Acct 313 Exam 3 - Chap 8/9, 10, 11
(10) Examples of Non-cash Acquisitions On April 1, 2014, Kelly Clarkson Corporation purchases a new truck from a used car dealer. What should the journal entry be if: (a) The truck has a list price of $16,000 and is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for $15,200. Clarkson uses a perpetual inventory system. (b) The truck has a list price of $14,000 and is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of $10 and a market price per share of $13.
(a) Truck 15,200 *computer usually sells for 15,200 so it was the best estimate for true price of exchange _______Sales Revenue 15,200 COGS 12,000 _______Inventory 12,000 (b) Truck 13,000 *market price is the best estimate for true price of exchange _______Common Stock @ Par 10,000 _______PIC in Excess of Par 3,000
(Journal Entry) On January 1, 2020, CB Power Inc. purchased land and a power plant located next to the DCA River. CB purchased the land for $2,000,000 and the power plant for $18,000,000. CB is obligated to decommission and remove the power plant after 20 years. There is a 30% likelihood the costs of decommissioning and removal will be $1,500,000, and a 70% likelihood the costs will be 2,000,000 (the power plant has no salvage value). Provide the journal entries for the acquisition of the assets and all the journal entries related to the asset on December 31, 2020 (CB uses straight-line depreciation and their credit-adjusted risk-free rate is 8%).
1) Land 2,000,000 ______Cash 2,000,000 2) Plant 18,396,914 ______Cash 18,000,000 (purchase price plus PV of ARO) ______Asset Ret. Liability 396,914 3) Depreciation Exp. 919,846 ______Accum. Depreciation 919,846 4) Accretion Exp. 31,753 ______Asset Ret. Liability 31,753
(Journal Entry&Depreciation) On July 1, 2021, Firm JJ purchased another machine for $80,000. There were no shipping or installation costs associated with this machine, and the machine has a useful life of 8 years with no salvage value. If Firm JJ uses the sum-of-the-years'-digits method of depreciation, what would the journal entries for depreciation be for this machine on December 31, 2021, and December 2022, respectively?
12/31/21 Dep. Expense 8,889 ______Accum. Dep. 8,889 12/31/22 Dep. Expense 16,667 ______Accum. Dep. 16,667
(Journal Entry&Depreciation) On January 1, 2021, Firm LL paid $82,000,000 for a silver mine owned by the state of Minnesota. As part of the purchase, Firm LL agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. Firm Ll expects to extract solver from the mine for five years at which point it will restore the land. The value of the land at the end of the extraction period (salvage value) is $32,000,000. Assume that Firm LL extracts one-fifth of the silver each year and therefore uses a straight-line method of depletion. Firm LL's Credit-adjusted risk-free interest rate is 7% and it estimated the possible cash flows for restoring the land, five years after its extraction activities begin, to be the following: Cash outflow___Probability 5,000,000___35% 7,500,000___65% A) Provide the journal entries Firm LL would have made to account for the initial acquisition of the mine on Jan 1, 2021. B) Provide the adjusting journal entries Firm LL makes on Dec 31, 2021, related to the asset as well as the retirement obligation C) What will the book value of the asset retirement obligation be one year before the asset is retired?
5,000,000___35% = 1,750,000 7,500,000___65% = 4,875,000 = 6,625,000 discount 5 yrs @ 7% = 4,723,533 A) Silver Mine 86,723,533 ________Cash 82,000,000 ________Asset Ret. Ob 4,723,000 B) Dep. Expense 10,944,707 ( (86,723,533 - 32mil ) / 5) ________Accum. Dep. 10, 944,707 Accretion Expense 330,647 _______Asset Ret. Ob 330,647 (6,625,000 discounted 4 yrs @ 7yrs minus beginning ARO value) C) 6,625,000 discounted 1 yr @ 7% - 6,191,589
(10) Example of Accounting for AROs On January 1, 2016, the Winder Mining Co. paid $50 million for a copper mine owned by the state of Wyoming. To obtain the mine, Winderl agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. The mine has a useful life of three years with a salvage value of $20 million. Winderl uses the straight-line method of depreciation. The company's credit-adjusted risk-free interest rate is 6%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: Cash outflow_______Probability $ 5 million______________40% $10 million______________60% What journal entry should Winder makes for the initial acquisition of the copper mine? On December 31, 2016? On January 1, 2019, assuming that it pays $6,000,000 to restore the land on that date?
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(LIFO liquidation) Briefly explain a LIFO liquidation and its effects on net income. Are the net income effects temporary or persistent? Explain why.
A LIFO liquidation is the result of a LIFO firm working down to older and lower layers of inventory costs. These occur when less inventory is purchased than sold, and the result is a temporary increase in net income (due to the temporarily lower COGS). The increase is temporary because eventually the firm will have to purchase more inventory and COGS will then increase.
(11) Dispositions and Exchanges
A company may retire or dispose of assets through sale, exchange, or abandonment. Recognize up to the date of disposal. Depreciation/Amortization expense ______Accumulated depreciation/amortization Derecognize disposed asset and related accumulated depreciation/amortization account. Recognize gain or loss on disposal for the difference between the book value of the asset given up and the fair value of the consideration received for it Cash (or other asset) Accumulated depreciation Loss on sale of asset, where appropriate ______PP&E ______Cr. Gain on sale of asset, where appropriate
(Goodwill) On Jan 1, 2020, Firm OO acquires Firm QQ for $6,560,000 in cash. The total fair value of Firm QQ's identifiable assets is $12,750,000 and the total fair value of their identifiable liabilities is $6,830,000. A) What is the value of Goodwill Firm OO should record at the time of the acquisition? B) At the time of the acquisition, Firm QQ became the QQ Division of Firm OO. At the end of 2021, the carrying value of the QQ Division (including Goodwill) is $6,100,000, the sum of the expected future net cash flows of the QQ Division is $6,650,000, and the fair value of the QQ Division (including Goodwill is $5,850,000. Record the journal entry, if any, Firm OO would record for impairment of the Goodwill associated with the QQ acquisition.
A) 12,750,000 - 6,830,000 = 5,920,000 6,560,000 - 5,920,000 = 640,000 B) Goodwill Write-down 250,000 __________Goodwill 250,000 6,100,000 - 5,850,000 = 250,000
(Impairment Loss) Assume Firm UU (also known as Firm W) makes inventory impairment decisions on an individual product basis (i.e. for each Item No.). A) Given the following inventory information at the end of 2021, what summary journal entry, if any, would Firm UU record for inventory impairment? 106B - 450 Units - FIFO - $16 per unit - $ 15 replacement costs - $23 selling price - $4.50 costs to complete sale - $5.50 normal profit 792Z - 600 Units - LIFO - $18.50 per unit - $17 replacement costs - $22.50 selling price - $2 costs to complete sale - $3 normal profit B) Does Firm UU follow IFRS? Explain.
A) Loss of Inventory Impairment 600 ______Inventory 600 106B = no write down since cost is greater than NRV 792Z = write down since cost is greater than 17.50 B) No, IFRS does not allow LIFO
(Journal Entry) Record the journal entry Firm 11 would make for each of the following: A) Firm 11 spends $100,000 on research aimed at developing a new product B) Firm 11 spends $40,000 to refurbish a machine in its manufacturing plant. The refurbishing of the machine extends the machine's useful life by 4 years C) Firm 11 spends $2,500 to have its fleet of delivery vans serviced
A) R&D Expense 100,000 __________Cash 100,000 B) PP&E 40,000 __________Cash 40,000 C) Maintenance Expense 2,500 __________Cash 2,500
(11) Example of Activity-based method & Straight-line method
Activity-based method Cost = 1,000 Salvage Value = 100 Total Estimated Units = 100,000 Units this year = 10,000 = (1,000 - 100) * (10,000/100,000) = 90 Straight-line method Cost = 1,000 Salvage Value = 100 Service Life = 9 years = (1,000-100)/9 = 100 every 9 years
(11) Changes in Depreciation Estimates or Methods
Adjust depreciation for current and subsequent periods based on new estimates/methods. Do not change previously reported results. For example, for straight-line depreciation method: Deprecation charge = (remaining book value less salvage value)/(remaining estimated service life) For changes in depreciation methods, companies must explain why new method is preferable.
(10) Costs of PP&E and Intangible Assets
All expenditures made to acquire/construct the asset and bring it to the location and condition necessary for its intended use. Examples: purchase price; closing costs; professional fees; grading, filling, draining, and clearing of land; freight; insurance during transit; assembly and testing costs. Improvements to land with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as Land Improvements and depreciated. Natural resources: acquisition, exploration, development, and restoration costs. Self-constructed buildings and equipment: all costs incurred during construction, including materials, labor, and an allocation of overhead.
(8/9) Periodic system example
COGS = x Inventory (EB) 180,000 _____Inventory (BB) 120,000 _____Purchases 600,000 x= 720,000 - 180,000 = 540,000
(11) Example of Exchanges of Assets Carlos Company exchanged equipment used in its manufacturing operations plus $5,000 in cash for similar equipment used in the operations of Tony Company. The following information pertains to the exchange. What journal entries should Carlos and Tony make to record the transaction? ______________________________________________Carlos _________Tony Equipment (cost)______________________$40,000_______$45,000 Accumulated depreciated_________$12,000________$14,000 Fair Value of equipment_____________$29,000________$34,000 Cash given up__________________________$5,000
Carlos: Equipment 34,000 (fair value of received) Accumulated Depreciation 12,000 Equipment 40,000 Cash 5,000 Gain on Exchange 1,000 Tony: Cash 5,000 Equipment 29,000 Accumulated Depreciation 14,000 Equipment 45,000 Gain on Exchange 3,000
(11) Depreciation/Amortization Review
Concept: PP&E and intangible assets are usually purchased with the expectation that they will provide benefits over several years. The value of the asset is consumed over time and this cost needs to be recognized for the related periods. Instead of measuring the value reduction directly, we allocate the cost of long-lived assets to expense in a systematic manner to those periods expected to benefit from the use of the asset. The term depreciation is used for PP&E, depletion for natural resources, and amortization for intangible assets. Land and indefinite-lived intangible assets (including goodwill and IPR&D) are not depreciated/amortized. Depreciation Expense XXX ______Accumulated Depreciation (contra asset) XXX Amortization Expense XXX ______Intangible Asset XXX (use of the contra asset Accumulated Amortization is permitted but not common)
(Journal Entry) On January 1, 2020, Firm CDB borrowed $2,000,000 at 6% to finance the construction of a warehouse for its own use. CDB concluded construction on December 31, 2020. They started construction of the warehouse on April 1 and concluded on December 31. During 2020, they made the following expenditures on the warehouse: April 1 - $250,000 July 1 - $1,000,000 October 1 - $400,000 December 31 - $100,000 CDB also had the following debt outstanding during all of 2020: a $1,500,000 note at 7%; a 2,000,000 note at 6%; and a 7% note at $1,500,000. All interest payments for CDB occur on December 31. Prepare the summary journal entry to record the interest costs incurred by CDB during 2020.
Construction in Progress (or Building) 47,250 Interest Expense 402,750 ______Cash 450,000
(8/9) When the current utility of inventory is less than its cost (e.g., due to damage, physical deterioration, obsolescence, changes in price level), the decline in value is recognized as a loss in earnings in the period in which it occurs:
Cost-of-Goods-Sold Method _COGS _____Inventory Loss Method _Loss on write-down of inventory _____Inventory Some companies credit an allowance account rather than directly reducing the inventory balance. Companies usually determine whether a decline in the value of inventory has occurred on an item-by-item basis, but can also do so for categories of inventory or total inventory as long as the method chosen is applied consistently from period to period
(11) Example of changes in depreciation methods Holt Company purchased a computer for $8,000 on January 1, 2013. Straight-line depreciation is used, based on a 5-year life and a $1,000 salvage value. In 2015, the estimates are revised. Holt now feels the computer will be used until December 31, 2016, when it can be sold for $500. Holt prepares annual financial statements with a December 31 year end. Compute the 2015 depreciation.
Cost: 8,000 Salvage Value: 1,000 Life: 5 2012 = (8,000 - 1,000) / 5 = 1,4000 2013 = 1,400 2014 = 1,400 2015 = (5,200 - 500) / 2 = 2,350
(Journal Entry) Firm DB pays $5,000 in cash to develop its own customer database with demographic and purchase-related information. Firm DB expects the database to generate positive cash flows for 6-7 years. Provide the journal entry Firm DB would record for the expenditure.
Customer list expense 5,000 (or some other expense) _____Cash 5,000
(11) Example of Declining-balance method & Sum-of-the-years'-digits method
Declining-balance method Cost = 1,000 Salvage Value = 100 Service Life = 9 years Yr 1: 1,000 * 2/9 = 222 of Dep Exp. Yr 2: (1,000-222) * 2/9 = 173 of Dep Exp. Sum-of-the-years'-digits method Cost = 1,000 Salvage Value = 100 Service Life = 9 years Yr 1: (1,000 - 100) * 9/(9(10)/2) = 900 * 9/45 = 180 Yr 2: (1,000 - 100) * 8/45 = 160
(Journal Entry&Depreciation) Based on the information in question #16 above, how would the journal entries for the depreciation expense at the end of 2019 and 2020 change if Firm AB purchased the equipment on July 1 of 2019?
Depreciation Exp. 23,750 ______Accum. Depreciation 23,750 Depreciation Exp. 35,625 (23,750 + 11,875) ______Accum. Depreciation 35,625
(Journal Entry&Depreciation) On January 1, 2019, Firm AB purchased a machine for $92,000. They paid $2,000 to have the machine shipped to their manufacturing plant and $1,000 to have it installed. The machine can be sold for scrap at the end of its four-year useful life and Firm AB anticipates receiving $4,000 for the scrap, but it will cost $1,000 to disassemble and haul the machine to the scrap yard. Firm AB depreciates the machine using the double-declining balance method. Record the journal entries associated with the purchase of the equipment and the depreciation expense at the end of the 2019 and 2020.
Equipment 95,000 ______Cash 95,000 Depreciation Exp. 47,500 ______Accum. Depreciation 47,500 Depreciation Exp. 23,750 ______Accum. Depreciation 23,750
(10) Characteristics of Property, Plant, and Equipment (PP&E)
Examples: land, building structures (offices, factories, warehouses), equipment (machinery, furniture, tools). Acquired for use in operations and not for resale (inventory) or speculation (investments). Long-term in nature and usually depreciated. Exception is land, which is not depreciated. Possess physical substance.
(8/9) Period costs generally are expensed in period incurred
Examples: selling costs (marketing), and administrative costs. Exception: interest costs related to assets produced as discrete long-term projects
(Turnover ratio) The inventory turnover ratio is calculated as COGS / (Average Inventory) where Average Inventory is (Beginning inventory + Ending inventory) / 2. Firm A values inventories on the LIFO basis and has a COGS of 16,980 for 2020. Calculate Firm A's inventory turnover ratio on a FIFO basis. _____________________2020_______2019 Raw Materials_______1,250_______1,100 WIP___________________675_______690 Finished Goods_________2,630_______XXXX Total FIFO value___________4,555_______XXXX Less adjustment to LIFO______890_______820 Total LIFO value____________3,665_______3,780
FIFO ratio = 16,910/(4555+4600)
(Capitalization) Research and development costs incurred to generate a patent are only capitalized if there is a sufficiently high probability the project will actually produce a patent. (True of False)
False (R&D costs to develop a patent are not capitalized)
(Inventory) Target sells a warehouse for cash. They should record the following journal entries: Cash 14,500,000 ______Revenue 14,500,000 COGS 12,000,000 ______Warehouse 12,000,000
False because the warehouse is not inventory. The journal entry should be... cash 14,500,000 accumulated depreciation XX ______ warehouse 12,000,000 ______ gain (or debit loss) XX
(Intangibles) If the PPE of an intangible asset is acquired in exchange for something other than cash, the cost of the acquired asset is equal to the book value of the consideration given or the book value of the asset acquired, whichever is more clearly evident. (True/False)
False, IFRS companies may choose to measure PP&E and limited-life intangible assets at either cost (as required under U.S. GAAP) or at fair value.
(LIFO conformity rule) Many firms use LIFO for tax purposes and FIFO for financial reporting purposes (True or False)
False, companies would like to do this, but the LIFO conformity rule does not allow it.
(11) Depreciation/Amortization for Partial Periods
General approach: determine depreciation expense for full year and then prorate this depreciation expense between the two periods involved (on the basis of the nearest full month). Other variations: ◦Full year of depreciation in year of acquisition and none in year of disposal. ◦Full year of depreciation in year of disposal and none in year of acquisition. ◦One-half year of depreciation in both year of acquisition and year of disposal. Partial Year (one) Depreciation Step 1. Calculate a normal year-one depreciation expense Step 2. Allocate part of the expense to year-one based on the number of months you own the asset Step 3. The remaining expense is allocated to the next year (alongside the the full amount of that year's depreciation) Step 4. Repeat this process
(11) Impairment of Goodwill
Goodwill is not amortized because it is considered to have an indefinite life. Goodwill must be assessed for impairment at least annually. Compare the fair value of the reporting unit to its carrying amount, including goodwill. ◦If the fair value exceeds the carrying amount, there is no impairment. ◦If the fair value is less than the carrying amount, record the difference as an impairment loss. ◦The amount of the impairment loss is limited to the amount of goodwill allocated to the reporting unit. Impairment Loss XXX _____Goodwill XXX
(10) Initial Accounting: Assets Acquired in a Business Combination (Including Goodwill)
Identifiable intangible assets are recognized by the acquirer even if they were not previously recognized by the acquiree (e.g., an internally created customer list). goodwill is measured as the excess of the cost of the purchase over the fair value of the identifiable net assets (assets less liabilities) purchased. Steps for Aquisition: 1)Identify ALL assets and liabilities of the target 2)Determine fair values of assets and liabilities (fair value = price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants) 3)Record assets and liabilities at fair value (on your balance sheet/on your books) 4)Record goodwill ( = excess of the purchase price over the fair value of the net assets: which is the assets over liabilities) - if the fair value of the net assets is higher than the purchase price record a "Bargain Purchase Gain"
(Impairment Loss) Firm CA has a trademark with a book value of $2,400,000 (it acquired the trademark in an acquisition). Firm CA expects the sum of the net cash flows (undiscounted) generated by the trademark to be $2,500,000. The fair value of the license is assessed to be $2,300,000. What journal entry, if any, would Firm CA make to record a loss on impairment?
Impairment Loss 100,000 ______Trademark 100,000
(11) Example of Impairment of Goodwill Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division's net assets, including the goodwill, have a carrying amount of $800,000. Assume that the fair value of the division is estimated to be $750,000 and the fair value of the identifiable net assets (other than goodwill) is $425,000. Prepare Waters' journal entry, if necessary, to record impairment of the goodwill.
Impairment Loss 50,000 ______Goodwill 50,000 *can't be over the $400,000 of recorded goodwill
(11) Example of Impairment of Indefinite-Life Intangible Assets Kenoly Corporation owns an indefinite life broadcast license that has a carrying amount of $200,000. Kenoly expects future net cash flows from this license to total $210,000. The fair value of the license is $110,000. Prepare Kenoly's journal entry, if necessary, to record the loss on impairment.
Impairment loss 90,000 _________Intangible asset 90,000
(10) Interest Costs During Construction
In general, interest is recognized as an expense in the period in which it is incurred. However, companies are required to capitalize interest costs incurred during the construction of PP&E. Consistent with concept that historical cost of an asset includes all costs (including interest) incurred to bring asset to the condition and location necessary for its intended use. ◦Once construction is complete, the asset is ready for its intended use and can be used to generate revenues. At this point, interest is reported as an expense.
(10) Interest Capitalization: Effects on Financial Statements
Interest expense PP&E/Construction in progress (CIP) ________Cash/interest payable Reduces interest expense in the period in which the interest is capitalized, but increases depreciation expense in current and future periods. Companies must disclose total interest cost incurred during the period, as well as the portion charged to expense and the portion capitalized. This will be on the face of the income statement or in the notes to the financial statements.
Write Down of Inventory for U.S GAAP Companies Using LIFO
Inventories measured using LIFO or the retail inventory method are reported at the lower of cost and market value at each reporting period under U.S. GAAP. Cost: acquisition price of inventory computed using the LIFO cost flow assumption. Market value: the middle of the following three amounts ◦Replacement cost: cost to replace the item by purchase or reproduction. ◦Net realizable value (ceiling): estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ◦Net realizable value less a normal profit margin (floor).
Write Down of Inventory for U.S GAAP Companies Using Average Cost or FIFO and all IFRS Companies
Inventories measured using a method other than LIFO (or the retail inventory method) are reported at the lower of cost and net realizable value (NRV) at each reporting period under U.S. GAAP. Under IFRS, all inventories are reported at the lower of cost and net realizable value (NRV). (Important: IFRS does not permit LIFO.) Under IFRS, a write-down in the value of inventory may be reversed in a subsequent period (i.e., inventory may be written back up to its original cost) if net realizable value has increased. U.S. GAAP does not permit reversals of inventory write-downs.
(10) Example of Recognition of Goodwill On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $425,000. At the time of purchase, Aumont's assets and liabilities were as follows: Item_____________________________________Carrying Value_____Fair Value Inventory________________________________50,000____________55,000 Building__________________________________250,000___________225,000 Equipment_______________________________85,000____________90,000 Internally Generated Trademark_____0________________65,000 Accounts Payable_____________________30,000____________30,000 Prepare the journal entry to record the purchase. How would your answer be different if Winan's Corporation paid $350,000 for Aumont?
Inventory 55,000 Building 225,000 Equipment 90,000 Trademark 65,000 *doesn't show up on their balance sheet Goodwill 20,000 (leftover amount between credit and debits) _______Cash 425,000 _______A/P 30,000
(8/9) LIFO formulas
Inventory FIFO - LIFO Reserve = Inventory LIFO Inventory Turnover Ratio : COGS / (Beg. Inventory + End. Inventory / 2)
(8/9) Inventory Case -What costs are included in inventory and COGS as opposed to SG&A? -Does allocating a cost to COGS vs. SG&A affect net income? -Why might a company want to keep costs out of COGS? Why might a company want to include costs in COGS as opposed to SG&A?
It is not clear cut as to what to put in COGS and SG&A
(8/9) Inventories
Items that a company holds for sale in the ordinary course of business or materials that will be consumed in the production of goods to be sold
(Journal Entry) On Jan 1, 2020, Firm ZZ borrowed $3,200,000 at 9% to finance the construction of a warehouse next to its largest distribution center. The warehouse was completed on June 30, 2021. During 2020, Firm ZZ made the following expenditures on the warehouse: Jan 1, 2020 - $1,000,000 May 1, 2020 - $1,500,000 Sept 1, 2020 - $2,000,000 Dec 1, 2020 - $1,500,000 June 30, 2021 - $100,000 Firm ZZ also had the following debt outstanding during all of 2020 and 2021: an $8,000,000 note at 8% and a $2,000,000 note at 9%. All interest payments for Firm ZZ occur on December 31 and are paid in cash. A) Prepare a summary journal entry to record the interest costs incurred by Firm ZZ during 2020. B) Prepare a summary journal entry to record the interest costs incurred by Firm ZZ during 2021.
Jan 1, 2020 - $1,000,000 x 4/12 = 333,333 May 1, 2020 - $2,500,000 x 4/12 = 833,333 Sept 1, 2020 - $4,500,000 x 3/12 = 1,125,000 Dec 1, 2020 - $6,000,000 x 1/12 = 500,000 = 2,791,666 @ 9% = 251,250 A) CIP 251,250 Interest Exp. 856,750 _______Cash 1,108,000 (interest on all debt) B) CIP 269,101 Interest Exp. 838,899 _______Cash 1,108,000 6,000,000 + 251,250 = 6,251,250 split into... 3,200,000 x 9% x 6/12 = 144,000 3,051,000 x 8.2% x 6/12 = 125,101
(8/9) Other LIFO Considerations
LIFO can result in tax benefits (due to higher COGS and lower net income) when price level increases. ◦LIFO conformity rule: if company uses LIFO for tax purposes, it must also use LIFO for financial reporting. LIFO reserve: the difference between the FIFO inventory values and LIFO inventory values. LIFO liquidations: when inventory levels decline during a period, noncurrent costs of inventory (COGS) will be matched with current selling prices. Companies must disclose the material effects of LIFO liquidations on net income. LIFO is not permitted under IFRS.
(LIFO&FIFO) Firm C uses the LIFO cost flow assumption and on December 31, 2020 (the last day of the fiscal year) has 1,000 units of inventory with a cost of $50 per unit. Firm C makes the following assessments related to its inventory: (a) replacement cost is $45 per unit; (b) net realizable is $48; (c) normal profit margin is $6 per unit. What journal entry, if any, would Firm C make related to its inventory? What journal entry, if any, would Firm C make if it measured its inventory using FIFO?
LIFO: Loss on inventory write-down/COGS 5,000 ______Inventory 5,000 FIFO: Loss on inventory write-down/COGS 2,000 ______Inventory 2,000
(10) Characteristics of Intangible Assets
Lack physical existence (e.g., patent or trademark). Instead, they derive value from the rights and privileges granted to the company owning them. They are not financial instruments (e.g., investments in stock and bonds, accounts receivable, bank deposits), which derive value from the right to receive cash or cash equivalents in the future. Normally provide benefits over a period of years and thus are classified as long-term.
(10) Example of Basket Purchase Schwartzkopf Co. purchased for $2,200,000 property that included both land and a building to be used in operations. The land and building do not meet the definition of a business. The seller's book value was $300,000 for the land and $900,000 for the building. By appraisal, the fair value was estimated to be $500,000 for the land and $2,000,000 for the building. What journal entry should Schwartzkopf make to record the acquisition of the land and building?
Land 440,000 Building 1,760,000 _______Cash 2,200,000 Relative fair value: 500,000 / (500,000 + 2,000,000) = 20% 2,000,000 / (2,000,000 + 500,000) = 80%
(10) Asset Retirement Obligations (AROs)
Legal obligations associated with the disposition of PP&E and natural resources. Become part of the cost of the related asset. Example: oil and gas company has to restore land to original condition after extraction. AROs are reported on the balance sheet at fair value. The fair value of AROs is often estimated by calculating the present value of expected future cash outflows, discounted using a credit-adjusted risk free rate
(10) Interest Capitalization: Amount
Lower of avoidable interest (amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset) or actual interest cost incurred during the period. Note: interest capitalization does not require that funds actually be borrowed for the specific construction project, only that the company has outstanding debt. ◦The presumption is that even if the company doesn't borrow specifically for the project, funds from other borrowings must be diverted to finance the construction. GAAP requires interest capitalization for a qualifying asset only if its effect, compared with the effect of expensing interest, is material. Step 1: Compute weighted-average accumulated expenditures. ◦Weight construction expenditures by the fraction of the accounting period that the company can incur interest cost on the expenditure. Step 2: Compute avoidable interest. ◦For the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings. ◦For the portion of weighted-average accumulated expenditures that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period. Step 3: Compute actual interest cost. Capitalize the lower of actual interest cost incurred during the period or avoidable interest.
(Journal Entry) Firm AC purchased a sorting machine, a stacking machine, and a roller from Machines-R-Us for $2,400,000. The seller's (Machines-R-Us) book values were $300,000 for the sorting machine, 500,000 for the stacking machine, and $300,000 for the roller. At the time of the purchase, the fair values of the machines were estimated to be $600,000 for the sorting machine, $1,400,000 for the stacking machine, and 500,000 for the roller. What journal entry should Firm AC make to record the purchase of the machines?
Machine (sorting) 576,000 Machine (stacking) 1,344,000 Machine (roller) 480,000 _______Cash 2,400,000
(Capitalization) Under U.S. GAAP, when can software development costs be capitalized?
Once technological feasibility has been achieved.
(10) Interest Capitalization: Capitalization Period
Over what period can companies capitalize interest? Capitalization period begins when: ◦First expenditures for asset have been made. (construction progress started) ◦Interest cost is being incurred. Capitalization period ends when the asset is substantially complete and ready for its intended use or interest costs are no longer being incurred.
(Journal Entry) On July 1, 2021, Firm JJ purchased a machine for $80,000 in cash. They paid $1,200 to have the machine shipped to their manufacturing plant for use and $800 to have it installed. The machine has a useful life of 8 years and the company can sell the machine for $2,400 to a scrap yard at the end of the machine's useful life, but it will cost $600 to remove the machine and transport it to the scrap yard. Provide the appropriate journal entry for the purchase.
PPE 82,000 ______Cash 82,000
(11) Example of Impairment of PP&E and Finite-Life Intangible Assets Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss. How would your answer differ if the carrying amount of the equipment was $480,000?
PPE w/ cost = $900,000 Accum Dep = 380,000 Carrying book value = 520,000 1)Sum of undiscounted future net cash flows of asset = 500,000 *since it is lower than 520,000 there is an impairment loss 2)Sum of discounted future net cash flows of asset = 1,000 *500,000 carrying value - 1,000 = 120,000 impairment loss Impairment loss 120,000 PPE 120,000 No entry for $480,000 since 500,000 is greater than it
(11) Example of Impairment of PP&E and Finite-Life Intangible Assets
PPE w/ cost = 1,000 Accum Dep = 500 Carrying book value = 500 1)Sum of un-discounted future net cash flows of asset = 400 *since it is lower than 500 there is an impairment loss 2)Sum of discounted future net cash flows of asset = 300 *500 carrying value - 300 = 200 impairment loss Journal entry method 1: Impairment loss 200 Accum Dep 500 PPE 700 (1000 cost - 300 fair value) Journal entry method 2: Impairment loss 200 PPE 200 Journal entry method 3: Impairment loss 200 Accum Dep 200
(Perpetual) Firm B had 300 calculators on hand at January 1, 2021, costing $16 each. Purchases and sales of calculators during the month of January were as follows: Date - Purchases - Sales 1/12 __________________200 @ $25 1/14___ 150 @ $17 1/29__ 100 @ $18 1/30 ________________150 @ $30 Firm B does not maintain a perpetual inventory record. According to a physical count, 200 calculators were on hand on January 31, 2021. What is the cost of the remaining inventory under the FIFO method? What is the cost of remaining inventory under the LIFO method? What would they be under a perpetual inventory system?
Periodic FIFO Inventory = 3,500 Periodic LIFO Inventory = 3,200 Perpetual FIFO Inventory = 3,500 Perpetual LIFO Inventory = 3,300
(Perpetual) Firm BD had 800 units of inventory on hand on March 1, 2021, each unit with a cost of $8. Purchases and sales on inventory during the month of March were as follows: Date______Purchases______Sales 3/12___________________________600 @ $16 3/14______300 @ $9 3/29______200 @ $10 3/30___________________________350 @ $18 Firm BD maintains periodic inventory records. According to a physical count, 350 units of inventory were on hand on March 31, 2021. What is the value of the remaining inventory at the end of March under the FIFO method? What would the COGS be if Firm BD used LIFO and a perpetual inventory system?
Periodic FIFO: 200 @ 10 + 150 @ 9 = 3,350 Perpetual LIFO: 600 @ 6 + 200 @ 10 + 150 @ 9 = 8,150
(8/9) Average-cost method
Price items in inventory and goods sold on the basis of the average cost of all similar goods available during the period. Examples include weighted average (periodic) or moving average (perpetual).
(10) Summary of Notes
Purchased intangibles are capitalized which includes intangible assets that are inquired in an acquisition or In Process R&D (indefinite life = no amortization) Internally Developed intangibles are NOT capitalized (costs are expensed as incurred) - exceptions -- direct costs such as fees to acquire patent -- software development costs after point of technological feasibility (point where all planning/testing/etc. has been conducted that is required to establish a product that can be produced) ) Research: process of attaining new information Development: turn new knowledge into a product or service
(8/9) Summary of Perpetual Journal Entries
Purchases _Inventory XXX _______Accounts Payable XXX Freight _Inventory XX _______Cash XX Purchase Discounts (Gross Method) _Accounts Payable XXX _______Inventory XX _______Cash XXX Purchase Returns _Accounts Payable XX _______InventoryXX Sales _Accounts Receivable/Cash XXX _______Sales Revenue XXX _Cost of Goods Sold XXX _______Inventory XXX End of Reporting Period _No journal entry
(8/9) Summary of Periodic Journal Entries
Purchases _Purchases XXX _______Accounts Payable XXX Freight _Freight In XX _______Cash XX Purchase Discounts (Gross Method) _Accounts Payable XXX _______Purchase Discounts XX _______Cash XXX Purchase Returns _Accounts Payable XX _______Purchase Returns XX Sales _Accounts Receivable/Cash XXX _______Sales Revenue XXX No journal entry for COGS End of Reporting Period (solving COGS) _Cost of Goods Sold XXX _Inventory (ending) XXX _Purchase Returns XX _Purchase Discounts XX _______Inventory (beginning) XXX _______Purchases XXX _______Freight InXX
(8/9) Extra stuff to know
Purchases increase inventory with a debit balance Freight-in increase inventory with a debit balance Purchase discounts decrease inventory with a credit balance Purchase returns decrease inventory with a credit balance
(10) Initial Accounting of measure PP&E and limited-life intangible assets
Recorded at cost, which is the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use. Example journal entry for acquisition of equipment for cash: Dr. Equipment XXX Cr. Cash XXX The cost of the asset will be allocated to future periods through depreciation or amortization where applicable (discussed in Chapter 11). IFRS companies may choose to measure PP&E and limited-life intangible assets at either cost (as required under U.S. GAAP) or at fair value.
(8/9) Product costs are capitalized as part of inventory
Retailer: purchase price, freight charges, insurance costs while goods are in transit, costs of unpacking. Manufacturer: direct materials, direct labor, overhead (heat, electricity, insurance, taxes, depreciation).
(11) Impairment of PP&E and Finite-Life Intangible Assets
Review asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Step 1: Recoverability Test. If sum of expected future net cash flows (undiscounted) from use of the asset and its eventual disposal is less than the carrying amount of the asset, an impairment loss exists. Step 2: Fair Value Test. The amount of the impairment loss is the carrying amount less the fair value of the asset. ◦Fair value of asset is based on market price, if available, or calculated using the present value of expected future net cash flows. Journal entry (used by the textbook): Impairment Loss (calculated) XXX Accumulated Depreciation (plug) XXX _______PP&E (original cost less current fair value) XXX Impairment Loss (calculated) XXX _______Intangible asset XXX Acceptable alternative journal entry for PP&E impairment: Impairment Loss (calculated) XXX _______Accumulated depreciation or PP&E XXX Under U.S. GAAP, even if the value of the asset increases in future periods, the impairment loss cannot be reversed.
(8/9) Journal Entry for Expected Returns
Sales Return XXX (netted against revenue?) __________Allowance for Returns XXX (netted against A/R) __________or Refund Liability XXX (cash sale) Inventory YYY (est. returns) __________COGS YYY
(Capitalization) What costs should be capitalized into inventory and expensed as COGS?
Shipping costs for inventory that is f.o.b. shipping point Costs associated with receiving inventory shipments (unloading, unpacking, etc.) Salaries of production line workers in manufacturing plants NOT Sales commissions to employees for inventory sales Salaries of retail store managers
(11) Service (Useful) Life
Step 1: What is the asset's useful life? Can be expressed in units of time or units of activity. Depends on physical factors (e.g., wear and tear) and economic factors (e.g., obsolescence, legal life). Estimated based on past experience with similar assets, statistical methods, or arbitrary classifications.
(11) Allocation Base
Step 2: What is the allocation base for the asset? Allocation base = cost - salvage value (total amount of cost to be allocated over an asset's service life). Salvage (residual) value: estimated amount that the company will receive when it sells the asset or removes it from service less any anticipated disposal costs. Note: IFRS requires component depreciation. This means that each part of an item of PP&E that is significant to the total cost of the asset must be depreciated separately (e.g., building is separated into foundation, structure, roof, heating system, elevators, etc.). Under U.S. GAAP, component depreciation is permitted, but rarely used.
(11) Allocation Methods
Step 3: What cost allocation method is best for this asset? Activity-based method (units-of-production approach) ◦Assumes depreciation is a function of use or productivity, rather than the passage of time. ◦Deprecation exp. = (cost-salvage value) x ( units this year) / (total estimated units) Straight-line method ◦Assumes depreciation is a function of the passage of time, rather than usage. ◦Widely used because of simplicity. ◦Deprecation exp. = (cost - salvage value) / (estimated service life)
(11) Other items:
Straight-line depreciation method is the most common method for financial reporting accelerated methods are most common for tax purposes (no conformity rule). Depletion usually determined using units-of-production. Straight-line amortization is most common method for intangibles with finite useful lives. Indefinite-lived intangible assets include Goodwill, IPR&D, and Trademarks (e.g., brand and trade names acquired in business combinations)
(11) Impairment of Indefinite-Life Intangible Assets (Other than Goodwill)
Test for impairment at least annually. Fair Value Test. If fair value is less than carrying amount of an indefinite-lived intangible asset, the asset is impaired. The impairment loss is measured as the difference between fair value and carrying amount. Impairment Loss XXX ______Intangible Asset XXX Companies do not use the recoverability test for indefinite-lived intangible assets. Cash flows might extend indefinitely so some assets might never fail the undiscounted cash flows recoverability test.
(8/9) Specific identification
Track each specific item of inventory and include in COGS when sold. Generally used when a company has a relatively small number of costly, easily distinguishable items (e.g., fine jewelry).
(Depreciation methods) Most companies use accelerated methods of depreciation for tax purposes and the straight-line method for financial reporting. (True or False)
True
(LIFO&FIFO) Firms using the FIFO will have a higher net income and higher inventory values than firms using LIFP in an environment of rising prices. (True/False)
True
(Perpetual) A company using a perpetual inventory system would record the following journal entry for the sale of 100 units (cash sale) at a selling price of $10 a unit and a cost of $6 a unit at the time of the sale: Cash 1,000 _____Sales Revenue 1,000 COGS 600 _____Inventory 600 (True/False)
True
(10) Example of Receipt as Contribution Elcorn Enterprises decided to relocated its office headquarters to the city of Westmont. The city agreed to pay 20% of the $20 million cost of building the headquarters in order to entice Elcorn to relocate. Elcorn paid its portion of the cost of the building in cash. What journal entry should Elcorn record for the acquisition of the building under U.S. GAAP?
U.S GAAP Building 20,000,000 _______Cash 16,000,000 _______Donation Rev. 4,000,000 *temp account, increases net income, closed to net earnings -If PP&E or an intangible asset is received as a donation/gift from another party, recognize the PP&E or intangible asset at the fair value of the asset received and recognize revenue in the period received.
(10) Example of Initial Accounting for Intangible Assets During 2014, McCormick Company purchased a trademark for $50,000. McCormick also embarked on a research program to develop a patent. It incurs $275,000 of research costs, and $250,000 of development costs after economic viability is achieved. Finally, McCormick incurs legal expenses of $60,000 to obtain the patent. What journal entry should McCormick make to record these costs under U.S. GAAP? How would your answer differ under IFRS? What is the effect of the journal entries on the balance sheet? Income statement?
US GAAP Trademark 50,000 Patent 60,000 R&D Expense 525,000 ___________Cash 635,000 IFRS Trademark 50,000 Patent 310,000 (legal and developed) Research Exp 275,000 ___________Cash 635,000
(10) Exception: Internally Created Intangibles
Under U.S. GAAP, the costs associated with research and development activities (R&D) are generally required to be expensed when incurred, even if they lead to the creation of a patent or copyright that provides future value to the firm. ◦Exception: direct costs are capitalized (e.g., legal costs to obtain a patent). ◦Exception: if materials, equipment, or facilities used in R&D activities have alternative future uses, they may be capitalized and depreciated as used in future periods. ◦Exception: software development costs incurred after technological feasibility is achieved may be capitalized. In contrast, IFRS requires capitalization of development costs (i.e., recognition as an intangible asset) once technical feasibility is achieved. Research costs are expensed. *in the early stages of production/research there is a lot of uncertainty about value, so VASB says to expense instead of record
(8/9) Example of Lower of Cost or Market/NRV Item No.-Quantity-Cost per Unit-Replacement Cost-Estimated Selling Price-Disposal Normal Profit 1320 - 1,200 - $3.20 - $3.00 - $4.50 - $0.35 - $1.25 1333 - 900 - 2.70 - 2.30 - 3.50 - 0.50 - 0.50 1437 - 1,000 - 3.60 - 3.10 - 3.20 - 0.25 - 0.90 1626 - 1,000 - 4.70 - 5.20 - 6.00 - 0.50 - 1.00 Assume that the appropriate book value of inventory is determined on an individual product basis. What adjusting journal entry, if any, should be recorded at the end of the reporting period under U.S. GAAP assuming that inventory cost is determined using LIFO? Using FIFO? Under IFRS?
Using LIFO? COGS/Loss on Inventory Write Down 1,070 ______Inventory 1,070 Using FIFO? COGS /Loss on Inventory Write Down 650 ______Inventory 650 Under IFRS? COGS /Loss on Inventory Write Down 650 ______Inventory 650
(10) AROs Journal Entries
When obligation is created (e.g., at time of acquisition or development): _PP&E XXX _______Asset Retirement Liability (fair value) XXX Each reporting period (to record increase in carrying value of ARO due to the passage of time): _Accretion Expense XXX _______Asset Retirement Liability XXX When obligation is settled: _Asset Retirement Liability XXX _Loss (where appropriate) XXX _______Gain (where appropriate) XXX _______Cash XXX
(10) Interest Capitalization: Qualifying Assets
Which assets qualify for interest capitalization? ◦Assets (including buildings, plants, and large machinery) that require a period of time to get them ready for their intended use. ◦Assets that are in use or ready for their intended use do not qualify for interest capitalization. Interest capitalization can also apply to inventory items that are constructed or produced as discrete, long-term projects. Examples include ships and airplanes.
(8/9) LIFO Liquidation Example 1
Year___Purchase/Sold___Units___Cost___COGS/NI 2019______Purchase_________100______$1_________0 / 0 2020_____Purchase__________50______$10_______________ ___________Sell @ $20 _________50______$10____500/500 ____________________________________(50x10) / (50x20 - 500) 2021_____Purchase___________50______$12_______________ 2021_____Sell @ $24________ 50 _____$12____600 / 600 ____________________________________(50x12) / (50x24 - 600) 2022 No Purchases 2022_____Sell @ $2_________ 50_______$1________50 / 1150 ____________________________________(50x1) / (50x24 - 50)
(10) Example of Interest Capitalization Shalla Company started construction of a building for its own operations on January 1, 2014, and completed it on June 30, 2015. Shalla made the following expenditures related to the building: January 1, 2014 - $210,000 March 1, 2014 - $300,000 October 31, 2014 - $240,000 March 1, 2015 - $450,000 June 30, 2015 - $100,000 Shalla had the following debt outstanding all of 2014 and 2015. Annual interest is paid on December 31. 15%, $550,000 loan to finance construction of the building 10%, $400,000 note payable 12%, $600,000 note payable Prepare the summary journal entry(ies) required to record the interest costs incurred by Shalla during 2014 and 2015.
Yr 1 1.210k *2/12 = 35k 510k *8/12 = 340k (210+300=510) 750k *2/12 = 125k (210+300+240=750) = 500k (average expenditure for 2014) 2. 500k * 15% = 75k (avoidable interest) 3. Compare avoidable interest with total interest and take lower as capitalized = 75k *capitalization period starts right away since construction starts and debt is owed CIP 75,000 (capitalized) Interest Exp. 119,500 (difference) ________Cash 194,500 (total of debt) Yr 2 1.750k +75k * 6/6 = 825k *different than method used for yr 1 450k * 4/6 = 300k = 1,125,000 (weighted average Accum. Cost for 6-month window) *last debt not included 2. first 550k * 15% * ½ = 41,250. (1/2 is for 6-month window) remaining 575k * 11.2 % * ½ = 32,200 (400k/(400k+600k) = 40% at 10% = .04 and 60% at 12% = .072) = 73,450 (avoidable interest) CIP 73,450 Interest Expense 121,050 ________Cash 194,500
(8/9) LIFO Liquidation Example 2 Esquire Inc. uses the LIFO method to value its inventory. Inventory at January 1, 2016, was $500,000 (20,000 units at $25 each). During 2016, 80,000 units were purchased, all at the same price of $30 per unit. 85,000 units were sold during 2016 for $100 per unit. Esquire uses a periodic inventory system. Assuming an income tax rate of 40%, what is LIFO liquidation profit or loss that the company would report in a disclosure note accompanying its financial statements?
_______________Actual w/ Liquidation__________"As If" No Liquidation Revenue ________8,500,000 ____________________8,500,000 - COGS__________ 2,525,000 ____________________2,550,000 = Gross Profit ___5,975,000 ____________________5,950,000 - Tax Expense___2,390,000 ____________________2,380,000 = Net Income___ 3,585,000 ___-15,000 _____3,570,000 report it but its probably not material
(LIFO & LIFO reserve) Firm GG reported the following information related to its inventory for fiscal 2021. They reported COGS under LIFO of 14,827. a) Fill in the missing value. ______________________________________2021 Raw Materials__________________1,997 WIP________________________________2,675 Finished Goods________________1,638 Total FIFO value_______________6,310 Less adjustment to LIFO_____641 Total LIFO value_______________??? b) Firm GG's COGS under FIFO (for 2021) is 14,818. What was the LIFO reserve in 2020?
a) 6,310 - 641 = 5,669 b) 14,818 + ( 641 - x ) = 14,827 x = 632
(Impairment loss) Firm DC owns a machine that cost $1,200,000, has accumulated depreciation of $400,000, a salvage value of $100,000, and three years left of its useful life. Firm DC expects the net cash flows produced by the machine to be $250,000 for each of the next three years. The fair value of the equipment is $700,000. a) Prepare the journal entry, if any, to record an impairment loss. b) How would your answer differ if the accumulated depreciation was $500,000?
a) Impairment loss 100,000 _____Equipment 100,000 (or Accum. Dep.) (You could debit Loss for 100k and Accum, Dep. for 400k, and credit Equipment 500k) b) No entry (since book value would be greater than sum of future cash flows)
(Journal Entry) Record the journal entries Firm AD would have made for the following expenditures incurred during 2020. a) Paid $12,000 to replace the tires of its fleet of delivery vans. b) Paid $24,000 to refurbish a sorting machine; the refurbishment extended the machine's useful life by two years. c) Paid $10,000 to repair a stacking machine; prior to the repair the stacking machine was not functioning, but after repair the machine produced positive cash flows for the firm.
a) Maintenance Exp. 12,000 ________Cash 12,000 b) Equipment 24,000 ________Cash 24,000 c) Repair Expense 10,000 ________Cash 10,000
(11) Example of Costs Subsequent to Acquisition Indicate how each of these transactions would be recorded in the accounting records. a)The company increased its plant capacity by building a new addition at a cost of $270,000. b)The entire plant was repainted at a cost of $23,000. c)The asbestos cement slate roof was removed and replaced with a wood shingle roof at a cost of $61,000. The cost of the old roof was $80,000 with $39,000 of accumulated depreciation.
a) posted online b) c)
(11) Example of Depreciation Methods Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2014. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31. Machine usage was 800 hours during 2014 and 1900 hours during 2015. Calculate 2014 and 2015 depreciation for (a) straight-line, (b) activity method, (c) double-declining balance, and (d) sum-of-the-years'-digits.
a) straight-line Cost = 117,900__________________________________Cost = 117,900 Salvage Value = 12,900 ____________________Salvage Value = 12,900 Service Life = 5 years ______________________Service Life = 5 years (117,900 - 12,900)/5 = 21,000 * 5/12 = 8,750 (21,000 * 7/12) + 8,750 = 21,000 b) activity method Cost = 117,900____________________________Cost = 117,900 Salvage Value = 12,900________________Salvage Value = 12,900 Total Estimated Units = 21,000 _____Total Estimated Units = 21,000 Units this year = 800 ___________________Units this year = 1900 (117,900 - 12,900) * (800/21,000) = 4,000 (117,900 - 12,900) * (1900/21,000) = 9,500 c) double-declining balance Cost = 117,900_________________________ Cost = 117,900 Salvage Value = 12,900____________ Salvage Value = 12,900 Service Life = 5 years ______________Service Life = 4 years Yr 1: 117,900 * 2/5 = 47,160 * 5/12 = 19,650 Yr 2: (117,900 - 47,160) * 2/5 = 28,296 & (47,160 - 19,650) + (28,296 * 5/12) = 39,300 Yr 1: 117,900 * 2/4 = 58,950 * 5/12 = ?? Yr 2: (117,900-58,950) * 2/4 = ??* 5/12 = ?? d) sum-of-the-years'-digits Cost = 1,000 __________________________Cost = 1,000 Salvage Value = 100______________ Salvage Value = 100 Service Life = 5 years ____________ Service Life = 4 years Yr 1: (1,000 - 100) * 9/(9(10)/2) = 900 * 9/45 = 180 Yr 2: (1,000 - 100) * 8/45 = 160 Yr 1: (1,000 - 100) * 9/(9(10)/2) = 900 * 9/45 = 180 Yr 2: (1,000 - 100) * 8/45 = 16
(8/9) Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye. Assume all transactions are cash transactions. Date_______Transaction______________Quantity_______Price/Cost 1/1_______Beginning Inventory_______1,000_______________$12 2/4_______Purchase_____________________2,000_______________$18 2/20_______Sale__________________________2,500_______________$30 4/2_______Purchase_____________________3,000_______________$23 11/4_______Sale____________________________2,200_______________$33 A physical count of ending inventory on December 31 shows that 1,300 units are left on hand. Prepare journal entries to record these transactions and related adjusting journal entries (if any) on December 31, assuming Ehlo uses: a)Periodic system, FIFO cost flow. b)Perpetual system, FIFO cost flow. c)Periodic system, LIFO cost flow. d) Perpetual system, LIFO cost flow. e) Periodic system, weighted-average cost flow. f) Perpetual system, moving-average cost flow.
a)Periodic system, FIFO cost flow. 2/4 Purchases 36,000 _______Cash 36,000 2/20 Cash 75,000 _______Sales Revenue 75,000 4/2 Purchases 69,000 _______Cash 69,000 11/4 Cash 72,600 _______Sales Revenue 72,600 12/31 Inventory (ending) 29,900 COGS 87,100 _______Purchases 105,000 _______Inventory (beginning) 12,000 Ending Inventory 1300 units x $23 = 29,900 COGS 1000 units x $12 = 12,000 2000 units x $18 = 36,000 1700 units x $23 = 39,100 4700 units 87,100 b) Perpetual system, FIFO cost flow. 2/4 Inventory 36,000 _______Cash 36,000 2/20 Cash 75,000 _______Sales Revenue 75,000 COGS 39,000 _______Inventory 39,000 * (1000 x $12) + (1500 x $18) 4/2 Inventory 69,000 _______Cash 69,000 11/4 Cash 72,600 _______Sales Revenue 72,600 COGS 48,100 _______Inventory 48,100 * (500 x $18) + (1700 x $23) 12/31 No journal entry (c) Periodic system, LIFO cost flow. 2/4 Purchases 36,000 _______Cash 36,000 2/20 Cash 75,000 _______Sales Revenue 75,000 4/2 Purchases 69,000 _______Cash 69,000 11/4 Cash 72,600 _______Sales Revenue 72,600 12/31 Inventory (ending) 17,400 COGS 99,600 _______Purchases 105,000 _______Inventory (beginning) 12,000 Ending Inventory 1000 units x $12 = 12,000 300 units x $18 = 5,400 1300 units 17,400 COGS 3000 units x $23 = 69,000 1700 units x $18 = 30,600 4700 units 99,600 (d) Perpetual system, LIFO cost flow. 2/4 Inventory 36,000 _______Cash 36,000 2/20 Cash 75,000 _______Sales Revenue 75,000 COGS 42,000 _______Inventory 42,000 * (2000 x $18) + (500 x $12) 4/2 Inventory 69,000 _______Cash 69,000 11/4 Cash 72,600 _______Sales Revenue 72,600 COGS 50,600 _______Inventory 50,600 * 2200 x $23 12/31 No journal entry
(Intangibles) Which of the following are intangible assets? a) Trademarks b) Patents c) Copyrights d) Customer lists e) software & franchise licenses
all
(8/9) f.o.b. destination
buyer includes items in inventory when received
(8/9) f.o.b. shipping point
buyer includes items in inventory while in transit you record right at purchase since you own inventory and are responsible for shipping cost
(8/9) Perpetual system
continuously track changes in the inventory account as they occur. If the physical count of inventory is below the perpetual inventory balance (e.g., due to theft or spoilage), reduce the inventory balance and recognize a loss or adjust COGS.
Purchase Commitments
contracts that obligate a company to buy a specified amount of merchandise or raw materials at specified prices on or before specified dates. usually, the buyer does not recognize an asset or liability at the commitment because the contract is "executory" in nature: neither party has fulfilled its part of the contract. If material, the buyer should disclose details of formal, non-cancelable purchase contracts. If the contract price is less than the market price, no special adjustments are made. Inventory is recorded at its cost (i.e., the contract price) when purchased. _Inventory/Purchases (contract price) XXX ______ Cash
(11) Costs Subsequent to Acquisition
costs to achieve greater future benefits should be capitalized. ◦The useful life of the asset is increased. ◦The quantity of units produced from the asset is increased. ◦The quality of units produced from the asset is enhanced. Expenditures that maintain a level of services should be expensed immediately (e.g., ordinary repairs). Type - Definition - Usual Accounting Treatment Repairs and Maintenance - expenditures to maintain a given level of benefits - expense in the period incurred Additions - the addition of a new major component to an existing asset - capitalize and depreciate over the remaining useful life of the original asset or its own useful life, whichever if shorter Improvements - the replacement of a major component -capitalize and depreciate over the useful life of the improved asset Rearrangements - expenditures to restructure an asset without addition replacement, or improvement - if expenditures are material and clearly increase future benefits, capitalize and depreciate over the future periods benefited
(8/9) Periodic system
determine the quantity of inventory on hand periodically. ◦Record all acquisitions of inventory in a separate purchases account. ◦Beginning inventory + Purchases (cost of goods acquired or produced during the period) Cost of goods available for sale - Ending inventory (based on physical count) Cost of goods sold during the period
(8/9) Last-in, first-out method (LIFO)
higher COGS, lower Net Income (more accurate) The last items purchased are the first items sold. Results in different ending inventory and COGS amounts depending on whether periodic or perpetual method is used. Advantage: matches current costs against current revenues on the income statement. Disadvantage: inventory balance not close to current cost.
(8/9) Goods in transit
included in inventory when legal title is obtained
(Indefinite assets) Which of the following have indefinite lives? a) land b) in-process R&D c) patents d) copy machines e) trademarks
land, in-process R&D, and trademarks
(8/9) First-in, first-out method (FIFO)
lower COGS, higher Net Income the first goods purchased are the first sold. Advantage: inventory balance close to current cost. Disadvantage: fails to match current costs against current revenues on the income statement, which can inflate net income.
(8/9) Manufacturers- Inventory
produce goods to sell & usually have 3 inventory accounts: ◦Raw materials inventory: not yet in production. ◦Work in process inventory: raw materials, direct labor, and a share of manufacturing overhead for items that are partially processed ◦Finished goods inventory: completed but unsold
(8/9) Merchandisers - Inventory
purchase inventory in a form ready for sale usually have one inventory account.
(8/9) Sales with high rates of return
recognized as a sale with a related allowance for returns if returns can be reasonably estimated (part of inventory kept on the balance sheet) otherwise, no sale is recognized and all goods should remain in inventory
(8/9) Consigned goods remain the property of the consignor until ____ and (should / should not) be included in the consignee's inventory.
sold should not
(11) Allocation Methods (continued) - Accelerated (decreasing-charge) methods (common tax method)
◦Higher depreciation charges in earlier years and lower charges in later years. Declining-balance method ◦Deprecation exp. = (book value at beginning of year) x (chosen multiple (e.g. 2)) / (estimated service life) ◦Company discontinues depreciation when the book value of the asset is reduced to its salvage value. Sum-of-the-years'-digits method ◦Deprecation charge = (cost-salvage value) x (remaining life in years at beg. of period) / (sum of the years^′ digits) ◦Sum of the years' digits = (n (n+1))/2, where n is the estimated service life of the asset.