Chapter 2 Flashcards
1. Explain how certain events affect the accounting for inventory and PP&E 2. Prepare journal entries relating to specific inventory and PP&E events 3. Describe the basic differences between income tax and other types of taxes 4. Explain the function of deferred tax assets and liabilities
when is a change in costing method permitted?
a change is permitted if it makes the cost information more relevant and reliable (typically, this translates to more accurate or more informative in the specific business context). Remember, accounting standards require inventory to be reported at historical (i.e., acquisition) cost.
What is LCNRV Rule
The lower of cost and net realizable value (LCNRV) rule is common to both ASPE and IFRS and requires that inventory owned by the company is measured and presented at either A) historical cost, or B) net realizable value (NRV), whichever is lower.
Net realizable value (NRV) is effectively the selling price of inventory less the estimated costs required to make the sale.
will ending inventory errors resolve themselves over the span of 2 periods?
YES
what is the effect of COGS and Gross Profit in year 1 and 2 if ending inventory of year 1 is understated?
Year 1:
COGS = overstated
GP = understated
year 2:
BI = understated
COGS = understated
GP = overstated
what is the effect of COGS and Gross Profit in year 1 and 2 if ending inventory of year 1 is overstated?
year 1:
COGS = understated
GP = overstated
year 2:
BI = overstated
COGS = overstated
GP = understated
what are evidence of impairment
- decline in market value
- major advances in technology
- physical damage
- asset idling
what is an asset’s recoverable amount?
the greater of:
a) fair value less cost of disposal
b) value in use = PV of estimated future cash flows an asset will generate as result of its use less cost of disposal
can the amount of an impairment reversal exceed the amortized cost when impaired?
NO - is limited to the amount of the impairment loss.
Partial reversals are also possible if the new recoverable amount is higher than the carrying amount but less than the original amortized cost before impairment.
When should an asset be tested for impairment
- when there are indicators of impairment
- goodwill and intangible assets have to be tested for impairment annually
what is depreciation
Depreciation is an accounting method which allocates the depreciable cost of an asset over the asset’s estimated useful life. Depreciation is sometimes referred to as amortization and the expense account in a COA is called “depreciation expense” or “amortization expense”.
how do you calculate DDB (double declining balance)
- Calculate the total acquisition cost of the asset (this becomes beginning balance in Year 1)
- Calculate straight-line (SL) depreciation rate: 1 ÷ estimated useful life in years
- Calculate DDB rate: SL rate (from Step 2) x 2
- Calculate depreciation: DDB rate X beginning of period book value (aka carrying value)
- Exception: In the last year we must calculate depreciation to ensure the ending book value = residual value
what is income tax?
Income tax is an expense that’s charged by governments on the income generated by companies and individuals. In Canada, corporations and individuals are taxed at the federal and provincial levels. Additionally, the Canadian tax system is referred to as a progressive system, meaning that the rate of tax paid varies based on the income level. Finally, corporate tax rates in Canada are lower than personal tax rates.
how to calculate income tax
income tax expense = pre-tax earnings * tax rate
yearly concerns about income tax (personal income)
Your tax for the year is based on the calendar year
however taxes are paid in the end of April
what are tax installments
tax installments - which are 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.
keep in mind that a corporate tax year won’t match the calendar year if the company has chosen an off-calendar fiscal year-end (but we’ll leave that to your tax courses as well).
What is goods and services tax (GST)
Goods and services tax (GST), also known as value-added tax (VAT) in many parts of the world, is a tax that is imposed at each stage of the supply chain, from production, to distribution, to the sale to the end customer.
HST in Ontario = 13%
what is the account used for tax when a business purchases inventory
HST receivable
what is the account used for tax when a business sells inventory
HST Payable
HST payable > HST receivable
what will the business have to do
the company will have a net payable balance of HST and will have to remit (i.e., pay) that tax to the provincial government
HST payable < HST receivable
what will the business have to do
nothing - the provincial government will reimburse the company for the difference
what is deferred tax assets (DTA) and deferred tax liabilities (DTL)
are 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.
how to calculate:
1. find income taxes based on IFRS and based on CRA tax rules
- IFRS taxes = income tax expense
- CRA taxes = tax payable
expense > payable = DTL
expense < payable = DTA
deferred tax liability = CR
deferred tax asset = DR
what is property tax?
Property tax is an expense paid on non-movable property owned by an individual or corporation, including land and any buildings on that land. This tax is typically collected by the municipal government (e.g., Regional Municipality of Waterloo) the land and/or building resides on and is used for funding very specific services in that municipality including libraries, public schools, fire stations, and police services.
what are the 3 variables property tax rate is based on:
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)
how do corporations pay property tax
- assessed tax on an annual basis (recorded in income statement)
- may need to pay with installments:
- pro-rate by month (record matching principle)
- record tax liability for matching principle
- reduce liability as it pays tax installments
