FAR - F4: Working Capital and Fixed Assets

Question 1

F4: Working Capital & Fixed Assets

**Factoring receivables without recourse is a sales transaction.

Answer 1

**Factoring without recourse transfers the risk of uncollectible accounts to the buyers.

Question 2

F4:**Factoring receivables may be treated as a sales transaction

Answer 2

**Factoring with recourse leaves the risk of uncollectible accounts with the seller.

Question 3

F4: **Pledge receivables

Answer 3

Pledging receivable is the process of obtaining a loan using the receivables as collateral.

Question 4

F4: **Assigning Receivable

Answer 4

Assigning receivables is the process of obtaining a loan by transferring to the lender the debtor’s right to cash collected on receivables.

Question 5

F4: When the allowance method of recognizing uncollectible accounts is used…

Answer 5

the entry to record the write-off of a specific account decrease both accounts receivable and the allowance for uncollectible accounts.

JE:
Dr - Allowance for uncollectible accounts
Cr - Accounts receivable

**Net income is not affected.

Question 6

F4: How to calculate “Adjusted Cash Balance…”

Answer 6

**Adjusted Cash Balance = Unadjusted cash balance +/- bank errors + credit memos - service charges

For example:
Adjusted cash balance = $10,012 - (95 - 59) + 35 - 50 = 9,961

Question 7

F4: Which method of recording uncollectible accounts expense is consistent with accrual accounting?

Answer 7

**Allowance method is consistent with accrual accounting; direct write-off is not consistent with accrual accounting.

Question 8

F4: Net sales should reflect estimated sales returns but not exchanges

Answer 8

**When sales returns can be estimated, a decrease in revenue with a debit to the allowance for sales returns is made.
For example; 10% returns are expected. $1,000,000 less 10% is $900,000.

**Expected exchanges do not affect net sales or inventory or cost of sales. The earnings process is complete for the exchange. SFAS 48 para. 3,4.

Question 9

F4: Factoring of Accounts receivalbles

1. Without recourse - True Sale (Risk is transfer to buyer)
2. with recourse - Sale or Loan (Risk remains with seller)

Answer 9

**Factoring receivables is the process by which a company converts its receivables to cash by assigning them to a factor, either with or without recourse.

Question 10

F4: How to calculate Net Proceeds at discount (Maturity Value)

Answer 10

1. Original Term 12 months
   6 months gone by
   ————————————
   Remaining month: 6
2. Bank wants 6 months of interest at 10% of maturity value:
   10% on MV for 6 months

Face of Note: $500,000
Interest rate on Note 8% x 1Y = $40,000

So Maturity Value of Note: $540,000
Discount by Bank 10% x 1/2 year = 5%
———————————————————
Bank Interest: ($27,000)

Proceeds from Bank: (540,000 - 27,000) = $513,000

Less: Face Value ($500,000)

Roth Interest: $13,000

Question 11

F4: Substance over form

Answer 11

It is primary quality of decision usefulness. Information must be valid, and economic substance is more important than legal form.

Question 12

F4: Milton Co. pledged some of its accounts receivable to Good Neighbor Financing corp in return for a loan.

Answer 12

**Milton will retain control of the receivables.

**When a company pledges (assigns) receivables in return for a loan, the assigning company will retain title to the receivables and will use the proceeds collected from the receivables to repay the loan.

Question 13

F4: What amount of cash receive from the $80,000 factored receivable without recourse. Assume 10% of the A/R as an allowance for sales returns and %5 commissions

Answer 13

**Factoring involves a company converting its receivables into cash by assigning them to a “factor” either with or without recourse. Aloc factored its receivables without recourse, meaning the sale is final and the factor assumes the risk of any losses
Of the $80,000 factored, 10% was retained by the factor ($80,000 x 10% = $8000) and %5 commission is taken off ($80,000 x 5% = 4,000) to get to cash received of $68,000.

Question 14

F4: Inventories

A. Goods in Transit - Read Carefully - are “We” buyer or seller

1. F.O.B Shipping Point
2. F.O.B Destination

Answer 14

• *F.O.B Shipping Point - Buyer pays
• Buyer’s Inventory - “Freight in” added to cost of inventory
• *F.O.B Destination - Seller pays
• Seller Inventory - “freight out” selling expense.

Question 15

F4: B. Shipment of Non-conforming Goods (Wrong goods)

Answer 15

**Seller’s inventory

Question 16

C. Sales with a Right to return

Answer 16

• *Can we “reasonably” estimate returns
  1. if not then “NO SALE YET”, no A/R
  2. If can then setup a contra account “Allowance of Sales return” of Sales

Question 17

F4: D. Consigned Goods

1. Consignor - True owners
2. Consignee - Sales agent, inventory is not belong to them.

Answer 17

Consignor - Inventory cost includes shipping cost to consignee
Sales

------------------
GP
-Commission
-Advertising
---------------------
NI
=============

Question 18

F4: Valuation of Inventory

**Net Realizable value

Answer 18

• *GAAP requires that inventory be stated at its “COST”
• • Cost - Sold at a profit

= Selling price - disposal cost

Question 19

B. Departure from the Cost Basis - If sold at a loss

Answer 19

1. Lower of cost or market

2. Precious Metals and Farm Products - at Net realizable Value = Selling price - disposable cost

Question 20

**Lower cost or Market(LCM)

**If you sell it at loss, book the loss now.

Answer 20

**Separately applying LCM to each item results in most conservative Ending Inventory or Total Inventory

Question 21

Under GAAP, Lower cost or Market

Under IFRS, Lower of cost or Net Realizable Value(NRV)

Answer 21

Market Terms:
1. Market value = Middle value of an inventory item’s replacement cost, its market ceiling and its market floor.

2. Replacement Cost = Cost to purchase the item of inventory as of the valuation date
3. Market ceiling = Net Realizable value ( Net Selling price less cost to complete and dispose)
4. Market Floor = market ceiling - normal profit margin (Based on SP only)

Question 22

**Reversal of Inventory Write-down

Answer 22

GAAP does not allow reversal, but IFRS does original write-off and reduction of COGS.

Question 23

**Under GAAP, determine the lower of cost or Market

Answer 23

Under GAAP, 3 steps process:

Step 1: Calculate Market Ceiling (NRV)
Selling price - Cost to Complete = NRV

Step 2: Calculate Market floor:
NRV - Profit margin = Market Floor

Step 3: Find the middle value then compare with Cost then pick the lower value.

**JE to record the write-down
Dr - Inventory loss due to decline in market value
Cr - Inventory

Question 24

**Under IFRS, determine the Lower of cost or Market

Answer 24

**2 steps process:

step 1: Calculate NRV
Selling price - Cost to completion

Setp 2: Pick up the lower of the cost.

Question 25

Periodic Inventory system Vs Perpetual Inventory system * *Periodic - Use Purchases - No COGS until period end * **Perpetual - No Purchases, - Every time we buy inventroy we Dr - inventory and sell inventory, Cr - Inventory * *updated immediately, we do not wait at the end of the period.

Answer 25

A. Periodic Inventory system -*Use Purchases, -temporary system -End of the accounting period. - COGS "Plug" Disadvantages - shortages "lumped" in with COGS ``` Memorize: Beginning Inventory + purchases (Net of returns & discounts) = Cost of goods Available for Sale -Ending inventory (Physical count) ``` =COGS "Plug" ``` **What if Ending Inventory is overstated or incorrect, What is the ripple effects? "COGS & GP also incorrect" "Overstated + and Understated -" If Ending inventory + COGS - SP - -------------- GP + ======== ```

Question 26

Jouranl Entry for Periodic system:

Answer 26

**No COGS until period end Dr - Cash $140,000 Cr - Sales $140,000

Question 27

Jouranl Entry for Perpetual method:

Answer 27

Step 1: Dr - Cash $140,000 Dr - Sales $140,000 Step 2: And Update: Dr - Cost of Goods Sold $100,000 (20,000 x $5) Cr - Inventory - $100,000

Question 28

**What if if we purchase 50,000 units for $6/units

Answer 28

Under Periodic system, use purchases: Dr - Purchases (50,000x6) 300,000 Cr - Cash 300,000 Under Perpetual method: Dr - Inventory $300,000 Cr- Cash $300,000

Question 29

**Primary Inventory cost flow assumpstion

Answer 29

**Under IFRS, LIFO method is not allowed. Only FIFO method. Under GAAP, allows LIFO and FIFO are weighted average method. **If LIFO is used for tax purposes, it must also be used in the GAAP financial statements.

Question 30

If LIFO and P + (price is rising) | **What effects in the balance sheet and the income statements

Answer 30

**Assuming inflation: Balance sheet: EI - (Cheap) A = L + E Income statement: Rev. + Step 1 Expensive --------------- Profit - Taxable Income -

Question 31

FIFO and LIFO method * *FIFO - Up to bottom (1st batch to last batch) * *LIFO - bottom up (start with last batch)

Answer 31

1. FIFO Periodic = FIFO Perpetual | 2. LIFO Periodic NOT= LIFO Perpetual

Question 32

**Handle each assumption separately then net results: **Use Overstated + and Understated -

Answer 32

``` Step 1: BI 26- +Purchase ------------------ COGAFS 26- -EI -------------------- COGS 26- ``` ``` Step 2: COGAFS -EI 52 + ------------------ COGS 52 - ``` Step 3: COGS 26- + COGS -52 = COGS = 78- Net Sales COGS 26- + COGS 52- = GP 78+

Question 33

**Determine LCM

Answer 33

SP - Cost to complete = NRV - Profit = Floor

Question 34

*FIFO Periodic vs Perpetual **LIFO Periodic vs Perpetual **An Example of LIFO Periodic and Perpetual Method:

Answer 34

*FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory. **LIFO Periodic and LIFO Perpetual will not the same dollar valuation of ending inventory **An Example of LIFO Periodic (Valuate at the end of period): **LIFO period is whatever is left after selling at the end of the period: b/l 1/2: 2000 units x $1 = $2000 P 1/8: 200 units x $3 = 600 --------------------------------------------------- Ending Inventory: $2,600 An Example of LIFO Perpetual ( you valuate continuous as inventory flow, top to bottom): Date - Units - Unit/cost - End Inventory - COGS -------- --------- ------------- -------------------- ---------- b/l 1/1 2000 $1 $2,000 P 1/8 1,200 $3 3,600 Sold 1/23 (1200) 3 (3,600) 3,600 (600) 1 (600) 600 p 1/28 800 5 4,000 ---------------------------------------------------------------------------- EI: $5,400 COGS: 4,200

Question 35

**How to calculate COGS

Answer 35

**Calculate COGS ``` Beginning Inventory +Purchase price -Purchase Discount +Freight-in *Freight-out (Not included, Selling Expense) -Ending Inventory --------------------------------- Cost of Goods Sold: ``` *Freight-out is a selling expense, not an item that is capitalizable as inventory. **Freight-in is capitalized as part of inventory. (i.e., it is part of the cost of getting the inventory ready for its intended use)

Question 36

**Change inventory valuation method from FIFO to LIFO in a period of rising prices.

Answer 36

**Under LIFO, ending inventory (EI) has a lower valuation then uner FIFO since older, lower costs are assigned to ending inventory. **Similarly, Under LIFO, COGS has a higher valuation than under FIFO since recent higher costs are assigned to goods sold. **This higher COGS means that NET taxable income under LIFO decrease.

Question 37

**Total Inventory valuation in the balance sheet **Inventory will not be transferred until title transfer is occurred.

Answer 37

``` **The $90,000 inventory purchase should be included in inventory since it was shipped prior to year end and the title transferred to the company at the shipping point. the unshipped goods of $120,000 belong to the company since at year-end there has been no title transfer to the buyer. So Inventory includes: Physical count of $1,500,000 +Inventory in transit of $90,000 +the unshipped sale of $120,000 ---------------------------------- Total invenotry valuation $1,710,000 ```

Question 38

**Under the moving-average method, a new weighted average cost is computed after each purchase, and issues are priced at the latest weighted-average cost.

Answer 38

For Example: Balance 1/1 1000 x $1 = $1,000 Purchase 1/7 600 x 3 = 1,800 ------------------------------------------------ B/L 1/7 1600 x 1.75 (New weighted-avg.) = 2,800 sold 1/20 (900) x 1.75 = (1,575) ---------------------------------------------------- B/l 1/20 700 x 1.75 = 1,225 Purchase 1/25 400 x 5.0 = 2000 -------------------------------------------------------------------------------- b/l 1/31 1100 x 2.93 (new weighted avg.) = 3225 **Calculate new weighted-average for every purchase. **In this example, the next units sold would be priced at $2.93, the new weighted-average cost.

Question 39

**What amount should Opal's inventory account at December 31 be reduced?

Answer 39

**1. 40% markup and the goods held on consignment (not belonging to Opal) must be reduced from Inventory account. So reduced form Inventory account is: 40% x 40,000 = 16,000 Goods held on cosignment = 27,000 -------------------------------------------------------- Total inventory reduce = $43,000 **$36,000 of goods shipped FOB shipping point (Buyer pays for shipment) should be included in inventory (Title has passed to Opal)

Question 40

**Inventory accounting systems is true? 1. Periodic inventory system 2. Perpetual inventory system. **A disadvantage of the periodic inventory system is that the cost of good sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

Answer 40

1. With a periodic inventory system, the quantity of inventory is determined only by physical count, usually at least annually. Therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period and the cost of inventory sold and inventory shortages connot be easily distinguished. 2. With a perpetual inventory system, the inventory record for each item of inventory is updated for each purchase and each sale as they occur. The actual cost of goods sold is determined and recorded with each sale. At year end, inventory per the perpetual records can be compared to actual inventory per a physical count and inventory shortages can be identified.

Question 41

**Consignment Sales

Answer 41

**In consignment sales, revenue is recognized when the goods are sold to a third party. Until the sale, the goods remain in the consignor's inventory. **Hart sold $32,000 worth of the consigned inventory and all calculations will be based on that amount. Sales $32,000 Cost of Sales (40% x 50,000) $20,000 --------------------------------------------------------- Gross profit: $12,000 ``` Selling Expense: Advertising 1,200 commission 10%: 3,200 ---------------------------------- Total selling expense: $4,400 ``` Net Income: 7,600 =================

Question 42

**The Cost of consigned inventory

Answer 42

**The cost of consigned inventory includes the cost of the inventory and any costs needed to get the inventory in place for sale. In this question, that is $20,000. Because the $500 is paid for advertising, and not for something like freight, it is not included in the cost of the inventory. at the end of the year, 30% of the inventory will remain unsold.

Question 43

What is the effect of COGS and Taxable Income when Prices are rising? ** FIFO and P^ (Price is rising) **LIFO and P^ **Under FIFO, the first costs inventoried are the first costs transferred to cost of goods sold. In a period of rising prices, FIFO results in the lowest cost of goods ans the highest net income.

Answer 43

**FIFO and P^ (Higher) EI ^(Higher) Expensive => A^(Higher) = L + E Rev. -COGS - (lower) => "Cheap" items will sell first --------------------------------------------------------------------- Gross Profit ^ (higher) => Tax liability ^ (Higher) **LIFO and P^ (Higher) EI - (Lower) => "Cheap" A - (lower) = L = E Rev. -COSGS (Higher) => Expensive items will sell first -------------------------- Gross Profit - (Lower) Taxable Income will lower.

Question 44

**COGS Formula: ``` BI (Beginning Inventory) +P (Purchases) ---------------------------- =COGAFS (Cost of Goods Available for sale) -EI ---------------------------------------- =COGS ```

Answer 44

EI^ => A^ = L +E **Because inventory is a component of current assets, an overstatement of ending inventory will cause current assets to be overstated. **Base on COGS formula: An overstatement of EI will cause an understatement of COGS, which will result in an overstatement of Gross Profit. Rev. -COGS - (understatement) ----------------- Gross Profit - (Overstatement)

Question 45

**Shipping costs **Shipping costs from overseas (Freight-in) - Cost of Inventory **Shipping costs to export customers (Freight-out) - Selling Expenses ***What amount of shipping costs should be included in Seafood trading's year-end inventory valuation?

Answer 45

**The $1.5 million in overseas shipping costs must be allocated between ending inventory and cost of goods sold at year end, as follows: ``` BI: $0.0 +P: 12.0 ----------------- COGAFS: $12.0 -EI: 3.0 -------------------- COGS: $9.0 ``` so $9/$12 = 75% was sold and $3/$12 = 25% remained in ending inventory at year end. **Therefore, shipping costs from overseas $1.5 x 75% = $1.125 should be included in COGS **and $1.5 x 25% = $375,000 should be included in EI. **The $1.0 million in shipping costs to export customers are a selling cost that will be included in SG&A expenses.

Question 46

**When the current market value of the inventory is less than the fixed purchase price in a purchase commitment,...

Answer 46

the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.

Question 47

**Agent (Consignee) and Seller (Consignor)

Answer 47

**When an agent(consignee) will hold and sell goods on behalf of the consignor, until the inventory is sold, the seller (consignor) will include in his/her inventory because title and risk of loss are retained by the consignor.

Question 48

**How to calculate "Dollar-value LIFO" Price Index = EI at Current year /EI at Base year Therefore, EI at Base year = EI at current year / PI

Answer 48

Step 1: Price index(PI) = EI at Current Year/EI at Base year Step 2. Date: Inv. at Current$ / index = Inv. at base $ Step 3. Layers x index = LIFO Result

Question 49

** An Example of Dollar-value of LIFO

Answer 49

Date - Base/yr/Cost - Current/yr/cost - LIFO Inv. Layer --------- ------------------- -------------------- ----------------------- 1/1/Y1 90,000 90,000 90,000 Y1 Layer 20,000 30,000 21.818 *(Note 1) ---------------------------------------------------------------------------------- 110,000 120,000 111,818 Y2 Layer 40,000 80,000 53,333**(Note 2) --------------------------------------------------------------------- 150,000 200,000 165,151 *Note 1: Price Index: 120,000/110,000 = 1.09 LIFO Layer: 20,000 x 1.09 = 21,818 **Note 2: Price Index: 200,000/150,000 = 1.33 LIFO Layer: 40,000 x 1.33 = 53,333

Question 50

** Operating Cycle - 5 Steps and Journal Entry a.k.a Cash conversion cycle or Net Operating cycle

Answer 50

Operating Cycle: 5 Steps -------------------------------------------- Step 1: Purchase inventory for $100 and receive Inventory from supplier on credit: ------------------------------------- Dr - Inventory 100 Cr - A/P $100 Step 2: Payment to suppliers -------------------------------------------------- Dr - Cash $100 Cr - A/P $100 ``` Step 3: Selling inventory to customer on credit: (2 Journal Entries) ----------------------------------- a. Dr - A/R $110 Cr - Sales $110 ``` b. Dr - COGS $100 Cr - Inventory $100 Step 4: Collect cash from customer: -------------------------------------------------- Dr - Cash $110 Cr - A/R $110 ``` Step 5: Calculate Gross Profit ------------------------------- Sales $110 $100 ---------------------- Gross Profit: $10 ====================== ```

Question 51

F4 - Fixed Assets **Accumulated Depreciation Account (AD) (Contra-asset)

Answer 51

Net Book Value (NBV) = Cost - AD

Question 52

**Valuation of Fixed Assets - Under GAAP A. Historical cost B. Donated Fixed Assets

Answer 52

*Historical Cost = Purchase price Payments over time = Note payable **Donated Fixed Assets Dr - Fixed Asset (FMV) Cr - Gain on nonreciprocal transfer(gift) - Unusual or infrequent in nature.

Question 53

**Valuation of Fixed Assets under IFRS A. Cost Model B. Revaluation Model

Answer 53

*Cost Model: Carrying Value = Historical cost - Accumulated Depreciation - Impairment **Revaluation Model: (must be made frequently to ensure that carrying value does not differ materially from fair value at the end of the reporting period.) Carrying value = Fair value at revaluation date - subsequent accumulated depreciation - subsequent Impairment 1. Revaluation losses - Income Statement 2. Revaluation Gaines - Not on Income Statement(I/S) -> Other Comprehensive Income (OCI) 3. Impairment - OCI - to zero then loss on I/S

Question 54

1. Additions: increase quantity 2. When you see "Improvements and Replacements" (increase usefulness) 3. Ordinary repair 4. Extraordinary repair (increase usefulness) **Increase life - Reduce Accumulated Depreciation

Answer 54

1. Capitalize 2. You immediately "Capitalize" 3. Expense 4. Capitalize

Question 55

** Cost of Land - Up to Excavation (Digging a hole) **Cost of Building - Excavation forward **"Basket Purchase" of Land and Building 100 - Land (60) - Building (40)

Answer 55

**Cost of Land Up to Digging a hole - Filling in a hole or leveling **Digging foundation -> Building Cost * *Building cost - digging a hole for the foundation. - Construction loan - Architect's fees - Alteration and improvements

Question 56

**How do you increase the NBV?

Answer 56

**By decreasing Accumulated Depreciation DR - Accumulated Depreciation - (decrease) thus NBV + (increase) Cr - Cash/Accounts Payable.

Question 57

**Investment Property (IFRS Only) - Rental or to flip(selling it) **Cost of Investment Property * *Investment property Measurement Models 1. Cost Model 2. Fair Value Model **U.S. GAAP does not have separate classification for "Investment Property" - It is part of Property, Plant and Equipment (PP&E)

Answer 57

**US GAAP does not have separate classification for "INVESTMENT PROPERTY" **"U.S. GAAP does not include a specific definition or set of accounting rules for Investment property" * *Cost of Investment Property - Purchase price - Expenses directly related to purchaing, including legal services, professional fees. transfer taxes and other taxes. * *Capitalized - Addition - Major Replacement - Extraordinary repair or maintenence * *Expense - Ordinary repair or maintenance **Investment Property Measurement Models 1. Cost Model Carrying value = Historical cost - Accumulated Depreciation (AD) 2. Fair Value Model **Investment property is reported on the balance sheet at fair value and "NOT" depreciated.

Question 58

**Fixed Assets CONSTRUCTED BY A COMPANY - Cost **Capitalization of Interest Costs

Answer 58

Cost Include: - Direct materials and Direct Labor - Repairs and Maintenance expenses - Overhead cost - **"Construction period interest" **Capitalization of Interest Costs - Construction Period Interest * *Should be capitalized (based on weighted average of accumulated expenditures) as part of the cost of producing fixed assets, such as: - to pay for materials, labor, overhead things of these nature. * *DO NOT capitalize Interest Cost - to buy inventory - During only - Intentional delays in construction - waiting for market to improve - you have to expense. - Ordinary delays - waiting for a permit - you can capitalize.

Question 59

**Computing Capitalized Cost

Answer 59

1. Weighted Average Amount of Accumulated Expenditures - Not Amount borrowed - Know as "Avoidable interest" 2. Interest Rate on Borrowings - Rate on construction loan 3. Interest Rate on Excess Expenditures - General Debt 4. Not to Exceed Actual Interest Costs - CAP 5. Do not Reduce Capitalizable Interest

Question 60

**Machine purchased for use in a company's manufacturing operations

Answer 60

**Any cost incurred to acquire and make ready a plant asset is capitalized. - Insurance on machine with in transit - Testing and preparation of machine for use.

Question 61

**What amount of interest cost should be Capitalized under interst computed on the weighted-average amount of accumulated exprenditures?

Answer 61

Under the weighted-average amount of accumulated expenditures: - Avoidable interest = the interest on the weighted-average amount of accumulated expenditures. - Capitalized interest = the smaller of the total interest or the avoidable interest.

Question 62

**Interest Expense incurred...

Answer 62

Rules: Interest costs incurred "during the construction period" of machinery to be used by a firm as a fixed asset, should be capitalized as part of the historic cost of acquiring the fixed asset. **Interest costs on the fixed asset " subsequent to the construction period" as well as interest costs on the routine menufacture of machinery for sale to customers (inventory) should be expensed in the income statement for the period incurred.

Question 63

**Leasehold improvement cost...

Answer 63

**Leasehold improvements are capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease (in this question, the amortization period is the lesser of 15 or 20)

Question 64

Cost of Land

Answer 64

``` **The cost of land includes all costs to acquire the land and get it ready for use: Cash Paid for land: $135,000 +Title search fees: 625 +County assessment: 2,500 +Removal of building: 16,000 ----------------------- Total cost of Land: $154,125 ``` **The building excavation costs are costs incurred incurred to construct the building that must be included in the total building cost, no the cost of the land.

Question 65

Question: What amount of impairment loss will the entity report on its december 31, Year 4 Income statement?

Answer 65

Answer: When the building were revalued in Year 1, the $200,000 revaluation gain was booked to other comprehensive income as a revaluation surplus. Under IFRS, if a revalued asset becomes impaired, the impairment is recorded by first reducing any revaluation surplus to zero, with further impairment losses reported on the income statement. **IN this problem, the buildings were impaired on December 31, Year 2 because the $2,295,000 carrying value of the buildings exceeded the $2,000,000 recoverable amount. The $295,000 ($2,000,000 - $2,295,000) impairment loss is recorded by first reducing to zero the $200,000 revaluation surplus from the Year 1 revaluation, and then recorded the $95,000 remaining impairment loss on the income statement.

Question 66

Q: Under IFRS, what will the entity report as investment property on its balance sheet?

Answer 66

A: Under IFRS, investment property is defined as land and buildings held by an entity to earn rentals or for capital appreciation. Therefore, this entity will report total investment properly of $9,750,000 ($5,000,000 land held for rental income + $4,750,000 buildings held for capital appreciation).

Question 67

**Under IFRS revaluation model

Answer 67

1. Further revaluation is necessary when the carrying value of revalued fixed assets differs materially from fair value. 2. Revaluation losses are reported on the I/S 3. Revaluation gains are reported on the OCI 4. Revaluation can not be performed on individual fixed assets only or on classes of assets. **Under IFRS, if an individual fixed asset is revalued, then the entire class of fixed assets to which that asset belongs must be revalued. Individual fixed assets cannot be revalued alone.

Question 68

**How to calculate "weighted average interest rate"?

Answer 68

**The weighted average interest rate is calculated as follows: [(6/14) x 8% + (8/14) x 9%] = 0.0857 or 8.57% **If borrowing are not tied specifically to the construction of an asset, the weighted average interest rate for the other borrowings of the company should be used. **Note: that if there were borrowings tied to the specific construction, the rate on those borrowing would be used.

Question 69

Question: How much interest should be capitalized by Starlight during Year 3?

Answer 69

Answer: Compare avoidable interest to actual interest cost incurred and capitalize the lower amount. **Total expenditure of $250,000 / 2 = $125,000 (Average accumulated expenditure) x .10 (Interest rate on specific borrowing) ---------------------------------------------------------------- Avoidable interest: 12,500 Actual Interest: $200,000 x 0.10 = $20,000 150,000 x 0.7 = $10,500 ---------------------------------------------------------------------- Total Actual interest cost: = $30,500 > $ 12,500 avoidable interest cost **Capitalize the lower amount. Interest earned on money invested is interest revenue. It does not affect the amount of interest expensed or capitalized.

Question 70

**Question: What amount of interest should Cann capitalize as part of the cost of the plant addition?

Answer 70

A: Construction period interest is capitalized based on the weighted average of accumulated construction expenditures. The interest rate paid on borrowings specifically for asset construction is used first to determine the amount of interest cost capitalized. ***If the average accumulated expenditures outstanding exceed the amount of the specific new borrowing, interest on the excess is computed based on the interest rate for other borrowings of the company. Average Expenditure: $200,000 4/12 (Jan -Apr) $ 66,667 $800,000 7/12 (May - Nov) 466,667 $1,100,000 1/12 (Dec) 91,666 ---------------------------------------------------------- Average Expenditure: $625,000 Capitalized Interest Expense: Construction loan: $500,000 x 12% = $60,000 Excess Expenditures: $125,000 x 10% = 12,500 ----------------------------------------------------------------------- Captalized INterest: $72,500

Question 71

Question: What amount of interest should be capitalized for the year ended Dec 31, Year 1? **The Weighted Average Accumulated Expenditures must be calculated.

Answer 71

Step 1: The weighted average accumulated expenditures must be calculated Jan 1: Purchase Land $120,000 12/12 = $120,000 Sep 1: Progress Payment of contrator 150,000 4/12 = $50,000 ---------------------------------------------------------------------------- Weighted average accumulated expenditures: $170,000 Step 2: Compute the capitalized interest is 10% x $170,000 = $17,000 Step 3: Compare the capitalized interest to actual interest: Actual interest $300,000 x 10% = $30,000 **The interest to capitalize is the lesser of the actual interest or capitalized interest. Therefore, the amount of capitalized interest would be $17,000.

Question 72

**Under IFRS, the reversal of a revaluation is recognized in profit and loss...

Answer 72

and increase in value of $5,000 will be recognized as OCI.

Question 73

Question: Under IFRS, which of the following items is considered investment property?

Answer 73

Answer: Part of a building held to earn rentals.

Question 74

F4: Depreciation Method - Sum-of-Year's Digits for 4 years Step 1: Calculate Base for depreciation Purchase price ------------------------------------ Base for depreciation Step 2: Depreciation schedule: Year 1 Fraction (4/10) x Base = Depreciation Expense Year 2 Fraction (3/10) x Base = Depreciation Expense Year 3 Fraction (2/10) x Base = Depreciation Expense Year 4 Fraction (1/10) x Base = Depreciation Expense

Answer 74

``` Example: Purchase price : $20,000 salvage value: 2,000 ------------------------------------------------ Base : $18,000 ``` Sum-of-the-year digits for 4 years: 4(4 + 1)/2 = 10 Year 1 (1996) 4/10 x 18,000 = 7,200 year 2 3/10 x 18,000 = 5,400 year 3 2/10 x !8,000= 3,600 year 4 1/10 x 18,000 = 1,800 ----------------------------------------------------------- 10/10 $18,000 ``` Calculating of the carrying amount at 12/31/1998 Purchase price: $20,000 1996 dep exp. (7,200) 1997 dep exp. (5,400) 1998 dep. exp (3,600) ------------------------------------------- Carrying value at 1998: $3,800 =============================== ```

Question 75

``` F4: How to calculate "Depletion" expense Step 1: **Depletion base = Purchase price + development cost + estimated restoration cost - salvage value ``` Step 2: **Depletion = Depletion base/total resource extract Step 3: Depletion expense = depletion x total resource(e.g. ore) sold

Answer 75

Example: Removal ore estimated at 1,200,000 tons ``` Depletion base= Purchase price: $2,640,000 +development cost: 360,000 +restoration cost: 180,000 -Salvage value: (300,000) ------------------------------------------------------ Depletion base: $2,880,000 ``` Depletion = $2,880,000/1,200,000 = $2.4 per ton Depletion expense = $2.4 x 60,000 = $144,000

Question 76

Depreciation Method - Double-declining-balance -Asset subject to rapid obsolescence Step 1: Double-declining-balance rate = 2 x 1/useful life or Straight-line rate Step 2: Depreciation expense = Double-declining-balance rate x (Cost -Accumulated depreciation) or NBV -Ignore Salvage Value **Max. AD = Cost - Salvage Value.

Answer 76

Example of Double-decling-balance method - 4 year useful life and estimated 10% salvage value for $80,000 Double-declining-balance rate = 2 x 1/4 = 50% 1992 expense = .5 x $80,00 = $40,000 1993 expense = .5 x (80,000 - 40,000) = 20,000 1994 expense = .5 x (40,000 -20,000) = 10,000 1995 expense = .5 x (20,000 -10,000) = 5,000

Question 77

Depreciation Method - Straight-Line method **Depreciation calculations should be based on fair market value or cash equivalent price of the machinery was $110,000 less salvage value

Answer 77

**On the transaction date, the machinery would be recorded at its fair market value (110,000), cash would be credited $10,000 and Notes Payable would be credited for $100,000. **Straight-line Depreciation = (110,000 - $5000)/10 = $10,500

Question 78

Depreciation Method - Units-of-Production method -An asset's service potential declines with use

Answer 78

Formula: Step 1: Cost - Salvage value/ estimated units or hours = Rate per unit or hour Step 2: Rate per unit or hour x # of units produced or hours worked = Depreciation expense ---> Now a "variable cost"

Question 79

**Depreciation rule under IFRS

Answer 79

**IFRS requires component depreciation. Under component depreciation, the machinery, component, and inspection cost are recognized and depreciated separately. Machinery: ($300,000 - $55,000 -$5,000)/15 = 16,000 Component: $55,000 /10 = $5,5000 Inspection: $5000/5 = $1,000 ------------------------------------------------------------------------ Total Year 1 straight line depreciation: $22,500

Question 80

**Computes Composite Depreciation on the straight-line method **Composite assets means dissimilar assets. For example: Machine A, Machine B, Machine C.

Answer 80

**Composite life = Total Depreciable Cost / Total Annual Depreciation Expense

Question 81

Question: What amount of impairment loss should be reported under U.S. GAAP **Carrying Value: $120,000 Expected future Cash Flows of $130,000 Present value of expected cash flows of $100,000 Market Value of $105,000 Test impairment loss: ----------------------------------- Step 1. To determine whether an impairment loss exists, undiscounted future cash flows are compared to carrying value. Step 2. if an impairment loss exist, then the fair value of the asset can be used to determine the amount of the loss to be recognized. Step 3: the amount of the impairment loss Impairment Loss = Carrying value - Fair value ------------------------------------------------------------------------- ** a subsequent reversal of an impairment loss is prohibited under U.S. GAAP. **Note, that reversal of the impairment loss is permitted under IFRS.

Answer 81

Answer: $0 **Under U.S. GAAP, the first step in determining if a long-lived asset is impaired is to compare the carrying amount of the asset to the undiscounted expected future cash flows from the asset. **If the undiscounted expected future cash flows exceeds the carrying value of the asset, then there is no impairment. **In this problem, the expected future cash flows of $130,000 exceed the asset's carrying value of $120,000, so there is no impairment.

Question 82

Question, What amount of impairment loss should be reported under IFRS? **Impairment loss = Greater of (Fair value less costs to sell and Present value of future cash flow) - Carrying value = $105,000 - $120,000

Answer 82

Under IFRS, impairment exists when the carrying value of a fixed assets exceeds the fixed asset's recoverable amount. **The recoverable amount is the greater of the fair value of the assets less cost to sell and the asset's value in use (a.k.a the present value of future cash flow)

Question 83

Question: Under U.S. GAAP, restorations of carrying value for long-lived assets are permitted if an asset's fair value increases sebsequent to recording an impairment loss of which of the following? a. Held for use b. Held for disposal

Answer 83

Answer: Held for disposal.

Question 84

Question: When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accunts receivable and the allowance for uncollectible accounts (AUA)?

Answer 84

Answer: Accounts receivable - No effect Allowance for Uncollectible acclunts - Increase(AUA) Write off JE: Dr. AUA Cr - A/R Restore Write off JE: - Just reverse or switch write off JE DR - AR CR - AUA **So No effect on AR but AUA increase.

Question 85

Question: What amount should the company include in the current liability section of the balance sheet?

Answer 85

Answer $16,000 **The $16,000 current portion of the mortgage-note payable must be reported as a current liability. **The non-current portion of the mortgage-note payable, the short-term debt that is being refinanced with long-term debt and the depreciation-related deferred tax liability must be reported as non-current liabilities.

Question 86

Question: What amount should be reported as cash and cash equivalents on Smite's balance sheet?

Answer 86

**The Post-dated check should not be included in cash and cash equivalents because it is dated after the balance sheet date. **Cash and cash equivalents would not include the $30,000 in the bond sinking fund. Cash in a bond sinking fund is restricted cash.

Question 87

**Quick Ratio

Answer 87

Quick ratio = Cash + Net Receivable + Marketable securities/ Current liabilities **Net Receivable = Accounts Receivable - Allowance for Uncollectible acconts.

Question 88

Question: What amount should be classified as cash on Smith's balance sheet at December 31, Year 1? **Bank Reconciliation for Smith as follows: ``` Big Bank: --------------- Bank Balance : $150,000 Deposit in transit: 5,000 Book Balance $155,000 ``` Small Bank; Bank Balance : $1,500 Outstanding checks: (8,500) Book Balance: (7,000)

Answer 88

Answer: The amount that should be classified as cash on Smith's balance sheet is the $155,000 book balance in the Big Bank, which can be reconciled to the bank balance as follows: $155,000 (Book Balance) = $150,000 + 5,000 (adjusted bank balance) The $7,000 negative balance (overdraft) in the Small Bank account should be reported on the balance sheet as a liability. Note that the Small Bank balance is reconciled as follows: ($7,000) Book Balance = $1,500 - $8,500 (Adjusted bank balance - Outstanding checks)

Question 89

Question: What amount of interest revenue should be included included in Mill's Year 2 income statement?

Answer 89

Answer: $16,500 **The interest to be recorded is calculated as follows: Face amount of non-interest-bearing note: $200,000 Present value factor at $1 for 3 years x .75 ----------------------------------------------------------------- Carrying amount at 1/1/Y1 : $150,000 Interest for Year 1 is x 10%: 15,000 ----------------------------------------------------------- Carrying amount at 12/31/Y1: $165,000 Interest Revenue Y2 is 10%: 16,500 ------------------------------------------------------------ Carrying Amount at 12/31/Y2: $181,500 ==========

Question 90

Question: What is the Net Cash Balance after the reconciliation?

Answer 90

**Starting with the $54,200, the only two things we can do are to add teh deposits in transit of $350 and subtract the outstanding checks of $1,500. This yields us a corrected or adjusted cash balance of $53,050

Question 91

Question: What was the price index used to compute Bach's Year 2 dollar value LIFO inventory layer?

Answer 91

Answer: 1.33 Date At Base Year Cost at Current Year --------- ------------------------- ------------------------ 1/1/Y1 $90,000 $90,000 Y1 layer 20,000 30,000 Y2 layer 40,000 80,000 ------------------------------- ------------------- $150,000 $200,000 Price Index = 200/150 = 1.33

Question 92

Question: At December 31, the total of Mare's current asset is:

Answer 92

``` Answer: Selling price of consigned goods $26,000 Cost of consigned goods (26,000/1.30) -------------------------------------------------------------- Unrealized profit: $6,000 ``` Current Asset Prelim AJE Final ----------------------- ---------- --------- -------- Cash: $70,000 -- $70,000 A/R (net) 120,000 - 94,000 Inventory 60,000 20,000 80,000 ----------------------------------------------------------------------- Total: $250,000 (6000) $244,000 ============

Question 93

Question: At December 31, the total of Mare's current asset is:

Answer 93

``` Answer: Selling price of consigned goods $26,000 Cost of consigned goods (26,000/1.30) -------------------------------------------------------------- Unrealized profit: $6,000 ``` Current Asset Prelim AJE Final ----------------------- ---------- --------- -------- Cash: $70,000 -- $70,000 A/R (net) 120,000 - 94,000 Inventory 60,000 20,000 80,000 ---------------------------------------------------------------------- Total: $250,000 (6000) $244,000 ============

Question 94

Question: What amount should Kauf report as net profit (loss) from this transaction for the year?

Answer 94

Answer: ``` Net Sales : $80,000 Cost of Sales (2/3 x 72,000): (48,000) ----------------------------------------------------------- Gross Profit: $32,0000 Freight (2/3 x 7,500): (5,000) Commission (10% x $80,00) (8,000) Advertising: (4,500) ---------------------------------------------------------------- Net Profit: $14,500 ```

Question 95

Question: On Grey's December 31, Year 1, Balance sheet, what amount should be reported as cash?

Answer 95

Answer: Since the check is not disbursed as of December 31, Year 1, it should be added back to the checkbook balance in determining the 12/31/Y1 cash balance.. **Thus the correct cash balance = $12,000 + 1800 = $13,800

Question 96

Question: A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:

Answer 96

Answer: Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building. **Since the carrying value of the damaged portion of the building is known and is uninsured, the component method is used and a loss in the amount of the carrying value of the damaged portion of the building must be recognized. **The refurbishing costs a new asset (the reconstructed building) and must be capitalized.

Question 97

Question: How much of the interest incurred should be reported as interest expense in the year-end income statement?

Answer 97

Answer: Rule: 1. Interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset, should be capitalized as part of the historic cost of acquiring the fixed asset. 2. Interest cost on the fixed asset subsequent to the construction period as well as all interest costs on the routine manufacture of machinery for sale to customers (inventory) should be expensed in the income statement for the period incurred.

Question 98

Question: How much of the interest incurred should be reported as interest expense in the year-end income statement?

Answer 98

Answer: Rule: 1. Interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset, should be capitalized as part of the historic cost of acquiring the fixed asset. 2. Interest cost on the fixed asset subsequent to the construction period as well as all interest costs on the routine manufacture of machinery for sale to customers (inventory) should be expensed in the income statement for the period incurred. 3. Interest cost incurred before or after construction period should be expensed as well as interest cost incurred during intentional delays in construction.

Question 99

Question: What is the capitalized cost of the equipment?

Answer 99

Answer: The amount capitalized as the cost of the equipment should include all amounts necessary to purchase the equipment, bring the equipment to the location and condition as necessay for its intended use. **These costs will include the cash paid for the down payment, the present value of the note payable, the shipping charges, and the installation charges. Down Payment $4,000 Present value of note payable $6,000 x 2.58 = 15,480 shipping charges: $2,000 Installation charges: $3,500 --------------------------------------------------- Cost of the Equipment: $24,980 =========

Question 100

Question: What is the capitalized cost of the equipment?

Answer 100

Answer: The amount capitalized as the cost of the equipment should include all amounts necessary to purchase the equipment, bring the equipment to the location and condition as necessay for its intended use. **These costs will include the cash paid for the down payment, the present value of the note payable, the shipping charges, and the installation charges. Down Payment $4,000 Present value of note payable $6,000 x 2.58 = 15,480 shipping charges: $2,000 Installation charges: $3,500 --------------------------------------------------- Cost of the Equipment: $24,980 =========

Question 101

Question: What amount of impairment loss will the entity report on its December 31, Year 4 Income Statement?

Answer 101

Answer: When the buildings were revalued in Year 1, the $200,000 revaluation gain was booked to other comprehensive income as a revaluation surplus. **Under IFRS, if a revalued asset becomes impaired, the impairment is recorded by first reducing any revaluation surplus to zero, with further impairment losses reported on the income statement. **In this problem, the buildings were impaired on December 31, Year 4 because the $2,295,000 carrying value of the buildings exceeded the $2,000,000 recoverable amount. **The $295,000 impairment loss is recorded by first reducing to zero the $200,000 revaluation surplus from the Year 1 revaluation, and then recorded the $95,000 remaining impairment loss on the income statement.

Question 102

Question: Under IFRS, what will the entity report as investment property on its December 31, Year 1 balance sheet?

Answer 102

Answer: Under IFRS, investment property is defined as land and buildings held by an entity to earn rentals or for capital appreciation. Therefore, this entity will report total investment

Question 103

Question: Under IFRS, what will the entity report as investment property on its December 31, Year 1 balance sheet?

Answer 103

Answer: Under IFRS, investment property is defined as land and buildings held by an entity to earn rentals or for capital appreciation. Therefore, this entity will report total investment property of $9,750,000 $5,000,000 land held for rental Income +$4,750,000 buildings held for capital appreciation.

Question 104

Question: What interest rate should Sun use to calculate capitalized interest on the construction?

Answer 104

Answer: **if borrowings are not tied specifically to the construction of an asset, the weighted average interest rate for the other borrowings of the company should be used. **The weighted average interest rate is calculate as follows: 6M/14M x 0.8 = 8M/14M x 0.9 = .0857 = 8.57%

Question 105

Question: What amount of interest should be capitalized for the year ended December 31, Year 1?

Answer 105

Answer:The amount of interest which should be capitalized for the year ended December 31, Year 1 is $17,000. This amount is calculated as follows: Step 1: The weighted average accumulated expenditures must me calculated: 1/1/Y1 Purchase land: $120.000 x 12/12 = 120,000 9/1/Y1 Progress payment for contractor: 150,000 x 4/12 = 50,000 ------------------------------------------------------------------------------ Total WAAE = $17,000 Step 2: Compute the capitalized interest by multiplying the appropriate interest rate times the weighted average accumulated expenditure. **Because the weighted average accumulated expenditures are less than the amount borrowed, the interest rate to use is the rate on the borrowed funds. **So Capitalized interest is calculated as 10% x $170,000 = $17,000 Step 3: Compare the capitalized interest to the actual interest. **The amount of interest capitalized cannot be greater than actual interest. **Actual interest for the year would be $300,000 x 10% = $30,000 **The Interest to capitalized is the lesser of actual interest or capitalized interest. **Therefore, the amount of capitalized interest would be

Question 106

Question: What amount of interest should be capitalized for the year ended December 31, Year 1?

Answer 106

Answer:The amount of interest which should be capitalized for the year ended December 31, Year 1 is $17,000. This amount is calculated as follows: Step 1: The weighted average accumulated expenditures must me calculated: 1/1/Y1 Purchase land: $120.000 x 12/12 = 120,000 9/1/Y1 Progress payment for contractor: 150,000 x 4/12 = 50,000 ------------------------------------------------------------------------------ Total WAAE = $17,000 Step 2: Compute the capitalized interest by multiplying the appropriate interest rate times the weighted average accumulated expenditure. **Because the weighted average accumulated expenditures are less than the amount borrowed, the interest rate to use is the rate on the borrowed funds. **So Capitalized interest is calculated as 10% x $170,000 = $17,000 Step 3: Compare the capitalized interest to the actual interest. **The amount of interest capitalized cannot be greater than actual interest. **Actual interest for the year would be $300,000 x 10% = $30,000 **The Interest to capitalized is the lesser of actual interest or capitalized interest. **Therefore, the amount of capitalized interest would be $17,000.

Question 107

Question: Under IFRS, How should the company account for the Year 2 change in fair value?

Answer 107

Answer: By recognizing $10,000 in Profit or Loss and $5,000 in Other Comprehensive income **The original acquisition price of the land was $100,000. at the end of Year 1, the carrying amount would have been revalued to $90,000. **Under the revaluation model of IFRS, the reversal of a revaluation is recognized in profit or loss. **For this reason, at the end of Year 2, the portion of the increase in fair value of land from the revalued carrying amount of $90,000 in Year 1 to the original acquisition cost of $100,000 is recognized in profit or loss. **If a revaluation results in an increase in value. however, it should be credited to other comprehensive income. **For this reason, the increase in value of $5,000 (105,000 - 100,000) will be recognized as other comprehensive income. **Under IFRS, the reversal of a revaluation is recognized in profit and loss NOT OCI.

Question 108

Question: Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company's manufacturing operations would be capitalized?

Answer 108

Answer: Any cost incurred to acquire and make ready a plant asset is capitalized. e. g. insurance on machine while in transit - testing and preparation of machine for use.

Question 109

Question: What amount of interest should Cann capitalize as part of the cost of the plant addition?

Answer 109

Answer: Capitalized interest = $72,500 Step 1: Find weighted average of accumulated construction expenditure: 200,000 x 4/12 = $66,667 (200,000 + 600,000) 800,000 x 7/12 =

Question 110

Question: What amount of interest should Cann capitalize as part of the cost of the plant addition?

Answer 110

Answer: Capitalized interest = $72,500 Step 1: Find weighted average of accumulated construction expenditure: 200,000 x 4/12 = $66,667 (200,000 + 600,000) 800,000 x 7/12 = 466,667 (800,000 + 300,000) 1,100,000 x 1/12 = 91,666 ----------------------------------------------------------------------- Average Expenditures: $625,000 Step 2: Find Capitalize interest expense: Construction loan: $500,000 x 12% = 60,000 Excess Expenditures: 125,000 x 10% = 12,500 -------------------------------------------------------------------- Capitalize interest: $72,500 =============

Question 111

Question: What amount of interest should Cann capitalize as part of the cost of the plant addition? **Construction period interest is capitalized based on the weighted average of accumulated construction expenditures. **The Interest rate paid on borrowings specifically for asset construction is used first to determine the amount of interest cost capitalized. **If the average accumulated expenditures outstanding exceed the amount of the specific new borrowing, interest on the excess is computed based on the interest rate for other borrowings of the company.

Answer 111

Answer: Capitalized interest = $72,500 Step 1: Find weighted average of accumulated construction expenditure: 200,000 x 4/12 = $66,667 (200,000 + 600,000) 800,000 x 7/12 = 466,667 (800,000 + 300,000) 1,100,000 x 1/12 = 91,666 ----------------------------------------------------------------------- Average Expenditures: $625,000 Step 2: Find Capitalize interest expense: Construction loan: $500,000 x 12% = 60,000 Excess Expenditures: 125,000 x 10% = 12,500 -------------------------------------------------------------------- Capitalize interest: $72,500 =============

Question 112

Question: In its year-end income statement, what amount should Vorst report as depletion?

Answer 112

Answer: Step 1: Calculate Depletion base Depletion base = Purchase price: $2,640,000 +Development cost: 360,000 +Restoration cost: 180,000 -Salvage value (expected sell price of the property): 300,000 ----------------------------------------------------------------------- Depletion base: $2,880,000 Step 2: Find depletion per ton Depletion base/estimated removeable natural resource. = 2.4 Step 3: deplition cost = 2.4 x 60,000 =144,000

Question 113

Question: In its Income Statement, what would Rye report as the depreciation expense for 1994 using the double-declining-balance method?

Answer 113

Answer: Step 1: Find the double-declining-balance rate = 50% (2 x 25% straight -line rate) Step 2: Calculate depreciation expense Depreciation expense = 50% x Book value of $80,000 Note: Salvage value is not included in the calculation of depreciation under the double-declining-balance method.

Question 114

Question: In its Income Statement, what would Rye report as the depreciation expense for 1994 using the double-declining-balance method?

Answer 114

Answer: Step 1: Find the double-declining-balance rate = 50% (2 x 25% straight -line rate) Step 2: Calculate depreciation expense Depreciation expense 1st year= 50% x Book value of $80,000 = $40,000 Depreciation exp 2nd year = 50% x (80,000 - $40,000) = $20,000 Depreciation exp Y3 = 50% x (40,000 -20,000) =$10,000 Note: Salvage value is not included in the calculation of depreciation under the double-declining-balance method.

Question 115

Question: In its year-end income statement, what amount should Lem report as depreciation for this machinery?

Answer 115

Answer: On the transaction date, the machinery would be recorded at its fair market value ($110,000), cash would be credited $10,000 and notes/payable would be credited for $100,000. **The cash payments include interest as well as principal. Straight-line depreciation = ($110,000 - $5,000)/10 = $10,500 **Note: Depreciation calculations should be based on fair market value less salvage value.

Question 116

Question: What amount was debited to accumulated depreciation during Year 2 because of property, plant and equipment retirements?

Answer 116

Answer: Debits to accumulated depreciation can be determined as follows: Bal 12/31/Y1 : $370,000 Depreciation of Y2: $55,000 --------------------------------------------- Balance before retirements: $425,000 Bal 12/31/Y2 (after retirements): 400,000 ------------------------------------------------------------ Debit for retirements: $25,000 =========

Question 117

Question: What amount was debited to accumulated depreciation during Year 2 because of property, plant and equipment retirements?

Answer 117

Answer: Debits to accumulated depreciation can be determined as follows: Bal 12/31/Y1 : $370,000 Depreciation of Y2: $55,000 --------------------------------------------- Balance before retirements: $425,000 Bal 12/31/Y2 (after retirements): 400,000 ------------------------------------------------------------ Debit for retirements: $25,000 ========= **Note: Depreciation for Year 2 must be added to Year 1 Accumulated Depreciation to determine Year 2 Accumulated depreciation.

Question 118

Question: Which of the following uses the straight-line depreciation method? 1. Group depreciation or 2. Composite depreciation

Answer 118

Answer: Both. **Both group and composite depreciation are based on the straight-line depreciation method. The group method is for groups of similar assets while the composite method is for a collection of dissimilar assets.

Question 119

Question: Which of the following uses the straight-line depreciation method? 1. Group depreciation or 2. Composite depreciation

Answer 119

Answer: Both. **Both group and composite depreciation are based on the straight-line depreciation method. The group method is for groups of similar assets while the composite method is for a collection of dissimilar assets.

Question 120

Question: What is depreciation expense for the year ended December 31, Y1?

Answer 120

Answer: IFRS requires component depreciation. Under component depreciation, the machinery, component, and inspection cost are recognized and depreciated separately: Machinery ($300,000 - $55,000 - $5,000) = $240,000/15 = $16,000 Component: $55,000/10 = $5,500 Inspection Cost: $5,000/5 = $1,000 ---------------------------------------------------------- Total S/L depreciation: $22,500

Question 121

Question: What amount represents the depreciable base ussed by the new owners?

Answer 121

Answer: The depreciable base of an asset is historical cost/Original cost minus salvage value. **The cost of the equipment to the manufacturing firm was $135,000 and the salvage value estimated by the manufacturing firm was $15,000. **So the depreciable base is $120,000 ($135,000 - $15,000)

Question 122

Question: In its December 31,1992, balance sheet, what amount should Gei report as accumulated depreciation?

Answer 122

Answer: Step1: When a permanent impairment occurs, the book value is reduced and a loss is recorded. Step 2: The loss is credited to accumulated depreciation. In addition, the current year's depreciation expense should be added. Step 3: The new book value is depreciated over the new life: Accumulated depreciation 1/1/92: $420,000 Loss ($900,000-420,000) - $300,000 = $180,000 New Depreciation for 1992: ($300,000/3)= $100,000 ------------------------------------- Accumulated depreciation, 12/31/1992: $700,000 ========== **Note: The !80,000 loss is added to accumulated depreciation.

Question 123

Question: What amount of impairment loss should be reported under U.S. GAAP?

Answer 123

Answer: Step 1: Under GAAP, the first step in determining if a long-lived asset is impaired is to compare the carrying amount of the asset to the undiscoounted expected future cash flows from the asset. Step 2: If the undiscounted expected future cash flows exceeds the carrying value of the asset, then there is no impairment. Step 3: In this problem, the expected future cash flows of $130,000 exceeds the asset's carrying value of $120,000, so there is no impairment, despite the fact that the fair value of the asset and the present value of the future cash flows are less then the carrying amount.

Question 124

Question: What amount of impairment loss should be reported under IFRS?

Answer 124

Answer: Step 1: Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount. Step 2: The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (Present value of future cash flows). Steps 3: In this problem, the fair value less costs to sell of $105,000 exceeds the value in use of $100,000, so the recoverable amount is $105,000 Step 4: The carrying value of $120,000 exceeds the recoverable amount of $105,000, so an impairment loss must recorded Impairment loss = Recoverable amount - Carrying amount = $105,000 - $120,000 = $15,000

Question 125

Question: What amount should Katt record as restoration of preciously recognized loss in the current year's financial statements under US. GAAP?

Answer 125

Answer: $0 **There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under GAAP. **Note: Reversal of impairment loss is permitted under IFRS.

Question 126

Question: Under U.S. GAAP, restorations of carrying value for long-lived assets are permitted if an asset's fair value increase subsequent to recording an impairment loss for which of the following?

Answer 126

Answer: - Held for use - NO - Held for disposal - Yes Step 1: Under U.S. GAAP, long-lived assets that are impaired can only have their carrying value restored if they are helf for disposal. Step 2: Assets that are held for continued use that are impaired are not permitted to have any restoration of carrying value. Step 3: Keep in mind that any write-ups are limited to previous write-downs.

Question 127

Question: Which of the following statements concerning the impairment of fixed assets under U.S. GAAP is true?

Answer 127

Answer: III. To determine the amount of any impairment loss, fair value must be used. Step 1: To determine whether an impairment loss exists, undiscounted future cash flows are compared to carrying value. Step 2: If an impairment loss exists, then the fair value of the asset can be used to determine the amount of the loss to be recognized.