On the balance sheet inventory is listed in the current assets section. As a current asset, inventory is viewed by users of financial statements as an asset that may be readily converted to cash if needed. In line with the historical cost principle, the valuation of inventory is solely based on the amount the inventory was purchased for. However, if the value of the inventory decreases below the original cost, then when valuing inventory the historical cost principle must not be used in this case. The reason for such a decrease in value could be for many reasons such as price level changes in the market, obsolescence, or a natural disaster such as a flood or fire. In lieu of such events the ...view middle of the document...
The market price refers to terms such as replacement cost and other terms used to calculate the market cost such as the net realizable value (NRV). The NRV is the price in which during normal operations the inventory is estimated to be sold at minus the amount it cost to dispose and complete the item.
Capitalizing Interest on Building Construction
When companies purchased long term assets such as buildings they usually procured the funds by issuing debt or by securing the funds from a financial institution such as a bank. Per GAAP institutions are required to interest cost incurred while the acquisition is in progress or during the construction of the asset. By capitalizing the interest the total interest amount is added to the original cost of the asset which adheres to the historical cost principle. The expense will then be depreciated over the life of the asset and not fully charged against earnings for the current period. The capitulation of interest period should begin when expenditures for the asset is made.
One of the categories of assets in which the capitalization of interest is allowed is the construction of a building in which the company plans to use to generate revenue. For assets that are already in service and assets that are not intended to be used to generate income the interest should be charged against earnings and not capitalize. In the case of purchasing land the interest should only be capitalize if the land was purchase with the intention to build a building on the land. In the latter case the interest will be added to the cost basis of the building in capitalized.
Recording gain or loss on asset disposal
Over the course of the life of an asset the value of the asset is depreciated over multiple periods of the lifespan of the asset as a depreciation expense, which reflects the decreasing value of the asset. When the asset is no longer useful to the institution the asset is disposed of and the asset account is cleared to reflect the disposal and the accumulated depreciations account is cleared to show that the value of the asset decreased over time. Any differences between the two latter accounts are reconciled by either recording a loss or a gain. A gain should be recorded if the sale of a long-term asset is more than the recorded book value of the asset, and a loss should be recorded if the sale of an asset is less the recorded book value.
For an example, say if a truck company sales of the company trucks for $5,000. On the company records indicates that the original cost of $30,000 less accumulated depreciation of $26,000. Therefore, the current book value of the truck is $4,000. Therefore, the sale of the truck for $5,000...