Lecture 4

Question 1

Factoring Receivables

Answer 1

Factoring receivables without recourse is a sales transaction. Factoring without recourse transfers the risk of uncollectible accounts to the buyer. ASC 310-10-05-6

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 2

Pledging Receivables

Answer 2

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

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

Question 3

Assigning

Answer 3

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

Question 4

% of uncollectibles

Answer 4

Determines ending AFDA Balance

Bad debt expense
AFDA

Question 5

If equity is issued to pay for short term debt

Answer 5

The credit is to long-term liability rather than common stock because Footnote 2 of SFAS No 6, Classification of Short-Term Obligations Expected to Be Refinanced, states “if equity securities have been issued [after the balance sheet date but before the balance sheet is issued], the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity.”

Question 6

Aging of receivable

Answer 6

Required uncollectible balance

Question 7

Depreciation related to deferred tax

Answer 7

depreciation-related deferred tax liability, must be reported as noncurrent liabilities.

Question 8

Cash and Cash Equivalents

Answer 8

Cash is defined as actual unrestricted cash and cash equivalents are defined as short-term, liquid investments that are so near maturity (original maturity date was within three months of the purchase date) that the risk of changes in the value because of interest rate changes is insignificant.

Question 9

Quick ratio

Answer 9

Excludes prepaid rent and inventory

Question 10

factoring

Answer 10

Factoring involves a company converting its receivables into cash by assigning them to a “factor” either with or without recourse. Aloe 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% = $8,000) and another 5% for commission is taken off ($80,000 x 5% = $4,000) to get to cash received of $68,000 ($80,000 - $8,000 - $4,000).

Question 11

% of AR

Answer 11

required balance. its a percent of Gross AR not NRV AR. only take AR without subtracting AFDA

Question 12

AFDA and AR

Answer 12

Both are asset accounts remember that. So a write off has zero effect on assets

Question 13

Advanced payment of taxes

Answer 13

Paying the equivalent of three months of sales taxes on projected retail sales in satisfaction of the licensing requirement that is fully refundable after five years is a noncurrent asset. Because the transaction is expected to result in the realization of cash in the future, the payment is an asset. It is a noncurrent asset because the cash will be realized at a time beyond the normal operating cycle or one year.

Question 14

Deposits received from customers

Answer 14

Liability

Question 15

Inventory

Answer 15

FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory. LIFO or average, perpetual versus periodic will not.

Question 16

Valuation of inventory GAAP

Answer 16

Under U.S. GAAP, inventory is valued at the lower of cost or market. Market is defined as the median value of the market ceiling(NRV), market floor(NRV-PM), and replacement cost

Question 17

Valuation if inventory IFRS

Answer 17

Under IFRS, inventory is valued at the lower of cost or net realizable value. Net realizable value is equal to the net selling price less the costs to complete and dispose, which is equivalent to the market ceiling under U.S. GAAP

Question 18

Dollar value lifo/price index

Answer 18

Ending Inventory at current year cost(including layer_/ EI at base year cost

Question 19

LIFO Layer

Answer 19

PI*lifo layer at base cost=dollar value lifo

Question 20

Dollar value lifo

Answer 20

Date Base year cost Current year cost Dollar val lifo
Y1 same same same
Y1 layer
Y1 EI
Y2 Layer
Y2 EI

Question 21

Consignor

Answer 21

Rule: Consignor must include consigned goods (in the hands of the consignee) in his own inventory, at his cost plus warehousing costs of consignor before goods are transferred to consignee plus shipping costs to consignee.

Question 22

dollar value lifo

Answer 22

The dollar-value LIFO method adjusts inventory retail prices and ending inventory cost for price-level changes.

Question 23

Lower of cost or market

Answer 23

Applying the lower of cost or market rule (item by item) separately to “each item” results in the lowest inventory amount.

Question 24

LIFO Reserve

Answer 24

LIFO reserve is the difference between inventory on the LIFO method versus any other cost method

Question 25

NRV

Answer 25

NRV=sp-processing cost

Question 26

Moving average

Answer 26

Usnder the moving-average method, a new weighted average cost is computed after each purchase, and issues are priced at the latest weighted-average cost. Think about it logically you have a purchase cost so the weighted average will be calculated after it

Question 27

periodic vs perpetual

Answer 27

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 cannot be easily distinguished. 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 28

loss on purchase committment

Answer 28

read carefully probable loss on purchase committment is different than loss on inventory and only includes future

Question 29

Net income

Answer 29

When thinking invent diont forget to include cogs when calculate net income

Question 30

Total inventory LCM

Answer 30

If using total inventory for LCM than add two together to figure out LCM

Question 31

If you are not getting correct number

Answer 31

Read question carefully

Question 32

rising prices

Answer 32

In a periodic inventory system, the weighted-average method results in net income that is lower than FIFO net income and higher than LIFO net income when prices are rising. In a perpetual inventory system, the moving-average method results in net income that is lower than FIFO net income and higher than LIFO net income when prices are rising.

Question 33

Allocating shipping costs between ending inventory and cogs

Answer 33

Calculate cogs or EI based on formula. Calculate the ratio of cogs and EI based on goods available for sale. apply the ratio to the shipping costs

Question 34

Loss on purchase committment

Answer 34

The loss on the purchase commitment is recognized on the balance sheet as a liability, not as a valuation account offsetting inventory. When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, 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 35

inventory method prohibited

Answer 35

IFRS state that the inventory accounting method used by an entity should match the actual flow of goods. LIFO rarely reflects the actual flow of goods and is therefore prohibited under IFRS.

Question 36

profit margin

Answer 36

Profit margin is calculated based on selling price . Note this when subtracting from NRV

Question 37

important note about EI,COGS and EI

Answer 37

An understatement of ending inventory results in an overstatement of cost of goods sold, which results in an understatement of net income and retained earnings.Think it all the way through

Question 38

Read carefully

Answer 38

if prepayment is made for inventory this should be a prepaid asset not ap

Question 39

Consignment

Answer 39

While 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 40

EI at dollar value lifo

Answer 40

remember to start from year one and make your way through. As long as your remember this conceptually its easy

Question 41

LCM

Answer 41

remember when given different products calculate lcm on each one and than sum it

Question 42

NRV

Answer 42

Sales value - cost to complete Also unfinished inventory at cost is treated as cost even though logically you woud think that cost plus cost to complete is cost

Question 43

rev rec with right of return

Answer 43

Clothes Co. cannot book revenue at the time of sale because it cannot reasonably estimate returns. Because Link is given 12 months to return any clothing for a refund, once the 12-month period has passed, Clothes can then recognize revenue because any future returns will result in exchanges rather than refunds.

Question 44

land

Answer 44

raze the building means to remove a building to make the land ready for us Excavate means to make land hollow for building so its a building cost

Question 45

Interest capitalization : the smaller of total interest incurred and avoidable interest

Answer 45

Total interest incurred equals the interest on the specific construction debt ($50,000) plus interest on other borrowing ($20,000) for a total of $70,000. Avoidable interest equals the interest on the weighted-average amount of accumulated expenditures ($40,000). Capitalized interest equals the smaller of the total interest incurred or the avoidable interest. Thus, capitalized interest equals $40,000. SFAS 34 para. 12-15

Question 46

capitalized costs

Answer 46

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 create a new asset (the reconstructed building) and must be capitalized.

Question 47

interest costs fixed asset- capitalize during construction, expense post inventory expense all

Answer 47

Rule: 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 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 48

Cost of equipment

Answer 48

The cost of equipment includes all expenditures related directly to the acquisition or construction including invoice price less cash discounts and other discounts, freight-in, installation charges and sales and Federal Excise Taxes. Cost includes all costs necessary to get the asset to its proper place, at the intended time and in condition for its intended use.

Question 49

Leasehold improvements

Answer 49

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). The leasehold improvement costs should thus be expensed over a period of 15 years. This rule makes sense because the party making the leasehold improvements will benefit from the improvements for either the life of the improvements or the term of the lease if the term of the lease is shorter than the life of the improvements (in which case, somebody else will benefit from the improvements for the remaining life of the improvements).

Question 50

Cost of equipment

Answer 50

he 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 necessary 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:

Question 51

Revaluation gain

Answer 51

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 ($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 statemen

Question 52

IFRS investment property

Answer 52

Under IFRS, investment property is defined as land and buildings held by an entity to earn rentals or for capital appreciation

Question 53

Investment property

Answer 53

When investment property is reported at cost less accumulated depreciation, fair value must be disclosed. Investment property may be reported at cost less accumulated depreciation or fair value. When investment property is reported at fair value, it is not depreciated. Gains and losses from investment property fair value adjustments are reported on the income statement. Revaluation gains on fixed assets not classified as investment property are reported in other comprehensive income.The best evidence of investment property fair value is current prices in an active market for similar property in the same location and condition. If this information is not available, the present value of future cash flows may be used to determine fair value.

Question 54

IFRS revaluation

Answer 54

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 55

interest when borrowing are not tied to an investment

Answer 55

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 calculated as follows: [(6,000,000/14,000,000) * .08] + [(8,000,000/14,000,000) * .09] = .0857, or 8.57%.

Question 56

sewage system is not land but a

Answer 56

A sewage system is a Land Improvement.

Question 57

Interest cap

Answer 57

avoidable interst = interest capitalized based on CUMULATIVE average accumulatedures expendit $250,000, spent uniformly during the year avg expe = 250/2 = 125

Question 58

Revaluation

Answer 58

nder the revaluation model of IFRS, the reversal of a revaluation is recognized in profit or loss.

Question 59

basket purchase

Answer 59

allocated based on fair value allocation multiplied by purchase price

Question 60

Sum of years digits

Answer 60

N(n+1)/2 = sum of years for exam 10 say useful life is 4 years salvage life year one is 4/10 year two 3/10 etc

Question 61

Depletion

Answer 61

unit depletion =Depletion based/estimated recoverable units depletion based = cost of land+development costs+restoration-residual value depletion=units depletion*units extrac cogs depletion=unit depletion*units sold

Question 62

Double declining

Answer 62

2*1/n*cost-accum dep ( IGNORE SV) | n=useful life

Question 63

units of production

Answer 63

Units-of-production depreciation method reflects that an asset's service potential declines with use

Question 64

impairment

Answer 64

still take dep in year of impairment based on the new value

Question 65

composite and group

Answer 65

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 66

depreciation

Answer 66

If accumulated depreciation equals original cost, then the asset has been depreciated to $0. Depreciable assets should not depreciated below salvage value under any depreciation method.

Question 67

Component

Answer 67

IFRS requires component depreciation. Under component depreciation, the machinery, component, and inspection cost are recognized and depreciated separately:

Question 68

depreciable base - trick be careful

Answer 68

The depreciable base of an asset is cost minus salvage value.

Question 69

permanent impairment

Answer 69

When a permanent impairment occurs, the book value is reduced and a loss is recorded. The loss is credited to accumulated depreciation. In addition, the current year's depreciation expense should be added. The new book value is depreciated over the new life.

Question 70

composite life

Answer 70

dep cost/annual dep

Question 71

impairment loss

Answer 71

When a permanent impairment has occurred, the book value is reduced with a credit to accumulated depreciation. Depreciation of the remaining balance is taken over the remaining life.

Question 72

IFRS impairment

Answer 72

nder IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount. 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)

Question 73

Reversal of impairment

Answer 73

. There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under U.S. GAAP. Note that reversal of impairment loss is permitted under IFRS.

Question 74

Test for recoverability

Answer 74

The carrying amount of fixed assets should be tested for recoverability at least annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Question 75

restored not reversing

Answer 75

Under U.S. GAAP, long-lived assets that are impaired can only have their carrying value restored if they are held for disposal. Assets that are held for continued use that are impaired are not permitted to have any restoration of carrying value. Keep in mind that any write-ups are limited to previous write-downs.

Question 76

impairment loss presentation

Answer 76

he third statement is true. The first statement is incorrect, since impairment losses are shown as a component of income from continuing operations, before tax. The second statement is also false. To determine whether an impairment loss exists, undiscounted future cash flows are compared to carrying value. 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.v

Question 77

impairment two step exists because CA

Answer 77

A fixed asset is first tested for impairment. If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized. In this problem, the carrying value is $170 million and the undiscounted future cash flows are estimated to be $150 million. Therefore, an impairment loss must be recorded. The amount of the impairment loss is the amount by which the carrying amount exceeds the fair value of the asset:

Question 78

Sale lease back - accounting for gain

Answer 78

t. Dean Manufacturing is leasing its facility back for a minor length of time, less than 10 percent of the useful life of the property (2­year lease / 25­year useful life). The gain on the sale would not be deferred but would be recognized in full, since the earnings process is deemed to be complete