Acc 541 Week 2

Week Two: Response to Client's Questions

Frank A. Harling

ACC/541

November 14, 2011

Rebecca Kime

Week Two: Response to Client's Questions

I have been taking a look at the work papers for your company and I understand that you have a few questions about the following information that I am requesting. I want to try to help bring clarity to the following topics: Adjusting lower cost of market inventory on valuation, Capitalizing interest on building construction, Recording gain or loss on asset disposal and Adjusting goodwill for impairment.

Adjusting Lower Cost of Market Inventory on Valuation

First let me make clear of the understanding of the Lower of cost or Market method. According to the American Institute of Certified Public Accountant “market should not exceed the net realizable value (i.e., estimated selling price in the ordinary course of business less reasonably predictable cost of completion and disposal), and market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin” (Schroeder, Clark, & Cathey, 2011, P. 268). Let me provide an example for you. Let’s say that your company is in the business of selling coffee cups that you purchase from a supplier. In December 2010 you have 100 cups in your inventory that you purchased from your supplier for $2 per cup but you plan to sell those cups for $4 per cup profiting $2 per cup. On December 31st your supplier does a permanent price drop to where those same cups are now only $1 per cup. You know that your competitors will swoop in and buy up all of those cups and drop the price they sale them for to $3 a cup. You must follow suit with reducing your price to $3 as well but that means you will be taking a $100 loss because you actually paid more for your inventory. You ask yourself how this loss should be reported on the financial statement. Should you report the loss as just a smaller profit in 2011 when the cups are sold, or should you...