FAR Deck 4 Flashcards
Shipping costs, when to include in the initial cost of inventory
When inventory (goods) are shipped FOB destination, the siller will retain ownership of the goods durining transporation and the seller will pay for the cost of freight-out.
When inventory (goods) are shipped FOB shipping, the buyer will retain ownership of the goods during transportation and the buyer will pay for the cost of freight-in. This cost will be included in the initial cost of inventory (along with warehouse xost prior to sale, insurance, repackaging, modifications and cost incurred to bring the saleable to condition (for example assembly).
Calculation for profit recognized in construction contract
It is the differnece between Construction in Progress (CIP) and Expenses
For cumulative years you will need to deduction prior year expenses from CIP and deduct pror year profits, to get that year profits specifically.
What are the 3 fair value measurement techniques (MIC)
Market : Information generated by market transactions for identicial or similar items
Income : Estiminated future amounts discounted to a single, current amount
Cost: Amount currently required to replace benefit derived from an asset
Depletion
Depletion is used to allocate the cost of a natural resource over its useful life based on the units extracted.
Depletion is recognized each period in a 3 step process:
Step 1 - Determine the volume in units remaining to be extracted at the beginning of the year. In the first/initial year, this will equal total units expected to be extracted.
Step 2 - Calculate the cost per unit by dividing the depletion base by the units in Step 1. In the initial year, the base equals total cost (purchase price, development costs, resotration costs) less salvage value. In periods after, the base is the carrying value of the resource less the salvage value.
Step 3 - Calculate depletion by multiplying the per-unit rate in Step 2 by the unts extracted. The depletion expense is based off the units sold.
An Asset Retirement Obligation
An Asset Retirement Obligation (ARO) is when a companys long-lived tangible asset purchased or leased for business operations creates a future liability at the end of its useful life.
An ARO is recoreded at the FV of the liability. The FV equals the PV of the future payments to be made to satisify the oblgation. (note future cash flows are never used)
An accretion expense
An accretion expense is recorded to increase the liability’s carrying value so that is eventually equals the future obligation
A nonreciprocal transfer
A nonreciprocal transfer occurs when no consideration, equity, or service is provided in returned by the recipient.
An asset received in a nonrecirocal transfer is recorded at the FV on the date of contribution,
Recording a nonmonetary exchange that lacks commercial substance
Step 1: Record asset received
- -- Record at the lowest of:
- CV of asst given up + cash paid ( - cash received)
- FV of asst given up + cash paid ( - cash received)
- FV of asset received
Step 2 : Remove asset given up
- Remove cost and any related accumulated depreciation
Step 3 : Recognize gain or loss
- - Recognize losses
- - Generally defer gains (unless cash is received, then recognize on a proportional basis)
New asset (inventory) carrying amount can be calculated as the FV of the asset giving up minus the cash received or plus the cash paid)
Avoidable Interest Calculation
1 - Calculate weighted average accumulated expenditures (AAE).
Multiply construction payments by porportion of year.
2 - Calculate avoidable interest
- Apply AAE (Step 1) first to construction specific debt - Any remainder is applied to general debt
- Calculate actual interest earned
- Determine lesser of avoidable interest (Step 2) or actual interest (Step 3).
Lesser amount is the interest capitalized - Remainder is expensed.
* Interest expense is recorded on only the portion of debt that was used for construction.
Interest is capitalized when debt proceeds were used for construction.
Recognizing a gain/loss when seling a depreciable asset
When a company sells a depreciable asset (eg warehouse), the carrying value is compared to the sale proceeds to determine any realized gain or loss.
If the money you received from the sale is more than the carrying value of the asset you are selling, then a gain is reported. If the money you received from the sale is less than the carrying value of the asset you are selling, then a loss is reported.
Simplified LCM or NRV (LCNRV) Rule
This rule is to be used for inventory methods such as FIFO and average cost.
It compares inventory cost with NRV.
The inventory cost is the ending inventory amount.
The NRV is the sales value minus disosal costs.
The lower of COST or NRV will be used as the carrying amount.
Impairment Determination
An impairment is when an assets value is not recoverable and is required to be written off.
Its deemed nonrecoverable when the undiscounted cash flows expected to result from the use and disposition of the asset is less than the CV (i.e. recoverability test).
Based off the recoverability test and if its deemed unrecoverable, the amount to be written off is determined by: Carrying Value - FV
Commercial substance
Having commercial substance means future cash flows are expected to significantly change – when this happens the transaction is measured at the fv of assets.
It it lacks commercial substance, the carrying value of the assets given up is used to measure the transaction.
Excavation
Excavation costs are assoicated with construction the new plant.
FIFO and ending inventory
Under FIFO, the same dollar amount in ending inventory will result regardless if the periodic inventory system is used or the perpetual system.
FIFO’s ending inventory includes most recent purchases and produces the saem EI under both periodic and perpetual.
