Random from Cumulative EQs Flashcards
Periodic System and COGS
A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system
On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs.
On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.
What amount should Grimm recognize as consignment sales revenue for 2005?
Consignment sales revenue is the revenue recognized on consignment sales.
In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.
On January 2, 2004, Adam Co. purchased, as a long-term investment, 10,000 shares of Mill Corp.’s common stock for $40 a share.
On December 31, 2004, the market price of Mill’s stock was $35 a share, reflecting a temporary decline in market price. On December 28, 2005, Adam sold 8,000 shares of Mill stock for $30 a share.
For the year ended December 31, 2005, Adam should report a loss on disposal of long-term investment of:
The realized loss on the sale of available-for-sale securities is the decline in market value since the acquisition of the securities sold. The $80,000 loss equals 8,000($40-$30). The loss to the beginning of 2005 is unrealized and recorded in owners’ equity.
Criterion for capitalizing post-acquisition cost
The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction.
An overall reduction in production costs meets the second criterion. Therefore, both costs are capitalized rather than immediately expensed.
Freight Out recognition.
Freight-out is a delivery expense. It is not inventoried because the goods have reached salable condition before incurring this cost. Only costs that contribute to preparing inventory for sale are inventoried.
Equity Method Disclosures
The investor must disclose the accounting policy for the investee. It is possible for the investor to use equity method accounting or elect the fair value option to account for the investee. The users of the financial statement need to know the basis for the equity accounting and if the investment included intercompany profits or other items that could impact the carrying value.
LOCOM for Inventory
Inventory must be carried at lower of cost (such as LIFO, FIFO) or market. Market is replacement cost subject to a ceiling and floor. The ceiling for replacement cost is net realizable value (selling price less cost to complete) and the floor is net realizable value less normal profit margin. Use simple numbers to help solve this abstract question. In this question original cost (assume = 100) is greater than market ((replacement cost) assume = 80). Market (80) is greater than net realizable value (assume = 70). Market is subject to a ceiling of net realizable value (70). In this case the inventory would be valued at net realizable value.
Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities?
Under IFRS No. 9, investments in debt securities may be (1) transferred from amortized cost (when the investment originally meets both the business model test and the cash flow characteristic test) to fair value when the investment fails to continue to meet both the business model test and the cash flow characteristic test and (2) transferred from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.
Many years after constructing a plant asset, management spent a significant sum on the asset. Which of the following types of expenditures should be capitalized in this instance:
Post-acquisition expenditures, which increase the useful life (assuming normal maintenance) or the utility (usefulness or productivity) of the asset, are capitalized. Such expenditures provide value for more than one year. The original useful life of an asset assumes regular maintenance. Therefore, regular maintenance does not increase the intended useful life of the asset.
Lee, Inc. acquired 30% of Polk Corp.’s voting stock on January 1, 2004 for $100,000. During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee’s 30% interest in Polk gives Lee the ability to exercise significant influence over Polk’s operating and financial policies.
During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash.
What should the gain on sale of this investment in Lee’s 2005 Income Statement be?
Lee uses the equity method because it has significant influence over the investee. The equity method requires that the investor recognize its share of undistributed earnings of the investee in its own income.
The carrying value of the portion of the investment sold reflects 1/2 of the entire income of the investee for 2005, but only the first dividend. The second dividend was declared after the sale and thus could not have affected the investment carrying value on the date of sale.
The carrying value of the entire investment at the date of sale equals:
$100,000 + .30[$40,000-$25,000 + .5($50,000)-$15,000] = $107,500.
The gain, therefore, equals: $66,000-.5($107,500) = $12,250
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When remeasurement to fair value is used, it must be applied to the entire class or components of PPE.
Current Assets and Prepaid Taxes
Current assets are assets that are collectible within one year. However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense. In addition, $250,000 of the special accounts receivable is not due for over one year and is, therefore, non-current. Therefore, current assets should be $1,950,000 ($2,500,000-$300,000-$250,000).
G&A Expense when Office Space Shared
General and administrative expenses include expenses that are not related to significant specifically identifiable activities. G & A costs benefit the entire firm rather than one specific function.
The $170,000 of legal and audit fees are included in G & A expenses and are 1/2 of the rent for the office space ($120,000 = .5 x $240,000). The portion of rent related to accounting is G & A. The other half of the rent is a selling expense, a significant separate activity. The interest and loss are also separately reported.
The purpose of IASB’s Framework for the preparation and presentation of financial statements includes all of the following except:
D. Assist the IASB in enforcing regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs.
Remember that the IASB has no enforcement authority. The enforcement is carried out by regulators, such as the SEC in the U.S., Central Banks, and governmental authorities. As such, the purpose of the IASB’s Framework is not to assist in enforcing regulations, accounting standards, and procedures but, rather, to assist in promoting the harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs. IASB Framework, para. 1.
Which of the following items would be recognized in financial statements prepared using an income tax basis of accounting relating to permanent differences?
Nontaxable Income Nondeductible Expenses
Both nontaxable income items (e.g., life insurance proceeds from the death of an officer) and nondeductible expenses (e.g., premium cost of life insurance on an officer) would be recognized in financial statements prepared using an income tax basis of accounting.
