The following were excerpts from the Accounting Teachers Conference Updates in Practical Accounting 2 which covers the gray areas in the said subject. I hope you find this one useful to better understand the gray areas in preparation for the actual board examination.
INSTALLMENT SALES
Valuation of Repossessed Merchandise
When the syllabus was formulated sometime 2003, because of certain issues needed to be resolved regarding the valuation of repossessed merchandise, it was suggested that any problem for CPA Board Examination in relation to valuation of repossessed (which is also applicable to trade-in merchandise), the FAIR MARKET VALUE of Repossessed (or Trade-in) Merchandise should be given instead of “estimated selling price or sales price”
ISSUE: PROPER VALUATION OF REPOSSESSED MERCHANDISE (2ND HAND MERCHANDISE)
Objective: Kieso and Weygandt commented that “the objective should be to put any asset on the books at its fair value or, when fair value is not ascertainable, at the best possible approximation of fair value”
(Comment supplied: it should be fair value at the date of repossession)
Objective: Kieso and Weygandt commented that “the objective should be to put any asset on the books at its fair value or, when fair value is not ascertainable, at the best possible approximation of fair value”
(Comment supplied: it should be fair value at the date of repossession)
Different Views:
— PAS 2 par. 28 – It should be at Net Realizable value (Estimated selling price less costs to sell and dispose)
— Skousen, Weygandt – The condition of the merchandise repossessed, the cost of reconditioning, and the market for second-hand merchandise of that particular type all be considered, some contend that repossessed merchandise should be entered at a valuation that will permit the company to make its regular rate of gross profit on resale.
— PAS 2 par. 28 – It should be at Net Realizable value (Estimated selling price less costs to sell and dispose)
— Skousen, Weygandt – The condition of the merchandise repossessed, the cost of reconditioning, and the market for second-hand merchandise of that particular type all be considered, some contend that repossessed merchandise should be entered at a valuation that will permit the company to make its regular rate of gross profit on resale.
RECOMMENDATION: For CPA Board Examination, the Fair Market Value should always be given instead of Estimated Selling Price /Resale Price.
GAIN ON REPOSSESSION
Time honored principle (quoted from the book of Allan R. Drebin, 1982 – Advanced Accounting)
“Ordinarily, however, conservatism would suggest that no more than the unrecovered cost, the difference between the receivable balance and the deferred gross profit balance, be assigned to the repossessed goods. No gain, then would be reported at the time of repossession; recognition of gain would await the sale of the repossessed goods.”
RECOMMENDATIONS:
1.Undergraduate – this principle should be emphasized.
2.For CPA Board Examination, distinguished the question as to:
·Gain to be recorded or recognized – it should be zero
·Gain on repossession – there should be a gain as computed. Proof of this are actual CPA board examinations in US and even US textbook
1.Undergraduate – this principle should be emphasized.
2.For CPA Board Examination, distinguished the question as to:
·Gain to be recorded or recognized – it should be zero
·Gain on repossession – there should be a gain as computed. Proof of this are actual CPA board examinations in US and even US textbook
FRANCHISE
There was actually no gray area involved, it is only a matter of interpretation.
For Notes Receivable to be considered REVENUE – 3 conditions:
Services – substantial performance, and
Period of refund – expired or non-refundable, and
Collectibility – reasonably assured
Services – substantial performance, and
Period of refund – expired or non-refundable, and
Collectibility – reasonably assured
If collectibility is not reasonably assured, then to recognize GROSS PROFIT), either use:
Installment sales method
Cost recovery method
Installment sales method
Cost recovery method
For Cash to be considered REVENUE – 2 conditions:
Services – substantial performance, and
Period of refund – expired or non-refundable
If the cash received or down payment is non-refundable and it represents services already performed, then the Cash down payment is considered as REVENUE.
Services – substantial performance, and
Period of refund – expired or non-refundable
If the cash received or down payment is non-refundable and it represents services already performed, then the Cash down payment is considered as REVENUE.
Non-refundable of franchise does not automatically considered revenue, following are excerpts from various sources:
Office of the Chief Accountant: US SEC
Revenue Recognition in Financial Statements –
Frequently Asked Questions and Answers
III. Topic 13.A.3. – Nonrefundable Payments
Revenue Recognition in Financial Statements –
Frequently Asked Questions and Answers
III. Topic 13.A.3. – Nonrefundable Payments
The staff's response to Question 5 in SAB 101 highlights the requirement under GAAP to defer revenue recognition in certain circumstances, notwithstanding the receipt of a nonrefundable upfront payment from the customer
Q: Question 5 of SAB 101 addresses a telecommunications company's accounting for nonrefundable up-front activation fees. How should the activation fee for 12 telephone service be accounted for in the following situation?
A: The staff believes that the revenue from the fee should be deferred and recognized over the expected term of the customer relationship
COST ACCOUNTING : PROCESS COSTING-DETECTION OF LOSS UNITS START, DURING, OR END OF PROCESS
The syllabus in Practical Accounting 2 focus only on Normal Lost (end of inspection)
Reason: Normal lost units – with inspection point
Reason: Normal lost units – with inspection point
There are two different opinions regarding this matter.
According to Usry, Hammer and Matz :
If the ending work-in-process passes thru the point of inspection, then no work done or no equivalent production for normal lost units.
If the ending work-in-process did not pass thru the point of inspection, then the work done or equivalent production for normal lost units should be the point of inspection –
—· If materials were added before the inspection point then 100% work done
— If materials were added after the inspection point then zero work done
If the ending work-in-process passes thru the point of inspection, then no work done or no equivalent production for normal lost units.
If the ending work-in-process did not pass thru the point of inspection, then the work done or equivalent production for normal lost units should be the point of inspection –
—· If materials were added before the inspection point then 100% work done
— If materials were added after the inspection point then zero work done
According to Horngren, Raiborn, Kinney and Barfield, Rayburn, and CMA
Whatever the stage of inspection would be, then the work done should always be the inspection point –
· If the materials were added before the inspection point then 100% work done
· If materials were added after the inspection point then zero work done
Whatever the stage of inspection would be, then the work done should always be the inspection point –
· If the materials were added before the inspection point then 100% work done
· If materials were added after the inspection point then zero work done
RECOMMENDATION: Undergraduate - the opinion of Horngren, et al should be given an emphasis.
CREDITS:
Antonio Dayag
ACCCOUNTING TEACHERS CONFERENCE
Naga City, 2011
Antonio Dayag
ACCCOUNTING TEACHERS CONFERENCE
Naga City, 2011
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