EXAM 3 Flashcards
Cost
Inventory valuations using specific identification
Net Realizable Value
Inventory item’s selling price - icosts of completion and disposal
Lower-of-Cost-or-Net-Realizable-Value (LCNRV) and Lower-of-Cost-or-Market (LCM) : To account -
- Individual Items
- Major Categories
- Total Inventory
A company (may/may not) change from year to year its application of LCNRV
may NOT
(LCNRV/LCM) ADJ. Journal Entries:
COGS Method
DR- COGS
CR- Inventory
(LCNRV/LCM) ADJ. Journal Entries:
LOSS Method
DR- Inventory Loss
CR- Inventory
LCNRV Method’s are both:
accepted by GAAP
result in same net income
Gross Profit is affected under what method (COGS/LOSS)
COGS
Lower-of-Cost-or-Market is allowed by GAAP if a company uses:
LIFO or retail inventory costing method
Market
inventory item’s replacement cost
Ceiling
market must not be higher than inventory item’s NRV
Floor
market must not be lower than NRV - normal profit margin
To record market:
at lower of the cost or the market
Retail Inventory Method:
must be known-
-total cost of merchandise purchased
-total retail value of merchandise purchased
-total cost of goods available for sale
-total retail value of goods available for sale
-net sales for the period
Physical counts (are/are not) required, but most companies perform
Are NOT
Retail Inventory method is accepted by:
GAAP and for income tax purposes
Markups
increase above the original selling price of a product
Markup Cancellation
reduction of the markup (not to exceed the markup amount)
Net Markups
markups - markup cancellations
Markdowns
reduction in the original selling price of a product
Markdown Cancellations
reduction of the markdown (not to exceed the markdown)
Net Markdowns
markdowns - markdown cancellations
Conventional Approach (cost to retail %)
(Cost of Goods Available) / (Retail Price of Goods Available + Net Markups)
DO NOT SUBTRACT NET MARKDOWNS
Inventory Disclosures
-Inventory Basis (LCNRV,LCM)
-Inventory Cost Method (FIFO,LIFO,Avg. Cost)
-Inventory Components
-Significant Financing Arrangements
Debt Investments and Examples
investments in the debt of another company/entity
ex. US GOV securities, municipal/corporate bonds
Premium
coupon rate > effective interest rate
Discount
coupon rate < effective interest rate
Held-to-Maturity Debt Securities
positive intent and ability to hold until maturity
Record HTM securities at
amortized cost
Acquisition cost
-plus amortized discount
-less amortized premium
Face Value of the Security
-less the unamortized discount
-plus the unamortized premium
To amortize discount/premium:
effective interest method
Straight-line interest method is only acceptable if:
its results are similar to effective interest method
Available-for-Sale Debt Securities
no intent to sell in near term or to hold until maturity
AFS Security Current Asset v Long Term Investment
Within one year- Current Asset
Longer than one year - Long Term Investment
ADJ from amortized cost to fair value
DR- Fair Value ADJ (permanent)
CR- Unrealized Holding Gain or Loss - equity (temporary)
Other Comprehensive Income
-no effect on net income
-closed to accumulated other comprehensive income
Trading Debt Securities
intent to sell them in near future
Fair Value Option: HTM and AFS
-record at fair value
-record the unrealized holding gain/loss in net income
-apply the instrument-by-instrument basis
-adoption must be when investment is purchased (continued as long as entity owns it)
Fair Value HTM: to record -
DR- HTM Debt Securities
CR- Unrealized Holding Gain or Loss - Income
Fair Value AFS: to record -
DR- AFS Debt Securities
CR- Unrealized Holding Gain or Loss - Income
Equity Investment and Examples
investment in the capital stock of another company
ex. common/preferred stock
Include _____ _______ in the cost of an equity security
broker’s commissions
Investor
purchases equity investments and records the investment as an asset
Investee
has the common/preferred stock
Significant Influence
ability of the investor to influence the operational and financial policies of the investee
Investor owns:
< 20%
20-50%
> 50%
Fair Value Method
Equity Method
Consolidated Financial Statement
to record and adjust less than 20%
-Adjust to fair value at the end of the year
DR- Fair Value ADJ
CR- Unrealized Holding Gain or Loss (affects net income)
DR and CR balance in Unrealized Holding Gains or Losses
CR- increase net income
DR- decrease net income
Realized gain or loss on the sale of an equity security
Gain- increase net income
Loss- decrease net income
Investee Loss
if net loss exceeds the carrying value, company will stop equity method and leave at 0
The changes in the fair value of Available-for-Sale Debt Securities do not affect net income. (T/F)
True
-affects Comprehensive Income
A company will DR AFS for increases in the fair value of the debt security and CR AFS for decreases in the fair value of the debt security. (T/F)
False
-will DR/CR the Fair Value ADJ account
Assume a company has HTM DS but did not select the fair value option. At what value should the HTM DS be shown on a company’s Balance Sheet?
Amortized Cost
On 1/1/2022 a company purchased HTM DS that are due 12/31/2027. Under what category will the company include HTM DS on its 12/31/2022 Balance Sheet?
Long-Term Investments
What effect, if any, (increase, decrease, no effect) will a CR balance in the Unrealized Holding Gain or Loss - Equity account for the year ended 12/31/2022 have on the company’s 12/31/2022 net income? The company did not elect the fair value option for this security.
No Effect
A company may record some of its HTM DS at amortized cost and some of its HTM Ds at fair value. (T/F)
True
A company may record some of its AFS BS at amortized cost and some of its AFS DS at fair value. (T/F)
False
-should always report at fair value
Are equity securities adjusted to fair value at year end?
No
What effect, if any, will the receipt of cash dividends from the investee have on the investor’s net income?
No Effect
What effect, if any, will the investor’s share of the investee’s net income have on the investor’s net income?
Increase
What effect, if any, will the investor’s share of the investee’s net loss have on the investor’s net income?
Decrease
PPE characterisitics
-Long Lived
-Physical/Tangible
-Used for purpose of the company’s operations
To record PPE:
-Capitalize (record as asset)
-Historical Cost
Land
-Purchase Price
-Do NOT depreciate
When land was originally purchased and building is razed:
-Cost of removing the old building: Add to cost of land
-Proceeds from the salvage of materials from the demolition of the old building: Deduct to the cost of land
Land held for resale (should/should not) be recorded under PPE
Should NOT
Land Improvement Examples
Landscaping
Driveways
Parking Lots
Sidewalks
Buildings Purchased
-Purchase price
-Closing costs
-Realtor’s commissions
-Costs of remodeling
Buildings Constructed
-Contract price
-Architect and building permits
-Excavation costs
-Commissions, etc.
-Interest Costs
Equipment
-Purchase Price
-Sales Tax
-Freight Costs
-Insurance on the equipment (while in transit)
-Installation Costs
-Costs of testing the equipment
Interest Capitalization
-requires a period of time to get the qualifying asset ready for its intended use
-discrete asset
When should you use interest capitalization?
for company’s own use or for sale/lease
When should you not use interest capitalization?
used in business now, currently being used in the business, not discrete assets
Interest Capitalization Period
expenditures have occurred, process is ongoing for intended use, interest cost has been incurred
Amount of interest to capitalize: capitalize the LOWER of
avoidable interest or actual interest
Weighted Average Accumulated Expenditures
Amount x Capitalization Period
Weighted-Average accumulated expenditures are equal to or less than the specific borrowings
weighted-average accumulated expenditures x specific borrowings interest rate = avoidable interest
weighted-average accumulated expenditures exceed specific borrowings
a) amount of specific borrowings x specific borrowings interest rate
b) excess of weighted-average accumulated expenditures over the specific borrowings x weighted-average interest rate of other borrowings
(a) + (b) = avoidable interest
Interest Capitalization Disclosures
- contra-account to interest expense under “other expenses”
- notes to the financial statement
How should the company account for interest earned on the excess funds?
Record the interest earned as “Interest Revenue”
Deferred-Payment Contracts
Long-term debt to purchase PPE
How should PPE be value on the day it is acquired?
Fair value
What if the purchase of PPE involves a deferred-payment contract?
Value at the cash paid plus the PV of the debt at the time of the purchase
Recognition of the interest on long-term notes:
Effective interest method
Assume a company purchases PPE by issuing common stock. The common stock is not publicly traded. The par value of the common stock may be used to value the PPE. (T/F)
False
-Par value may never be used
Assume a company exchanges capital stock for the purchase of a PPE asset. At what value should the company record the asset on its book?
Record the asset at fair value of the capital stock given up or the fair value of the asset received, whichever is more readily determinable. If the capital stock is publicly traded assume the fair value is more readily determinable.
Three Steps of the exchange of non-monetary assets
1) Comercial Substance
2) Calculate the amount of gain or loss
3) Amount of loss or gain to be recognized
Non-monetary asset has commercial substance:
If the exchange results in a loss/gain
recognize the loss/gain
Non-monetary asset lacks commercial substance:
If the exchange results in a loss
recognize the loss
Non-monetary asset lacks commercial substance and has no cash:
If the exchange results in a gain
defer the gain
Non-monetary asset lacks commercial substance and cash is paid:
If the exchange results in a gain
< 25%
> 25%
defer gain
recognize gain
Record a capital expenditure as:
an asset
Record a revenue expenditure as:
an expense
At what value should PPE be recorded?
Historical Cost
PPE (may/may not) be increased to fair value after it is originally recorded.
may NOT
Depreciation
systematic allocation of an asset’s depreciable cost over its estimated useful life
Estimated useful life
period of time that the company expects to use the depreciable asset
Salvage Value
company’s expected disposal value of the depreciable asset
Depreciation Base
cost - salvage value
Book value
cost - accumulated depreciation
Gain and Losses for PPE
Gain- CR
Loss- DR
Straight-Line depreciation
Full Year and Partial
[(Cost - Salvage Value)/ (Estimated Useful Life)]
[(Cost - Salvage Value)/ (Estimated Useful Life)] x [(number of months)/ (12)]
A company could recognize either a gain or a loss as a result of an involuntary conversion of PPE. (T/F)
True
A company could recognize either a gain or loss as a result of an abandonment of PPE. (T/F)
False
-a company will not record a gain of abandonment
Changes in accounting estimate for PPE
-Change in estimated useful life
-Change in salvage value
-Change in depreciation method
An accelerated depreciation method will result in higher total depreciation expense over the life of the depreciable asset than the straight-line depreciation method. (T/F)
False
Accelerated Depreciation and Examples
-higher depreciation expense in the asset’s earliest years when compared to straight-line
-total accumulated depreciation over the life of the asset will be the same under all methods
EX. Declining Balance, Sum-of-the-Years’ Digits
Activity Depreciation
Full and Partial
[(Cost - Salvage Value)/(Total Estimated Units)] x (actual units produced in the year)
[(Cost - Salvage Value)/(Total Estimated Units)] x (actual units produced in the period)
Double-Declining Balance Depreciation
Full and Partial
[(cost-accumulated depreciation)/(estimated useful life)] x 2
[(cost-accumulated depreciation)/(estimated useful life)] x 2 x [(number of months/12)]
Sum-of-the-Years’ Digits
(Number of years of estimated useful life remaining as of the beginning of the year)/(Sum of the years of the asset’s estimated useful life = [n x (n+1)]/ 2)
Under the double-declining balance depreciation method, salvage value is deducted in calculating depreciation expense. (T/F)
False
Under the sum-of-the-years’ digits, at the end of a depreciable asset’s estimated useful life the ____ _____ should = its _____ ______
book value, salvage value
Company’s should not use ____ approach
Prospective
If the estimated future undiscounted net cash flows are greater than the asset’s carrying value:
the asset is not impaired
If the estimated future undiscounted net cash flows are less than the asset’s carrying value:
the asset is impaired
If undiscounted net future cash flows is less than the carrying value, impairment loss is calculated by:
-the excess of the PPE carrying value over fair value
Accounting treatment for research and development:
expense research and development costs in the period incurred
Limited life and Examples
-definite (specific) lives
EX. Patents/Copyrights
Patents
gives the owner the right to exclusively manufacture, use, and sell a product
life: 20 years
Copyright
gives the creator the right to use, reproduce, and sell their artistic work
life: life of creator + 70 years
Amortization Expense (Limited-Life)
(cost-residual value)/(legal life)
DR
Limited Life Effects:
Total Assets
Total Liabilities
Net Income
Decrease
No Effect
Decrease
Trademark
a name, symbol, etc. that represents a company or product
life: 10 yrs. INDEFINITELY, unless becomes generic
- do not amortize
-test for impairment annually
Goodwill
-Do NOT capitalize
-test annually
Indefinite-life assets other than goodwill should be amortized. (T/F)
False
Goodwill is the excess of the ____ ____ over the ____ _____ of the acquired company’s net assets
Purchase Price, Fair Value
Net assets are _____ _____ less _____ ______
total assets, total liabilities
A company only capitalizes goodwill when it buys another company; internal-goodwill is not capitalized. (T/F)
True
Franchise
limited-life or indefinite-life depending on terms
