Client Understanding Paper
December 13, 2010
Client Understanding Paper
To be able to complete the analysis of the work papers of the current clients’ work papers certain information must be obtained. The topics of the information requested are the (1) adjusting lower cost of market inventory on valuation, (2) capitalizing interest on building construction, (3) recording gain or loss on asset disposal, and (4) adjusting goodwill for impairment. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper.
The adjusting lower cost of market inventory valuation ...view middle of the document...
6. There are arguments that the use of lower of cost or market rule for inventories, are only applied for downward adjustments, the arguments have been ignored because the importance of maintaining conservative financial statements was deemed more important.
Capitalizing interest on building construction has been an issue because of the question of when to capitalize the interest on the building construction. Because materials and supplies are needed for the construction of the building extra financing is needed from outside sources. Through this financing interest is incurred during the construction period. There is a debate to how the interest incurred should be recorded. Some arguments are that interest is a financing rather than an operating charge and therefore should not be charged against an asset. To counter that argument others note that if the asset was acquired from outsiders, interest charges would be part of the cost basis to the seller and would be included in the sales price (Schroeder, Clark & Cathey, 2005, p. 276). To address these opinions the Financial Accounting Standards Board issued SFAS No. 34, “Capitalization of Interest Costs.” This simply states that interest should be capitalized only when an asset requires a period of time to be prepared for its intended use. This statement was intended to recognize interest cost as a significant part of the historical cost of acquiring an asset (Schroeder, Clark & Cathey, 2005, p. 256). The qualifications for assets to meet the requirements are (1) assets that are constructed or otherwise produced for an enterprise’s own use and (2) assets intended for sale or lease that are constructed or otherwise produced as discrete projects. Another issue that was addressed by SFAS No. 34 was the determination of the proper amount of interest to be capitalized. The decision of the FASB was that the amount to be capitalized is the amount that could have been avoided had the asset been ready for use. To calculate the amount of avoidable interest to be used one must apply the appropriate interest rate to the average amount of the accumulated expenditures for the asset during the construction period.
Recording gains or losses on an asset disposal is important to ensure the gains and losses have been recorded correctly. When assets are sold, traded, or exchanged by an enterprise there is a loss or gain from the transaction. A loss occurs when an asset is sold, traded, or exchanged at a net amount lower than the original purchase value, or the basis, of the asset. A gain occurs when an asset is sold, traded, or exchanged at a net amount greater than the basis. To record the loss or gain on an asset disposal first the book value must be determined. To determine the book value of an asset the accumulated depreciation is subtracted from the cost of the asset. If the asset is sold for more than the book value then there will be a gain likewise if the asset is sold for...