Chapter 2

Question 1

do the accounting standards permit companies change their inventory costing method?

Answer 1

yes, provided that the change results in a more relevant and reliable information on the financial statements., the change must be applied retroactively (comparative financial statements must reflect the change as if the method has always been applied)

Question 2

what happens if inventory becomes worth less than the cost it was purchased for?

Answer 2

lower of cost and net realizable value (LCNRV) rule comes in

Question 3

what is the LCNRV rule?

Answer 3

requires that inventory owned by the company is measured and presented either historical cost or net realizable value - which ever is lower

Question 4

define net realizable value (NRV)

Answer 4

the selling price of inventory less the estimated costs required to make a sale

Question 5

what happens if NRV is lower than the historical cost

Answer 5

an inventory write down is required

Question 6

what’s the journal entry for an inventory write-down

Answer 6

DR. COGS
CR. Inventory

Question 7

what happens when the NRV increases from a previous NRV?

Answer 7

partially reverse the initial write-down (the difference of NRV x quantity)

Question 8

how is inventory valuation driven by?

Answer 8

market forces

Question 9

how are inventory errors possible?

Answer 9

the processes to validate ending inventory

Question 10

how to manage inventory errors

Answer 10

1. ending inventory can be understated or overstated
2. ending inventory errors resolve themselves over the span of 2 periods - this self-resolution is a result of the relationship between the inventory and COGS –> if the ending inventory is overstated in 1 period, that period’s COGS will be understated resulting in an overstatement of gross profits and then in the next period the opposite will happen

Question 11

what’s the journal entry to dispose an asset

Answer 11

DR. accumulated depreciation
CR. PP&E - asset

Question 12

what are the steps to dispose an asset that has a residual value and is scrapped or sold to another party for an amount above its residual value?

Answer 12

1. ensure accumulated amortization is up to date at the time of sale/disposal
2. calculate the asset’s carrying value immediately prior to the sale/disposal
3. calculate any gain/loss by comparing the carrying value to the proceeds of sale/disposal
4. record the disposal in the accounting information system

remove the asset and corresponding accumulate amortization from the books before booking the gain or loss on sale

Question 13

can the carrying value be significantly different than the recoverable amount of the asset?

Answer 13

yes, due to:
a decline in market value
major advances in technology
physical damage
asset idling

Question 14

define impariment

Answer 14

a state when an asset’s carrying value exceeds its recoverable amount

Question 15

what’s the asset’s recoverable amount

Answer 15

A) fair value less costs of disposal
B) value in use, which is the present value of the estimated future cash flows the asset will generate as a result of its use less costs of disposal

Question 16

when do the accounting standards require companies to conduct impairement tests

Answer 16

anytime there’s indictors of impairment

Question 17

what’s the journal entry to impair the asset

Answer 17

DR. Loss on asset impairment
CR. PP&E asset

Question 18

can assets be written up?

Answer 18

yes, through the reversal of asset impairment if the recoverable amount increases in the future

Question 19

are partial reversals posisble?

Answer 19

yes, if the new recoverable amount is higher than the carrying amount but less than the original amortized cost before impairment

Question 20

can the amount of the reversal exceed the asset’s amortized cost at the time the impairment was taken?

Answer 20

no, the amount of the reversal is limited to the amount of the impairment loss

Question 21

under IFRS, when are goodwill and certain intangible asset required to be tested for impairment? vs ASPE?

Answer 21

IFRS - annually

ASPE - when indicators of impairment arise

Question 22

how to calculate Double-declining balance (DDB)

Answer 22

1. calculate the total acquisition cost of the asset (beginning balance in year 1)
2. calculate the straight-line depreciation rate (1/estimated useful life in years)
3. calculate DDB rate: SL rate (form step 2) x 2
4. calculate depreciation: DDB rate x beginning of period book value (carrying value) for all the periods then add the total depreciable amount to find the extra depreciation in the last year?

exception: in the last year we must calculate depreciation to ensure the ending book value = residual value

Question 23

define income tax

Answer 23

an expense that’s charged by governments on the income generated by companies and individuals

Question 24

how to calculate the tax rate?

Answer 24

divide the income tax expense by the pre-tax earnings

Question 25

define tax installements

Answer 25

periodic payments of the company’s estimated total annual income taxes to avoid a large tax bill once they file their taxes for the fiscal year

Question 26

define the Goods and Services tax (GST

Answer 26

a value-added tax that is imposed at each stage of the supply chain, from production to distribution to the sale to the end customer

Question 27

what’s the journal entry to purchasing inventory with HST?

Answer 27

DR. Women’s accessories inventory
DR. HST receivable
CR. cash

Question 28

why is HST DR? and labelled as a receivable

Answer 28

the HST that a corporation pays is refundable but the provincial government unless the corporation collects more HST than it pays, where it will owe the government

Question 29

what’s the journal entry for a sale with HST

Answer 29

DR. Cash
CR. women’s blouses revenue
CR. HST payable

Question 30

what happens when the HST receivable exceeds the HST payable?

Answer 30

the provincial governmnt will reimburse the company for the difference

Question 31

what happens when the HST payable exceeds the HST receivable?

Answer 31

the company will have to remit (pay) that tax to the provincial government

Question 32

how frequently does the HST need to be remitted?

Answer 32

monthly, quarterly or annually depending on the business operations and size

Question 33

what are deferred tax assets (DTA) and deferred tax liabilities (DTL)

Answer 33

balance sheet items that can be either current or non-current which arise from differences in the calculation of income for accounting purposes and income for tax purposes

Question 34

can the earnings before taxes the corporation reports on the income statement for accounting purpose can be different than the taxable income that’s reported to the CRA?

Answer 34

yes - difference in method of depreciation used by the company vs the CRA depreciating the asset based on the asset class it’s in

Question 35

how does the DTL arise

Answer 35

it’s created for the amount of tax that would eventually need to be paid, as throughout the life of the asset, the amount of tax paid for accounting and tax purposes must be same if the CRA deducts less tax

Question 36

what’s the journal entry for a DTL?

Answer 36

DR. income tax expense $265
CR. income tax payable $203
CR. deferred tax liability $61

Question 37

how is depreciation referred to by the CRA?

Answer 37

capital cost allowance (CCA)

Question 38

define property tax

Answer 38

an expense paid on non-movable property owned by an individual or corporation, (land + any buildings on the land)

typically collected by the municipal government

Question 39

how is property tax calculated in ontario

Answer 39

1. the general municipal tax rate - set independently by each municipality and can vary based on the type of property owned
2. the education tax rate (set by the provincial government)
3. the property value (determined by the municipal property assessment corporation (MPAC) and reassessed every four years)

Question 40

when and how are corporations assessed on property taxes? how do corporations pay the tax?

Answer 40

on an annual basis and are recorded as an operating expense on the statement of profit or loss

corporations pay their property tax via installments

Question 41

once a corporation knows its property tax expense for the year, will it pro-rate the annual expense by month (consistent with matching principle) record a corresponding property tax liability and reduce that liability as it pays its tax installments?

Answer 41

yes