Client Understanding Paper

To properly use the cost method in valuing your property, all direct and indirect costs associated with it must be applied. Some general rules apply to the cost method including that for merchandise on hand at the beginning of the tax year, cost means the inventory price of the goods. Also, for any merchandise purchased during the year, cost means the invoice price less discounts plus freight and other charges occurred in acquiring the goods. For any merchandised produced during the year, cost means all direct and indirect costs that have to be capitalized under the uniform capitalization rules (UNICAP). Under UNICAP, you must capitalize the direct costs and partial indirect costs for production or resale activities subject to these rules. Rather than claiming these costs as a current deduction, you include them in the basis of property your produce or acquire for resale. You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or dispose of the property. Under the lower of cost or market method, compare the market value of each item on hand on the inventory date with its cost and use the lower value of its inventory value. This method is applied to goods purchased and on hand and basic elements of cost of goods being manufactured (direct materials, direct labor). This method does not apply to goods accounted for under the LIFO method.

As an amusement park operator, it is clear to assume that WAL’s intention of acquiring the wound-up company’s assets was to move and operate them at the new location. Therefore, transportation cost ($350,000) and the other costs to get them up and running ($400,000 and $500,000) should be capitalized as part of acquired asset ($4.25 million). By the lower of cost or market valuation system rule, $4.25 million will be recorded for the purchase price. In addition, 0.60 million valuation difference needs to be accounted for using appropriate ASPE recommendations. This capitalization approach will lead to the same effects as the above two approaches toward stakeholders.

835-20-30-2   The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the assets ' acquisition periods

835-20-15-8 Land that is not undergoing activities necessary to get it ready for its intended use is not a qualifying asset. If activities are undertaken for the purpose of developing land for a particular use, the expenditures to acquire the land qualify for interest capitalization while those activities are in progress. The interest cost capitalized on those expenditures is a cost of acquiring the asset that results from those activities. If the resulting asset is a structure, such as a plant or a shopping center, interest capitalized on the land expenditures is part of the acquisition cost of the structure. If the resulting asset is developed land, such as land that is to be sold as developed lots, interest capitalized on the land expenditures is part of the acquisition cost of the developed land.

330-10-30330-10-30-1 The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production cost, and its determination involves many considerations. 330-10-30330-10-30-2 Although principles for the determination of inventory costs may be easily stated, their application, particularly to such inventory items as work in process and finished goods, is difficult because of the variety of considerations in the allocation of costs and charges.

When calculating the percentage change in inventories, an issue arises when using either the lower cost of market or the market value. When looking at the calculations for finished goods inventory (insulated wire) and copper rod inventory Laramie has applied the lower cost of market. However, the calculation pertaining to plastics inventory reveals that the market value should be used for classification, but Laramie has used cost. The percentage change of the plastics inventory if the $.12 per pound is used is a 27% decrease. The importance of classifying inventory correctly

* Accumulation of costs exceeds the amount expected for acquisition or construction of the asset

Estimate the effect of capitalizing software costs on Microsoft’s fiscal 1997, 1998, and 1999 income statements and balance sheets. Assume that 1) 60% of Microsoft’s research and development expenses were incurred after technological feasibility was established, 2) the average product life was two years, 3) the company had always capitalized these costs; and 4) the company begins amortization capitalized software costs at the beginning of the following fiscal year.

The statement of reserves should be reviewed, since the acquisition of the tavern, through the purchase of the seller’s interest, results in the buyer, Ms. Growne accepting both known and unknown liabilities of the business prior to her ownership. In addition, by reviewing the financial statements to look at the net operating gain or loss, Ms. Growne can determine if there is a loss she can offset against her other sources of income. For some individuals, the idea of being able to offset other income with these losses incurred prior to ownership is appealing, due to the tax benefit that may result. However, if the buyer does not have significate income to be offset or is not in a higher tax brackets, this benefit of the acquisition through interest becomes less attractive. In addition, if the sellers basis in the assets are significantly less than the assets fair market value, the buyer is likely to incur greater gains on the assets in the future, resulting in a higher taxable income and leading to negative tax implication. In contrast, if the assets of the business were purchased, the buyer would not be susceptible to prior liabilities and the seller must examine their basis for each asset, compare it with the assets current market value, and incur any applicable gains or losses, intern shifting the tax consequences of an increase in

As part of the business and finance module, I am require to write a report, discussing how depreciation impacts a firm in the construction industry. Within this report I will discuss different areas of depreciation such as what is depreciation? , causes of depreciation, its importance in the construction industry, how depreciation affects profits and how depreciation can be measured. I will also discuss the different methods for calculating depreciation and the effects on accounts if depreciation is not accounted for. In this report, I will be giving examples of fixed assets that are common to the construction industry and also give examples of how depreciation is calculated.

3. Depreciation: The moment a product is sold it is considered as used product and price of the product is less. There are some exceptions to this rule as land; gold etc. usually appreciates over time. For other products customers are actually buying products that will depreciate over time.

Property, Plant & Equipment (PPE) (AASB 116): “Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item including borrowing costs that are related to the

Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for leasehold improvements. Tools, dies, and molds are amortized using the straight-line method over 3 years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property, plant, and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Any

Revenue expenditure is defined as “a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same accounting period. This yields the most accurate income statement results,” (Revenue Expenditure, n.d). On the other hand, capital expenditures are defined as “the funds or assumption of a liability in order to obtain physical assets that are to be used for productive purposes for at least one year. This type of expenditure is made in order to expand the productive or competitive posture of a business. A capital expenditure is recorded as an asset, rather than charging it immediately to expense. The fixed asset is then charged to expense over the useful life of the asset, using depreciation” (What is a capital expenditure, n.d). The distinction between revenue and capital expenditures is important because revenue expenditure is charged as soon as the cost is incurred, while capital expenditure is depreciated over the life of the asset. “If the asset’s life is increased, the efficiency provided is increased, or if output is increased, its service potential has increased, and the cost of expenditure should be capitalized and written off over the expected period of benefit. All other expenditures made subsequent to acquisition should be expensed as incurred,” (Schroeder, Clark & Cathey, 2014, p. 318).

IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market. 14.