ACC 541: Accounting Theory and Analysis
April 12, 2015
I would like to take the time to introduce myself, my name is Anne-Marie Sweat and I am a Staff Accountant with ABC LLC. I have been given the task of analyzing the work papers for your company and for that I am thankful. In my findings I have discovered that there are several items that additional information is needed in order to complete my analysis. I will try to be as clear as possible as to why these items are necessary for the following request for clarification.
Clarification of Items
1. Adjusting lower cost of market inventory on valuation (University of Phoenix, 2015)
2. Capitalizing interest on building construction (University of Phoenix, 2015)
3. Recording gain or loss on asset disposal (University of Phoenix, 2015)
4. Adjusting goodwill for impairment (University of Phoenix, 2015)
Lower of Cost of Market “The conservatism principle and a specific accounting pronouncement, Accounting Research Bulletin No. 43 (ARB No. 43) leads to an accounting valuation method known as the lower of cost or market, or LCM. In this method the term "market" includes both the market in which the company purchases its merchandise as well as the market in which it sells its merchandise.” (Lower of Cost or Market (Explanation)). This principle gives us as accountants much needed guidance when faced with two amounts to choose from. Either a smaller asset amount of less profit which is determined to be the best benefit of the client. (Averkamp, 2004-2015) There are several purposes for the lower of cost or market rule as follows:
1. They have to be objective, verifiable and realistic since they are what is used to calculate the performance of the company.
2. They are matching; which is an accounting principle that revenues and expenses associated with them are reported in the same accounting period.
3. There are two alternative values that can be recorded in the financial reports which can be either lower net income or lower value of an asset. (Schmidt, 2004-2015)
Capitalize Interest According to (FASB), “The interest cost eligible for capitalization shall be the interest cost recognized on borrowings and other obligations. The amount capitalized is to be an allocation of the interest cost incurred during the period required to complete the asset. The interest rate for capitalization purposes is to be based on the rates on the enterprise's outstanding borrowings. If the enterprise associates a specific new borrowing with the asset, it may apply the rate on that borrowing to the appropriate portion of the expenditures for the asset. A weighted average of the rates on other borrowings is to be applied to expenditures not covered by specific new borrowings. Judgment is required in identifying the borrowings on which the average rate is based.” (Summary of Statement No 34)
Disposal of Assets Disposal of assets is accounted for several different ways, which is determined by the nature of the disposal itself. The overall purpose to reverse the costs of the asset plus the depreciation and potentially netting either a gain or a loss.
Fully depreciated which means there were no proceeds from the disposal, the entry would be a debit to accumulated depreciation and a credit to the asset account.
A Loss is when the disposal or sale of an item is less than the cost of acquiring it; this entry would have to not only debit accumulated depreciation but the loss on the sale as well. The credit would again be to the asset account.
A Gain is the opposite when you make a profit, the entry that would be necessary for this is a debit to accumulated depreciation and then a credit to both the asset account and gain on the sale. (Bragg, 2013)
Adjusting Goodwill Goodwill is an intangible asset (meaning an asset that you can’t touch physically) for example a name-brand like NIKE. The brand has a