Question

You are working for Mindak LLP, an accounting consulting firm, as a research and accounting specialist. Kay Candy Inc. asked you to research and explain the U.S. GAAP rules for AR, Inventory, PPE&E and Intangible Assets. The client wants you to reference and explain the rules in the FASB codification for these topics (answering the specific questions requested below). Kay Candy Inc. will then use your business professional memo to look up the rules in the codification.  

Please make sure you include in your memo discussion of all four items (a) to (d) below. Reference the relevant topic, subtopic, section and paragraphs. You should reference the codification by using “FASB ASC XXX-XX-XX-XX”. Your grade will primarily focus on whether you are identifying the proper topics, subtopics, sections and paragraphs in the codification. You can summarize each item referenced in 1-2 sentences. You should not be copying any of the codification into your memo as the client can go look directly at the codification reference.

a) Receivables: The company has sold goods to a customer in exchange for a note receivable (maturity date in three years). How does the company determine the exchange price?

b) Inventory: The company uses the FIFO inventory cost flow assumption. They believe that the value of the inventory has declined. How should they measure a decline in inventory valuation?

c) PP&E: The company has entered into a nonmonetary exchange with a piece of equipment. How should they account for the nonmonetary exchange of equipment?

d) Intangible Assets: The company has acquired a patent for a new product from another company. How should they recognize the patent acquisition?

Answer 1

a) Receivables: The company has sold goods to a customer in exchange for a note receivable (maturity date in three years). How does the company determine the exchange price?

Answer :As per GAAP, Receivable is determine on market price of good sold on the transaction date. company should pass a journal entry by debit the customer and crediting the sales accounts on market value of good sold.

b) Inventory: The company uses the FIFO inventory cost flow assumption. They believe that the value of the inventory has declined. How should they measure a decline in inventory valuation?

Answer : Under GAAP, inventory is recorded as the least of cost or market value, where market value is defined as the current replacement cost as limited by the net realizable value(NRV), where NRV is esteemed selling price less by any reasonable cost associated with the sale.

An entity can measure its inventory value to be declined if market value is generally falling and net realization value is decreased however cost of procurement was high as compare to current market price. or

Associated expenses of such inventory is high to sale, then also value of inventory will be in decline stage.

and hence, GAAP require that inventory be written down as soon as its cost is higher than its net realizable value. In a sense, this means the inventory is "underwater."

c) PP&E: The company has entered into a nonmonetary exchange with a piece of equipment. How should they account for the nonmonetary exchange of equipment?

Answer : as per GAAP, Company should account this transaction on fair market value of equipment on the date of the transaction.

d) Intangible Assets: The company has acquired a patent for a new product from another company. How should they recognize the patent acquisition?
Answer. As per GAAP, Company is not allowed to revalue the patent acquired as it has already been valued initially.
Now company should carry the value of patent as per the rule of US GAAP i.e
"Intangible assets are carried at historical cost less accumulated amortization and impairments.