Ch 2 Case Study Flashcards
Pro Packs, Inc. manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. The company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as a part of the cost of inventory:
Canvas used in the construction of the packs.
Capitalize.
ASC 330-10-30-1: costs are equal to the amount of expenses that are directly or indirectly needed to finish the production of inventory.
Pro Packs, Inc. manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. The company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as a part of the cost of inventory:
Zippers purchased from YKK (a supplier), including the cost of freight for the zippers to be shipped.
Capitalize.
Freight-in is added into ending inventory. It should also be included.
ASC 330-10-30-1: costs are equal to the amount of expenses directly or indirectly related to the final production of the inventory.
Pro Packs, Inc. manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. The company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as a part of the cost of inventory:
Wages paid to employees operating industrial sewing machines.
Capitalize.
Per Wiley Review book: all costs necessary to bring the item of inventory to salable condition should be capitalized.
Pro Packs, Inc. manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. The company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as a part of the cost of inventory:
Electric utility bills related to the operation of the plant.
Capitalize the portion allocated to inventory/cogs.
This would be a variable cost included in inventory.
Pro Packs, Inc. manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. The company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as a part of the cost of inventory:
Contract labor paid to update and maintain the company website, through which customers can directly place backpack orders.
Expense. Do not capitalize.
ASC 330-10-30-8: selling expenses are not to be included in the cost of inventory.
On January 31, an improperly stacked box fell from the top shelf of a warehouse, injuring an employee. The employee was hit, fell, and broke his wrist. Your company self-insures for the risk of such incidents rather than paying an insurance company to absorb the risk of such claims. The employee has been treated for his injuries and has retained a lawyer. The lawyer has not yet filed a formal claim with the company. According to your internal risk management team, the amount of claim likely to be sought by the employee could range between $50,000 and $300,000.
Is your company required to record a liability for this incident? When, and for what amount?
The company is required to record a liability on the books for this incident.
The lowest estimated cost should be used to accrue the liability, in this case it would be $50,000.
A loss contingency should be accrued when the information available before issuing the financial statements suggest that a liability has occurred at the financial statement date (ASC 450-20-25-2a). In addition, the amount of the loss must be reasonably estimated (ASC 450-20-25-2b).
On January 31, an improperly stacked box fell from the top shelf of a warehouse, injuring an employee. The employee was hit, fell, and broke his wrist. Your company self-insures for the risk of such incidents rather than paying an insurance company to absorb the risk of such claims. The employee has been treated for his injuries and has retained a lawyer. The lawyer has not yet filed a formal claim with the company. According to your internal risk management team, the amount of claim likely to be sought by the employee could range between $50,000 and $300,000.
What disclosures are required, if any?
The company is required to disclose the incident.
ASC 450-20-50-1: the disclosure should explain the incident and describe the rationale behind the estimated contingency loss.
