FAR - Inventory, PPE, and Non-monetary exchange

Question 1

A perpetual inventory system would result in the same ending inventory value as a periodic inventory system for the following inventory valuation methods:

Answer 1

FIFO - will be the same

LIFO and Average - will be different

Question 2

When prices are rising, what impact would FIFO and LIFO have on profit and on the balance sheet?

Answer 2

When prices are rising, what impact would FIFO and LIFO have on profit and on the balance sheet?

Question 3

What is a periodic inventory system? What is a perpetual inventory system?

Answer 3

periodic - the quantity of inventory is determined only by a physical count (at least one annually); therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period and cost of inventory sold and inventory shortages cannot be easily distinguished.

perpetual inventory system - the inventory record for each item of inventory is updated for each purchase and each sale as they occur. the actual COGS is determined and recorded with each sale.

Question 4

How to measure inventory subsequent to initial recognition?

Answer 4

1. Lower of cost or market (LCM) - this is used for LIFO
   - market is is the current cost to replace inventory. market cannot be higher than the ceiling which is Selling Price minus Cost of Disposal and lower than the Selling Price minus Cost of Disposal and profit margin
2. Lower of cost or net realizable value - all other methods.
   - compares the inventory book value to the NRV, if lower than an impairment is recorded (to COGS)

Question 5

Relating to Inventory Valuation, what is the marketing ceiling and what is the market floor?

Answer 5

1. Market Ceiling - is the NRV. This is the sales price minus the cost to complete the inventory.
2. Market Floor - is the NRV minus the normal profit margin

Question 6

In a non-monetary exchange, what is the difference between an exchange having commercial substance vs non commercial substance?

Answer 6

When there is commercial substance, the asset given up or received uses the fair value approach,

When there is no commercial substance, the asset given up or received uses the book value approach

Question 7

What depreciation method does not subtract the salvage value?

Answer 7

double declining balance method

Question 8

How are losses recorded in a non-monetary exchange when the book value exceeds the fair value of the asset given up?

Answer 8

Losses are recognized immediately. This will be the difference between the FV and BV of the asset GIVEN UP. To record the asset RECEIVED, you add the BV of the asset given up, add any cash paid, minus any cash received, and minus any loss recognized.

Question 9

If Greg Inc needs to pay to ship inventory that is being consigned at Leigh Inc, is the shipping costs expensed or capitalized in inventory?

Answer 9

The shipping costs are capitalized in inventory on Greg’s books.

Question 10

Relating to non monetary exchanges, how do you know if an exchange lacks commercial substance or not?

Answer 10

An exchange will lack commercial substance if:

1. the question states it lacks commercial substance
2. there is no changes in future cash flows
3. no changes in the economic position of the two parties

Question 11

Relating to non monetary exchanges, how do you calculate gain on exchanges that have commercial substance and that do not have commercial substance

Answer 11

1. If the transaction has commercial substance. It is related as a monetary exchange for gains and losses. The gain is calculated = FV of Old Asset - BV of Old Asset (Cost - A.D)
2. If the transaction does not have commercial substance. A gain may not be recognized:
   - no cash paid/received - no gain
   - if cash is received and cash is less than 25% of total asset - gain recognized proportionally
   - if cash is received and cash is greater than 25% - gain is recognized as if a monetary transaction for BOTH SIDES

***Losses are always recognized!

Question 12

What inventory methods use the lower of cost or market?

Answer 12

LIFO and Retail Method

Question 13

If beginning inventory is understated, what is the impact on COGS for the year?

Answer 13

This will result in COGS being understated for the year

Question 14

Can you reverse an impairment of PPE for:

1. Held for use?
2. Held for Sale?

Answer 14

you can only reverse impairment for held for sale PPE

Question 15

Are inflows and outflows for PPE (and other investments) shown net or separately?

Answer 15

They should be reported separately at their gross amounts.

Question 16

What of the following costs can be capitalized for equipment?

1. Sales tax paid on the machine
2. Installation cost
3. Finance charges on purchase loan

Answer 16

1. Sales tax can be capitalized
2. Installation cost can be capitalized
3. Finance charges are expenses

Question 17

Are excavation costs included in the cost of the land or building?

Answer 17

The building

Question 18

What is the accounting treatment for fixed asset replacements & improvements?

• if the carrying value of the old asset is known
• if the carrying value of the old asset is unknown

Answer 18

if the carrying value of the old asset is known:
-remove the old asset, record a gain or loss. Capitalize the new asset/cost of improvement.

if the carrying value of the old asset is unknown:
debit A/D and credit cash/AP

Question 19

What should the total cost of inventory be?

Direct Labor $1
Indirect Labor $2
Insurance on machine equipment $3
Advertising $4

Answer 19

Direct Labor, Indirect Labor, and Insurance on machine equipment = $6

Advertising is excluded

Question 20

What is considered cost for the following two methods:

1. Lower of cost or market
2. Lower of cost and net receivable value

Answer 20

Current cost on books

Question 21

If a FOR profit company donates property to a NFP, how is it recorded by the FOR profit company?

Answer 21

it is recorded as an expense at fair value (NOT book value)

Question 22

a company is manufacturing equipment for it’s own use and equipment which it is going to sell, how should the interest be treated by the company?

Answer 22

the interest on the machine being built for the company will be capitalized during the construction period, and then will be expensed post construction period.

interest on equipment being built to be sold will be expensed as incurred