Recording Sales, Accounting Issues, Capitalizing Interest, Reporting Gains and Losses, and Contingent Gains and Losses
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1. Company A manufactures and sells small paper goods. They sell to major retailers such as Costco, Sam's Club and Wal-Mart. These large retailers demand that should goods be unsold at any time in the future, they may return the goods, without limitation, to the Company A and charge back transportation and a repack charge.
When should Company A record the sale? At the date of original shipment to the retailers; at the date the retailers actually sell the goods; when the retailers return merchandise and any unreturned goods can be determined to be sold? Are these goods "consigned goods"?
2. You are the CFO (Chief Financial Officer) of a Utility Company which owns several nuclear power plants. One of your plants has had many severe operational problems and state regulators are refusing to grant permission to restart the plant. In fact you will never get permission to restart this particular plant. The book value of this plant is 3.5 billion dollars.
Management has an offer to sell the plant to Canada. This is the only offer they have. Canada will disassemble the entire plant and ship it to Canada at their expense. They want to generate electricity to light up "We Love America" billboards all across the country without using oil. J They are offering 250 million dollars for the plant. Assuming management can get state department approval for the sale, they are still unsure as to whether to sell or not. Canada wants the plant shipped within 6 months and is pushing for a contract signing date.
What accounting issues (and accounting issues only) are present in this situation? Assuming the transaction takes place, what gain or loss would be recorded by your company?
3. What is the theoretical justification for capitalizing interest during the construction period of a new asset? What is the significance of obtaining a certificate of occupancy in relation to interest capitalization?
4. What are the general rules for how gains or losses on retirement of plant assets should be reported in income? Is an involuntary conversion considered a retirement?
5. Explain how gains or losses on impaired assets should be reported in income. Is an asset impairment considered an asset retirement?
6. Define and discuss Contingent gains and Contingent losses and why do we record one and not the other? What principle is involved?
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Solution Summary
This solution of 678 words answers a variety of questions that touch upon recording sales, accounting issues, capitalizing interest, reporting gains and losses, and contingent gains and losses. All references used are included.
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Question 1
First, according to Anthony, Hawkins and Merchant (2004) "[in] consignment shipment the supplier [Company A] ships goods to the consignee [major retailers] who attempts to sell them. The consignor retains title to the goods until they are sold. The consignee can return any unsold goods to the consignor" (p. 117).
Second, Company A should record the sale only when they are sold by the major retailers which it can determined when the retailers return merchandise and any unreturned goods can be determined to be sold. Hence, the entry upon shipment of the consignment is:
Debit: Merchandise on consignment xxx
Credit: Merchandise inventory xxx
Question 2
One of the accounting issues would be how to present the plant in the financial statement of the Utility Company - the plant is no longer a working asset, hence it should be removed from the company's property, plant and equipment. Another is how much should it be valued in the financial statements - $3.5 billion or $250 million?
Assuming that the Utility Company sold the plant to Canada, the recognized loss would be the difference between the sales price and the book value of the plant which is ...
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