CRAM W1

Question 1

What is the retail inventory method?

Answer 1

Similar to Gross Profit method, retail inventory method uses relationship between costs and selling price to estimate COGS and ending inventory.

Cost to Retail %: (BI+Net Purch @ cost)/(BI+Net Purch @ Retail) applied to ending inventory at retail gives EI at cost.
**When Net Markups/Markdowns are present, these are applied in the denominator for the applicable C/R%.

Question 2

How is LCM established under the retail inventory method? How is FIFO-LCM established?

Answer 2

FIFO-LCM excludes BI and net markdowns (but includes net markUPs) from the C/R%. The ratio is smaller, resulting in lower ending inventory.

Note that the C/R% is still applied to the estimated EI @ retail (Net Markdowns included) in order to determine EI @ cost.

Question 3

When using the retail inventory method, is transportation-in added to purchases for a period?

Answer 3

No. Transportation in is not included in purchase amounts for retail column.

Question 4

When a purchase commitment is recorded for inventory, and there is a loss at YE, what are the JE’s?

Answer 4

The full amount of the commitment must still be recorded as a liability. Purchases throughout the year are recorded as they occur, and the diff at YE is added to the liability account, while the DR is to a loss.

Question 5

Under LIFO, in a period of rising prices, what is the result of an inventory liquidation?

Answer 5

COGS will be lower because the inventory liquidated costs less, and profits will be higher.

Question 6

What valuation method is most appropriate when there is a relatively small number of significant dollar value items in inventory?

Answer 6

Specific Identification

Question 7

What is IFRS inventory valuation for LCM?

Answer 7

LCM under IFRS is the lower of current cost (BV) or NRV (sales price-cost to complete, sell, or dispose)

Question 8

Can costs to test a machine post installation be capitalized?

Answer 8

Yes. All costs associated with getting the equipment ready for use are capitalized.

Question 9

If a company has to make modifications to the building that equipment is installed in in order for that equipment to function properly, is the co. able to capitalize those costs?

Answer 9

Yes; ALL costs associated with getting equipment ready for use are capitalized.

Question 10

What is the rule regarding non-monetary exchanges that lack commercial substance (defined as no expected change in cash flows)? How are these transactions recorded?

Answer 10

The asset received is recorded at BV of the asset which was given up plus any boot given when G/L are not recognized.

In the event that boot is received in addition to the new asset, a G/L IS recognized but only for the portion related to the boot. [(Boot Rec’d/Total Consideration)*Total G=Gain recognized.]

Question 11

How are the costs associated with removing a building from an existing parcel of land treated?

Answer 11

These removal/excavation costs are recorded as a loss in the period incurred.

Question 12

Is casualty insurance on a new building capitalized?

Answer 12

No; this is an expense that may be recorded either as a prepaid or expensed when incurred.

Question 13

If values are supplied for the NP as well as the annual payments for a purchase when determining the amount to capitalize for equipment using time value of money, which amount should be used in the calculation?

Answer 13

If values are supplied for the total NP amount as well as the annual payments for an asset and the payments * term = the NP, use the annuity factor.

Question 14

When a constructed plant asset’s FV is less than construction and other capitalizable costs, at what amount is the asset recorded?

Answer 14

The asset is capitalized at the lesser of the 2 amounts; in this case, at the FV.

Question 15

How is the amount of interest to be capitalized for a constructed asset determined?

Answer 15

The amount of interest to be capitalized is the lesser of the actual interest paid or the avoidable interest (calculated as: interest rate*average accumulated expenditures for the period).

On the exam, you may be instructed to use a particular method, in which case, ignore the actual interest paid amount in the interest of time.

Question 16

What is the formula to calculate the interest to be capitalized for a constructed asset? Define the components and methods.

Answer 16

Interest Rate*Average Accum. Expend. (AAE)
Interest Rate is calculated as:
1. Wtd. Avg. Method:rate on all existing debt, weighted (that is, the total interest cost/total debt=%)
2. Specific Interest Method: construction loans only

AAE - average of actual expenditures or simple average of BB and EB. When calculating AAE, important to note term during year: if spent in May, allocate total 8/12mos.

Question 17

When assets are acquired by means other than cash, what is true about recording the value of the asset acquired?

Answer 17

The more objective or readily determinable value is used to record the asset.

IE, if an amount of stock that is significant in relation to OS stock is exchanged for an asset, the fair value of the asset is used because the stock price is subjective to the # OS.

Question 18

Under what circumstances will the specific method and weighted average method of calculating interest to be capitalized yield the same results?

Answer 18

When AAE exceed total interest bearing debt (principal) and/or the interest rates on all interest bearing debt instruments are the same, the amount of interest to be capitalized will be the same under both the specific and weighted average methods.

Question 19

When there is a BB in CIP (PY AAE), including capitalized interest, is the figure included in the determination of capitalized interest for the following year?

Answer 19

Yes; that BB figure will be included in the AAE in the following year to determine interest capitalized. Any interest capitalized in the first year (or PY’s) is then compounded in this calculation.

Question 20

When land is purchased for a building site, is interest capitalized on the land?

Answer 20

The cost of the land will be included in AAE if the land was purchased during the year of construction, however, interest is not added to the land account since it is not under construction-the building is.

Question 21

What is the units of production method of depreciation?

Answer 21

[(Cost-Salvage)/Lifetime Estimated Production] * Year’s Production

Question 22

What is the SYD depreciation method?

Answer 22

SYD: Y1+Y2+Y3+Y4+Y5=15 (always to be in denominator)

UL/SYD*(Cost-Salvage)=Depreciation

Question 23

If an asset that is sold halfway through its UL for 50% of the original cost incurs a loss during the sale, what depreciation method must have been used?

Answer 23

Straight line depreciation

BV at sale exceeds cash received from sale

Question 24

How is the depletion of natural resources calculated?

Answer 24

Depletion Rate * # units removed in period

DepRt: (Natural Resources Balance-Residual Value)/(Total Estimated Units)

Question 25

Under what circumstances is recovery of previously recognized impairment losses allowed?

Answer 25

An asset held for disposal may be written back up after an impairment loss has been recognized. In theory, that recovery will be realized in the near future.

Question 26

When is a long-lived asset tested for impairment?

Answer 26

When circumstances indicate that the carrying amount may not be recoverable.

Impairment is a 2-step process, and this is the first step. (2: measure diff FV and CV)

Question 27

The IFRS asset impairment test compares the CV with the recoverable amount. What is defined as the recoverable amount, under IFRS?

Answer 27

It is the greater of the FV less costs to sell or the value in use (the PV of expected future cash flows).

Question 28

When an entity under IFRS chooses the revaluation model for PPE, what is required?

Answer 28

When one asset is revalued, under this model, all assets within the entire class must be revalued.

Question 29

Is Redeemable Preferred Stock considered an equity investment for accounting purposes?

Answer 29

No; aka callable preferred stock, may be reacquired by the issuing org. under prescribed conditions.

Question 30

When a security is transferred from AFS to HTM, how is the unrealized holding G/L treated for the remaining life?

Answer 30

All unrealized holding G/L are amortized over the remaining life of the security.

Question 31

How are the cash flows from purchases and sales of Trading Securities treated in the Statement of Cash Flows?

Answer 31

These cash flows are considered operating activities in the Statement of Cash Flows

Question 32

When a bond is purchased in between interest dates and interest is included in the purchase price, what is the initial investment cost recorded?

Answer 32

If a $1M bond is purchased at a discount between interest dates for $946k, including interest of $40k, the initial cost is $906k. Any subsequent interest recorded, therefore, is calculated based on that figure.

Question 33

How are bond prices and market interest rates related?

Answer 33

Inverse relationship: if bond prices increase, the market value of fixed income investments decreases due to better opportunities in the market.

Question 34

Should G/L on bond investments be reported separately or as a net amount in the Income Statement?

Answer 34

G/L should be reported separately, by investment, in income from continuing operations as they arise from different transactions.

Question 35

If an investor purchases an HTM Bond between interest dates at a discount, is the CV of the bond at the purchase date more than the cash paid to the seller?

Answer 35

No; price paid is less than FV when a bond is discounted. The additional cash paid for accrued interest is credited to interest rec’bl, and the CV is the portion of the amount paid, less the interest amount.

Question 36

How is the purchase of investments recorded under the cost method? Are there ever subsequent adjustments to the asset account?

Answer 36

The initial purchase is recorded at cost, and dividends are recorded as income. The only adjustments ever required would be if a permanent decline in FV occurs (write down or write off), or a liquidating dividend (co. issues dividends in excess of the earnings for the period-diff is a liquidating dividend).

Question 37

When an org. transfers an investment from one class to another class, under what circumstances would an unrealized G/L on the transfer not be recognized in current net income?

Answer 37

HTM -> AFS
Investment is recorded at FV with any difference from original recorded cost (unrealized G/L) taken to OCI instead of net income.

Question 38

Under IFRS, the Business Model Test used to evaluate debt instruments for classification is mainly concerned with what aspect/characteristic of the investment?

Answer 38

This test is concerned with the investor’s intent upon purchase of the investment.

Question 39

What is the main difference between the AFS and Trading investment classifications?

Answer 39

The timing - if intent to sell within the ‘near term’ it is a Trading security. Beyond the ‘near term’ makes it an AFS.

Question 40

How is the ending balance of an investment account determined when the investor transitions at December 31 from cost to equity method?

Answer 40

The equity method is applied for the entire year based on the % owned at cost method.

IE, if an investor owns 10% Jan 1-Dec 30 and purchases additional shares @ 12/31, qualifying for equity method, income and dividends @ YE are recorded per the 10% ownership for the year under the equity method.
***NOTE that if an investor purchases additional shares qualifying the investment for equity method at the beginning of a period, prior periods recorded under cost method are not restated to equity method.

Question 41

Under the equity method, how is reportable income (to be included in IS) determined?

Answer 41

If investor owns 40%:

40% of investee earnings
LESS: any excess of assets over BV
any applicable depreciation

*remember to always apply the ownership %