Client Understanding Paper
In order to follow Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB), it is important that we have accurate information about certain items and follow certain rules. An explanation as to why each of these is necessary is contained here. We want to make sure that you understand the reasons why we are doing certain things. We will also provide examples with the explanations and hope that these will assist in your understanding.
Adjusting lower cost or market on inventory valuation
When valuing inventories, there are several methods that can be used. The first is the
First In, First Out (FIFO) ...view middle of the document...
Special circumstances must be considered when we construct a building. When we capitalize interest, the amount of interest that is capitalized is added to the basis or cost of the building. In order to be able to capitalize the interest on building construction, according to Schroeder, Clark and Cathey (2011), there certain criteria that must be met. These are “the asset must not be ready for its intended use and it must be undergoing activities necessary to get it ready.” If it does not meet the criteria, then the interest would need to be reported as an interest expense.
The amount of interest that can be capitalized according to FASB ASC 835-20-30 is the amount of interest that would not have been paid if the building or asset was already in existence (Schroeder, Clark, & Cathey, 2011). For example, if you spent $5,000 in interest, but only $3,500 would have been paid if the building was ready, then the amount that could be capitalized would be $1,500. If it cost $100,000 to build the building and the capitalized interest was $1,500 then the basis or cost of the building would be $101,500. The cost would then be depreciated over the useful life of the building (Schroeder, Clark, & Cathey, 2011). The remaining amount of interest would be reported on the financial statements as an interest expense.
Recording gain or loss on asset disposal
At times, we will sell or dispose of our assets. When we sell or dispose of an asset, it is important that we account for any gain or loss. If the asset is sold for more than its book value, then we would record a gain. If it is sold or disposed of for less than its book value, then we would record a loss (Kimmel, Weygandt, & Kieso, 2007). For example, if we had a piece of machinery that we had purchased for $5,000 and we had depreciated $4,000, it would have a book value of $1,000. If we sold it for $2,000, then we would record a gain of $1,000. If we sold it for $500, then we would record a loss of $500. If the piece of machinery were disposed of, then we would record a loss of $1,000.
If the item were one that had not been depreciated, we would use the cost of the item and calculate the gain or loss as we did with a depreciable asset. For example, if our asset cost $500 and we sold it for $600, we would record a gain of $100. If it were sold for $400, we would record a loss of $100. If the asset were disposed of, we would record a loss of $500.
Adjusting goodwill for impairment
There are a few items that are considered intangibles that are more difficult on which to place a value or a “useful life”. Among these intangibles are copyrights, trademarks, patents, franchises and goodwill. Accounting for these is handled differently than for assets that have a...