Chapter 2

Question 1

What are the three different methods we learnt in afm 191 for costing inventory?

Answer 1

Special Identification Method
FIFO
Weighted -average cost

Question 2

What can a company not do with ‘inventory methods’

Answer 2

They can’t switch back with these methods , they have to be consistent with one

Question 3

What are they permitted to do with inventory methods

Answer 3

They are allowed to change if its deemed more ‘relavant and reliable”. They have to change everything even pereivous financial statements.

Question 4

What if what we recorded for inventory is inaccurate? or The inventory is worth less than the cost it was purchased? What do we do

Answer 4

We use the lower of cost and net realizable value (we wite it down)

Question 5

What is LCNRV?

Answer 5

Lower of cost and net realizable value basically requires the inventory to be measured and presented in two ways:

a) Historical cost
b) Net realizable value

Whichever is lower

Question 6

What is net realizable value?

Answer 6

The effective price of inventory minus the costs required to make the sale (its how much we expect to get when selling inventory minus costs incurred)

Question 7

If the NRV is less than the historical cost what do we do?

Answer 7

We do an inventory write-down to show its realistic value

Question 8

What is the journal entry to write down inventory when NRV is less than the historical cost?

Answer 8

DR. Cost of goods sold $X
CR. Inventory $X
To record an inventory write-down.

Remember its the change in the difference between the NRV and Histroical cost

Question 9

What if the NRV increases after the write down, whats the journal entry for that?

Answer 9

DR. Inventory $X
CR. COGS $X
To record an inventory write-up.

(19-16) = 3

Question 10

What is something we’re limited to do when making the reversal

Answer 10

We’re only limited to the change we made previously nothing higher, and also limited to the historical cost we cannot make that higher

Ex: Went up by 2$
(18-16)

Question 11

What are the errors tht show up when inventory is counted incorrectly and how do they fix the mistake

Answer 11

1) ending inventory can be either understated or overstated
2) ending inventory errors resolve themselves over the span of two periods.

Question 12

What does over and understated mean?

Answer 12

Understated- Less than what actually there is

Overstated- More than what we actually there is

Question 13

How is this resolution possible?

Answer 13

This self-resolution is a result of the relationship between inventory (on the balance sheet) and cost of goods sold (on the income statement).

Question 14

What happens if iventory is overstated

Answer 14

Ending inventory is overstated

Which for tha period COGS –> Understated (you said you sold more toys than what you actually did)

GP –> Overstated

BEG INVENTORY (next period) –> Overstated

COGS –> Overstated

GP –> understated

Question 15

What happens if inventory is understated

Answer 15

end inventory- understated
Cogs –> overstated
Gp- understated

beg - understated
cogs - understated
gp-overstated

Question 16

Acronym for ‘overstated’ inventory

Answer 16

uo ou

Question 17

Acronym for ‘understated’ inventory

Answer 17

ou uo

Question 18

When we discard PP&E and theres no residual value whats the journal entry?

Answer 18

DR. Accumulated depreciation -lawnmower $5,000
CR. PP&E – lawnmower $5,000
To recognize disposition ($0 residual value) of lawnmower no longer in use.

Question 19

What are the four proper steps in writing odd an asset where there’s residual value + gain/losses on the sale of asset disposal.

Answer 19

1. Ensure the accumulated depreciation up to the date of time of disposal (book any required depreciation expense)
   - Straight line depreciaiton and subtract the residual value
2. Calculate the asset’s carrying value immediately before the sale/disposal. (asset - accumulated depreciation)
3. Calculate any gain or loss by comparing the carrying value to the proceeds of sale/disposal.

(Proceeds from the sale of disposal - carrying value)

4. Record the disposal in the accounting information system (AIS).

Question 20

What is imapirement?

Answer 20

its when an assets carrying value might exceed its recoverable amount

Question 21

What are some signs of imapirement?

Answer 21

A decline in market value
Major advances in technology (i.e., asset obsolescence)
Physical damage
Asset idling (i.e., not being actively used)

Question 22

what happens if there are signs of imapirement

Answer 22

We have to write down this asset: when the carrying value exceeds recoverable amount

Question 23

What is the recoverable amount

Answer 23

(whichever is higher)

a) Fair value misus costs of disposal (how much the asset would be sold at)

b) Value in use –> How much the asset will generate for the company

Question 24

What is the journal entry if there is an impairment

Answer 24

DR. Loss on asset impairment $X

CR. PP&E asset $X
To record impairment of asset.

(we write what value the asset lost)

Question 25

Can we reverse the journal entry of an 'impairement'?

Answer 25

yes we can but we're limited to what we had done previously and the assets worth.

Question 26

How do you do the "double-declining balance method"?

Answer 26

1. Calculate the total acquisition cost of the asset (this becomes the beginning balance in Year 1) (its the costs and asset) 2. Calculate straight-line (SL) depreciation rate: 1 ÷ estimated useful life in years 3. Calculate DDB rate: SL rate (from Step 2) x 2 4. 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

Question 27

What is 'income tax"

Answer 27

Its an expense charged by govy on income generated by individuals and companies

Question 28

What is income tax expense a % of

Answer 28

Pre-tax earnings

Question 29

How does corporations pay their 'income tax"

Answer 29

through tax installments

Question 30

What are 'tax installments'

Answer 30

These are periodic payments that are made to the government to avoid a large bill at the end

Question 31

What is the journal entry when a company records its tax installments

Answer 31

Dr. Income tax expense Cr. Income tax payable

Question 32

When they pay their tax installments

Answer 32

Dr. Income tax payable Cr. Cash

Question 33

what is HST

Answer 33

its a tax imposed on many things

Question 34

What is HST in canada

Answer 34

13%

Question 35

How do we know if HST is "debited" and is called ""

Answer 35

If the corporation buys products they can receive a refundable amount which is why its debited and called HST recievable

Question 36

How do we know if HST is "credited" and is called ""

Answer 36

When a company collects HST form customrs and pays that to the government. This is a credit and is payable.

Question 37

What happens if HST payable exceeds HST recievable

Answer 37

They owe money to govy and vise versa

Question 38

What are deferred tax assets and liabilities?

Answer 38

There is a differece in calculating income for accounting and tax purposes so what we record for CRA might be different than what we record on our financial statemets

Question 39

Why do they differ?

Answer 39

Most commonly deepreciation as they might have a difference in calculating depreciation which may be higher or lower usually meaning income for tax might be lower

Question 40

What is a deferred tax liability

Answer 40

The tax that eventually needs to be paid

Question 41

What is property tax?

Answer 41

A tax paid for non movable proerpty owned by individual or coproaation

Question 42

Can they pay property tax in installemnts

Answer 42

YES

Question 43

What is the journal entry for property tax recorded on financial statements

Answer 43

DR. Property tax expense $5,000 CR. Property tax payable $5,000

Question 44

Property tax journal entry when paid?

Answer 44

DR. Property tax payable $15,000 CR. Cash $15,000