8: Inventory
"Net amount that a company expects to realize from selling inventory" refers to what term?
Net Realizable Value
What does PPE stand for?
Property, Plant, and Equipment
Which depreciation does NOT use (Cost - Salvage Value) as the base?
Double declining method
"The type of asset lacks physical existence, is not a financial instrument, and is usually long-term" defines what term
Intangible assets
What are the 3 types of debt securities covered in this chapter?
What defines each of them
Held-to-maturity: Debt securities that the company has the positive intent and ability to hold to maturity.
Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences.
Available for sale: Not held-to-maturity or trading (actual book definition lol)
In LCM, what three numbers are used to find the market value?
1. Net Realizable Value
2. Net Realizable Value - Normal Profit Margin
3. Replacement Cost
If a building is purchased, which of the following are capitalized?
- Purchase Cost
- Employee Wages
- Legal fees
- Taxes paid for purchase
Capitalized: Purchase Cost, Legal fees, Taxes paid for purchase
Expensed: Employee Wages
(*if had constructed building, worker wages capitalized)
What is the formula to determine the sum-of-years-digits denominator?
x = useful life (years)
(x[x+1]) / 2
Ex. 3 year life --> 3*4/2 = 6, same as 1+2+3 = 6
Which types of intangible assets are amortized? Which types are not?
Are amortized: Patents, Copyrights, Franchises, etc
NOT amortized: Goodwill, Renewable Trademarks, etc
What type of Equity security records an unrealized holding gain/loss?
0-20% ownership
This type of security has passive interest and records under the fair value method
Wonka Factory has unfinished inventory (cocoa beans) with a cost of $700, a sales value of $1,200, an estimated cost of completion of $200, and estimated selling costs of $400.
What value should this inventory be recorded as on the balance sheet using LCNRV?
Record as $600
Net Realizable value: 600 --> (1,200 - 200 - 400)
Cost: 700
Barney acquires property for a factory site for $3 million for the site and agreed to assume unpaid property taxes of $42,000 and an unpaid mortgage loan of $240,000. The city also assessed the company $40,000 for sewers, street pavement, and water mains.
Real estate commissions $70,000
Cost to demolish an old warehouse on the land $12,000
Salvage value related to building demolition $2,000
Cost of landscaping (useful life of 20 years) $120,000
What is the cost of land? Land improvement?
Land: $3,402
(3M + 42k + 240k + 40k + 70k + 12k - 2k)
Land Improvement: $120,000
(120k)
Owen acquired the right to use 1,000 acres of land to mine for silver. The lease cost is $300,000, and the related exploration costs on the property are $100,000 and are expensed as incurred. Intangible development costs incurred in opening the mine are $900,000. Owen estimates that the mine will provide approximately 100,000 ounces of silver.
What is Owen’s depletion cost per unit for the silver?
(300k + 900k) / 100k = $12 per ounce of silver
*Exploration cost not included in calculation*
Vidushi incurred $180,000 in legal costs to successfully defend a patent with a useful life of 12 years. Using straight-line amortization, what is the annual amortization expense?
180,000 / 12 = $15,000 / year
The fair market value of the available-for-sale security is $274,386.82 on 1/1/25. On the same day, its book value is $263,972.53.
Create an adjusting entry (if needed)
Dr. Fair Value Adjustment $10,414.29
Cr. Unrealized Holding Gain/Loss $10,414.29
Krusty Krab has a beginning inventory of $70,000 and purchases of $300,000, both at cost. Sales at the selling price amount to $280,000. The markup on the selling price is 30%. There was a fire, and everything was destroyed.
How much ending inventory was destroyed in the fire?
$174,000
(70,000 + 300,000-[280,000-280,000*0.3])
On 11/13/24, Elmo Company contacted Cookie Monster Co to build a building. Elmo made the following payments:
January 1: $250,000
March 1: $300,000
May 1: $600,000
July 1: $700,000
December 31: $100,000
What is the Weighted-Average Accumulated Expenditure? 12/31/25
$1,250,000
(250k x 12/12) + (300k x 10/12) + (600k x 8/12) + (700k x 6/12) + (100k x 0/12)
Cost: $12,000,000
Accumulated Depreciation: $3,000,000
Expected future net cash flows: $8,000,000
Fair value: $5,000,000
Remaining useful life: 5 years
*Will continue using the asset in the future*
Prepare the JE to record the impairment (if any) of the asset at 12/31
Recoverability Test: 8M < 9M (12-3M) --> Impaired
Loss = NCV - FMV = 9M - 5M = 4M
Dr. Loss on Impairment 4M, Cr. Accumulated Depreciation 4M
Brigitte paid $400,000 to acquire Warner Bros. whose fair value of net assets was $350,000. What amount of goodwill should Brigitte record?
Goodwill = 400,000 - 350,000 = 50,000
Jackson buys 20% of Trinity Corp. on 1/1/21. 50,000 shares $10/share.
Trinity Corp.’s 2021 Net Income = $400,000.
Trinity Corp's 12/31/21, the 50,000 shares have a fair value of $12/share
1/16/22, Trinity Corp. announced & paid cash dividend of $300,000. Jackson receives 20%.
Make appropriate journal entries
1/1/21:
Dr. Equity Investment 500k, Cr. Cash 500k
12/31/21:
Dr. Equity Investment 80k, Cr. Investment Income 80k
12/31/21 (fair value): NO ENTRY
1/16/22:
Dr. Cash 60k, Cr. Equity Investment
Water bottles have a replacement cost of $120,000, net realizable value of $70,000, and a normal profit margin of $40,000. It had an original cost of $100,000.
What is the market value of the water bottles? Record loss, if necessary.
Market Value: 70k
Dr. Inventory Loss 30k, Cr. Inventory 30k
Upper limit: 70k, Lower limit: 70k - 40k = 30k, Replacement = 120k. Record at middle value
Weighted-Average Accumulated Expenditure: $1,250,000
Specific Debt: 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2024, with interest payable annually on December 31. $750,000
General Debt: 10%, 5-year note payable, dated December 31, 2021, with interest payable annually on December 31 $550,000
General Debt: 12%, 10-year bonds issued December 31, 2020, with interest payable annually on December 31. $600,000
What is the avoidable interest?
(750k x 15%) + ([1.25M - 750k] x 11.04%)
11.04% is the Weighted-average interest rate
Total General debt = 1,150,000 (550k + 600k)
Total general interest = 127k (550k x 10% + 600k x 12%)
Weighed-average interest rate = 127k/1.15M = 11.04%
Cost of MRI machine (Jan 1): $1,000,000
Estimated useful life: 10 years
Estimated salvage value: $100,000
Productive life in hours: 20,000 hours
Hrs/year: Y1=1800, Y2 = 1500
Find depreciation for the first 2 years under:
Straight line
Activity depreciation
Double-Declining-Balance Method
Sum-of-the-Years’-Digits Method
Straight line: (1M-100k)/10 years -->90k Depreciation each year
Activity: (1M-100k)/20k --> rate = $45/hr
Y1:1800 x 45 = 81k, Y2: 1500 x 45 = 67,500
Double-Declining: *base = 1M*, rate 1/10 x 2 = 1/5.
Y1: 1M x 1/5 = 200k. Y2: (1M-200k) x 1/5 = 160k
Sum-of-years-digits = 1+2+3+...+10 = 55
Y1: (1M - 100k) x 10/55 = 163,636.36
Y2: (1M - 100k) x 9/55 = 147,272.73
Thien recorded goodwill of $290 million from acquiring Vy. At year-end, the net book value including goodwill was $1,160 million, but the fair value of Vy was $1,020 million.
What impairment loss should Thien record? Create the journal entry
Fair Value Test: 1,020,000 < 1,160,000 --> Impairment
Impairment Loss: 1,160,000 - 1,020,000 = 140,000
Dr. Loss on Impairment 140k, Cr. Goodwill 140k
On 1/2/25, Will acquires $300,000 of Arnold’s 7% bonds at a price of $263,972.53. Interest is received on 1/1 each year, and the bonds mature on January 1, 2028. The investment will provide Will with a 12% yield. The bonds are classified as held-to-maturity.
Journalize the entries on:
1/1/25
1/1/26
1/1/25:
Dr. Debt Investments $263,972.53, Cr. Cash $263,972.53
1/1/26:
Interest Receivable: 300k x 7% = 21k
Interest Revenue: $263,972.53 x 12% = 31,676.70
Dr. Interest Receivable 21,000
Dr. Debt Investments 10,676.70
Cr. Interest Revenue 31,676.70