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Week 2 Case Assignments
1.) To determine the amount at which inventory should be reported on the December 31, Year 1, balance sheet, Monroe Company compiles the following information for its inventory of Product Z on hand at that date:
Historical cost $20,000
Replacement cost 14,000
Estimated selling price 17,000
Estimated costs to complete and sell 2,000
Normal profit margin as a percentage of selling price 20%
The entire inventory of Product Z that was on hand at December 31, Year 1, was completed in Year 2 at a cost of $1,800 and sold at a price of $17,150.
Required:
Determine the impact that Product Z has on income in Year 1 and in Year 2 under (1) IFRS and (2) U.S. GAAP.
Summarize and discuss the difference in income, total assets, and total stockholders' equity using the two different sets of accounting rules over the two-year period.
Do not forget to include proper APA formatting and citation where necessary. Do not forget to respond to the other cases this week.
2.) Atlanta Tours Company entered into a five-year lease on January 1, Year 1, with Duck Boats, Inc. for a customized duck boat. Duck Boats, Inc. will provide a vehicle to Atlanta Tours Company with the words "Gone with the Wind" carved into the sides. Following are the terms of the lease arrangement.
Fair value of the wagon at the inception of the lease is $10,000
There is an eight-year estimated economic life
Estimated (unguaranteed) residual value is $3,500. Atlanta Tours Company does not absorb any gains or losses in fluctuations of the fair value of the residual value.
Annual lease payments of $2,000 are due on January 1 of each year. The implicit interest rate in the lease is 6 percent.
There is an option to purchase at end of lease term for $4,000.
The lease is noncancelable and may not be extended.
Required:
Discuss whether Atlanta Tours Company should classify this lease as an operating lease or as a finance lease under (a) IFRS and (b) U.S. GAAP.
Discuss your reasoning.
Do not forget to include proper APA formatting and citation where necessary. Do not forget to respond to the other cases this week.
3.) Ultima Company offers its customers discounts to purchase goods and take title before they actually need the goods. The company offers to hold the goods for the customers until they request delivery. This relieves the customers from making room in their warehouses for merchandise not needed yet. The goods are on hand and ready for delivery to the buyer at the time the sale is made. Ultima Company pays the cost of storage and insurance prior to shipment. Customers are billed at the time of sale and are given the normal credit period (90 days) to pay.
Required:
Determine whether Ultima Company should recognize revenue from the sale of goods at the time title passes to the customer or whether it should defer revenue recognition until the goods are delivered to the customer.
Answer for All Three Questions:
The FASB’s codification was implemented to assist users of GAAP. The codification is separated into two sections; authoritative and nonauthoritative. The purpose is to make finding GAAP standards easier. It does not change GAAP, it simply changes the way it is presented (McEwen, Hoey, Brozovsky, 2006, pp. 391-398). I personally think that the FASB’s codification was a great addition. The codification helps users to easily navigate through the standards which makes finding answers much less of a headache. Accounting laws and regulations are constantly changing and having somewhere to easily locate these regulations allows for less mistakes and more compliance. Using the FASB’s codification, I searched for operating lease recognition. It was easy to find using the search bar at the top. It came up as 840-20-05 Leases-Operating Leases-Overview and Background and from there I could click on the 20-Operating Leases to find the section 25-Recognition. I have used the website previously, but I always found it quite simple to locate what I was looking for. Overall, I think that the FASB’s codification was a good idea because it enables users of GAAP to easily locate standards.
References
Financial Accounting Foundation. (2016). FASB Accounting Standards Codification [Data file]. Retrieved from
McEwen, R.A., Hoey, T.J., & Brozovsky, J.A. (2006). The FASB's Codification Project: A Critical Step toward Simplification. Accounting Horizons, 20.4, 391-398.
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