[Oimie]

When I feel like as if the information is not sufficient. For example:

On July 1, year 4, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying value was $2,500. On July 15, year 4, Rudd received and recorded a $700 invoice for a new engine installed in the van in May year 4, and another $500 invoice for various repairs. In August, Rudd received $3,500 under it’s insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain(loss) on disposal of the van in its year 4 income statement?

a. $1,000

b. $300

c. $0

d. (200)

Am I wrong to question whether or not Rudd. Co already capitalized the $700 before the accident ($1,800 + $700)? Cause technically shouldn’t the the carrying value increase the moment the new engine was installed?. It says the engine was installed in the van on May year 4. The carrying value is $2,500 as of July 1, year 4. But the invoice of $700 didn’t didn’t come in until July 15th.

So what are the rules here? It’s scenarios like these that are demotivating me.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[excel monkey]

Oimie, I would not debit inventory and credit accounts payable until the invoice is received. There should be a three way match between the internally generated purchase order, the receiving report, and the vendor invoice prior to recording accounts payable for the inventory.

Two questions for you Oimie –

1) The question specifically states the invoice was received and recorded on July 15. It says nothing about when it was actually paid. So, for the journal entries you proposed, there would have to be one in between to record the actual invoice, per the question. What would it be?

2) Do you really want your accounts payable folks (or anyone, for that matter) to be able to record an accounts payable without proper documentation (the invoice, in this case)? What would prevent them from entering fraudulent transactions?

FAR - 91
AUD - 88
BEC - 86
REG - 79

[Anonymous]

I worked for a small company and the invoice would come with the goods most of the time but we had a couple of instances were the invoice came after and we were not able to enter it until that final invoice came in to make sure that they were billing the right amount/price. We all know that under accrual basis the expenses are recognized when incurred. So I know were you are coming from. I just associated that MCQ saying “received and recorded invoice” to that experience. I really dont want to confuse you. I know you understand the concept. Some of these MCQs do include certain things to confuse you. This is one of them.

[mla1169]

I think I can clear this up for you. If the company had recorded the new engine in May, they would have debited the asset and credited a liability, which may have been accounts payable. They did not do that in May, which is why the problem states they received and recorded the bill. If it had been done at the time of purchase the bill would already have been recorded. That one word in the problem makes it clear that the $700 was not part of the $2500 value of the truck.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Oimie]

@excel monkey: You made a very good point in your first question. I see the picture now prior to reading mla1169's reply, which sums it up. And the more I think of it now, the more is makes sense now. Thank you and mla1169!

As for your second question, it might be my lack of knowledge and/or experience, but I actually don't find it unreasonable (accounting principle wise) if a “company” records accounts payable prior to receiving an invoice as long as the goods were already received. But certainly recording it with proper documentation would decrease the opportunities for fraud.

@Coquipr41: I see! Thank you!

This whole thing will probably stick in my head for the rest of my accounting career now haha! Thanks guys!

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[mla1169]

Well if you're using the accrual method you must record something when goods or services are received even if there is no corresponding invoice. If you work for a company that has a receiving dept, the receipt will go in as a debit to inventory or an expense and the offsetting account will be something like unvouchered receipts. If you're just booking an estimate through a journal entry the debit would be to an asset or expense and the offset would be accrued accounts payable which would be cleared out by receipt of an invoice.

This is getting ahead of things but if you have inventory at year end but haven't received an invoice something HAS to be recorded on the GL for it, unless you're on cash basis. Auditors look for that, and will request an adjusting JE if it hasn't been done yet.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

No problem Oimie! I like this kind of discussion because they always help one way or the other. When are you taking the exam? I'm taking AUD next week and the nerves are kicking in. Lol. But I feel more confident in comparison to the other two.

[Oimie]

@mla1169: I would suppose so! But I guess this will vary from entity to entity.

@Coquipr41: I just ordered my transcript to be sent in to the CPAES this past Wednesday. Waiting to get approved and unsure when I will be taking it yet. But at the pace I am studying, I think I will need at least 2 months of studying for FAR. As you can see, it bugs me to not understand something and I don't feel confident if I am not at least ~85% familiar with each topic.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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