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On March 21, Year 2, a company with a calendar year-end issued its Year 1 financial statements. On February 28, Year 2, the company's only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company's Year 1 financial statements?
Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements
Revenues and gains are recognized when they are:
realized or realizable orearned.
Expenses and losses are recognized when one of the following has occurred:
Consumption (using up) of benefit
Occurrence or discovery of loss of future economic benefit
Four fundamental recognition criteria are (subject to the pervasive cost-benefit constraint and the materiality threshold):
Definitions: The item must meet the definition of an element of financial statements.
Measurability: The item has a relevant attribute that can be quantified with sufficient reliability.
Relevance: The information about it is capable of making a difference in user decisions.
Faithful representation: The information is representationally faithful, complete, unbiased, and error-free.
“Realized” and “recognized” are not synonymous.
There are seven accepted criteria for revenue recognition:
Point of sale
Production and delivery—recognize prepayment (magazine subscription)
Percentage of completion—long-term contract
With passage of time—rent, interest
Completion of production (before sale)—when product is readily salable at determinable prices without significant effort
Completed transaction—in exchange for noncash assets
Installment basis—when cash is collected
In accordance with FASB ASC 860-10, when a transfer of financial assets occurs and the transferor surrenders control over those financial assets, a sale is deemed to have occurred as long as the consideration received is not:
a beneficial interest in the transferred assets controlled by the transferor.
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Decrease in both ending inventory and net income
In a period of rising prices, changing from FIFO to LIFO will cause ending inventory to ---------------------- because the earlier, lower-cost items will be included.
In a period of rising prices, changing from FIFO to LIFO will cause ending inventory to decrease because the earlier, lower-cost items will be included.
A company issues bonds at 98, with a maturity value of $50,000. what does the entry look like?
- Cash 49,000
- Bond Discount 1,000
- Bonds Payable 50,000