Chapter 8 - Solution Manual

Interpretive response the adjustment should be

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Interpretive Response: The adjustment should be estimated based upon the method used by the bank or a reasonable approximation of that method. The following is a sample computation of the amount of compensating balances to be disclosed where uncollected funds are involved. Assumptions: The company has agreed to maintain compensating balances equal to 20% of short- term borrowings. SAB Topic 6.H.4, Miscellaneous a. Periods required. Question: For what periods are ASR 148 disclosures required? Interpretive Response: Disclosure of compensating balance arrangements and other disclosures called for in ASR 148 are required for the latest fiscal year but are generally not required for any later interim period unless a material change has occurred since year end. b. 10-Q Disclosures. Question: Are ASR 148 disclosures required in 10-Q's?
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161 Interpretive Response: In general, ASR 148 disclosures are not required in Form 10-Q. However, in some instances material changes in borrowing arrangements or borrowing levels may give rise to the need for disclosure either in Form 10-Q or Form 8-K. FASB ASC 8-8 SFAS 115 Cross Reference FAS 115. Found at 320-10 Investments-Debt and Equity Securities. FASB ASC 8-9 ARB 43 and Inventory Found through Cross Reference. 330-10-30-1 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. Room for Debate Debate 8- 1 Team 1 Defend LIFO Cost of goods sold if the purchase is postponed until 19x9: Beginning Inventory: First Layer 10,000 x $15 $ 150,000 Second Layer 22,000 x $18 396,000 Purchases 250,000 x $20 5,000,000 Available 282,000 $5,546,000 Sold (245,000) Ending Inventory 37,000 646,000 Cost of Goods Sold $4,900,000 Cost of goods sold if the purchase is made in 19x8: Available from above 282,000 $5,546,000 Additional Purchase 40,000 x $17 680,000 Available 322,000 $6,226,000 Sold ( 245,000) Ending Inventory 77,000 1,446,000 Cost of Goods Sold $4,780,000 Difference $ 120,000 Calculation of ending inventory: Purchase in 19x8 19x9 10,000 x $15 $ 150,000 $ 150,000 22,000 x $18 396,000 396,000
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162 5,000 x $20 100,000 45,000 x $20 900,000 Ending Inventory $ 1,446,000 $ 646,000 Cost of sales Purchase in 19x8 19x9 40,000 x $17 $ 680,000 205,000 x $20 4,100,000 245,000 x $20 $ 4,780,000 $ 4,900,000 The difference: 40,000 x ($20-17) = $ 120,000 The use of LIFO allows MVP to expense 40,000 units as cost of sold at $17 rather than $20, thereby lowering cost of sales by $120,000 if the purchase is made in 19x8. This shows that management can manipulate earnings under LIFO simply by choosing when to purchase. Even though it is obvious that these items were not sold or consumed during the period. This makes the income statement look better than it otherwise would. Hence, for MVP the use of LIFO has value. To management, it could mean a bigger bonus.
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