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    issues of inventory, interest, asset disposal, impairment

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    Consider the following scenario: As a newly hired Staff I, you are responsible for analyzing the work papers for one of the clients of your organization. Your client is not clear about why you are asking for information on the following topics:

    o Adjusting lower cost of market inventory on valuation
    o Capitalizing interest on building construction
    o Recording gain or loss on asset disposal
    o Adjusting goodwill for impairment

    Write a response that addresses your client's request.

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    Solution Preview

    Dear Client,

    The reason I am asking about information in your inventory, interest costs, asset disposal and goodwill amounts is that they have special treatment under generally accepted accounting rules. Therefore I need information on each of these for areas to be sure that the assets, gains and losses and any impairments are properly recorded and related footnotes are complete and clear. Below I explain each of the four areas individually and let you know what information I need to complete my work.

    1. Inventory.

    Inventory is usually reported at your actual cost. However, generally accepted accounting principles requires inventory to be reported at the "lower of cost or market" so I need information about the market in order to do this test to see if reporting your inventory at cost is appropriate. The market value I need to use to test your inventory and ensure that it is reported at the lower of cost or market is usually replacement cost. That is, the purchase price plus all acquisition costs.

    The replacement cost, however, is potentially adjusted for a ceiling or floor value. The ceiling is the net realizable value, that is, your selling price less selling costs. The floor is the net realizable value minus a normal profit margin. So, as you can see, I need a number of things to do my work on your inventory:

    ? Actual costs
    ? Replacement costs
    ? Net realizable value (selling prices less selling costs)
    ? Normal profit margin

    I will then test each product to see if market is below your actual cost. If the market values at the period end are lower than the product costs, you will need to record a loss and restate ending inventory to the ...

    Solution Summary

    Your response is 1,127 words and explains the details needed from the client and why those details are needed. It discusses how you would check to see if each of these areas is reported in accordance with U.S. GAAP.