Ch 2 - Inv/PPE/Tax Flashcards
What is the Specific identification inventory method?
A method used for unique items, such as custom orders
This method tracks each specific item sold.
What does FIFO stand for in inventory methods?
First-In, First-Out
This method assumes that the oldest inventory items are sold first.
What is the Weighted-average cost inventory method?
A method that calculates the average cost of inventory items
Useful when inventory items are indistinguishable from one another.
Can you switch inventory methods?
Can switch if it makes info more relevant and reliable but beware of:
Retroactive restatement, disclosure requirements, and increased audit support
Changes should aim to improve the relevance and reliability of information.
What are common events affecting inventory?
- Damage, theft > > Treat like an inv. sale w/o revenue piece
- Obsolescence & Spoilage»_space; Look at LCNRV
These can lead to inventory write-downs or adjustments.
What does LCNRV stand for? What does it state? What are the requirements?
Lower Cost, Net Realizable Value. States if an inventory write-down is necessary.
If…
–Historical Cost is lower, Do nothing
- NRV is lower, WRITE-DOWN
Used to determine the value of inventory for write-downs.
How is NRV calculated?
Selling price of inventory minus estimated costs to make the sale
NRV helps assess whether a write-down is needed.
What is the journal entry for writing down inventory?
Treat like an inventory sale.
Ex:
DR. Coffee Beans (COGS)
CR. Coffee Bean Inventory
Reflects a write-down due to spoilage.
When can a write-up of inventory be recorded?
If a previous write-down was taken and has a ceiling equal to the original cost
Write-ups are treated like inventory purchases.
What is the journal entry for an inventory write-up?
Treat like an inventory purchase.
Ex.
DR. Leather gloves inventory
CR. Leather gloves COGS
Used to record an increase in inventory value due to market price spikes.
What is the order of inventory calculation (to help determine how errors effect inventory).
Errors that result from miscount self-corrects over two periods - the errors offset each other in Yr. 1 and Yr. 2
Order of inventory
1. Sales
2. COGS:
- Beginning inventory
- Purchases
- COGS available for sale
- (Ending inventory)
- COGS
3. Gross Profit (Sales - COGS)
This error self-corrects in the following period.
What are the four steps for accounting for the sale or disposal of PP&E?
- Update accumulated amortization
- Calculate carrying value
- Calculate gain/loss
- Record the disposal
These steps are consistent between ASPE and IFRS.
How is carrying value calculated? How is recoverable amount calculated?
Carrying value: Historical cost less accumulated depreciation
Recoverable amount: Greater of
- Fair value less costs of disposal
- Value in use (will be given)
This value is compared against cash received to determine gain/loss.
What indicates impairment of PP&E?
Carrying value > recoverable amount
Recoverable amount is the higher of fair value less costs of disposal or value in use.
What is the journal entry for recording an impairment loss?
DR. Impairment loss
CR. PP&E Asset
Used when impairment is identified.
What is the Double-Declining Balance (DDB) method? What is the formula? What about at the last year of the useful life?
The double declining balance method is often used for assets that experience a rapid decline in value in the early years of their use
Formula:
- total asset cost - accum. dep * (1/estimated useful life * 2)
- last year of useful life:
total asset cost - accum dep - x = residual value
x = depreciation for last year
DDB method involves calculating a straight-line rate and doubling it.
What is the GST rate in Ontario?
13%
GST applies to nearly all goods and services.
What does the journal entry for estimating income tax expense look like?
DR. Income Tax Expense
CR. Income Tax Payable
Reflects the estimated tax obligation.
What is the journal entry for recording an installment payment of income tax?
DR. Income Tax Payable
CR. Cash
This entry reduces the liability and cash.
What is the journal entry for an inventory purchase including HST?
DR. Inventory
DR. HST Receivable
CR. Cash
This reflects the cost of inventory plus the GST receivable.
What is the journal entry for an inventory sale including HST?
DR. Cash
CR. HST Payable
CR. Revenue
What happens if HST collected (payable) is greather than HST paid (receiveable)? What about vice versa?
If HST collected (payable) > HST paid (receivable), the company will have a net payable balance of HST and will have to remit (i.e., pay) that tax to the provincial government.
If the HST paid > the HST collected, the provincial government will reimburse the company for the difference.
