BUS 301
To calculate the amount of cost allocated to a period we must have what three items of information?
(1) the estimated useful life of the asset (2) the allocation base (which is the cost of the asset less its estimated residual value at the end of its useful life) (3) the allocation method.
Cost of goods sold =
(Beg. Inventory + Net Purchases) - Other expenses
Interest is capitalized (included in the asset's cost) for qualifying assets. What are these Qualifying assets ?
- Assets built for a company's own use. - Assets constructed as discrete projects for sale or lease. (Assets in this category are large construction projects such as a real estate development built for sale or lease)
Fair value is not used in exchanges in the rare case that....?
- Fair value cannot be determined - the exchange lacks commercial substance
An OVER statement of BEGINNING Inventory
- Overstates COGS - Understates net income - Understates retained earnings
An overstatement of ending inventory
- Understates COGS - Overstates net Income - Overstates Retained earninings
What 4 ways can a company acquire an asset through a noncash acquisition?
- by issuing debt or equity securities - by receiving donated assets - by exchanging other assets
An UNDER statement of ending inventory
- overstates COGS - understates net income - understates retained earnings
When fair value is not used for an exchange, the asset is exchanged for
- the book value of the asset given up, plus or minus any cash exchanged.
What costs can be capitalized for EQUIPMENT?
- the net purchase price, less discounts, - taxes, - transportation costs, - installation costs, - testing and trial runs.
What costs can be capitalized for BUILDINGS?
- the purchase price, - real estate commissions, - attorney's fees, - reconditioning costs to get the building ready for use.
What costs can be capitalized for LAND (not depreciable)?
- the purchase price, - real estate commissions, - attorney's fees, - title search, - title transfer fees, - title insurance premiums, - the cost of making the land ready for its intended use, including the cost of removing old buildings.
An UNDER statement of BEGINNING inventory
- understates COGS - overstates net income - overstates retained earnings
An error made and found in the previous year, it requires..?
-A restating of Net Income (The error should be retrospectively restated to reflect the correct inventory amount, cost of goods sold, net income, and retained earnings when the comparative 2014 and 2013 financial statements are issued for 2014.) - A correcting Journal Entry is also needed
Why are Inventory Estimation techniques used instead of taking a physical Inventory?
-It is less costly -Less time consuming
What are the two difficult accounting issues that must be addressed when a company is constructing assets for its own use?
1) Determining the amount of the company's manufacturing overhead to be included in the asset's cost. 2) Deciding on the proper treatment of interest incurred during the construction period.
What are the steps in the Retail Inventory method?
1) First, we add together beginning inventory and net purchases to find both cost and retail COGAS. 2) We divide the goods available for sale at cost by the retail price of goods available for sale to arrive at the cost-to-retail percentage. 3)Subtract our sales for from the selling price of goods available for sale, to arrive at ending inventory at retail. 4) we use our cost-to-retail percentage to convert our estimate of ending inventory at retail
What is the steps in the gross profit method?
1) First, we need an estimate of the gross profit (Sales X historical gross profit ratio) 2) Then we need to know the beginning inventory and net purchases that can be obtained from the existing accounting records and find goods available for sale (BEG. Inventory+ Net Purchases= COGAS) 3) We then must find ESTIMATED COGS (SALES-estimate gross profit= ESTIMATED COGS) 4) We then subtract estimated COGS from COGAS to estimate ending inventory
What are the impairment steps for finite-life assets to be held for sale?
1) Measure if its B.V is > undiscounted future cash flows; if yes it is impaired 2) find the impairment loss (B.V- (FAIR VALUE- cost to sell))
What are the impairment steps for finite-life assets to be held and used?
1) Measure if its B.V is > undiscounted future cash flows; if yes it is impaired 2) find the impairment loss (B.V- FAIR VALUE)
For financial reporting purposes, long-lived, revenue-producing assets typically are classified in what two categories?
1) Property, plant, and equipment. (Tangible) 2) Intangible assets.
The two accelerated methods for depreciation are???
1) Sum-of-the-years'-digits 2) declining balance
What three accounting steps are involved in dispositions?
1) Update depreciation or amortization to the date of disposal. 2) Remove the original cost of the asset and its accumulated depreciation or amortization from the books. 3) Record a gain or loss for the difference between the book value of the asset and the amount received.
For a deferred payment what are the steps in recording your noncash acquisition?
1) You must figure out whether the interest rate is realistic or not. 2) If realistic you make journal entry for face amount to record the asset acquisition 3) If not you find the present value of the future cash payments. 4) Then you you make the journal entry to record the asset acquisition. 5) you must make an entry to record interest expenses and final payment of the note
We can apply lower of cost or market in one of three ways, how??
1) can apply it to individual items of inventory 2) can apply to groups of similar items in inventory (such as desktop and laptop computers) 3) can apply LCM to the entire inventory.
During an exchange, general valuation principle states that asset is given up if....
1) equal to the fair value of asset given up plus cash paid or minus cash received, 2) equal to the fair value of asset acquired, if that is more clearly evident.
What 2 ways can a company choose to report a write-down in inventory??
1) is to report the loss as a separate item in the income statement 2) An alternative is to include the loss as part of the cost of goods sold.
Before we can successfully complete the retail inventory method, what 4 pieces of Information do we need to know?
1) sales for the period 2) net purchases at BOTH retail price and cost!! 3) the value of beginning inventory at BOTH retail and cost 4) any inventory adjustments to the retail price. (These adjustments might include additional markups or additional markdowns etc.)
What are the two most popular methods for estimating ending inventory?
1)Gross Profit Method 2) Retail Inventory Method
Conventional Retail Method commonly has a ________ cost2retail ratio than regular retail method.
A LOWER cost2retail ratio
A noncash Acquisition is when...
A company acquires assets without paying cash. Assets may be acquired by issuing debt or equity securities, by receiving donated assets, or by exchanging other assets.
Since a change to LIFO cannot be treated retrospectively, the LIFO method is used from the point of adoption forward and a what is needed describing what??
A disclosure note is needed to explain the nature and justification for the change as well as the effect of the change on current year's income and earnings per share. The note also must explain why retrospective application was impracticable
When a company applies LCM, what is required?
A material write-down of Inventory is needed.
Patents are ..?
A patent is an exclusive right to manufacture a product or to use a process that is granted by the United States Patent Office for a period of 20 years. The holder of the patent essentially has a monopoly right to use, manufacture, or sell the patented product or process without interference or infringement by others. Purchased patents are RECORDED AT ACQUISITION COST. *Research and development costs that lead to an internally developed patent are expensed in the period incurred.
AFTER! calculating the cost-to-retail percentage, you must remember EMPLOYEE DISCOUNTS are....?
ADDED to the net sales
We allocate a portion of the cost to expense in the income statement each
Accounting Period
How do you record the Gain/Loss journal entry for a disposition?
Accumulated depreciation........is debited Cash(if received)......................is debited a loss on sale(if applicable)......is debited Equipment......................................is credited a gain on sale.................................is credited
Dispositions are when...
After using property, plant, and equipment and intangible assets, companies dispose of them by sale, retirement, or exchanging them for other assets.
The gross profit method is NOT ACCEPTABLE FOR USE IN?
Annual financial statements.
The journal entry for an exchange where fair value could not be used is.....
Asset (BV +/- cash paid).............is debited Accumulated depreciation.........is debited Asset (original cost).....................is credited Cash............................................is credited
Interest is capitalized based on
Average Accumulated Expenditures (AAE) during the construction period.
Unused portion of the asset's cost appears in the balance sheet.
Balance Sheet
Ending retained earnings =
Beg. retained earnings + Net income - dividends
Depreciation, depletion, and amortization are processes of
COST ALLOCATION (not valuation)
The objective in Retail Inventory method is to....?
Convert ending inventory at retail to ending inventory at cost
How do you write the Journal Entry to Record the loss as part of cost of goods sold?
Cost of goods Sold is debited Inventory is Credited
Before calculating the cost-to-retail percentage, you must remember PURCHASE RETURNS is....?
DEDUCTED in both the cost and retail columns
Before calculating the cost-to-retail percentage, you must remember ABNORMAL SHORTAGE, SPOILAGE, OR THEFT is....?
DEDUCTED in both the cost and retail columns.
Before calculating the cost-to-retail percentage, you must remember PURCHASE DISCOUNTS TAKEN are...?
DEDUCTED in the cost column
AFTER! calculating the cost-to-retail percentage, you must remember NORMAL SHORTAGE, SPOILAGE, OR THEFT is...?
DEDUCTED in the retail column.
Natural Resources cost allocation Journal entry is...
Depletion is debited Natural Resource Asset is credited
How do you record the journal entry to updating depreciation to date of sale during a disposition?
Depreciation Expense.........is debited Accumulated Depreciation.............is credited
What impairs the utility or use of an Asset?
Deterioration, obsolescence, changes in price levels, or any situation that might compromise the inventory's salability impairs the utility of the inventory.
the translation of research findings into new, or the improvement of existing, products, services, or processes is
Development
The asset acquired through a noncash acquisition is recorded at?
EITHER The fair value of the consideration given OR the fair value of the asset acquired (whichever is more clearly evident)
The service life and the residual value used in depreciation computations are both
ESTIMATES
Markup cancellation means....
Elimination of ADDITIONAL MARKUP
In any noncash acquisition, the components of the transaction are to be recorded at their...?
FAIR VALUES
Pro-rating the depreciation based on the date of acquisition is time-consuming and costly. A commonly used alternative is the...?
Half-Year Convention
Lower of cost or market causes losses to be recognized in the....?
In the period the value of inventory declines below its cost rather than in the period that the goods ultimately are sold.
One major difference between Gross profit Inventory method and Retail Inventory method is?
In the retail method, we need to know both cost and selling price of certain accounts. Our objective in the retail method is to calculate ending inventory at retail, and then convert it from retail to cost.
Additional markup means...
Increase in selling price after initial markup.
Intangible Assets are
Intangible assets are assets, other than financial assets, that lack physical substance. These assets can be extremely valuable resources for a company. In general, they refer to the ownership of exclusive rights that provide benefits to the owner in the production of goods and services. The future benefits attributed to intangible assets usually are much less certain than those attributed to tangible assets.
What are some Intangible Assets?
Intangible assets include patents, copyrights, trademarks, franchises, and goodwill.
The Conventional retail Method considers what in calculating cost to retail Ratio?
It CONSIDERS MARKUPS TO COGAS calculation. (NOT MARKDOWNS)
If inventory write-downs are commonplace for a company, how will they report a write-down in Inventory?
It usually will include the losses as part of cost of goods sold.
INITIALLY, Inventory is recorded at?
Its historical Cost
What PP&E asset is not depreciable?
LAND
What costs can be capitalized for LAND IMPROVEMENTS and can they be depreciated?
Land improvements are enhancements to property such as driveways, parking lots, fencing, landscaping, and private roads. These are separately identifiable costs that are recorded in the land improvement asset account rather than in the land account. Unlike land, land improvements ARE DEPRECIATED.
How do you write the Journal Entry to Record the loss as a separate item in the income statement?
Loss on write-down of inventory is debited Inventory is Credited
Inventories are to be valued on the balance sheet at....?
Lower of cost OR market.
How do you find Market Value?
Market Value = The middle amount of the three values calculated for replacement cost: net realizable value, and net realizable value reduced by normal profit margin, and the given replacement cost
expenditures for additions, improvements or rearrangements are
NORMALLY CAPITALIZED.
Expenditures for maintenance and ordinary repairs are
NORMALLY EXPENSED
Goodwill is...?
Purchased goodwill results when one company buys another company for a price that exceeds the fair value of the separate identifiable net assets acquired. Goodwill, along with other intangible assets with indefinite useful lives, is not amortized.
Markdown means....
Reduction in selling price below the original selling price.
the retail method was developed for what?
Retail establishments such as department stores.
Net Income =
Revenues- COGS - other expenses
This depreciation method is determined by The annual depreciation is determined by dividing the asset's cost less its estimated residual value over the asset's estimated useful life in years.
Straight line method
Which are future benefits are more certain, intangible or tangible assets?
Tangible Assets
What is referred to as the Ceiling?
The Net Realizable Value is the Ceiling. [NRV= (Selling Price) - (Cost to complete and/or dispose)]
What is referred to as the floor?
The Net Realizable Value minus Normal Profit.
If an inventory error is made and found over 2 years later?
The error has self-corrected and no prior period adjustment is needed, but it still needs to be corrected retrospectively to reflect the correct inventory amounts.
What is the first indication of fair value in regards to noncash acquisitions?
The fair value of the consideration given to acquire the asset is the 1st indication. Sometimes the fair value of the asset acquired is used when that fair value is more clearly evident than the fair value of the consideration given.
The general rule for cost capitalization is...?
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
________ requires that part of the acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the future revenues are earned. A portion of an asset's cost is moved from the balance sheet to the income statement each period.
The matching principle
An exception to the immediate expensing of research and development costs is provided for work done under contract for other companies. These research and development costs are capitalized as inventory and carried forward into future years. Income from these contracts can be recognized using either the ________ or ________
The percentage-of-completion method or the completed contract method.
Why do companies have to take away from their revenue on donated assets?
The reasoning is that the company receiving the asset is performing a service for the donor in exchange for the asset donated
allocation method...?
The systematic approach used for allocation
The gross profit method can be used by insurance companies to?
To estimate lost, destroyed, or stolen inventory.
Allocation Base is the....?
Total amount of the cost to be allocated (cost-residual value@end of use)
An example of an activity-based method is?
Units-of-production
During the Half-Year Convention what happens...?
Using this convention, a company would record one-half of a year of depreciation in the year of acquisition, and one-half of a year of depreciation in the year of disposal.
Is LCM required by G.A.A.P??
Yes.
What do you do with markdowns and mark ups in the Conventional retail Method?
You must ADD mark ups to net purchases and begininng inventory and you SUBTRACT mark downs.
A nonmonetary exchange is considered to have commercial substance if the company expects ?
a change in future cash flows as a result of the exchange.
A franchise is ....?
a contractual arrangement under which the franchisor grants the franchisee exclusive rights to use the franchisor's trademark within a geographical area for a specified period of time. The franchisee usually makes an initial payment to the franchisor that is capitalized as an intangible asset along with any legal and license fees. ** Annual payments to the franchisor related to operations are expensed.
Research is...?
a planned search or critical investigation aimed at discovery of new knowledge with the hope that the new knowledge will result in new, or the improvement of, existing, products, services, or processes.
A write-down loss that is substantial and unusual should be reported as a what?
a separate item among operating expenses.
A Trademark is...?
a symbol, design, or logo that distinctively identifies a company, product, or service. If internally developed, trademarks have no recorded asset cost. If purchased, a trademark IS RECORDED AT ACQUISITION COST. Trademarks are registered with the United States Patent Office and are renewable indefinitely in 10-year periods.
These methods use a measure of an asset's activity (input or output) in a period for the depreciation computation??
activity-based methods (for depreciation)
Before calculating the cost-to-retail percentage, you must remember FREIGHT IN is....?
added to the cost column
Average accumulated expenditures is...?
an amount based on a weighted average computation of the qualifying expenditures times the number of months from the incurrence of the qualifying expenditures to the end of the construction period.
Copyrights are..?
an exclusive right of protection given to a creator of a published work such as literary, musical, artistic, and similar works. Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform, and record the work. Generally, the legal life of a copyright is the life of the creator plus 70 years.
most R&D costs are expensed...
as incurred
The journal Entry to record asset acquisition during a noncash acquisition.
asset..............is debited Note payable................is credited
To record the acquisition of Donated assets are recorded in journal entries as...?
asset........is debited a revenue account ............is credited
In regards to impairment, for ________, different guidelines apply to tangible and intangible assets with finite useful lives and intangible assets with indefinite useful lives
assets being held for use
If a deferred payment note payable includes an unrealistically low interest rate or is a noninterest-bearing note, the asset is recorded at ?
at the present value of the future cash payments. The interest rate used for the present values computations should be a current market rate of interest.
A deferred payment is...
can be a non cash acquisition vehicle usually a note payable.
if the construction is financed through a SPECIFIC new borrowing, the interest rate of the new borrowing is used for the
capitalization rate
If R&D assets have alternative future uses beyond the research and development project period, the cost should be
capitalized and depreciated or amortized over the current and future periods of use.
Interest can only be capitalized during
construction of qualifying assets.
Depreciation, depletion, and amortization are all examples of what?
cost allocation processes.
Depreciation, depletion, or amortization of an asset used in manufacturing a product is a part of the product ____that is included in ______.
cost......inventory
PP&E cost allocation journal entry is....
depreciation ...is debited accumulated depreciation is credited
A _____________should describe the effect of a change in estimate on income before extraordinary items, net income, and related per share amounts for the current period.
disclosure note
The most common declining-balance method is ?
double-declining balance method
Markdown cancellation means.....
elimination of a MARKDOWN.
Service Life is the...?
estimated expected use from an asset.
We usually have to force depreciation in the latter years to an amount that allows the book value to be equal to the
estimated residual value.
If property, plant, and equipment and intangible assets are purchased for exclusive use in research and development, the cost is I
expensed
When an asset is acquired with the issuance of equity securities, it is recorded at the?
fair value of the asset or the market value of the securities, whichever is more clearly evident.
Trade-ins of old assets in exchange for new assets are probably the most _______ type of exchange
frequent
Net sales are equal to
gross sales less returns.
The key to the gross profit method is ?
having a reliable gross profit ratio.
To record a journal entry for impairment loss?
impairment loss ...is debited accumulated depreciation..... is debited equipment .................is credited
The journal Entry to record interest expense?
interest expense.......is debited Discount on note payable.........................is credited
when a company changes to LIFO what is impossible to do?
it is almost impossible to calculate the income effect on prior years because it would require assumptions as to when specific LIFO inventory layers were created in years prior to the change.
Declining-balance methods initially ignore residual value, but we do not depreciate the asset below its residual value.
its residual value.
Qualifying expenditures include what during the accounting period?
labor, material, and overhead incurred on the construction project
To preclude the possibility of companies engaging in exchanges of appreciated assets solely to be able to recognize gains, fair value can only be used in.....?
legitimate exchanges that have commercial substance?
Financial analysts believe that inventory write-downs or arbitrary changes in inventory methods represent...?
manipulation of the earnings by management
Sum-of-the-years'-digits depreciation is calculated by ?
multiplying cost minus residual value times a fraction that declines each year of an asset's useful life. The numerator of the fraction is a number equal to the remaining useful life of the asset. For an asset with a four-year life, the numerator would be four for the first year, three for the second year, two for the third year, and one for the fourth year. The denominator of the fraction is constant. It is the sum of the digits in the asset's life from one to n, where n is the number of years in the asset's life. For example, if the estimated life is four years, the sum of the digits is 1 plus 2 plus 3 plus 4, a total of 10.
To record payment of note payable
note payable..........is debited cash/acct payable...............is credited
The straight-line rate is??
one divided by the estimated useful life. For example, if the useful life of an asset is ten years, the straight-line rate is one-tenth, or ten percent.
The depreciation, depletion, or amortization is expensed as
part of cost of goods sold when the product is sold.
Accountants use the gross profit method when...?
preparing forecasts and budgets.
A change in a depreciation METHOD will be treated....
prospectively
Changes in estimates for depreciation are accounted for _____.
prospectively.
voluntary changes in accounting principles involving inventory are reported HOW?
retrospectively
What is the steps to decidinging how to value inventory?
step 1- Is to find the market value (middle value of RC, NRV, and NRV-NP) and step 2- choose the lower of cost or market to value inventory
The most commonly used time-based method is the ?
straight-line method; which results in an equal amount of depreciation in each period
The interest capitalization period ends when the asset is...?
substantially complete and ready for its intended use or when interest costs no longer are being incurred.
What would be the replacement cost of inventory?
the Market value of Inventory.
One approach to assigning overhead to self-constructed assets is the incremental approach, where actual incremental overhead costs are recorded in
the asset account.
Accumulated depreciation represents?
the depreciation taken on the asset since its purchase, and is deducted from the asset's cost in the balance sheet to net to the book value of the asset.
If a deferred payment note payable includes a realistic interest rate, the asset acquired is recorded at ?
the face amount of the note
No gain or loss is recognized during an exchange when...
the fair value cannot be used
The interest capitalization period begins when...?
the first qualifying construction expenditures are incurred for materials, labor, or overhead, and when interest costs are incurred.
What costs can be capitalized for NATURAL RESOURCES?
the initial acquisition costs exploration costs development costs & restoration costs.
Impairment is ??
the loss of a significant portion an asset's benefits through casualty, obsolescence, or lack of demand for the asset's services. If an asset's value decreases and cannot be recovered through future use or sale, the asset is considered to be impaired and it should be written down to its net realizable value.
Initial Markup means....
the markup from cost to selling price. For example, if a company purchases an item for $6 and plans to sell it for $10, there is on initial markup of $4.
If specific new borrowing had been insufficient to cover the average accumulated expenditures for the year,what happens?
the portion of the average accumulated expenditures financed with specific new borrowing is capitalized using the interest rate on the specific new borrowing, and the remainder of the average accumulated expenditures is capitalized using the weighted-average interest cost of other debt excluding the specific new borrowing.
What are the costs that can be capitalized for INTANGIBLE ASSETS?
the purchase price and all other costs necessary to bring it to condition and location for use, such as legal and filing fees.
Purchases at retail are equal to ...?
the selling price of purchased goods less returns at retail.
Declining-balance methods are based on ??
the straight-line rate multiplied by an acceleration factor
If a trade lacks commercial substance then...
there is no gain on the exchange
The other time-based methods are referred to as accelerated methods because ???
they result in a greater amount of depreciation in the earlier years of an assets life
Auditors use the gross profit method when...?
they test and determine the reasonableness of their clients ending inventory.
What are the two general approaches to depreciation?
time-based methods and activity-based methods
Purchases equal...
to cost less returns and allowances, plus freight-in.
Net property, plant, and equipment is the _________________ (book value) of plant assets meaning the book value is not equal to market value.
undepreciated cost
What is the most commonly used method to assign overhead?
using a predetermined overhead rate, based on an overhead cost driver activity, that is used to assign the company's overhead to regular production. This approach is called the full cost approach.
If construction is financed with other debt, use the ____________ on the other debt for the capitalization rate.
weighted-average interest rate
Companies use the gross profit method when....?
when estimating COGS and Inventory in preparing interim reports
A departure from cost is warranted when?
when the utility of an asset (the probable future economic benefits) is no longer as great as its cost.
We recognize and measure impairment loss differently depending on ???
whether the asset is being held for use or held for sale
