Chapter 8 - Solution Manual

C steels inventories should be reported on the

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c. Steel's inventories should be reported on the balance sheet at market. According to the lower of cost or market rule, market is defined as replacement cost. Market cannot exceed net realizable value and cannot be less than net realizable value less the normal profit margin. In this instance, replacement cost is between net realizable value and net realizable value less the normal profit margin. Therefore, market is established as replacement cost. Since market is less than original cost, inventory should be reported at market. d. Ending inventories and net income would have been the same under either lower of average cost or market or lower of FIFO cost or market. In periods of declining prices, the lower of cost or market rule results in a write-down of inventory cost to market under both methods, resulting in the same inventory cost. Therefore, net income using either inventory method is the same. Case 8-4 a. The direct write-off method overstates the trade accounts receivable on the balance sheet by reporting them at more than their net realizable value. Furthermore, because the write-off often occurs in a period after the revenues were generated, the specific write-off method does not match bad debts expense with the revenues generated by sales in the same period. b. One allowance method estimates bad debts based on credit sales. The method focuses on the income statement and attempts to match bad debts with the revenues generated by the sales in the same period. The other allowance method estimates bad debts based on the balance in the trade accounts receivable accounts. The method focuses on the balance sheet and attempts to value the accounts receivable at their future collectible amounts. c. Anth should account for the collection of the specific accounts previously written off as uncollectible as follows: * Correction of allowance account by debiting accounts receivable and crediting allowance for doubtful accounts. * Collection of specific accounts previously written off as uncollectible by debiting cash and crediting accounts receivable. d. Anth should report the face amount of the interest-bearing notes receivable and the related interest receivable for the period July 1, 2008 through December 31, 2009, on its December 31, 2008, balance sheet as current assets. Both assets are due on June 30, 2009, which is within one year of the date of the balance sheet.
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147 Anth should report interest income from the notes receivable on its income statement for the year ended December 31, 2008. The interest income would be equal to the amount accrued on the notes receivable at the stated rate for twelve months. Interest accrues with the passage of time, and it should be accounted for as an element of income over the life of the notes receivable.
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