Accounting Test set

Percentage completed to date is calculated using the cost-to-cost ratio

"Cumulative actual costs incurred to date" /"Estimated total cost"

Gross margin as a % of sales

(Gross margin as a % of cost ) / (1 + Gross margin as a % of cost)

Gross Method and Net Method 12/15/04 Company buys a TV for $500 on 12/15/04 under the terms 5/10 n/30. Case 1: Payment made on 12/23/04 Case 2: payment made on 1/5/05

(Gross method) Purchase 500 Account payable 500 (Net Method) Purchase 475 Account Payable 475 Case 1: Payment made on 12/23/04 (Gross Method) (500- 500 x .05) = 475 Account payable 500 Cash 475 Purchase discount 25 (Net method) Account Payable 475 Cash 475 Case 2: payment made on 1/5/05 (Gross Method) Account payable 500 Cash 500 (Net Method) Interest expense 25 Interest payable 25 Account payable 475 Interest payable 25 Cash 500

Receivables turnover ratio

(Net sales) / (Average net accounts receivable).

Revenue recognized this period

(Total contract price x Percentage completed to date) (Minus) --- (Revenue recognized in prior periods)

Composite Life

(Total depreciable base (subtract salvage)) / (total annual depreciation exp. for all assets )

Gross profit for this period

(Total estimated gross profit x Percentage completed to date) (minus) --- Gross profit recognized in prior periods

04 Company sells a TV for $500 under the terms 5/10 n/30. (a) Gross Method and Net Method Suppose payments are made on 12/23/04. Suppose payments are made on 12/29/04. Suppose payments are made on 1/5/05.

(a) Gross Method Account Receivable 500 Sales revenue 500 Case 1: Suppose payments are made on 12/23/04. 12/23 Cash 475 Sales discount 25 Account Receivable 500 (500-500*.05)= 475 Case 2: Suppose payments are made on 12/29/04. Cash 500 Account Receivable 500 Case 3: Suppose payments are made on 1/5/05. 12/31 no entry 1/5/2005 Cash 500 Account Receivable 500 (b) Net Method 12/15 Account Receivable 475 Sales 475 12/23 Cash 475 Account Receivable 475 12/29 Cash 500 Account Receivable 475 Interest Revenue 25 12/31 Interest Receivable 25 Interest Revenue 25 1/ 1 Cash 500 Account Receivable 475 Interest Receivable 25

Composite Depreciation Rate

(total annual depreciation exp. for all assets ) / (total original cost of all assets)

A customer is more likely to control a good or service if the customer has

- An obligation to pay the seller - Legal title to the asset - Physical possession of the asset - Assumed the risks and rewards of ownership - Accepted the asset

Balance sheet

- Contract liabilities - Contract assets - Accounts receivable

Disclosure notes

- Nature, amount, timing, and uncertainty of revenue and cash flows - Outstanding performance obligations, discuss how performance obligations typically are satisfied, and describe important contractual provisions like payment terms and policies for refunds, returns, and warranties

The cost of Land includes

- Purchase price - closing costs such as title fees, and attorney's fees, transfer fees etc - real estate brokers' commissions - accrued property taxes and other liens on the land assumed by the purchaser. - cost of making the land ready for use. Land is never depreciated.

Revenue is recognized over a period of time if one of the following three conditions hold

- The customer consumes the benefit of the seller's work as it is performed (example: a cleaning service) - The customer controls the asset as it is created (example: a building extension) - The seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date even if the contract is cancelled (example: an order of jets customized for the U.S. Air Force) If a seller can't recognize revenue over time, it recognizes revenue at a point in time

Suppose the right to a mineral deposit is purchased for 1,000,000 on 1/1/92. It is estimated that 100,000 barrels of oil can be extracted from this site. Suppose that in the first year 15,000 barrels of oil is extracted.

1,000,000-0/ 100,000 = $10 15,00 barrels of oil is extracted Depletion (inventory) 150,000 Mineral Deposit (asset) 150,000 10 x 15,000 Sold 10,000 barrels Depletion expense (Cogs) 100,000 Depletion 100,000 10,000 x 10 = 100,000

Five Steps to Revenue Recognition

1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied

The Dakota Corporation operates several factories that manufacture medical equipment. Near the end of the company's 2007 fiscal year, a change in business climate related to a competitor's innovative products indicated to management that the $170 million book value of the assets of one of Dakota's factories may not be recoverable. Management is able to identify cash flows from this factory and estimates that future cash flows over the remaining useful life of the factory will be $150 million. The fair value of the factory's assets is not readily available but is estimated to be $135 million

1. Step one 170> 150 then impairment 2. 135 is the estimated value 3. 170 - 135 = 35 Million Impairment loss 35,000,000 Asset 35,000,000

Capital Cost(1/1/8) FV(12/31/08) One stocks 7,500 8,200 9,300 Chevy Chase 51,310 51,300 stocks - Ameriitrade stocks 37,000 29,100 Total 95,810 88,600 Sale(3/1/09) FV(12/31/09) Capital one Stock 9,300 Ameriitrade Stocks 36,050 Chevy chase 51,850 Stock

1/1/08 Investment- trading security 95,810 Cash 95,810 12/31/08 Unrealized holding loss 7,210 Fair Value adjustment 7,210 3/1/09 Cash 51,850 Investment- trading security 51,310 Gain on Investment 540 12/31/09 Fair Value adjustment 8,060 Unrealized adjust gain 8,060 Original cost 45350 44,500 MV 45500 33,000 850 11,500 Unrealized loss 4,290 Fair Value Adjustment 4,290

On 1/1/2011, Coopers Co. purchased a machine by signing a noninterest-bearing note requiring $40,000 to be paid on 12/31/2012. The appropriate interest rate is 8%. PV Factor based on N=2 , f=.8% = 0.85734 what is the journal entry?

1/1/11 Machine 34,294 Discount 5,706 account Notes Payable 40,000 12/31/11 Interest 2744 expense Discount 2744 (40,000 x-5,706) x .08= 2744 12/31/2012 Interest 2962 expense Discount 2962 (40,000- (5706-2744) x .08= Note Payable 40,000 Cash 40,000

On 1/1/2003 Byner Inc. purchased a tractor. Company paid $5,000 down and signed a non-interest bearing note requiring five annual installments of $5,000 to be paid at the end of each year. The appropriate interest rate is 10%. The fair value of the tractor is not determinable. Pv annuaity factors (c=16%, d=5) = 3.79079

1/1/2013 : 5,000 installments 1/1/2014: 5,000 1/1/2015: 5,000 1/1/2016: 5,000 1/1/2017: 5,000 1/1/2018: 5,000 1/1/2013 Tractor 23,954 Discount 6,046 Cash 5,000 Notes payable 25,000 12/31/2013 Interest expense 1895 Discount 1895 (25,000 -6,046) x .10= 1895 Note Payable 5,000 Cash 5,000 12/31/14 Interest expense 1585 Discount 1585 (25,000- 5,000)-( 6,046-1895) x .10= Note payable 5,000 Cash 5,000 12/31/2015 Interest expense 1243 Discount 1243 (25,000-10,000)- (6,046- 1585- 1896)x .10= 2074 Note Payable 5,000 Cash 5,000 12/31/2016 Interest Expense 868 Discount 868 12/17 Interest Expense 455 Discount 455

Suppose Smith Corp's Accounts Receivable net balance is $5,000 on 12/31/2014 and $7,000 on 12/31/2015. During 2014, net sales is 15,000. During 2015, net sales is $10,000. What is accounts receivable turnover and average collection period for 2015?

10,000) / ((5,000 +7,000)/ 2))= 1.67 Receivables turnover ratio 365 / 1.67 = 219 days for the average collection period

Gingerbread Inc. purchased a five year fire insurance policy on October 1, 2010 for $50,000 and debited insurance expense for the entire amount on that date. What is the adjusting entry on December 31, 2010?

10/1/2010 Insurance expense 50,000 Cash 50,000 12/31/2010 Prepaid Insurance 47,500 Insurance expense 47,500 Or Prepaid Insurance 50,000 Cash 50,000 Insurance expense 2500 Prepaid Insurance 2500

The Net realizable value of Accounts Receivable is the balance net of Allowances for Uncollectible Accounts.

100 Account Receivable (10) (allowance for uncollectable accounting) 90 Net Realizable value of account receivable

Suppose a company purchased an asset on 1/1/90 for $100,000 with a 6 year useful life (no salvage value) and uses the sum-of-the-years'-digits method for depreciation.

100,000x 6/ 1+2+3+4+5+6 (21)= 28,571 Depreciation expense 28,571 Accumulated Depreciation 28,571 100,000x 5/ 21= 23810 Depreciation Expense 23,810 Accumulated Depreciation 23,810 100,000 x 4 /21= 19048 Depreciation Expense 19048 Accumulated Depreciation 19048 100,000 x 3/21 = 14,286 Depreciation Expense 14,286 Accumulated Depreciation 14,286 100,000 x 2/21= 9, 524 Depreciation Expense 9,524 Accumulated Depreciation 9,524 100,000 x 1/21= 4,762 Depreciation Expense 4,762 Accumulated Depreciation 4,762

Suppose a company receives a non-interest bearing note for $10,000 on 11/1/08. The company pays $9,500 for it. The company receives the principal on 4/1/09.

11/1 Note Receivable 10,000 Cash 9,500 Discount on Note Receiavble 500 12/31/2008 Discount on Note Receivable 200 Interest revenue 200 (500 x 2/5) 4/1/2009 Cash 10,000 Note Receivable 10,000 Discount on Note Receivable 300 Interest Revenue 300

At the end of November 2006, Banner Mirror Company had an outstanding accounts receivable of $220,000. On December 1, 2006, the company borrowed $200,000 from Fidelity Associates and signed a promissory note. Interest at 12% is payable monthly. The company assigned $220,000 of its specific receivables as collateral for the loan. Fidelity Associates charges a finance fee equal to 1.5% of the accounts receivable assigned. If Banner collects $50,000 of Account Receivable on 12/31/2006

12/1/2006 Cash 196,700 (200,000- 1.5% x 220,000) Financing expense 3,300 Liability-Financing 200,000 arrangement Cash 50,000 Account Receivable 50,000 Interest expense 2,000 (200,000 x .12 x 1/12) Liability- Financing 50,000 arrangement Cash 52,000

Suppose a company receives a note for $10,000 on 12/1/08 that pays interest at 12% (per year). The principal is $10,000. Full interest is paid at the end (12/1/09) along with the principal.

12/1/2008 Note Receivable 10,000 Cash 10,000 12/31/2008 Interest Receivable 100 Interest Revenue 100 (10,000 x .12 x 1/12)= 100 12/1/2009 Cash 11,200 Note Receivable 10,000 Interest Receivable 100 Interest revenue 1,100 (10,000 x .12 x 11/12)

Company has the following portfolio of trading securities purchased on 12/30/2009 Cost (12/30)FV(12/31)selling price (1/1) Microsoft stocks 12,500 12,550 12,490 America 44,000 43,995 Online stocks Total 56,500 56,545

12/30/ 2009 Investment -trading 56,500 security Cash 56,500 12/31/2009 Fair Value adjustment 45 Unrealized holding gain 45 (56,540-56500= 45) 1/1 Cash 12,490 Loss on sale, investment 10 Investment -trading security 12,500 12/31/10 Unrealized Holding loss 50 Fair Value adjustment 50

The Astro Corporation develops computer software graphics programs for sale. A new development project begun in 2008 reached technological feasibility at the end of June 2009, and the product was available for release to customers early in 2010. Development costs incurred in 2009 prior to June 30 were $1,200,000 and costs incurred from June 30 to the product availability date were $800,000. 2010 revenues from the sale of the new product were $3,000,000 and the company anticipates an additional $7,000,000 in revenues. The economic life of the software is estimated at four years.

12/31/2009 Software development expense 1,200,000 Software development cost (asset) 800,000 Cash 2,000,000 Amortization 240,000 Expense Accumulated 240,000 amortization Revenue = 800,000 x (3Million / 10Million) = 240,000 the greater of revenue versus straight line Straight line = 800,000 x ¼ = 200,000

Suppose 1/1/2003 the company changes remaining useful life to 10 years. How would this change depreciation expense for 2003 and onwards?

120,000- 12,000- 5,000/ 10 = 10,300 Depreciation 10,300 Expense Accumulated 10,300 Depreciation

Suppose Company A purchases equipment for $120,000 on 8/1/2001. The asset is expected to have a 10 year useful life and no residual value. Assume straight-line depreciation. What's the journal entry to record depreciation for 2001 and 2002? Suppose 1/1/2003 the company changes remaining useful life to 10 years. How would this change depreciation expense for 2003 and onwards?

120,000/ 10 = 12,000 x5/12 = 5,000 Depreciation expense 5,000 Accumulated Depreciation 5,000 120,000-0/ 10 = 12,000 Depreciation Expense 12,000 Accumulated Depreciation 12,000 120,000- 12,000- 5,000/ 10 = 10,300 Depreciation Expense Accumulated Depreciation

Everglade Parks Inc. borrowed $570,000 from a bank with a 3-month note. Before the borrowing, it reported a current asset of $2,219,000 and current liabilities of $3,751,000 on its 2007 balance sheet. How did the borrowing affect Everglade Parks' current ratio?

2,219,000/3,751,000= .5916 Cash 570,000 Note payable 570,000 (2,219,000+570,000)/ (3,751,000+570,000) = .6455

Suppose a company purchases a truck with expected mileage of 100,000 on 1/1/2001. The cost of the truck is $20,000 and salvage value expected is $800. Suppose the company used the truck for 15,000 miles in the first year and 10,000 miles in the second year. Calculate depreciation expense for both years.

20,000- 800/100,000 = .0192 First Year : 15,000 x .0192 = 2880 Second Year : 10,000 x .0192 = 1920

Construction starts on 1/1/06 and ends on 10/1/07. Expenditures on the project: 1/1/06: $1,000,000 3/1/06: $1,600,000. 6/30/06: $1,800,000. 10/1/06: $600,000. 4/30/07: $585,000. 8/31/07: $900,000. Company has a construction loan of $3,000,000 outstanding during 2006 and 2007. Interest rate on this loan is 10%. Company also had long term loans of $4,000,000 and $6,000,000 with interest rates of 6% and 8% respectively during 2006 and 2007. Amount of interest that the company should capitalize in 2006 and 2007 using the specific interest method. Total cost of building Amount of interest expense that will appear in the 2006 and 2007 income statements

2006 Average Accumulated expenditure 1/1/06 1,000,000X12/12= 1,000,000 3/1/06 1,600,000X10/12= 1,333,333 6/30/06 1,800,000x6/12 = 900,000 10/1/06 600,000 X 3/12 = 150,000 Total of average expenditure = 3,383,333 Layer 1 (3,000,000 x .10) + Layer 2 ( 383,333x .072)= 300,000 + 27600 = 327,600 Building 327,600 Interest 692,400 expense (plug) Cash 1,020,000 (720,000 + 300,000) 2006: Capitalize = 327,600 Total Cost Building = 5,327,600 Total interest =694,400 1/1/07 5,327,600 x 9/9 = 5,327,600 4/30/07 585,000 x 5/9 = 325,000 8/31/07 900,00 x 1/9 = 100,00 Total Average expenditure = 5,752,600 Layer 1 (3,000,000 x .10x 9/12) + layer 2 (2,752,600 x .072x 9/12)= 225,000 + 148,640 = 373,640 Building 373,640 Interest 646,360 expense (plug) Cash 1,020,000 2007 Capitalized =373,640 ; Total cost of building = 5,327,600 + 585,000 + 900,000 +373,640 = 7,186,240 Interest 646,360

2014 2015 2016 Costs incurred during the year 1,000,000 2,000,000 1,600,000 Estimated future costs 2,700,000 1,500,000 0 Billings made during the year 1,200,000 2,000,000 1,800,000 Cash collections during the year 1,000,000 1,400,000 2,600,000 The contract price is $5 million. What is the cumulative actual costs incurred to date at the end of each year? What is the estimated total cost at the end of each year? Is there an expected total loss at the end of any year? What is the percentage of contract completed to date each year? Revenue to be recognized each year when recognizing revenue upon completion of the contract? Revenue to be recognized each year when recognizing revenue over time according to percentage of completion? Gross profit for each year when recognizing revenue upon completion of the contract? Gross profit for each year when recognizing revenue over time according to percentage of completion?

2014 2015 2016 1,000,000 3,000,000 4,600,000 2014 2015 2016 3,700,000 4,500,000 4,600,000 2014 2015 2016 No loss no loss no loss 2014 2015 2016 (1 m / 3.7m) (3 m / 4.5 M) (4.6 m / 4.6 M) 27.03% 66.67% 100% 2014 2015 2016 0 0 5M 2014 2015 2016 1,351,500 1,982,000 1,666,500 2014 2015 2016 0 0 0.4M 2014 2015 2016 351,390 (18,040) 66,650

The following information pertains to one item of inventory of the Dodge Company: Per unit Cost $270 Replacement cost 225 Selling price 292 Costs to sell 52 Applying the lower of cost and net realizable value rule, this item should be valued at

240

Given: - Ending inventory (LIFO) = $26,000 - Cost of goods sold (LIFO) = $350,000 - Beginning balance of LIFO Reserve = $25,000 - Ending balance of LIFO Reserve = $40,000 Calculate ending inventory and cost of goods sold under FIFO cost flow assumption

26,000 + 40,000= 66,000 FIFO EI 350,000 - 15,000= 335,000 FIFO COGS

Average Collection Period

365 / Receivables turnover ratio

Jackpot Inc. paid $1,000,000 on January 1, 2003 for a mining site, paid another $500,000 to prepare the mine for copper extraction. Extraction is expected to be over after 4 years at which time the company would have to restore the land to its original condition. The company has provided the following three cash flow possibilities for restoration costs: Cash Outflow Probability 1. $300,000 25% 2. 400,000 40% 3. 500,000 35% Risk free rate = 10%. Pv factor base on N=4 r = 10% = .68301 what is Expected cash flows related to restoration? What is the cost of the copper mine on the balance sheet on January 1, 2003? What is the year end adjusting entry to be made? The company purchased some new equipment on July 1, 2003 for $120,000 to aid the extraction. What is the journal entry at the end of 4 years (Dec 2006) if actual restoration cost was $430,000? What is the journal entry at the end of 4 years (Dec 2006) if actual restoration cost was 400,000?

410,000 = 300,000 x 25% + 400,000 x 40% 500,000x 35% = 1,780,034 1,500,000 +(410,000 x .68301) 1/1/2013 Copper Mine 1780034 Cash 1,500,000 Asset retirement 280,034 obligation 12/31/2013 Accretion expense 28,003 Asset Retirement 28,003 obligation (280,034 x 10%) 12/31/2004 Accretion 30,804 expense Asset retirement 30,804 obligation (280,034 +28,003) x .10= 30,804 12/31/2005 Accretion Expense 33884 Asset retirement obligation 33884 (280,034 + 28,003+ 30,804)x .10 = 12/31/2006 Accretion Expense 37273 Asset retirement obligation 37273 (280,034 + 28,003 + 30,804+ 33884) x . 10 Equipment 120,000 Cash 120,000 Asset Retirement obligation 410,000 Loss 20,000 restoration Cash 430,000 Asset retirement obligation 410,000 Cash 400,000 Gain from 10,000 restoration

On May 1, 2005, Spartan Apartments received $4,800 from a new tenant for one year's rent in advance (starting the same day). What is the adjusting entry on September 30, 2005 (the fiscal year end)?

5/1/2005 Cash 4800 Unearned Revenue 4800 9/30/2005 Unearned Revenue 2000 Rental Revenue 2000 Or Cash 4800 Rent revenue 4800 9/30/2005 Rent Revenue 2800 Unearned Revenue 2800

Parent Company purchased Sub Company for $500 million at a time when the fair value of Sub's net identifiable assets were $400 million. Sub continued to operate as a separate company. At the end of the next year, Parent did a goodwill impairment test revealing the following: Book Value of Sub's net assets, including goodwill $440 Sub's fair value $350 Fair value of Sub's net identifiable assets, excluding goodwill $325

500 M and Fair value of 400 million = 100 million of Goodwill Step 1: 350 < book value 440 We have an impairment Step2: Impairment loss 100 M -25 = 75 M (500-400 =100) (350-325= 25) Impairment loss 75,000,000 Goodwill 75,000,000

Evergreen Forest Co. made a payment of $102,000 to vendors at the end of its 2006 fiscal year. Before the payment its current assets was $550,000 and current liabilities totaled $400,000. How did the payment affect Evergreen Forest's current ratio?

550,000/ 400,000=1.375 Account Payable 102,000 Cash 102,000 (550,000-102,000) / (400,000-102,000) = 1.503

Dollar-value LIFO: A. Starts with ending inventory measured at current costs and recreates LIFO layers for measuring inventory costs. B. Increases the recordkeeping costs of LIFO. C. Only is allowed for internal reporting purposes. D. None of these is correct.

A

Materiality (a)

A consequence is that GAAP need not be followed in all situations.

Notes Receivables [short term]

A formal credit arrangement under which a company stands to receive some money at some future date. These usually arise from loans made to other companies or individuals. Notes can be interest bearing or non-interest bearing. Interest bearing note have a stated rate of interest which require periodic interest payments. Non-interest bearing notes have interest implicitly included in the face value. Face value = principal = amount to be received at the end of the contract. Interest payment = (stated interest)x(face value).

Factoring

A particular type of sale arrangement under which the buyer of the receivables takes responsibility of collecting on the receivables; pays some upfront cash and pays the remaining, less some fee, upon collection from the customers.

Securitization

A sale arrangement under which an intermediary takes ownership of the receivables and then creates bonds which are secured by the receivables. Money collected from the bond issue is used to pay the original company (that initially had the receivables). Company A has a lot of the receivable and sells them to intermediary. Intermediary pays, but must make it into a bond so he can sell to the investor then intermediary uses the bond to pay off Company A and uses the money collected from receivable to pay investors. The accounting for the sale of receivables depends on whether the sale is with recourse or without recourse.

Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities? A. Securities available for sale. B. Trading securities. C. Consolidated securities. D. Held-to-maturity securities.

A.

The adjusting entry required when amounts previously recorded as unearned revenues are earned includes: A. A debit to a liability. B. A debit to an asset. C. A credit to a liability. D. A credit to an asset.

A.

When recognizing revenue of long-term contracts upon completion of the project: A. Estimated losses on the overall contract are recognized before the contract is completed. B. Expenses are recorded each period, but revenue is only recognized when the contract is completed. C. Use of this method is not permitted under generally accepted accounting principles. D. Neither gains nor losses are recognized until the contract is completed

A.

The following info is taken from Swathmore Co.'s financial records for 2009: Accounts receivable (1/1/09) 74,000 Allowance for 54,000 doubtful accounts (1/1/09) Sales of 2009 (all on credit) 2,620,000 Cash collections of 2009 2,483,000 Write-offs in 2009 68,000 Bad debt expenses recorded 78,600 *Assume that the company records some bad debt expenses at the end of each quarter based on the percentage of credit sales (78,600 = 3% of 2,620,000) At the year end, the company determines bad debts using an aging schedule. The following relates to accounts receivable on 12/31/09: Age group Amount Percentage 0-60 days 430,000 4% 61-90 days 98,000 15% 91-120 days 60,000 25% Over 120 55,000 40% What is the adjustment needed for bad debts?

Account Receivable 2,620,000 Sales 2,620,000 Cash 2,483,000 Account Receivable 2,483,000 Allowance to uncollectible 68,000 Account receivable 68,000 Bad expense 78,600 Allowance of 78,600 uncolllectible account Bad debt expense 4300 Allowance for uncollectible 4300

What would you do if an account previously written off is collected?

Account Receivable 500 Allowance for Uncollectible 500 Cash 500 Account Receivable 500

Investment

Accounting depends on how long the company plans to hold the investment (debt or equity securities) and on the nature of influence (interest) in the investee company (equity securities).

Sale of Accounts Receivables without Recourse

Accounts receivable are sold to an intermediary (could be a financial institution). Ownership of the receivables moves to the intermediary. Creditors are requested to send the payments directly to the intermediary. The intermediary bears the risk of collection. If customers do not pay, the intermediary loses.

Estimated total cost

Actual costs incurred to date + Estimated future costs

Faithful Representation

Agreement between a measure and the phenomenon it purports to represent.

Economic Entity Assumption

All economic events can be identified with a particular entity.

Depreciation, depletion, and amortization

All refer to the process of allocating the cost of operational assets over future periods.

Suppose one of the customers who had not paid had left the country without a forwarding address. Suppose his unpaid bill was for $500. In this case the following journal entry would be made

Allowance for uncollectibles 500 Accounts receivable 500 This can be done for both the Percentage of Sales Method and the Aging Method. Note that this different from the Direct Write-off Method where accounts written off are matched with expenses.

Income Statement

Amortization expense associated with computer software cost. R&D expense associated with computer software development cost.

Held-to-Maturity (debt)

Amortized Cost

Held-to-maturity (debt)

Amortized cost

On 12/31/07 Apex accepted a nine-month 10 percent note for $200,000 from a customer. Principal and interest to be paid on 9/30/08. On 4/1/08 Apex discounted the note to its local bank. The bank's discount rate is 12 percent.

Amount Received : 215,000 - 12,900 = 202,100 4/1/08 Interest receivable 5,000 Interest Revenue 5,000 (200,000 x .10 x 3/12) Cash 202,100 Loss from 2,900 sales of notes Note Receivable 200,000 Interest receivable 5,000 12/31/07 Note Receivable 200,000 Sales 200,000

Assigning:

An arrangement under which specific receivables are used as collateral for debt and in case of failure to repay debt collections these receivables will be used to repay debt. The specific accounts receivable are reclassified as "accounts receivable assigned".

Software Development Costs

An exception to expensing all R&D costs exists for the computer software industry. SFAS 86: All costs incurred to develop or purchase computer software to be sold, leased, or otherwise marketed are expensed as R&D costs until technological feasibility of the product has been established. Costs incurred after technological feasibility but before the product is available for general release to customers are capitalized as an intangible asset. The periodic amortization of capitalized computer software development costs is the greater of (1) the ratio of current revenues to current and anticipated revenues or (2) the straight-line percentage over the useful life of the asset.

Patent:

An exclusive right to manufacture a product or process. Patents are granted for 20 years. For patents purchased, the purchase price is capitalized and expensed over the patent life. For patents internally developed simply the costs of processing the patent (legal fees, filing fees etc.) are capitalized

Consistency

Applying the same accounting practices over time.

Asset retirement obligations

Are liabilities associated with the restoration of an operational asset.

Trading Securities (Contd.)

Asset adjustments made directly to the investment account or to a valuation account called Fair Value Adjustment. When trading securities are sold, gains or losses are computed based on the difference between original cost and selling price. The balance in Fair value Adjustment has to be recalculated each year to adjust for sales and market value changes.

In testing for recoverability of an operational asset, an impairment loss is required if the

Asset's book value exceeds the undiscounted sum of expected future cash flows.

Last-in First-out (LIFO)

Assume that most recent inventory is sold first.

First-in First-out (FIFO):

Assume that oldest inventory is sold first.

Going concern assumption

Assumes the entity will continue indefinitely.

Accruals occur when cash flows: A. Occur before expense recognition. B. Occur after revenue or expense recognition. C. Are uncertain. D. May be substituted for goods or services.

B.

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet? A. Common stock held as available for sale securities B. Debt securities held to maturity C. Preferred stock held as trading securities D. All of these are reported at fair value.

B.

Collection of accounts receivable that previously have been written off results in an increase in cash and an increase in A. Accounts receivable. B. Allowance for uncollectible accounts. C. Bad debts expense. D. Net income.

B. Allowance for uncollectible accounts.

Memorex Disks sells computer disk drives with right-of-return privileges. Returns are material and reasonably predictable. Memorex should: A. Not record sales until the right to return has expired. B. Record an allowance for sales returns in the year of the sale. C. Debit sales returns in the period of the return. D. Debit sales in the period of the return.

B.Record an allowance for sales returns in the year of the sale.

Records expense when accounts actually default. Suppose on 1/15/05 a customer defaults on a payment of $1000. (Collection efforts over an extended period ended without a payment). Under the Direct Write-off Method the following journal entry would be recorded

Bad debt expense 1,000 Allowance for uncollectible 1,000 Problem is that the sale could have been made in 2004, so the matching principle is violated.

IFRS Versus US GAAP

Bank overdrafts are treated as liabilities under US GAAP. IFRS allows firms to offset this against other cash accounts in many situations

Matrix, Inc. uses the gross profit method to estimate end of month inventory. At the end of May, the controller has the following data - Net sales for May = $1,213,000 - Net purchases for May = $728,300 - Inventory at May 1 = $237,400 - Gross margin = 43% of sales Estimate Inventory at May 31.

Beg. Inventory 237,400 Purchase 728,300 Goods Available for sale 965,700 Cost of Goods Sold 691,410 End of Inventory 274,290

Given: - Net sales for the year = $80,000 - Net purchases for the year =$90,000 - Inventory at January 1 = $10,000 - Gross margin = 25% of cost Estimate Inventory as at December 31

Beginning Inventory 10,000 Purchase 90,000 Goods Available for sale 100,000 Cost of Goods Sold 64,000 Ending Inventory 36,000

Company exchanges a machine for a building. The machine originally cost $90,000 and has accumulated depreciation of $20,000. Company pays another 50,000 for the building Suppose FV of the building received is $150,000 FV of equipment given up is 85,000. FV of neither determinable

Building 150,000 Accumulated 20,000 Machine 90,000 Cash 50,000 Gain on 30,000 exchange Building 135,000 Accumulated 20,000 depreciation Machine 90,000 Cash 50,000 Gain on 15,000 exchange Building 120,000 (plug) Accumulated 20,000 Depreciation Machine 90,000 Cash 50,000

Ending inventory is equal to the cost of items on hand plus A. Items in transit sold f.o.b. shipping point. B. Purchases in transit f.o.b. destination. C. Items in transit sold f.o.b. destination. D. None of these.

C

The balance sheet reports A. Net income at a point in time. B. Cash flows for a period of time. C. Assets and equities at a point in time. D. Assets and liabilities for a period of time.

C.

Which of the following is not an indicator that control of a good has passed from the seller to the buyer? A. Buyer has legal title. B. Buyer has an unconditional obligation to pay. C. Buyer has scheduled delivery. D. Buyer has assumed the risk and rewards of ownership.

C.

Current ratio

CA/ CL

Company sells $200,000 in accounts receivable with recourse on 4/1/04. The company receives 80% of the receivables in cash on 4/1/04. The buyer promises to pay the rest upon collection, less 5% fee (calculated on total receivable). Fair value of the liability is $5,000. Suppose on 9/1/04 the company is paid back another 26,000: 9/1/04 What if on 9/1/04 the company is paid back another 24,000: 9/1/04

Cash 160,000 Receivable from factoring 30,000 Loss on receivable 15,000 Account Receivable 200,000 Recourse liability 5,000 Cash 26,000 Recourse liability 5,000 Receivables from factoring 30,000 Gain on sale of 1,000 Account Receivable Cash 24,000 Recourse liability 5,000 Loss on sale of 1,000 account receivable Receivables from factoring 30,000

Company sells $200,000 in accounts receivable without recourse on 4/1/04. The company receives 80% of the receivables in cash on 4/1/04. The buyer promises to pay the rest upon collection, less a 5% fee (calculated on the total receivable) Suppose the receivables are collected by 9/1/04 and money paid to the company on that date

Cash 160,000 (200,000 x .80) Receivables from factoring 30,000 (200,000 x (.20-05) Loss on Receivable 10,000 Account Receivable 200,000 (fee collected upon collection of receivables) Or Cash 150,000 Receivables from factoring 40,000 Loss on Receivable 10,000 Account Receivable 200,000 (fee was paid up front) 9/1/04: Cash 30,000 Receivable from factoring 30,000 Or Cash 40,000 Receivable from factoring 40,000

TrueTech Industries sells one-year subscriptions to the Tri-Net multi-user platform of Internet-based games. TrueTech sells 1,000 subscriptions for $60 each on January 1, 2016. At the end of each of the 12 months following the sale TrueTech would record following entry to recognize Tri-Net subscription revenue:

Cash 60,000 (60 x 1,000) Deferred Revenue 60,000 Deferred Revenue 5,000 (60,000 / 12) Sales Revenue 5,000

Inventory Turnover

Cogs/ Average Inventory

Core Principle

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services

Receivables

Company's claims to future collection of cash, other assets or services.

Materiality

Concerns the relative size of an item and its effect on decisions.

Consignment

Consignor transfers goods to consignee for ultimate sale to customer. Consignor retains ownership. Under a consignment arrangement, the holder of the goods (consignee) does not own the goods. Ownership remains with the shipper of the goods (consignor) until the goods are actually sold to a customer. Consigned goods should be included in the consignor's inventory not the consignee's inventory.

Controlling investments in equity (>50%)

Consolidated Financial Statements

Controlling investments in equity (>50%)

Consolidated financial statements

Indicators are used to determine when control has transferred from the seller to the customer

Control means that the customer has direct influence over the use of the good or service and obtains its benefits

When a company accrues federal income taxes at the end of the accounting period A. Its acid-test ratio increases. B. Its current ratio increases. C. Its debt to equity ratio decreases. D. Its debt to equity ratio increases.

D.

Distribution to Owners

Decreases in equity resulting.

Truck purchased for $20,000 on 1/1/97. Useful life is 12 years, salvage value = $800.

Depreciation expense 1,600 Accumulated Depreciation 1,600

On June 30, 2006, MeLo, Inc. sold equipment for $6,350 cash. The equipment was purchased on January 1, 2001 at a cost of $15,000. The equipment was depreciated using the straight-line method over an estimated ten-year life with zero salvage value. MeLo last recorded depreciation on the equipment on December 31, 2005, its year-end. Prepare the journal entries necessary to record the disposition of this equipment.

Depreciation 750 Accumulation 750 Cash 6350 Accumulated 8250 Depreciation Loss on sale 400 Equipment 15,000 (asset is always at face value) 15,000-0 / 10 = 1,500 1500 x 5.5 = 8,250

Depreciation on office equipment is $4,500 for the year.

Depreciation expense 4,500 Accumulated Depreciation 4,500

Sum-of-the-years'-digits method depreciation

Depreciation expense is calculated using the following formula: [Depreciation base]x[# of yrs. remaining (incl.current yr.)] / Sum of the years As with the other accelerated methods, this method records more depreciation in the early years.

Balance Sheet

Describes many of the resources a company has available for generating future cash flows. Provides liquidity information useful for assessing a company's ability to pay its current obligations. Provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in the capital structure.

Uncollectible Accounts Receivable

Dollar amount of sales revenue lost from customer default. Matching requires losses to be recorded in the period of the sale. If uncollectible amounts are not known, it has to be estimated.

Donated Assets

Donated assets are recorded at their fair value (available market price or appraised value). The amount of the contribution is considered revenue of the period.

Suppose a company issues 5,000 common shares (par value $1) on 1/1/05 to purchase some equipment whose value is not readily determinable. On 1/1/05 the company's shares were trading at $40.

Equipment 200,000 Common Stack 5,000 ARC 195,000 (5,000x (40-1)

Significant Influences (20-50% investments in equity)

Equity Method

Significant influence (20-50% investments in equity)

Equity Method

Income Statement Approach: Percentage of Sales method

Estimate expense based on a percentage of credit sales. Expenses recorded in the period of sale

Trademark

Exclusive right to display/use a certain word, slogan, symbol or emblem. Can be renewed indefinitely for periods of 10 years.

Yore Frame Inc Units purchased Price/unit Beg. Inventory: 1/1/09 600 22 4/1/2009 400 24 6/1/2009 250 25 8/1/2009 350 27 11/1/2009 400 28 Goods available for sale 2000 Ending inventory 500 • Determine cost of goods sold and ending inventory costs under the periodic inventory system for the FIFO, LIFO and average cost flow assumptions. • Record the end of period journal entries. • Suppose each unit is sold for $35 and income tax rate is 40%. Calculate the gross profit and tax effect under the FIFO, LIFO and average cost flow assumptions for Yore Frame.

FIFO Unit Sold 2,000-500 = 1,500 Cogs = 600 x 22 +400 x 24 + 250 x 25 + 250 x 27 = 35,800 Ending= 400 x 28 + 100 x 27 = 13,900 Inventory (end) 13,900 Cogs 35,800 Inventory (beg) 13,200 (600 x 22) Purchases 36,500 (400 x 24 + 250 x 25 + 350 x 27 + 400 x 28) LIFO Unit Sold 2,000-500 = 1,500 Cogs = (400 x 28 + 350 x 27 + 250 x 25 + 400 x 24 + 100 x 22)= 38,700 End = 500 x 22 = 11,000 Inventory (end) 11,000 Cogs 38,700 Inventory (beg) 13,200 (600 x 22) Purchase 36,500 Average Cost Total Units purchase / Goods available = Average Cost (600 x 22 + 400 x 24 + 250 x 25 + 350 x 27 + 400 x 28)= Total Units 497,000 / 2000 = 24.85 Units sold = 2,000 - 500 = 1,500 Cogs= 24.85 x 1500 = 37,275 End= 24.85 x 500 = 12,425 Inventory (end) 12,425 Cogs 37,275 Inventory (Beg) 13,200 (600 x 22) Purchase 36,500 FIFO Revenue 1500 x 35 = 52,500 Fifo Average cost LIfo Revenue 52,500 52,500 52,500 Cogs 35,800 37,275 38,700 Gross profit 16,700 15,225 13,800 Tax 40% 6,680 6,090 5,520

Which method gives the highest profit?

FIFO because we are selling the cheapest first. Also have the highest tax.

Which method gives more accurate balance sheet?

FIFO because you are selling the old purchase only keeping on average the most update price on a product.

Which method gives the highest inventory (ending)

FIFO because you selling the cheapest leaving those left that are higher in price.

Available-for-sale securities (debt & equity)

Fair Value (unrealized holding gains and losses reported in other comprehensive income)

Trading Securities (debt and equity)

Fair Value (unrealized holding gains and losses reported in earnings)

Available-for-sale securities Fair value (debt & equity)

Fair value (debt & equity) (unrealized holding gains and losses reported in other comprehensive income)

Trading securities Fair value (debt and equity)

Fair value (debt and equity) (unrealized holding gains and losses reported in earnings)

Self Constructed Assets

For self-constructed assets all identifiable costs of constructing the asset should be capitalized. Apart from identifiable labor and raw material costs, a portion of the company's manufacturing overhead cost should also be included. The allocation of the overhead cost can be based on some cost driver such as labor hours used. If the construction cost is financed, the interest amount can be capitalized into the cost of the asset.

If inventory purchased, is in transit on 12/31/xx under the terms FOB shipping point, it should be included in (buyer's) ending inventory calculations. What if inventory is in transit shipped FOB destination? Whose inventory is it?

Goods on Consignment

Disposition of Assets

If an asset is sold for cash, the asset and any accumulated depreciation has to be removed and gains or losses would be recorded if the net book value of the asset differs from the cash received.

Deferred Payments

If an operational asset is acquired by issuing a promissory note, Notes payable is credited for the amount. The asset is then recorded at the present value of the cash payments made at the appropriate interest rate, or at the fair value of the operational asset obtained, whichever can be better identified

Issuance of Equity Securities

If equity securities are issued to pay for an asset, either the fair value of the asset or the fair value of equity issued can be used to record the value of the asset.

Adjusting Cost to NRV

If inventory write-downs are commonplace for a company, losses usually are included in cost of goods sold When a write-down is substantial and unusual, GAAP requires that the loss be expressly disclosed Journal Entries Cost of goods sold............xx Inventory................... xx OR Loss on write-down of inventory xx Inventory......................... xx

Receivables turnover

If receivables are turning over fast that is good as it indicates that customers are paying quickly. A reduction in the receivables turnover ratio can suggest that receivables are getting unusually large. This could mean that companies are inflating revenues using accounting tricks.

Verifiability

Implies consensus among different measurers.

Comparability

Important for making inter-firm comparisons.

Sale or secured borrowing

In order to determine whether a sale of receivables have occurred, the FASB requires the following three conditions to be met: The transferred assets have been isolated from the transferor - put presumably beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Each transferee has the right to pledge or exchange the assets it received. The transferor does not maintain effective control over the transferred assets through either (1) an agreement that the transferor repurchase or redeem them before their maturity, or (2) the ability to cause the transferee to return specific assets. If all of the above conditions are not satisfied, the transaction is considered as a "secured borrowing".

Presentation and Disclosure

Income statement - Revenue - Bad debt expense - Interest revenue/expense

Monetary Unit Assumption

Inflation causes a violation of this assumption.

Confirmatory Value

Information confirms expectations

Timeliness

Information is available prior to the decision.

Predictive Value

Information is useful in predicting the future.

Full-Disclosure principle

Information that could affect decision making should be reported.

Intangible assets: Goodwill

Intangible asset that cannot be directly associated with any particular right. Inseparable from the company. Appears on the financial statements from acquisitions. The purchase price at acquisition minus the fair value of net assets of the acquired company is recorded as goodwill. Goodwill acquired is not amortized but is subject to impairment over time.

Interest Capitalization: Concepts

Interest can be capitalized during the construction period for (a) assets built for company's own use as well as for (b) assets constructed as discrete projects for sale or lease (ship, or real estate development). Capitalization period starts when expenditures start and end when the asset is substantially complete. Interest should be calculated on average accumulated expenditures. If expenditure takes place evenly throughout the year, average expenditure is usually taken as half the total expenditure for the period. If expenditures are not made uniformly throughout the year, a weighted average of the accumulated expenditures have to be calculated. Interest capitalized is the average accumulated expenditure times the interest rate. Note that the company should have debt outstanding to capitalize the interest. However, the company does not have to be borrowing specifically for the construction. The imputed interest however cannot exceed the actual interest incurred.

On October 1, 2016, Microchip lent $90,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2017

Interest receivable 1,800 Interest revenue 1,800

My Bank lends $1,500,000 to Me Company, with a provision requiring a 10% compensating balance. The line of credit carries an 8% interest rate. What is the effective interest rate on this loan? Annual interest as a percent of the money you can actually use

Interest= 1,500,000 x .08= 120,000 (1,500,000-1,500,000*.10 = 1,350,000 120,000/130,000= 8.89% effective interest rate

Lower of Cost and Net Realizable Value

Inventories are initially recorded at historical cost. Subsequently if it is determined that the probable future economic benefits from the inventory is impaired - Deterioration - Obsolescence - Changes in price levels Inventory must be reported at the lower of cost and net realizable value

periodic system uses the basic inventory equation

Inventory (beg.) + Purchases - Inventory (end) = Cost of goods sold

Suppose we are using FIFO and EI (book value) = 40,000. BI = 20,000 and purchases for the period was 52,000. Suppose also the NRV of ending inventory is $35,000. What is the adjustment needed and how should it be recorded? When the Inventory write-down is substantial and unusual When the inventory write-down is commonplace.

Inventory (end) 40,000 Cost Of goods sold 32,000 Inventory (Beg) 20,000 Purchase 52,000 Loss in Inventory Value 5,000 Inventory 5,000 (40,000 - 35,000) Cost of goods sold 5,000 Inventory 5,000

On January 1, 2009, Matrix, Inc. acquired 45% of the equity securities of Apex, Inc. for $1,400,000. On the acquisition date, Apex's net assets had a fair value of $3,000,000. and book value of $2,500,000. The difference was partly due to land (MV $100,000 higher) and building (MV $400,000 higher). During 2009, Apex paid cash dividends of $15,000 and reported net income of $175,000. Matrix determined that no impairment for goodwill is needed. Matrix chose to depreciate building over 20 years using straight line. Show all journal entries for the year 2009 in the books of Matrix.

Investment 1,400,000 Cash 1,400,000 Market value= 3,000,000 Fair Value = 2,500,000 Difference 500,000 Land (100,000) Building 400,000 (this portion is depreciatible) 45% x 3,000,000 = 1,350,000 1,400,000- 1,350,000 = 50,000 (Goodwill) 1/1/1 Investment 1,400,000 Cash 1,400,000 12/31 Investment- Apex 78,750 Investment revenue 78,750 (175,000 x .45) Cash 6,750 Investment in Apex 6,750 (15,000 x .45) Investment Revenue 9,000 Investment- apex 9,000 (400,000 x .45% x 1/20)

Investments

Investment in debt securities refer to the ownership of corporate bonds and notes, US Treasury securities, municipal bonds etc.

Investment

Investment in equity securities represents an ownership interest in another entity (common stock, preferred stock etc.).

Investments

Investments refer to the ownership of debt and equity securities of other enterprises (corporations, US Government etc.).

TrueTech Industries manufactures the Tri-Box System, a multiplayer gaming system allowing players to compete with each other over the Internet. - The Tri-Box System includes the physical Tri-Box module as well as a one-year subscription to the Tri-Net multiuser platform of Internet-based games and other applications. - TrueTech sells individual one-year subscriptions to the Tri-Net platform for $60. - TrueTech sells individual Tri-Box modules for $240. - As a package deal, TrueTech sells the Tri-Box System (module plus subscription) for $250. On January 1, 2016, TrueTech delivers 1,000 Tri-Box Systems to CompStores at a price of $250 per system. TrueTech receives $250,000 from CompStores on January 25, 2016. At the end of each of the following 12 months

January 1 Account Receivable 250,000 Sales Revenue 200,000 (250,000 x 240/300) Deferred Revenue 50,000 (250,000 x 60/300) January 25 Cash 250,000 Account Receivable 250,000 Deferred Revenue 4167 Sales Revenue 4167 (50,000 / 12)

Suppose a company buys 50 $1,000 3-year bonds on 1/1/09 at 102.62. Bonds pay 9% interest. Market rate of interest = 8%. Issue price is $51,310. Interest paid on 7/1 and 12/31.

January 1, 2009 Bond 50,000 Premium of bond 1,310 Cash 51,310 50,000 x 102.62/100 = 1.0262 50,000 x 1.0262 = 51,310 Cash 2250 Amortization of premium 198 Interest Revenue 2052 (51,310 x .08x 1/2) (.09 x 50,000 x ½)

Suppose a company buys 50 $1,000 3-year bonds on 1/1/09 at 102.62. Bonds pay 9% interest. Market rate of interest = 8%. Issue price is $51,310. Interest paid on 7/1 and 12/31. B) What if the company sells the bond at $50,500 on 1/1/10 due to unforeseen circumstances?

January 1, 2009 Bond 50,000 Premium of bond 1,310 Cash 51,310 50,000 x 102.62/100 = 1.0262 50,000 x 1.0262 = 51,310 Cash 2250 (.09 x 50,000 x ½) Amortization of premium 198 Interest Revenue 2052 (51,310 x .08x 1/2) 12/31/2009 Cash 2250 (.09 x 50,000 x ½) premium Bond 206 Interest Revenue 2044 ((51,310 -198 )x .08x 1/2) 222 231 240 Cash 2250 (fix) Interest Revenue 2036 (51,310-198-206)x .08 x ½) Premium Bond 214 Cash 2250 Interest revenue 2028 Premium Bond 222 Cash 2250 Interest revenue 2019 Premium Bond 231 Cash 2250 Interest Revenue 2010 Premium Bond 240 B) Cash 50,500 Loss on sale of bond 406 Premium of Bond 906 Bond 50,000

FIFO COGS

LIFO COGS - Change in LIFO reserve.

FIFO EI

LIFO EI + LIFO reserve

Which method gives the best Cost of good sold, the most updated information?

LIFO because it's the last set of units by selling the most recent purchase has the most recent price.

LIFO Liquidations

LIFO liquidations occur when a company under LIFO sells more goods than they purchased during the year.

The company X traded to company Y a tract of land for a similar tract of land. The old land had a book value of $2,500,000 and a fair value of $4,500,000. To equalize the fair value of the assets exchanged, in addition to the land, X paid Y $500,000 in cash. What's the journal entry to record the exchange? Alex

Land (new) 3,000,000 Land (old) 2,500,000 Cash 500,000 When there is no business purpose, you don't recognize a gain or loss.

Land and building purchased together for $500,000. Assessed fair value of the items: Land $200,000, building $400,000.

Land 166,667 Building 333,333 Cash 500,000

Bill Gates donates a land with a fair value of $200,000 to IBM Inc.

Land 200,000 Revenue 200,000

The cost of land improvements (with limited life) such as: driveways, walkways, parking lots, fencing, and lighting are capitalized into "Land Improvements" and depreciated over time.

Land improvement xxx Cash xxx

FIFO

Lower COGS Lower taxes (more cash) Higher income Better Higher assets Better B/S (more accurate inventory)

LIFO

Lower taxes (more cash) Higher income Better I/S (more accurate COGS)

If the selling price of Product A is $10 per unit, and the company estimates that sales commissions and shipping costs average approximately 10% of selling price

NRV= 10 - (10 x.10) = $ 9

Times interest earned ratio

Net Income + Interest expense + Taxes / Interest expense

Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?

Net Markdowns

Determining Net Realizable Value

Net Realizable Value (NRV): - Estimated selling price of the product reduced by reasonably predictable costs of completion, disposal, and transportation - Net amount a company expects to realize from the sale of the inventory

TrueTech Industries sells the Tri-Box, a gaming console that allows users to play video games individually or in multiplayer environments over the Internet. A Tri-Box is only a gaming module and includes no other goods or services. When should TrueTech recognize revenue for the following sale of 1,000 Tri-Boxes to CompStores? December 20, 2015: CompStores orders 1,000 Tri-Boxes at a price of $240 each, promising payment within 30 days after delivery. January 1, 2016: TrueTech delivers 1,000 Tri-Boxes to CompStores, and title to the Tri-Boxes transfers to CompStores. January 25, 2016: TrueTech receives $240,000 from CompStores.

No entry.Because there was no transfer/control of the product. Account Receivable 240,000 (240 x 1,000) Sales Revenue 240,000 Cash 240,000 Account Receivable 240,000

Conservatism

Not a qualitative characteristic, but a practical justification for some accounting choices

Asset Retirement Obligations

Obligations associated with the disposition of an operational asset (e.g., restoring land to its original condition after excavation). SFAS 143: Legal obligations associated with the retirement of tangible, long-lived asset be recognized as a liability and measured at fair value. The liability is matched with an increase in the operational asset. The fair value of the liability is the present value of the future expected cash flows related to asset retirement. Over time the difference between the future expected cash flows and the retirement liability is recorded as Accretion Expense and the liability is increased. If the actual cash flows from the asset retirement differs from the liability recorded, gains and losses can be recorded.

Natural resources

Often listed under property plant and equipment it consists of mineral deposits, oil and gas deposits, timber tracts, etc. If natural resources are purchased from another company, the initial value would include the purchase price plus other costs to bring the asset to the condition necessary for use. If natural resources are developed, then their initial value could include: Acquisition cost: Cost of acquiring the rights to exploring and extracting the resources. Exploration cost: Expenditures associated with drilling and excavating the resources. Development cost: Expenditures after the resources are discovered but before production begins. This includes costs of building tunnels, rigs etc. Restoration cost: Expenditures involved in restoring the land or other property to its original condition after the resources have been extracted.

Impairment of assets to be sold

Operational assets to be sold includes assets that management has committed to sell immediately in their present condition and for which sale is probable. Impairment = Book value - fair value less costs to sell.

To recognize revenue over time, a seller needs to estimate progress towards completion

Output-based estimate Measured as the proportion of the goods or services transferred to date Input-based estimate Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation

Suppose an asset was purchased on 1/1/00 and is depreciated using the double declining balance method. Depreciation expense for 2000 was $200,000. The asset has an estimated useful life of 5 years and the salvage value is $10,000. What is the original cost of the item?

Percentage x net book value 2/5 x Y = 200,000 = Y=500,000

Relevance

Pertinent to the decision at hand.

Copyrights:

Protection given to a creator of a published work, such as books, songs, paintings, etc. Protection is for the life of the creator plus 70 years. Accounting is the same as for patents

Cash Discount

Provides customers some incentives for early payments. The discount lost due to late payment should be interpreted as interest. Can be recorded using Gross Method or net Method.

Suppose a company purchased merchandise worth $5,000 on account and paid $300 in freight charges (cash). Then it returned merchandise worth $600. Record journal entries for each of these transactions assuming that the company uses the periodic method of accounting. Calculate the balance in net purchases as a result of these transactions.

Purchase 5,000 Account Payable 5,000 Freight in 300 Cash 300 Account payable 600 Purchase return 600 5,000+300-600= 4,700

Suppose Central Machine Tools purchased an industrial lathe to be used in its manufacturing process. The purchase price was $62,000. Central paid a freight company $1,000 to transport the machine to its plant location plus $300 shipping insurance. In addition, the machine had to be installed and mounted on a special platform built specifically for the machine at a cost of $1,200. After installation, several trial runs were made to ensure proper operation. The cost of these trials including wasted materials was $600. At what amount should Central capitalize the lathe?

Purchase price 62,000 Transportation 1,000 Shipping insurance 300 Installment 1,200 Wasted materials 600 Total 65,100

Suppose Big K purchased 8,000 shares (100 percent of shares outstanding) of Little K paying $10,000 in cash and issuing (and distributing to Little K's shareholders) 5,000 shares with par value of $1 and total market value of $41,200. The fair value of Little K's identifiable assets/liabilities are as follows: Cash $6,000 Accounts Payable 15,000 Accounts Receivable 9,000 Long-term Notes Payable 17,000 Inventory 8,000 Equipment 45,000 What's the amount of goodwill Big K should recognize? What's the journal entry?

Purchase price : 10,000 + 41,500 = 51,500 Fair value of Little K's not assets= 36,000 6,000 +9,000+8,000+ 45,000- 15,000-17,000= 36,000 Goodwill: 51,200- 36,000 = 15,200 What's the journal entry? Cash 6,000 Account receivable 9,000 Inventory 8,000 Equipment 45,000 Goodwill 15,200 Account payable 15,000 Long term note payable 17,000 Cash 10,000 Common stock 5,000 Addition Paid In Capita 36,200 (41,200-5,000)

Torch, Inc. has developed a new device incurring R&D costs of $21,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. The device has a useful life of 5 years. The legal life is 20 years. At the end of year 1, what is Torch's amortization expense?

R & D expense 21,000 Cash 21,000 Patent 3,000 Cash 3,000 Amortization expense 600 Accumulated Amortization 600 3,000/ 5 =

Research and Development

R&D costs include labor costs, materials, depreciation and amortization of operational assets used in R&D activities, and a reasonable allocation of indirect costs related to those activities. All research and development expenses should be expensed as they are incurred. R&D costs entail a high degree of uncertainty of future benefits. It is difficult to match R&D costs with future revenues. R&D should either be reported separately on the income statement or disclosed in the footnotes. R&D costs incurred under contract for other companies are expensed against revenue from the contract.

Manufacturing Company: Usually produces the goods they sell. They could have three types of inventory

Raw materials Inventory: Items acquired for direct use in the production process. Work-in-progress inventory: Unfinished products which is expected to be sold upon completion. Includes the amounts of (i) raw materials, (ii) direct labor, and, (iii) manufacturing overhead, used. Finished goods inventory: Completed products held for sale.

Trade Receivables/Accounts Receivable

Receivables arising from the sale of goods and services. These are informal (non-written) contracts. Accounts receivables are classified as current assets. While in general receivables should be recorded at the present value of expected cash receipts, the collection period of accounts receivable are fairly short and are thus usually recorded at the exchange price initially agreed on.

Financing with Receivables

Receivables can be sold or used as collateral for debt. The sale or collateralization of receivables results in a quick cash flow. The Company may not have to worry about the collection efforts. Under a sale arrangement the company has to pay a fee or service charge to the buyer.

Pledging

Receivables in general are pledged as collateral for loans. These are disclosed in the notes to the financial statements

Expense recognition

Recognizing expenses in the period they were incurred to produce revenue.

Periodic System

Records (i) all inventory purchase transactions as they occur, (ii) inventory sales only at the end of the period (year). Use purchase account at the time of inventory purchases Close purchase account at the end of the year Purchases xx Account Receivable xx At the end of the year. Inventory (Ending) xx Cost of good sold (for the year) xx Inventory (Beg) xx Purchase xx

Perpetual System:

Records all (i) inventory purchase transactions, and, (ii) inventory sales transactions, as they occur (during the year). Use inventory account at the time of inventory purchases The perpetual system provides more information and can identify inventory shortages and losses better. Inventory (purchase) xx Account receivable/cash xx Cost of goods sold (sell) xx Inventory xx

Periodicity assumption

Relates to the qualitative characteristic of timeliness.

On August 1, 2016, collected $12,000 in advance rent from another company that is renting a portion of Microchip's factory. The $12,000 represents one year's rent and the entire amount was credited to rent revenue.

Rent Revenue 7,000 Deferred Rent Revenue 7,000

On November 1, 2016, the company paid its landlord $6,000 representing rent for the months of November through January. Prepaid rent was debited.

Rent expense 4,000 Prepaid Rent 4,000

Cost effectiveness

Requires consideration of the costs and value of information.

Gain

Results if an asset is sold for more than its book value.

Fair Value Option

SFAS No. 159 allows companies to use a "fair value option" for held-to-maturity (HTM), available-for-sale (AFS) securities, and equity method investments. If this option is elected: The investments are carried at fair value. Unrealized gains and losses are included in income. For HTM and AFS investments, this just amounts to classifying the investments as trading. For equity-method investments, the investment is still classified on the balance sheet as equity method investments, but the portion at fair value must be clearly indicated. The fair value option is determined for each individual investment, and is irrevocable.

Vacation pay for the year that had been earned by employees but not paid to them or recorded is $8,000. The company records vacation pay as salaries expense.

Salaries expense 8.000 Salaries payable 8,000

Sales allowance: Results from damages or returns of defective products

Sales allowances xx [contra revenue] Accounts receivable xx

Gross Method

Sales are recorded at the gross (invoice) amount. Sales discount (contra-revenue) is recorded if payment is received within the discount period

Net Method

Sales are recorded at the invoice amount less the discount. Sales discount forfeited (or discount not taken) are recorded if payment is received after the discount period. This can be treated as interest revenue.

If returns are not frequent, they can be recorded when returns come in. In this case the returns are recorded as

Sales returns xx Accounts Receivable xx Inventory yy Cost of goods sold yy

If returns are regular and material, an estimated amount of returns are recorded in the period sales are made.

Sales returns xx [contra revenue] Allowance for sales returns xx [reduces accounts receivable] Inventory - estimated returns yy Cost of goods sold yy

Balance Sheet Approach: Accounts Receivable Aging Schedule

Same as the previous method, only now we calculate ending balance in Allowance for Doubtful Accounts based on total accounts receivable. Different percentages of uncollectibles are estimated for different age categories of receivables. The analysis yields the desired ending balance in the allowance account.

Sale of Accounts Receivables with Recourse For a transaction like this to be considered as a sale the following conditions need to be satisfied

Seller transfers receivables to the "buyer" who is responsible for collecting money on the receivables. However, if the buyer is unable to collect, the seller has to compensate the buyer. 1. The seller would not have access to the receivables. 2. The buyer have the right to exchange or pledge the receivables. 3. There is no repurchase agreement whereby the seller will gain access to the receivables again in the future.

A company wants to use group depreciation for appliances. It identified the following appliances on 1/1/08: Appliance Cost Residual Value Service Life (yrs) Stoves 15,000 3,000 6 Refrigerators 10,000 1,000 5 Dishwashers 8,000 500 4 In 2010 three new refrigerators costing 2,700 were purchased for cash. The old refrigerators originally costing 1,500 were sold for 200. Calculate the group depreciation rate, group life and depreciation expense for 2008&2010.

Stove Deprcietation 15,000-3,000 / 6 = 2,000 Refrigerators 10,000-1,000/ 5= 1,800 Dishwashers 8,000-500/4 = 1,875 Total Depreciation for all asset = 5,675 Composite Depreciation = 5,675/ 33,000= .1719696 Depreciable base = 12,000 + 9,000+ 7,500 = 28,500 Group life = 28,500/ 5,675= 5.022026 Depreciation Expense 5,675 Accumulated Depreciation 5,675 (Do this for Five years) Depreciation Expense 125 Accumulated Depreciation 125 Fridge 2,700 Cash 2,700 Cash 200 Accumulated Depreciation 1,300 (plug) Fridge 1,500 Depreciation Expense 5,882 Accumulated Depreciation 5,882 (33,000 + 2700-1500) x .172 = 5,882

Three Methods of Recognizing depreciation

Straight-line, Units of activity and Declining- balance. Each method is acceptable under generally accepted accounting principles.

Microchip began the year with $2,000 in its asset account, supplies. During the year, $6,500 in supplies were purchased and debited to supplies. At year-end, supplies costing $3,250 remain on hand.

Supplies expense 5,250 Supplies 5,250

Inventory Estimation Techniques

Taking a physical count of inventory is costly and time consuming. - How does the periodic system work? - What happens if there is a fire? Keeping track of various inventory layers and the prices at which these were bought is also not an easy job. Sometimes estimation techniques can be used to calculate the ending inventory values and cost of goods sold. Two approximate methods we will discuss are: - The Gross profit method - The Retail inventory method

Neutrality

The absence of Bias

Historical cost principle

The basis for measurement of many assets and iabilities

Cost effectiveness (A)

The benefits of providing accounting information should exceed the cost of doing so

Comprehensive income

The change in equity from non-owner transactions.

Buildings

The cost of buildings includes all necessary expenditures relating to the purchase or construction of a building. When a building is purchased, such costs include the purchase price, closing costs, and real estate broker's commission. Costs to make the building ready for its intended use consist of expenditures for remodeling and replacing or repairing the roof, floors, wiring, and plumbing. When a new building is constructed, cost consists of the contract price plus payments for architects' fees, building permits, interest payments (subject to some limitations) during construction, and excavation costs.

freight-in or transportation-in

The cost of inventory usually includes the cost of shipping the goods, if such costs are paid by the buyer

Goodwill

The excess of the fair value of a business over the fair value of all net identifiable assets.

Franchises

The franchisee pays an initial fee for the franchise which is capitalized over the franchise life.

Initial cost

The initial cost of an asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use (e.g., freight costs, installation costs, sales taxes, title fees, etc.). These costs are capitalized.

Perpetual Versus Periodic

The perpetual system provides more information and can identify inventory shortages and losses better. The periodic method is generally less costly to operate but does require a physical count at the end of the period.

Recognition

The process of admitting information into financial statements.

Retail Inventory Method

The retail inventory method can be used for financial reporting and for income tax purposes. It is appropriate for retail operations with - High volume sales and - Different broad types of merchandise at low unit prices More accurate than gross profit method because it's based on the current cost-to-retail percentage

Balance Sheet

The unamortized portion of capitalized computer software cost is an asset.

Fixed assets (land, building, machinery, and natural resources such as oil reserves, mineral deposits etc.).

They are used in operations and not held for resale They are long term and are subject to depreciation (except land) They are tangible (have physical substance)

Intangible Assets: (goodwill, patents, copyrights, trademarks, franchises):

They represent exclusive rights that provide benefits to the owner Intangible assets with finite useful lives (e.g., patents) are amortized; intangible assets with indefinite useful lives (e.g., goodwill) are not amortized. They lack physical substance

Free-on-board destination

Title transfers to purchaser upon arrival.

Free-on-board (FOB) shipping point

Title transfers to the purchaser at shipping point.

Conventional Retail Method

To approximate the lower of average cost and net realizable value, markdowns are not included in the calculation of the cost-to-retail percentage

Total estimated gross profit on the contract

Total contract price - Estimated total cost

Understandability

Users understand the information in the context of the decision being made.

Lump Sum Purchase

When a group of assets (having different characteristics, useful life, etc.) are purchased together, total cost should be allocated to individual items based on relative fair value of the items

Periodic loss occurs for profitable project.

When a project qualifies for revenue recognition over time, a loss sometimes must be recognized in at least one period along the way, even though the project as a whole is expected to be profitable.

Example: Date Index Inventory at year end prices 12/3105 100 38,000 12/31/06 120 54,000 12/31/07 132 66,000 12/31/08 140 56,000 12/31/09 125 55,000

Year 1 : 380 @ 100 Year 2: 450 @ 100 12/31/05 Price index within year / Base year pric index = base rate 100/100= 1= base rate Inventory @ year price : 38,000 Inventory @ base year price : 38,000/ 1 = 38,000 Layers : 38,000 @ 1 DVLIFO: 38,000 12/31/06 Base rate= 120/100= 1.2 Inventory @year price : 54,000 Inventory @ base year price: 54,000/1.2= 45,000 Layers : (38,000 @ 1) + (7,000 @ 1.2) DVLIFO:46,400 12/31/07 132/100= 1.32 Inventory @ year price : 66,000 Inventory @ base year price: 66,000/ 1.32 = 50,000 Layers : (38,000 @ 1) + (7,000 @ 1.2)+ (5,000 @ 1.32) DVLIFO: 53,000 12/31/08 140/100= 1.40 Inventory @ year price : 56,000 Inventory @ base year price: 56,000/ 1.40= 40,000 Layers: (38,000 @1 ) +(2,000 @ 1.2) DVLIFO: 40,400 12/31/09 125/100= 1.25 Inventory @ year price : 55,000 Inventory @ base year price: 55,000/1.25= 44,000 Layers: (38,000 @1) + ( 2,000 @ 1.2)+ (4,000@ 1.25) DVLIFO: 45,400

Suppose a company purchased an asset on 1/1/90 for $100,000 with a 6 year useful life and 20,000 salvage value and uses the double-declining balance method for depreciation. Calculate depreciation expense for all years using the double declining balance method. Suppose the company switched to straight line method starting from year 4, what would be the depreciation expense each year?

Year Allocation base Depreciation Accumulated depreciation Net book vale 1 100,000 33,333 33,333 66,666 2 66,666 22,222 55,555 44,444 3 44,444 14,815 70,370 29,630 4 29,630 9,630 80,000 20,000 5 6 29,630-20,000 / 3 = 3,210

Trade Discounts

certain percentage of the original price. The bottom line price is used in all journal entries

Quick assets

exclude inventories and prepaid assets from current assets.

Current ratio definition

expresses working capital as a ratio that allows for inter-firm comparisons.

Debt to equity ratio

indicates the extent of reliance on creditors, rather than owners, in providing resources. Total Liabilities / Shareholders' equity

notes receivable

is used to obtain immediate cash from a financial institution (either selling the receivables or using them as collateral) the arrangement is called discounting. Similar to accounts receivable, if the three conditions for sale treatment are met, then the transfer is accounted for as a sale. If the conditions are not met, the transfer is treated as a secured borrowing.

Things to consider when selecting a Depreciation Method

o Proper matching of revenues and expenses (activity-based). o Bookkeeping costs (straight line seems easiest). o Tax effect (book method and tax method can differ).

acid-test ratio

provides a more stringent indication of a company's ability to pay its current obligations.

Purchase discounts

reduce "Purchases" under the periodic system and "Inventory" under the perpetual system. Buyer can use the Gross or Net Method to record the transactions.

Purchase returns

that take place reduces "Purchases" under the periodic system and "Inventory" under the perpetual system. Contra-purchase account.

Working capital

the difference between current assets and current liabilities, is a popular measure of a company's ability to satisfy its short-term obligations.

Available-for-Sale Securities (AFS)

• Available-for-sale securities are: o Debt securities that are not held until maturity and are not classified as trading securities. o Equity securities comprising of less than 20% ownership of a particular entity and not considered trading securities. • These are recorded initially at cost. • Unrealized gains and losses (difference between book value and year end market value) are reported in other comprehensive income (stockholders' equity) but are not reported on the income statement. • Adjustments are recorded in a valuation account called Fair Value Adjustment, or directly to the investment account. • When available-for-sale securities are sold, gains or losses are computed based on the difference between original cost and selling price. • The balance in Fair value Adjustment has to be recalculated each year to adjust for sales and market value changes. • NOTE: When we add "Other Comprehensive Income" to "Net Income" we refer the result to Comprehensive Income".

Activity Based Method

• Depreciation is calculated based on usage rather than time. • If usage can be properly measured, this can be economically the most meaningful depreciation method (because it matches expenses with revenues better).

Depreciation

• Depreciation is the process of reducing the value of an asset and allocating it to expense over its useful (service) life in a rational and systematic manner. • Such cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle. • Depreciation Terms: o Depreciation is the allocation of long-term tangible assets. o Depletion is the allocation of natural resources. o Amortization is the allocation of intangible assets.

IFRS

• IAS No. 39: Fair Value through Profit & Loss (PVTPL, similar to TS), AFS, HTM • IFRS No. 9, required after January 1, 2018, eliminates AFS and HTM, replaced by more restrictive new classifications

Large Equity Ownership: Over 50% (Controlling Interest)

• If the investor company holds over 50% of an investee company, the investor company has complete control of the investee company. In this case the investee company is considered a subsidiary of the investor company (called a parent company). • Consolidated financial statements have to be prepared in this case.

Exception to the Equity Method

• In some cases even with 20-50% ownership an investor may not be able to exercise significant influence. This can happen if: o The investee challenges the investor's ability to exercise significant influence through litigation or other methods. o The investor surrenders significant shareholder rights in a signed agreement. o The investor is unable to acquire sufficient information about the investee to apply the equity method. o The investor tries and fails to obtain representation on the board of the investee

Depreciation Calculation

• Information needed to calculate Depreciation: Cost of the item. Salvage (residual) value. [Allocation base = Cost - salvage] Service life (or useful life). Allocation Method (or depreciation method): Time based or activity based. o Depreciation Methods: Straight line Method. Decreasing Charges, Methods (Accelerated Methods): • Declining balance Method. • Sum of the years' digit method. Activity based method. Other methods: (Group and composite methods; Hybrid or combination methods.

Amortization of intangibles

• Intangible assets with finite life (such as patents, trademarks) are amortized over useful life, usually using the straight line method. • Goodwill, which is expected to have an infinite life, is not amortized but is subject to impairment.

Investments

• Investments refer to the ownership of debt and equity securities of other enterprises (corporations, US Government etc.). • Investment in debt securities refer to the ownership of corporate bonds and notes, US Treasury securities, municipal bonds etc. • Investment in equity securities represents an ownership interest in another entity (common stock, preferred stock etc.). • Accounting depends on how long the company plans to hold the investment (debt or equity securities) and on the nature of influence (interest) in the investee company (equity securities).

Types of Subsequent Expenditures

• Repairs and Maintenance: Expenditures made to maintain the life and productivity of the asset (not increase it). These costs are expensed as they are incurred. • Additions: Involves adding a major new component to the existing asset. These increase the output of the asset and consequently these costs are capitalized into the price of the asset. • Improvements: This involves replacing a major component of the asset resulting in more or better output. These costs are capitalized into the price of the asset. • Rearrangements: Expenditures made to restructure the asset without addition, replacement or improvement. These costs can be expensed or capitalized depending on circumstances. • Costs of Defending Intangible Rights: o If intangible right is successfully defended, litigation costs should be capitalized and amortized (even if intangible asset was originally developed internally) o If defense of an intangible right is unsuccessful, then, the litigation costs should be expensed and the book value of the intangible asset should be reduced to realizable value For example, if a company is unsuccessful in defending a patent infringement suit, the book value of the patent should be written off as a loss.

Finite Life Assets to be Held

• SFAS 144 states that assets should be identified for possible impairment if events or changes in circumstances indicate that the book value of the asset or asset group is not recoverable. o Step 1: Apply Recoverability Test: If sum of the estimated future cash flows (undiscounted) from the asset (including disposal) is greater than or equal to the net book value of the asset then no impairment is needed. Otherwise continue to step 2. o Step 2: Get the fair market value of the asset. If this is not available, calculate the discounted value of the estimated future cash flows. o Step 3: Record impairment • = Net Book value - FV/estimated value.

Held to Maturity Securities (Debt Only)

• Securities a company plans to hold until it matures. • The following two conditions have to be satisfied: (1) the company has a positive intent to hold until maturity and (2) the company has the ability to hold these securities to maturity. • Since equity securities have no maturity, this applies only to debt securities. • Debt securities held to maturity are recorded at present value (amortized cost). • Interest is calculated using the effective interest method. • Do not recognize unrealized holding gains and losses.

Trading Securities (TS) (Equity and Debt)

• Securities that are held with the intention of selling in the near term in order to generate profits. • Both debt and equity securities can be classified as trading securities. • Few companies, outside of financial institutions engage in such frequent trading. • Trading securities are initially recorded at cost. • Unrealized holding gains and losses (calculated as the difference between acquisition value and value at year end) are reported on the income statement.

Subsequent Expenditures

• Subsequent to the acquisition, many operational assets require expenditures for repairs, maintenance, and improvement. • Such expenditures can either be capitalized into the price of the asset or expensed as they are incurred. • Expenditures can be capitalized if they are expected to produce benefits beyond the current year. • Such future benefits exist if any of the following happens: o The useful life of the asset is extended. o Operational efficiency of the asset is increased. o The quality of the goods or services produced increases

LIFO Conformity Rule

• The Internal Revenue Service regulations for federal income tax stipulate the LIFO conformity rule • The LIFO conformity rule requires that if a company uses LIFO to measure its taxable income, the company must also use LIFO to measure financial income reported to investors and creditors.

Depletion of natural resources

• The act of allocating the cost of natural resources over multiple periods is called depletion. • Depletion Calculation: o Depletion cost per unit = (cost - salvage) / total estimated units. o Depletion for the year = (depletion cost per unit)x(number of units used during the year).

Declining Balance method depreciation

• The declining-balance method records depreciation expense based on a fixed percentage of the current book value of the asset. • Book value = Cost - accumulated depreciation of the asset. • This method produces decreasing annual depreciation expense over the useful life of the asset. Such a method is called an accelerated-depreciation method. • The double declining balance method calculates the fixed percentage as twice the straight line rate. • Under the declining balance method the numbers are calculated using net book value of the asset and not the depreciation base. Consequently you should make sure that total depreciation does not exceed the depreciation base. • In some cases the company may switch from the declining balance method to straight line halfway through the asset's useful life. Otherwise in some years no depreciation might be recorded or too much depreciation might have to be recorded at the end to "catch up".

Loss is projected on the entire project.

• Total loss is when estimated total cost on the project is greater than contract price in any year. • If the contract is expected to result in a total loss on the entire project, the total loss must be fully recognized immediately in the period in which that loss becomes evident. • Adjustments must be made for gross profit recognized in previous periods.

Straight Line Method:

• Under the straight-line method, Depreciation is the same for each year of the asset's useful life. • The depreciable cost is the total amount subject to depreciation and is computed as follows: (Cost - salvage). • Depreciation expense is recorded over useful life as • Depreciation expense = (Cost - salvage value)/ Number of useful years