unit 2 | special accounting topics

Question 1

Recall costing inventory methods:

Answer 1

• Specific identification
• FIFO
• Weighted-average cost

Question 2

Can change in costing method be implemented?

Answer 2

Yes. As long as it results in more relevant & reliable information.
- Retroactive restatement
- Disclosure in notes
- Increased audit support

Question 3

Most common issues with inventory

Answer 3

Obsolescence/spoilage, damage, theft

Question 4

Lower of cost & net realizable value (LCNRV) rule

Answer 4

Requires that inventory owned by the company is measured & presented at either
1. Historical cost
OR
2. Net realizable value (NRV)

Write-down required when NRV < Historical cost (reversal limited to the historical cost)

Question 5

Net realizable value (NRV)

Answer 5

Selling price of inventory - estimated costs required to make the sale

Question 6

What is inventory valuation caused by?

Answer 6

Beyond company control, driven by market forces

Question 7

What are inventory errors caused by?

Answer 7

Directly caused by the company (poor control)
- Often occurs in the process of validating ending inventory

Question 8

What happens during an inventory error?

Answer 8

1. Ending inventory can only be understated or overstated
2. Ending inventory errors resolve themselves over the span of 2 periods

Question 9

Impairment indicators

Answer 9

• Decline in market value
• Asset obsolescence (technology advancement)
• Asset idling
• Physical damage

Question 9

How to calculate the gain or loss on the disposal of an asset?

Answer 9

1. Update accumulated depreciation
2. Calculate the carrying value
3. Calculate gain/loss
4. Record the disposal

Question 10

Define Impairment

Answer 10

A state when an asset’s carrying value exceeds its recoverable amount

Question 11

Define Recoverable amount

Answer 11

The greater of:
1. Fair value - costs of disposal
OR
2. Value in use

Question 12

Define Value in Use

Answer 12

The present value of the estimated future cash flows the asset will generate as a result of its use - costs of disposal

Question 13

How do you determine impairment?

Answer 13

Compare the recoverable amount with carry value to determine a “write-down” (if less)

Question 14

When should impairment tests be conducted?

Answer 14

Anytime/only there are indicators of impairment (to write-down the value of an asset)

Question 15

Does goodwill & certain intangible assets need to be tested for impairment? When?

Answer 15

Yes, annually.

Question 16

Limitation on the reversal of impairment loss

Answer 16

Reversal amount is limited to asset’s amortized cost at the time of impairment & the impairment loss amount

Question 17

Define depreciation/amortization

Answer 17

Allocates the depreciable costs of an asset over the asset’s estimated useful life

Question 18

Double-Declining Balance (DDB) method

Answer 18

Method of depreciation where depreciation is higher in the first years & declines over time

1. Calculate total asset acquisition cost
2. 1/uselife in years = SL rate
3. DDB Rate= SL rate x 2
4. DDB rate x beginning of period book value (carrying value)

Question 19

Define Taxes

Answer 19

A primary source of revenue for the government & key lever in fiscal policy (government implements tax policies & allocate spending)

Question 20

Income tax

Answer 20

Expense charged by governments on income generated by companies & individuals
(Corporate tax rate < personal tax rates)

Question 21

Progressive system

Answer 21

Rate of tax paid varies based on income level

Question 22

Tax installments (why?)

Answer 22

Periodic payments of the company’s estimated total annual income taxes
- To avoid large tax bill at the end of the fiscal year
- Required to companies with higher revenues

Question 23

Define Goods & Services Tax (GST)

Answer 23

→ Value-Added Tax (VAT)
Tax imposed at each stage of the supply chain (production → distribution → sale to customer)
- HST recoverable > payable → government reimburse
- HST recoverable < payable → remit to government

Question 24

Describe Deferred Tax Assets & Liabilities

Answer 24

Differences in the calculation of income for accounting & income for tax purposes (BS item, current or non-current)

Question 25

Why does Deferred Tax Assets & Liabilities exist?

Answer 25

EBT on IS often differ from taxable income reported to CRA
- Common cause of difference due to depreciation methods

Question 26

CRA name for depreciation on tax returns:

Answer 26

Capital Cost Allowance (CCA)

Question 27

Property Tax

Answer 27

Expense paid on non-movable property owned by an individual or corporation
- Land or any building on that land
- Collected by municipal government
- Used for funding specific services (libraries, public schools, fire stations, & police services)

Question 28

How often are property taxes paid?

Answer 28

• Assessed annually as an operating expense
• Typically paid in installments (monthly) → requires property tax liability account