Part 3 - Assets & Related Topics Flashcards
Define Terms: 2/10, n30
Terms: 2/10, n30 (2% discount if paid within 10 days; otherwise, net amount due in 30 days)
When accounting sales discounts with trade receivables, what are two common methods used?
Gross Method: Customer pays within the discount period.
Net Method: Customer pays after the discount period (Sales discount journalized as “Sale Discount Forfeited (CR)” and treated as other income).
What is factoring?
Factoring is selling trade receivables to a third party (factor) at a discount. The factor (buyer) then assumes the risk of collecting receivables.
Descrice factoring receivables without recourse and with recourse
*Factoring receivables without recourse is a “sale transaction” and it transfers the risk of credit losses to the buyer (the bank, etc.).
- A sale transaction (not a loan)
- The sale is final
- The buyer (factor) has no recourse against the seller (if the seller’s customers do not end up paying the receivables)
- The buyer assumes the risk of any losses on collections (the factor cannot sell back the receivables to the original party that had the receivables)
*Factoring with recourse may be treated as a sales transaction and it leaves the risk of credit losses with the seller. (company bears the risk of uncollectibles)
What is pledging?
Pledging receivables is using receivables as collateral for a loan and requires only disclosure.
Allowance for credit losses calculation
Beginning allowance for credit losses + Credit loss expense - Adjustment to credit losses (write-offs) + Adjustment to credit losses (recoveries) = Ending allowance for credit losses
COGS calculation
COGS = Beginning Inventory + Purchases + Freight in + Cost of low materials + Direct labor + Factory overhead - Ending Inventory
***There may be instances in which 100 percent of factory overhead is not included in the inventoriable cost.
How do you calculate Gross Profit?
Gross Profit = Sales - COGS
Temporary market declines are not recognized
in the interim financials, only permanent declines such as inventory losses are recognized.
What is LCNRV?
Lower Cost and Net Realizable Value (LCNRV):
Cost = The amount paid to purchase or produce the inventory.
NRV = The estimated selling price - Estimated costs of completion, diposal and transportation
Compare the cost of each inventory item (or group of items) to its NRV, If the cost > NRV, write the inventory to its NRV.
What is LCM?
Lower of Cost and Market Value (LCM):
Cost = As determined by FIFO, LIFO, or Average Cost methods.
NRV (Ceeling) = The estimated selling price - Estimated costs of completion, diposal and transportation
Normal Profit Margin = Selling Price x % of Profit Margin
Market Floor = NRV - Normal Profit Margin
Market Value = The replacement cost of the inventory < The Market Ceeling (NRV) or < The Market Floor
Compare the cost of each inventory to its market value. If the Cost > Market Value , write the inventory to the Market Value. (Use middle value!)
Do you capitalize feight-in?
Freight-in is capitalized as part of inventory (i.e.it is part of the cost of getting inventory ready for use)
How do you calculate “ending inventory” if it is not given in the question?
Ending Inventory = Sales / % of average markup cost
Explain “understated” and “overstated” inventory?
Understated Beginning Inventory: My purchases ended up being too high (it was supposed to be $0 not the understated $) and my ending inventory ended up being too high because I subtracted too much my purchases number.
Overstated Ending Inventory: The overstated $ amount is recorded instead of $0 amount .
Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at
the present value of all future payments.
How do you calculate weighted average interest rate from the borrowings?
(Debt A at Face Value Amount / Total Debt A & B) + (Debt B at Face Value Amount / Total Debt A & B)] = The weighted average interest rate to capitalize
What are the costs included in to increase the value of the land?
- Purchases
- Broker commissions
- Title and recording fees
- Legal fees
- Draining of swaps
- Clearing of brush and trees
- Site developement (e.g., grading of mountain tops to make a
- Existing obligations assumed by buyer, including mortgages and back taxes
- Cost of razing (tearing down) ans old buliding (demolition)
- LESS proceeds from sale of existing builddings, standing timber of soil
*Debt issuance costs are presented on the balance sheet as a direct reduction to the carrying amount of the bond and should not be included in the cost of the land.
What is depletion?
Depletion is a depreciation expense for natural resources.
How do you calculate depletion?
Depletion expense = Depletion Rate per ton x Ton of Sold Natural Resource
Depletion rate = Depletion base / estimated tons of removable natural resource (ore, gold, etc.)
Depletion base = Purchase price + developement cost + the estimated restoration costs - Residual (salvage) value
What is straight-line depreciation?
Straight-line depreciation method reflects that an asset’s service potential declines with the passage of time.
Cost - Salvage Value / Estimated Useful Life = Depreciation
How do you value a building as an asset held for sale?
A building as an asset held for sale will be valued at the lower of its book value or NRV (FV less the cost to sell).It will NOT be valued at historical cost.
How do you calculate gain or loss on the sale of an equipment?
Selling Price - Carrying Amount = Gain or Loss
When do you record an impairment loss of an asset?
An impairment loss would be recorded after the recoverability test is performed.
When the undiscounted expected future cash flows LESS than the carrying value of the asset, then there is an impairment loss.
The amount of impairment loss after the recoverability Test = Carryin Amount - Fair Value of Assets
Impairement Loss = Carrying amount before impairement - Recoverable Amount
Carrying amount before impairment = Original cost - Accumulated depreciation
*New carrying amount = Carrying amount before impairment - Impairment loss
The recoverability test is only performed on intangible assets with
a limited life.
So, the recoverability test is not performed for an intangible asset with an indefinite life (Goodwill, trademark and patent)
