

All entries affecting this account should be recorded in the
\"Miscellaneous\" columns of the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When advice of dividend credit is received and the credit union
    decides to spread the credit by monthly entries offsetting expenses
    over the entire calendar year (assume the dividend is for \$600, and
    60 percent applies to life savings insurance and 40 percent applies
    to borrowers' insurance):

  ----------- ----------------------------------------- ---------- --------------
  Dr.-Other                                             \$600      
  Prepaid                                                          
  Insurance                                                        

              Cr.-Life Savings Insurance                           \$30

              Cr.-Borrowers' Insurance                             20

              Cr.-Deferred Credits-Insurance Premium               550
              Rebates                                              
  ----------- ----------------------------------------- ---------- --------------

b)  Each month, to record the write-off of deferred insurance dividends
    as offsets to expenses during the year:

  ----------- --------------------------------------- ------------ --------------
  Dr.-                                                \$50         
  Deferred                                                         
  Credits-                                                         
  Insurance                                                        
  Premium                                                          
  Rebates                                                          

              Cr.-Life Savings Insurance                           \$30

              Cr.-Borrowers' Insurance                             20

                                                                   
  ----------- --------------------------------------- ------------ --------------

### Detailed Transactions

Credit:

a)  With the portion of dividend credits received which are to be
    prorated as offsetting credits to operating expenses for the
    remainder of the calendar year.

Debit:

a)  With periodic entries (monthly, quarterly or semiannually) to
    prorate the deferred credit over the calendar year.

**Unamortized Discount On Sale Of Assets**

This account is used when a sale of assets occurs and the purchaser
offers a note as partial payment. When this account is used, the note
will generally have an interest rate that is lower than the current rate
of interest that would be charged to the purchaser if he or she borrowed
the funds elsewhere. The Effective Interest Rate Method (simple interest
applied to the unpaid balance) is thus used to discount the interest
rate on the note to the current market interest rate for the
transaction.

This process is used to determine the amount of recognized gain that can
be realized during the current accounting period. The unrecognized gain
(Unamortized Discount) is credited to this account and is amortized as
income over the note\'s maturity.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

On January 1, 20X0, HEM FCU sells a computer to RAM FCU which originally
cost \$600,000. It has total depreciation of \$300,000. RAM FCU gave HEM
FCU a non-interest bearing note of \$400,000 in payment. The note was
payable 3 years later. Assume that current interest rate for the first
and second year would be as illustrated below:

*January 1, 20X0.*

+---+------------------------------------+-----------+-----------------+
| D |                                    | \$400,000 |                 |
| r |                                    |           |                 |
| . |                                    |           |                 |
| - |                                    |           |                 |
| N |                                    |           |                 |
| o |                                    |           |                 |
| t |                                    |           |                 |
| e |                                    |           |                 |
| s |                                    |           |                 |
| a |                                    |           |                 |
| n |                                    |           |                 |
| d |                                    |           |                 |
| C |                                    |           |                 |
| o |                                    |           |                 |
| n |                                    |           |                 |
| t |                                    |           |                 |
| r |                                    |           |                 |
| a |                                    |           |                 |
| c |                                    |           |                 |
| t |                                    |           |                 |
| s |                                    |           |                 |
|   |                                    |           |                 |
| R |                                    |           |                 |
| e |                                    |           |                 |
| c |                                    |           |                 |
| e |                                    |           |                 |
| i |                                    |           |                 |
| v |                                    |           |                 |
| a |                                    |           |                 |
| b |                                    |           |                 |
| l |                                    |           |                 |
| e |                                    |           |                 |
+---+------------------------------------+-----------+-----------------+
| D |                                    | 300,000   |                 |
| r |                                    |           |                 |
| . |                                    |           |                 |
| - |                                    |           |                 |
| A |                                    |           |                 |
| l |                                    |           |                 |
| l |                                    |           |                 |
| o |                                    |           |                 |
| w |                                    |           |                 |
| a |                                    |           |                 |
| n |                                    |           |                 |
| c |                                    |           |                 |
| e |                                    |           |                 |
| f |                                    |           |                 |
| o |                                    |           |                 |
| r |                                    |           |                 |
| D |                                    |           |                 |
| e |                                    |           |                 |
| p |                                    |           |                 |
| r |                                    |           |                 |
| e |                                    |           |                 |
| c |                                    |           |                 |
| i |                                    |           |                 |
| a |                                    |           |                 |
| t |                                    |           |                 |
| i |                                    |           |                 |
| o |                                    |           |                 |
| n |                                    |           |                 |
| o |                                    |           |                 |
| f |                                    |           |                 |
| F |                                    |           |                 |
| u |                                    |           |                 |
| r |                                    |           |                 |
| n |                                    |           |                 |
| i |                                    |           |                 |
| t |                                    |           |                 |
| u |                                    |           |                 |
| r |                                    |           |                 |
| e |                                    |           |                 |
| a |                                    |           |                 |
| n |                                    |           |                 |
| d |                                    |           |                 |
| E |                                    |           |                 |
| q |                                    |           |                 |
| u |                                    |           |                 |
| i |                                    |           |                 |
| p |                                    |           |                 |
| m |                                    |           |                 |
| e |                                    |           |                 |
| n |                                    |           |                 |
| t |                                    |           |                 |
+---+------------------------------------+-----------+-----------------+
|   | Cr.-Furniture and Equipment        |           | \$600,000       |
+---+------------------------------------+-----------+-----------------+
|   | Cr.-Gain (Loss) on Disposition     |           | 17,532          |
|   |                                    |           |                 |
|   | of Assets                          |           |                 |
+---+------------------------------------+-----------+-----------------+
|   | Cr.-Unamortized Discount on        |           | 82,468          |
|   |                                    |           |                 |
|   | Sale of Assets                     |           |                 |
+---+------------------------------------+-----------+-----------------+

*Computation of Gain or Loss on Disposition*

  ----------------- ------ ---------------------- ------ -----------------
  Step #1                  Present value factor          Discount Present

  Note              x      for 8% for 3 periods   =      Value

                                                         

  \$400,000         x      .79383                        \$317,532

                                                         

  Step #2                                                Unamortized

  Note              \-     Discount Present Value =      Discount

                                                         

  \$400,000         \-     \$317,532                     \$82,468
  ----------------- ------ ---------------------- ------ -----------------

Step #3: Compute resulting Gain or Loss \$400,00-(\$600,000 -
\$300,000)-\$82,468 = \$17,532

*Computation and Recording of Interest Income December 31, 20x0:*

Step #1:

Discounted PV x Current Interest Rate = Interest Income.

\$317,532 x 8% = \$25,402.56

Step #2 Entry:

+---+------------------------------------------+---+------------------+
| D |                                          | 2 |                  |
| r |                                          | 5 |                  |
| . |                                          | , |                  |
| - |                                          | 4 |                  |
| U |                                          | 0 |                  |
| n |                                          | 2 |                  |
| a |                                          | . |                  |
| m |                                          | 5 |                  |
| o |                                          | 6 |                  |
| r |                                          |   |                  |
| t |                                          |   |                  |
| i |                                          |   |                  |
| z |                                          |   |                  |
| e |                                          |   |                  |
| d |                                          |   |                  |
| D |                                          |   |                  |
| i |                                          |   |                  |
| s |                                          |   |                  |
| c |                                          |   |                  |
| o |                                          |   |                  |
| u |                                          |   |                  |
| n |                                          |   |                  |
| t |                                          |   |                  |
| o |                                          |   |                  |
| n |                                          |   |                  |
| S |                                          |   |                  |
| a |                                          |   |                  |
| l |                                          |   |                  |
| e |                                          |   |                  |
| o |                                          |   |                  |
| f |                                          |   |                  |
| A |                                          |   |                  |
| s |                                          |   |                  |
| s |                                          |   |                  |
| e |                                          |   |                  |
| t |                                          |   |                  |
| s |                                          |   |                  |
+---+------------------------------------------+---+------------------+
|   | Cr.-Other Non-Operating                  |   | 25,402.56        |
|   |                                          |   |                  |
|   | Income                                   |   |                  |
+---+------------------------------------------+---+------------------+

*December 31, 20X1:*

Step #1: Discounted Present Value of Note, 12/31/x0, + Discount
Amortization, 12/31/x0, x Current Interest Rate at Time of Sale =
Interest Income

\$317,532 + \$25,402.56 = \$342.934.56 x 8% = \$27,434.76

Step #2: Entry:

+---+------------------------------------------+---+------------------+
| D |                                          | 2 |                  |
| r |                                          | 7 |                  |
| . |                                          | , |                  |
| - |                                          | 4 |                  |
| U |                                          | 3 |                  |
| n |                                          | 4 |                  |
| a |                                          | . |                  |
| m |                                          | 7 |                  |
| o |                                          | 6 |                  |
| r |                                          |   |                  |
| t |                                          |   |                  |
| i |                                          |   |                  |
| z |                                          |   |                  |
| e |                                          |   |                  |
| d |                                          |   |                  |
| D |                                          |   |                  |
| i |                                          |   |                  |
| s |                                          |   |                  |
| c |                                          |   |                  |
| o |                                          |   |                  |
| u |                                          |   |                  |
| n |                                          |   |                  |
| t |                                          |   |                  |
| o |                                          |   |                  |
| n |                                          |   |                  |
| S |                                          |   |                  |
| a |                                          |   |                  |
| l |                                          |   |                  |
| e |                                          |   |                  |
| o |                                          |   |                  |
| f |                                          |   |                  |
| A |                                          |   |                  |
| s |                                          |   |                  |
| s |                                          |   |                  |
| e |                                          |   |                  |
| t |                                          |   |                  |
| s |                                          |   |                  |
+---+------------------------------------------+---+------------------+
|   | Cr.-Other Non-Operating                  |   | 27,434.76        |
|   |                                          |   |                  |
|   | Income                                   |   |                  |
+---+------------------------------------------+---+------------------+

**Deferred Credit-Insurance Premium Stabilization Reserve**

This account may be used by credit unions that are participating in risk
rating plans for loan protection and life savings insurance. These
insurance plans vary greatly.

Normally, when a credit union receives a premium refund, the refund
represents a reduction of the premium and it should be treated as such
by crediting the appropriate expense account. If the refund is for a
prior period and the amount is material, then the financial statements
for the prior period should be restated. On the other hand, if the
credit memo that is received by the credit union actually represents a
prepayment, the \"Insurance Premium Stabilization Reserve\" should be
debited with an offsetting credit to this account. Periodically, the
deferred credit should be amortized to expense over the period
benefited. Interest received, if any, on the deposit left with the
insurance company should be recorded in \"Other Miscellaneous Operating
Income\".

##### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When the insurance company advises the credit union of a refund or
    dividend on past premiums which is to be retained and credited to
    the credit union\'s reserve account; assume the dividend is for
    \$600, and 60 percent applies to life savings insurance and 40
    percent applies to borrowers\' insurance:

  --------------- -------------------------------------- ------------ ---------------
  Dr.-Insurance                                          \$600        
  Premiums                                                            
  Stabilization                                                       
  Reserve                                                             

                  Cr.-Deferred Credits-Insurance Premium              \$600
                  Stabilization Reserve                               
  --------------- -------------------------------------- ------------ ---------------

b)  Each month, to record the write-off of the deferred credit as
    offsets to expenses:

  ------------------- ---------------------------------------------- ------ --------------
  Dr.-Deferred                                                       \$50   
  Credits-Insurance                                                         
  Premium                                                                   
  Stabilization                                                             
  Reserve                                                                   

                      Cr.-Life Savings Insurance                            \$30

                      Cr.-Borrowers' Insurance                              20

                                                                            
  ------------------- ---------------------------------------------- ------ --------------

***Detailed Transactions***

Credit:

a)  With refunds or dividends on past premiums when the refund or
    dividend is to be retained by the insurance company and credited to
    the credit union\'s reserve account.

Debit:

a)  With periodic entries (monthly, quarterly or semiannually) to
    prorate the deferred credit over the calendar year.

**Other Deferred Credits**

This account represents the balance of income deferred by the credit
union for which no provision is made in other accounts in this series.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

***Detailed Transactions***

Credit:

a)  With amounts of miscellaneous income determined to be proper for
    deferred treatment.

b)  With deferred income recorded in this account, when transferred to
    income, or when written off with the approval of the board of
    directors.

**Deferred Credits-Net Origination Fees (Costs)-Lines Of Credit To
Members**

If the criteria for immateriality outlined in \"Origination Fees
(Costs)-Consumer Credit Transactions\", are met, the fees on lines of
credit should be taken directly into income and the direct costs
expensed as incurred. However, if the criteria are not met, the net fees
(costs) should be amortized and recognized as income using the
straight-line method of amortization over the life of the credit plan.
If the borrower pays all borrowings and cannot re-borrow under the
contract, any unamortized net fees or costs should be recognized in
income upon payment.

If the agreement provides for the option of converting a revolving line
of credit to a term loan, the federal credit union should recognize the
net fees or costs using the straight-line method over the combined life
of the line of credit and the term loan. If the option is exercised, the
net unamortized fees (costs) are transferred to the appropriate loan
contra account for net origination fees (costs). The net fees (costs)
should then be treated as an adjustment of yield using the interest
method. If the option is not exercised and the revolving line of credit
expires and all borrowings are extinguished, the net unamortized fees
(costs) should be recognized as income on the termination date.

Although there are no statutory or regulatory limitations regarding
maturity, sound business practice dictates that a termination date
should be built into the line of credit loan agreement. A termination
date provides the lender an opportunity to reevaluate the borrower\'s
financial position and the borrower, to reassess his or her credit
needs. Termination dates establish a point at which the equity line will
automatically end. The life of a home equity line of credit should be
short (i.e., 5 to 10 years) again to enable the periodic reevaluation of
the loan plan and to permit members to reassess their credit needs.

***Entries in the Journal and Cash Record***

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record the net origination fees (costs):

  ---------- ------------------------------------ ------------ ------------------
  Dr.-Cash                                        \$1,000.00   

             Cr.-Deferred Credits-Net Origination              \$1,000.00
             Fees (Costs)- Lines of Credits to                 
             Members                                           
  ---------- ------------------------------------ ------------ ------------------

b)  To record the monthly amortization at the end of the accounting
    period:

+---+---------------------------------------+-----------+-------------+
| D |                                       | \$41.67   |             |
| r |                                       |           |             |
| . |                                       |           |             |
| - |                                       |           |             |
| D |                                       |           |             |
| e |                                       |           |             |
| f |                                       |           |             |
| e |                                       |           |             |
| r |                                       |           |             |
| r |                                       |           |             |
| e |                                       |           |             |
| d |                                       |           |             |
| C |                                       |           |             |
| r |                                       |           |             |
| e |                                       |           |             |
| d |                                       |           |             |
| i |                                       |           |             |
| t |                                       |           |             |
| s |                                       |           |             |
| - |                                       |           |             |
| N |                                       |           |             |
| e |                                       |           |             |
| t |                                       |           |             |
| O |                                       |           |             |
| r |                                       |           |             |
| i |                                       |           |             |
| g |                                       |           |             |
| i |                                       |           |             |
| n |                                       |           |             |
| a |                                       |           |             |
| t |                                       |           |             |
| i |                                       |           |             |
| o |                                       |           |             |
| n |                                       |           |             |
| F |                                       |           |             |
| e |                                       |           |             |
| e |                                       |           |             |
| s |                                       |           |             |
| ( |                                       |           |             |
| C |                                       |           |             |
| o |                                       |           |             |
| s |                                       |           |             |
| t |                                       |           |             |
| s |                                       |           |             |
| ) |                                       |           |             |
| - |                                       |           |             |
| L |                                       |           |             |
| i |                                       |           |             |
| n |                                       |           |             |
| e |                                       |           |             |
| s |                                       |           |             |
| o |                                       |           |             |
| f |                                       |           |             |
| C |                                       |           |             |
| r |                                       |           |             |
| e |                                       |           |             |
| d |                                       |           |             |
| i |                                       |           |             |
| t |                                       |           |             |
| s |                                       |           |             |
| t |                                       |           |             |
| o |                                       |           |             |
| M |                                       |           |             |
| e |                                       |           |             |
| m |                                       |           |             |
| b |                                       |           |             |
| e |                                       |           |             |
| r |                                       |           |             |
| s |                                       |           |             |
+---+---------------------------------------+-----------+-------------+
|   | Cr.-Other Miscellaneous               |           | \$41.67     |
|   |                                       |           |             |
|   | Operating Income                      |           |             |
+---+---------------------------------------+-----------+-------------+
|   |                                       |           |             |
+---+---------------------------------------+-----------+-------------+

***Detailed Transactions***

Credit:

a)  With the fees received.

b)  With the amortization of net costs.

c)  With the unamortized net costs transferred to "Line of Credit to
    Members- Credit Cards".

Debit:

a)  With the direct costs incurred.

b)  With the amortization of net fees.

c)  With the unamortized net fees transferred to "Line of Credit to
    Members- Credit Cards".

**Deferred Credits-Net Origination Fees (Costs)-Home Equity Lines Of
Credit**

**Deferred Credits-Net Commitment Fees (Costs)-Lines Of Credit To
Members**

Fees charged for entering into an agreement to make a loan, i.e.,
letters of credit, should be credited to this account. Direct loan
origination costs incurred to make a commitment to originate a loan
should be debited to this account. The net commitment fees should be
deferred. If the commitment is exercised, the net fees should be
amortized into income on a straight-line basis over the life of the
contract. Account \"Service Income-Net Commitment Fees\" should be used
to recognize this income. If the commitment expires unexercised, the net
fees should be recognized in income upon expiration.

If the enterprise\'s experience with similar arrangements indicates that
the likelihood is slight that the commitment will be exercised, the net
fees should be recognized over the commitment period on a straight-line
basis as service fee income. If the commitment is subsequently
exercised, the remaining unamortized fees should be amortized on a
straight-line basis over the contract period.

If the borrower pays all borrowings and cannot re-borrow under the
contract, any unamortized net fees should be recognized in income upon
payment. If the borrower has the option of converting the line of credit
to a term loan, the straight-line method should be applied to the
combined life of the line of credit and term loan. If the option is
exercised the unamortized net fees should be transferred to \"Net
Commitment Fees (Costs)Loans to Members.\"

Once in the contra account, the net fees should be amortized into income
based on the interest method. If the option is not exercised and no
borrowings are outstanding, the net fees should be recognized in income.

If the commitment fee is determined retrospectively as a percentage of
the line of credit available but unused in a previous period, if that
percentage is nominal in relation to the stated interest rate on any
related borrowing, and if that borrowing will bear a market interest
rate at the date the loan is made, the commitment fee should be
recognized as service income as of the determination date.

### Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record the net commitment fees received from a member:

  ---------- ---------------------------------- ------------- ------------------
  Dr.-Cash                                      \$1,000       

             Cr.-Deferred Credit-Com- mitment                 \$1,000
             Fees (Costs)- Lines of Credit to                 
             Members                                          
  ---------- ---------------------------------- ------------- ------------------

b)  Assuming the commitment is exercised, the periodic amortization
    would be recorded as follows:

+---+--------------------------------------------+-----+--------------+
| D |                                            | \$  |              |
| r |                                            | 100 |              |
| . |                                            |     |              |
| - |                                            |     |              |
| D |                                            |     |              |
| e |                                            |     |              |
| f |                                            |     |              |
| e |                                            |     |              |
| r |                                            |     |              |
| r |                                            |     |              |
| e |                                            |     |              |
| d |                                            |     |              |
| C |                                            |     |              |
| r |                                            |     |              |
| e |                                            |     |              |
| d |                                            |     |              |
| i |                                            |     |              |
| t |                                            |     |              |
| - |                                            |     |              |
| C |                                            |     |              |
| o |                                            |     |              |
| m |                                            |     |              |
| - |                                            |     |              |
| m |                                            |     |              |
| i |                                            |     |              |
| t |                                            |     |              |
| m |                                            |     |              |
| e |                                            |     |              |
| n |                                            |     |              |
| t |                                            |     |              |
| F |                                            |     |              |
| e |                                            |     |              |
| e |                                            |     |              |
| s |                                            |     |              |
| ( |                                            |     |              |
| C |                                            |     |              |
| o |                                            |     |              |
| s |                                            |     |              |
| t |                                            |     |              |
| s |                                            |     |              |
| ) |                                            |     |              |
| - |                                            |     |              |
| L |                                            |     |              |
| i |                                            |     |              |
| n |                                            |     |              |
| e |                                            |     |              |
| s |                                            |     |              |
| o |                                            |     |              |
| f |                                            |     |              |
| C |                                            |     |              |
| r |                                            |     |              |
| e |                                            |     |              |
| d |                                            |     |              |
| i |                                            |     |              |
| t |                                            |     |              |
| t |                                            |     |              |
| o |                                            |     |              |
| M |                                            |     |              |
| e |                                            |     |              |
| m |                                            |     |              |
| b |                                            |     |              |
| e |                                            |     |              |
| r |                                            |     |              |
| s |                                            |     |              |
+---+--------------------------------------------+-----+--------------+
|   | Cr.-Service Income-Net                     |     | \$100        |
|   |                                            |     |              |
|   | Commitment Fees (Costs)                    |     |              |
+---+--------------------------------------------+-----+--------------+

c)  Assuming the commitment expires unexercised, the entry would be:

+---+--------------------------------------+--------+------------------+
| D |                                      | \$1,   |                  |
| r |                                      | 000.00 |                  |
| . |                                      |        |                  |
| - |                                      |        |                  |
| D |                                      |        |                  |
| e |                                      |        |                  |
| f |                                      |        |                  |
| e |                                      |        |                  |
| r |                                      |        |                  |
| r |                                      |        |                  |
| e |                                      |        |                  |
| d |                                      |        |                  |
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| m |                                      |        |                  |
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| t |                                      |        |                  |
| F |                                      |        |                  |
| e |                                      |        |                  |
| e |                                      |        |                  |
| s |                                      |        |                  |
| ( |                                      |        |                  |
| C |                                      |        |                  |
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| t |                                      |        |                  |
| s |                                      |        |                  |
| ) |                                      |        |                  |
| - |                                      |        |                  |
| L |                                      |        |                  |
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| s |                                      |        |                  |
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| f |                                      |        |                  |
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| d |                                      |        |                  |
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| M |                                      |        |                  |
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| m |                                      |        |                  |
| b |                                      |        |                  |
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| r |                                      |        |                  |
| s |                                      |        |                  |
+---+--------------------------------------+--------+------------------+
|   | Cr.-Service Income-Net               |        | \$1,000.00       |
|   |                                      |        |                  |
|   | Commitment Fees (Costs)              |        |                  |
+---+--------------------------------------+--------+------------------+
|   |                                      |        |                  |
+---+--------------------------------------+--------+------------------+

### Detailed Transactions

Credit:

a)  With the amount of fees received.

Debit:

a)  With the amount of direct costs incurred.

b)  With the period amortization of net fees.

c)  With the amount of net fees when the commitment expires unexercised.

d)  With the amount of unamortized net fees when the option to convert
    to a term loan is exercised.

**Deferred Credits-Net Commitment Fees (Costs)-Loans To Members**

Fees charged for entering into an agreement to make a loan should be
credited to this account. Direct loan origination costs incurred to make
a commitment to originate a loan should be debited to this account. The
net commitment fees should be deferred. If the commitment is exercised,
this account should be debited and the appropriate loan contra account
for net commitment fees should be credited. The net fees should then be
recognized as income over the life of the loan using the interest
method. If the commitment expires unexercised, the net fees should be
recognized as income upon expiration.

If the enterprise\'s experience with similar arrangements indicates that
the likelihood is slight that the commitment will be exercised, the net
fees should be recognized over the commitment period on a straight-line
basis as service fee income. If the commitment is subsequently
exercised, the remaining unamortized fees should be transferred to \"Net
Commitment Fees (Costs)-Loans to Members\" and recognized as income over
the life of the loan using the interest method.

#### SUSPENSE ACCOUNTS

**Unapplied Data Processing Exceptions**

The accounts in this series are provided for credit unions using
computers for the processing of accounting transactions. The accounts
are used to show the amount of unprocessed transactions rejected by the
computer because of error or invalid input data. Examples are
transactions bearing incorrect account numbers or names, an incorrect
transaction date, a transaction designated as a loan repayment when no
outstanding loan to the member is contained in the computer files, etc.

Two accounts are provided in this series for processing exceptions
relating to receipt and disbursement transactions, respectively. As an
alternative both unapplied disbursements may be recorded in "Unapplied
Data Processing Exceptions". Exceptions must be corrected and submitted
promptly for posting after a listing of exceptions has been received.

**Unapplied Data Processing Exceptions (Receipts)**

This account reflects amounts of transactions rejected by the computer
representing receipts which have not yet been applied. When the credit
union receives an exception listing, an adjusting entry should be
recorded in the Journal and Cash Record. The amount of unapplied
receipts should be entered in the Journal and Cash Record as a credit to
this account. The offsetting debit should be to the account(s) to which
the rejected transactions were originally credited, which in some cases
could be to the \"Undistributed\" accounts under \"Accounts Payable\".

When the unapplied exception is corrected, the adjustments made upon
receipt of the exception listing should be reversed in the Journal and
Cash Record as of the date of re-submittal to the computer.

### Entries in the Journal and Cash Record

All entries to this account should be recorded as "Miscellaneous" in the
Journal and Cash Record unless the credit union establishes separate
columns for such transactions because of the volume of debits and
credits affecting this account.

Illustrative Entries

  -----------------------------------------------------------------------

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a)  Upon receipt of an exception showing unapplied collections:

  -------------- -------------------------------- -------------- ------------------
  Dr.-Loans                                       \$1,400        

  Dr.-Interest                                    45             
  on Loans                                                       

                 Cr.-Unapplied Data Processing                   \$1,445
                 Exceptions (Receipts)                           
  -------------- -------------------------------- -------------- ------------------

[Note]{.underline}: If the credit union credits items sent to the
computer for processing to an "Undistributed" account in the Accounts
Payable series, the debit above would be to that account.

b)  When exceptions are corrected and resubmitted to the computer, the
    entry shown above should be reversed.

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

***Detailed Transactions***

Credit:

a)  With amounts of unprocessed receipt transactions rejected by the
    computer and shown on exception listings.

Debit:

a)  With amounts of rejected receipt transactions resubmitted to the
    computer for processing.

**Unapplied Data Processing Exceptions (Disbursements)**

This account is used to record disbursement transactions that were
rejected by the computer. When the credit union receives an exception
listing, this account is debited and the offsetting credit goes to
reverse the original entry or entries. When the unapplied exceptions are
corrected, which should be timely, the entries made above should be
reversed as of the date resubmitted to the computer.

###### *Entries in the Journal and Cash Record*

All entries to this account should be recorded as \"Miscellaneous\" in
the Journal and Cash Record unless the credit union establishes separate
column(s) for such transactions because of the volume of transactions
affecting this account.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  Upon receipt of an exception listing showing unapplied
    disbursements:

  ----------------- -------------------------------- --------------- ------------------
  Dr.- Unapplied                                     \$310           
  Data Processing                                                    
  Exceptions                                                         
  (Disbursements)                                                    

                    Cr.-Loans                                        \$250

                    Cr.-Shares                                       60
  ----------------- -------------------------------- --------------- ------------------

b)  When exceptions are corrected and resubmitted to the computer, the
    entry shown above should be reversed.

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

***Detailed Transactions***

Debit:

a)  With amounts of unprocessed disbursement transactions rejected by
    the computer and shown on exception listings.

Credit:

a)  With amounts of rejected disbursements transactions resubmitted to
    the computer for processing.

**COMMITMENTS AND CONTINGENT LIABILITIES**

######## Accrued Loss Contingencies

This account is used to accrue a loss from a loss contingency when both
of the following conditions exist:

a)  It is probable that an asset has been impaired or a liability has
    been incurred; and

b)  The amount of the loss can be reasonably estimated.

A loss contingency is defined as an existing condition, situation, or
group of circumstances that involve uncertainty as to possible gain or
loss to a credit union. It is resolved when one or more future events
takes place or fails to occur. When the uncertainty is removed, it may
confirm the purchase of an asset or the reduction of a liability or the
incidence of a loss, impairment of an asset, or a liability. Examples of
such contingencies would be:

a)  Pending or threatened litigation;

b)  Guarantees of indebtedness to others;

c)  Risk of loss or damage to credit union property by fire, explosion,
    flood, or other hazards which are not insurable;

d)  Agreements to repurchase loans, property, or other receivables that
    have been sold;

e)  Obligations of credit unions under standby letters of credit; and

f)  Actual possible claims and assessments.

### Entries in the Journal and Cash Record

The entries to this account are recorded as \"Miscellaneous\" in the
Journal and Cash Record. The offsetting changes to expenses should be
recorded in the separate column designated for operating expense debits.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record an accrual for a loss contingency that will result from
    uninsured medical expenses of a credit union member. The member fell
    on the icy outside steps of the credit union office and has filed a
    lawsuit against the credit union to recover medical expenses. The
    credit union's attorney believes that the credit union will incur
    the loss. The credit union's uninsured portion of the loss will be
    \$10,000. The court case is expected to be finalized in three
    months. The entry to record estimable or probable loss would be:

+---+---------------------------+-----------------+-------------------+
| D |                           | \$10,000        |                   |
| r |                           |                 |                   |
| . |                           |                 |                   |
| - |                           |                 |                   |
| M |                           |                 |                   |
| i |                           |                 |                   |
| s |                           |                 |                   |
| c |                           |                 |                   |
| e |                           |                 |                   |
| l |                           |                 |                   |
| l |                           |                 |                   |
| a |                           |                 |                   |
| n |                           |                 |                   |
| e |                           |                 |                   |
| o |                           |                 |                   |
| u |                           |                 |                   |
| s |                           |                 |                   |
| O |                           |                 |                   |
| p |                           |                 |                   |
| e |                           |                 |                   |
| r |                           |                 |                   |
| a |                           |                 |                   |
| t |                           |                 |                   |
| i |                           |                 |                   |
| n |                           |                 |                   |
| g |                           |                 |                   |
| E |                           |                 |                   |
| x |                           |                 |                   |
| p |                           |                 |                   |
| e |                           |                 |                   |
| n |                           |                 |                   |
| s |                           |                 |                   |
| e |                           |                 |                   |
| s |                           |                 |                   |
+---+---------------------------+-----------------+-------------------+
|   | Cr.-Accrued Losses        |                 | \$10,00000        |
|   |                           |                 |                   |
|   | Contingencies             |                 |                   |
+---+---------------------------+-----------------+-------------------+

The above entry would be made as of the balance sheet date.

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

***Detailed Transactions***

Credit:

a)  With amounts of periodic changes to expenses representing unpaid
    costs in order to allocate such costs over the period to which they
    apply.

Debit:

a)  With the amounts recorded to this account when the losses are paid;
    adjustments to the accrual amounts should be charged or credited as
    applicable to this account and the appropriate expense account.