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Pueblo Co. acquires machinery by paying $10,000 cash and signing a $5,000, 2-year, zero-interest-bearing note payable. The note has a present value of $4,208, and Pueblo purchased a similar machine last month for $13,500. At what cost should the new equipment be recorded?
Schwartzkopf Co. purchased for $2,200,000 property that included both land and a building to be used in operations. 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. At what amount should Schwartzkopf report the land and the building at the end of the year?
Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation. Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under longterm payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.
\r\n
Discuss the basic accounting problem that arises in handling each of the following situations.
\r\n(a) Assets purchased by issuance of common stock.
\r\n(b) Acquisition of plant assets by gift or donation.
\r\n(c) Purchase of a plant asset subject to a cash discount.
\r\n(d) Assets purchased on a long-term credit basis.
\r\n(e) A group of assets acquired for a lump sum.
\r\n(f) An asset traded in or exchanged for another asset.
How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?
What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?
Provide examples of assets that do not qualify for interest capitalization.
One financial accounting issue encountered when a company constructs its own plant is whether the interest cost on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?
Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?
The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.
\r\n(a) Organization and promotion expenses.
\r\n(b) Architect’s fees.
\r\n(c) Interest and taxes during construction.
\r\n(d) Interest revenue on investments held to fund construction of a building.
\r\nDo you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?
Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use:
\r\n(a) It should be excluded completely.
\r\n(b) It should be included at the same rate as is charged to normal operations.
\r\nWhat are the circumstances or rationale that support or deny the application of these methods?
Indicate where the following items would be shown on a balance sheet.
\r\n(a) A lien that was attached to the land when purchased.
\r\n(b) Landscaping costs.
\r\n(c) Attorney’s fees and recording fees related to purchasing land.
\r\n(d) Variable overhead related to construction of machinery.
\r\n(e) A parking lot servicing employees in the building.
\r\n(f) Cost of temporary building for workers during construction of building.
\r\n(g) Interest expense on bonds payable incurred during construction of a building.
\r\n(h) Assessments for sidewalks that are maintained by the city.
\r\n(i) The cost of demolishing an old building that was on the land when purchased.
Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets.
\r\n(a) Land.
\r\n(b) Machinery and equipment.
\r\n(c) Buildings.
Mickelson Inc. owns land that it purchased on January 1, 2000, for $450,000. At December 31, 2014, its current value is $770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2014, balance sheet? Explain.
What are the major characteristics of plant assets?
Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world’s most profitable and largest gold mining company outside South Africa. Part of the key to Barrick’s success has been due to its ability to maintain cash flow while improving production and increasing its reserves of goldcontaining property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves.
\r\nThe company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed.
\r\nBarrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company’s use of internally generated funds, rather than debt, to finance growth.
\r\nBarrick’s inventories are as follows.
\r\n\r\n
Instructions
\r\n(a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset?
\r\n(b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale?
\r\n(c) Suppose that gold bullion that cost $1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory.
\r\nHow would this error affect the following?
\r\nBalance Sheet Income Statement
\r\nInventory ? Cost of goods sold ?
\r\nRetained earnings ? Net income ?
\r\nAccounts payable ?
\r\nWorking capital ?
\r\nCurrent ratio ?
reported the following information regarding 2013–2014 inventory.
\r\n\r\n
\r\n
Instructions
\r\n(a) Why might Robots, Inc., use two different methods for valuing inventory?
\r\n(b) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO.
\r\n(c) Why does the LIFO liquidation reduce operating costs?
\r\n(d) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory.
The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/ Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf.
\r\nInstructions
\r\nRefer to M&S’s financial statements and the accompanying notes to answer the following questions.
\r\n(a) How does M&S value its inventories? Which inventory costing method does M&S use as a basis for reporting its inventories?
\r\n(b) How does M&S report its inventories in the statement of financial position? In the notes to its financial statements, what three descriptions are used to classify its inventories?
\r\n(c) What costs does M&S include in Inventory and Cost of Sales?
\r\n(d) What was M&S’s inventory turnover in 2012? What is its gross profit percentage? Evaluate M&S’s inventory turnover and its gross profit percentage.
Jones Co. is in a technology-intensive industry. Recently, one of its competitors introduced a new product with technology that might render obsolete some of Jones’s inventory. The accounting staff wants to follow the appropriate authoritative literature in determining the accounting for this significant market event.
\r\nInstructions
\r\nAccess the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
\r\n(a) Identify the authoritative literature addressing inventory pricing.
\r\n(b) List three types of goods that are classified as inventory. What characteristic will automatically exclude an item from being classified as inventory?
\r\n(c) Define “net realizable value” as used in the phrase “lower-of-cost-or-net realizable value.”
\r\n(d) Explain when it is acceptable to state inventory above cost and which industries allow this practice.
Refer to the data in IFRS9-8 for Keyser’s Fleece Inc. Prepare the journal entries for (a) the wool harvested in the first six months of 2014, and (b) the wool harvested that is sold for $10,500 in July 2014.
Keyser’s Fleece Inc. holds a drove of sheep. Keyser shears the sheep on a semiannual basis and then sells the harvested wool into the specialty knitting market. Keyser has the following information related to the shearing sheep at January 1, 2014, and during the first six months of 2014 Shearing Sheep
\r\nCarrying value (equal to net realizable value), January 1, 2014 $74,000
\r\nChange in fair value due to growth and price changes 4,700
\r\nChange in fair value due to harvest (575)
\r\nWool harvested during the fi rst 6 months (at NRV) 9,000
\r\nPrepare the journal entry(ies) for Keyser’s biological asset (shearing sheep) for the first six months of 2014.
Dover Company began operations in 2014 and determined its ending inventory at cost and at
\r\nLCNRV at December 31, 2014, and December 31, 2015. This information is presented below.
\r\nCost Net Realizable Value
\r\n12/31/14 $346,000 $322,000
\r\n12/31/15 410,000 390,000
\r\n(a) Prepare the journal entries required at December 31, 2014, and December 31, 2015, assuming that the inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method is used.
\r\n(b) Prepare journal entries required at December 31, 2014, and December 31, 2015, assuming that the inventory is recorded at cost and a perpetual system using the loss method is used.
\r\n(c) Which of the two methods above provides the higher net income in each year?
Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2014, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below.
\r\nItem
\r\nD
\r\nItem
\r\nE
\r\nItem
\r\nF
\r\nItem
\r\nG
\r\nItem
\r\nH
\r\nItem
\r\nI
\r\nEstimated selling price $120 $110 $95 $90 $110 $90
\r\nCost 75 80 80 80 50 36
\r\nCost to complete 30 30 25 35 30 30
\r\nSelling costs 10 18 10 20 10 20
\r\nUsing the LCNRV rule, determine the proper unit value for statement of financial position reporting purposes at December 31, 2014, for each of the inventory items above.
In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases.
\r\nCases
\r\n1 2 3 4 5
\r\nCost $15.90 $16.10 $15.90 $15.90 $15.90
\r\nSales price 14.80 19.20 15.20 10.40 17.80
\r\nEstimated cost to complete 1.50 1.90 1.65 .80 1.00
\r\nEstimated cost to sell
\r\n.50 .70 .55 .40 .60
Briefly describe the valuation of (a) biological assets and (b) agricultural produce.
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