FAR ( Working Capital)

Question 1

Trade discount

Answer 1

Trade discount are applied sequentially

A/R should be presented on the B/S at their net realizable value

Question 2

Sales return and allowance

Answer 2

If past experience shows that a material percentage of receivables are returned an allowance for sales returns should be established

Question 3

Direct write off Method ( not GAAP)

Answer 3

Under the direct write off method, the account is written off and the bad debt is recognized when the accounts becomes uncollectible.

J/E to record the account balance of 10k as un-collectible

Dr. Bad debt Expense 10k
Cr. A/R 10k

J/E to sales return
Dr. Sales return and allowance (contra sales)
Cr. A/R

Question 4

Allowance Method (GAAP)

Answer 4

The allowance for un-collectbles should be based on past experience. A percentage of each periods sales or ending accounts receivable is estimated to be uncollectible.

The credit is made to a valuation account such as allowance for uncollectible accounts

Question 5

Percentage of Sales Method - Income statement approach

Answer 5

Under the percentage of sales method, a percentage of each is debited to the account “Bad debt expense” and credited to the account “Allowance for doubtful accounts”

Question 6

Percentage of accounts receivable at year end - B/S approach

Answer 6

Uncollectible accounts may also be estimated as a certain percentage of accounts receivable at year end.

In percentage of accounts receivable at year end BAD DEBT EXP is a Plug

Question 7

Pledging (Assignment)

Answer 7

A/R is collateral for a loan and Pledging requires only note disclosure

Question 8

Factoring of Accounts Receivable

Answer 8

If a sale is non recourse, it means the sale is final and the assignee assumes the risk of any losses on collation.

J/E record to factor A/R without recourse 
Dr. Cash
Dr. Due from factor 
Dr. Loss on sale of receivable 
Cr. A/R

Question 9

Factoring A/R

Answer 9

If a sale is on recourse basis, it means that the factor has an option to re-sell any uncollectible receivables back to seller

Question 10

Notes Receivable-present value

Answer 10

Notes receivable are written promise to pay debt and the writing is called a promissory not. it can be C/A or a long term asset

Question 11

Sales with a right to Return

Answer 11

If goods are sold but the buyer has the right to return the goods, the goods should be included in the seller’s inventory if the amount of the gods likely to be return cannot be estimated

If the amount of goods likely to be returned can be estimated, the transaction will be recorded as a sale with an allowance for estimated returns recorded

Question 12

Precious Metal and Farm Products

Answer 12

Gold, silver and other precious metals, and meat and some agricultural products are valued at NET REALIZABLE VALUE.

NRV= SP - Cost of disposal

Question 13

Lower of Cost or Market ( US GAAP)

Answer 13

In the ordinary course of business, when the utility of goods is no longer as great as their cost, a departure from the cost basis principle of measuring inventory is required

Question 14

Under US GAAP

Answer 14

Under US GAAP, the term “market” in the phrase “lower of cost or market” generally means current replacement cost (whether by purchase or reproduction), provided the current replacement cost does not exceed NRV or fall below NRV reduced by normal profit margin

Question 15

Cost under IFRS

Answer 15

IFRS require inventory to be reported at the lower of cost or NRV

NRV = under IFRS is the same as the Market ceiling under US GAAP

IFRS allow the reversal of inventory write downs for subsequent recoveries of inventory value. The reversal is limited to the amount of the original write down and is recorded as a reduction of total inventory costs on the I/S in the period of reversal.

Question 16

Dollar Value LIFO ( Price index )

Answer 16

Price index = Ending inventory at current year cos divide by Ending inventory at base year cost

Question 17

Precious Metals and Farm Products

Answer 17

Gold, Silver and other precious metals and meat and some agricultural products are valued at Net realizable value which is net selling price less costs of disposal

Question 18

Cost Model (IFRS)

Answer 18

Fixed assets are reported at historical cost adjusted for accumulated depreciation and impairment

Cost model carrying value = Historical cost - Accumulated depreciation - Impairment

Question 19

Revaluation Model

Answer 19

A class of fixed assets is revalued to fair value and then reported at fair value less subsequent accumulated deprecation and impairment

Revaluation modle carrying value = FV at revaluation date - subsequent accumulated depreciation - Subsequent impairment

Question 20

Land Improvement are depreciable such as

Answer 20

Fences 
water systems
Sidewalk 
Paving 
Landscaping 
Lighting

Question 21

Investment property (IFRS only )

Answer 21

Under IFRS, land or building held by an entity or by a less under a finance (capital) lease to earn or for capital appreciation are classified and reported as investment property

Question 22

Investment property Measurement Models

Answer 22

Fair Value Model

Under the Fair Value Model, Investment property is reported on the B/S at Fair Value and is not depreciated.

Question 23

Construction period interest

Answer 23

Should be capitalized as part of the cost of producing fixed assets such as

1. Building , machinery , or land improvements, constructed or produced for others or to be used internally
2. Fixed assets intended for sale or lease and constructed as discrete project such as Real estate projects
3. Land improvements - If a structure is placed on the land, charge the interest cost to the structure

Question 24

Capitalization of Interest period

Answer 24

Begins when three condition are present

1. Expenditures for the asset have been made
2. Activities that are necessary to get the asset ready for its intend use are in progress
3. Interest cost in being incurred

Continues as long as the three conditions are present.

Question 25

No gain or loss is recognized when one asset is the group is retired

Answer 25

When a group or composite asset is sold or retired, the A/D is treated differently than the A/D of a single asset.

Question 26

Functional Depreciation

Answer 26

Functional depreciation arises from obsolescence or inadequacy of the asset to perform efficiently. Obsolescence may result from diminished demand for the product that the depreciable asset produces

Question 27

Sum of the years’ Digits

Answer 27

The Sum of the years digits method is one of the accelerated method of depreciation that provides higher depreciation expense in the early year and lower charges in the later year.

Formula
Depreciation expense = Cost - Salvage value X remming life of asset divided by Sum of the years’ digits .

Question 28

Double declining method

Answer 28

Formula for DDM
Dep Exp = 2X1/N X NBV (Cost - A/D)

Mas A/D = Cost - SV

Question 29

Units of producition

Answer 29

The units of production method relates depreaction to the estimate production capability of the an asset and is expressed in a rate per unit or hour

The Formula is
Cost - SV/ Estimate units or hours = Rate per unit or hour

Rate per unit or hour X # of units produced or hours worked = Dep Exp

Question 30

Depletion

Answer 30

Depletion is the allocation of the cost of wasting natural resources such as oil, gas, timber and mineral to the production process

Depletion base = Cost - Residual value

Question 31

Percentage depletion ( tax only)

Answer 31

It is based on a percentage of sales. It is allowed by Congress as a tax deduction to encourage exploration in very risky businesses

Percentage depletion can exceed cost depletion

It is limited to 50% of net income from the depletion property computed before the percentage depletion allowance

Question 32

Unit Depletion Base

Answer 32

Cost of purchase property
Plus development cost to prepare the land
Plus Any estimated restoration cost
Less Residual value of land after the resources

Question 33

When computing depletion on land, remember it is Real property

Answer 33

Residual Value (Subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price

Question 34

Fixed asset impairment

Answer 34

The carrying amounts of Fixed assets held for use and to be disposed of need to be reviewed at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable

Question 35

Gross profit Method

Answer 35

The gross profit method is used for interim F/S as part of periodic inventory system. Inventory is valued at retail, and the average gross profit percentage is used to determine the inventory cost for the interim F/S