[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

[Skynet]

Those additional information is nothing more than info just to throw you off. The only important info is the carrying value and the insurance money received. You will run into this a lot. Often the best way to get through this type of long question is to read the last sentence to see what they are asking.

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BEC - 78
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REG - 87

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[Oimie]

@That piece of info is causing me to not know whether to choose answer (a) $1,000 or (b) $300.

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

[Skynet]

It should be a. $1000. Since the carrying value on the date the truck was destroyed is $2500. The new engine was already included in the $2500 since it was installed on May before the accident. The invoices for repairs of $500 has no effect on the carrying value since because it should be expensed.

The really key here in this question is figuring out the carrying value and the insurance reimbursement to figure out the answer. Both of he info was readily given.

AUD - 90
BEC - 78
FAR - 84
REG - 87

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BEC : 78
REG : 87
FAR : 84
AUD : 90

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[Oimie]

@Skynet Yeah, that was the same exact way I was thinking. But when I went to check Wiley's answer key/explanation, it says it is (b) $300. It says “The unadjusted carrying value ($2,500) must be adjusted for the capital expenditure ($700) which has not yet been recorded.” I'm like =.= really dude? Where does it say that the carrying value is unadjusted in the question. And it just makes me wonder if there is a rule that states, expenditures are only capitalized once an invoice is received and recorded?

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

[Skynet]

That makes no sense. And you are right. The question was ambiguous. Based on the info on the question. I had assumed that the $2500 was the the adjusted amount. And like you said if Wiley's would have said that the amount was unadjusted then yes the answer should be $300.

I would assumed that the addition of the new engine amount would have already have been known even before the actual invoice was to be received at a later date.

This is why I'm not really a big fan of Wiley's.

I didn't have this problem with Gleim. The questions may be long sometimes but are at least clear on what they are asking.

AUD - 90
BEC - 78
FAR - 84
REG - 87

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Phase II : Megan Fox - In Progress
Phase III : Megan Fox & Scarlett Johansson Lingerie Pillow Fight
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BEC : 78
REG : 87
FAR : 84
AUD : 90

World Domination Plan

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Phase II : Megan Fox - Initiated
Phase III : Bring back 8-Tracks
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[Anonymous]

Hi Oimie. I studied from the same book and believe that Wiley's answer is correct. The installation of the new engine cant be recorded until the invoice is recieved. Therefore, the answer given in the book is correct. Sometimes Wiley's books mess up the answers by selecting the wrong letter but if you really learned the concept you'll catch those. I only found like three instances betwen the FAR and AUD books though.

[Oimie]

@Coquipr41: That should be the case according according to Wiley's answer but are you sure? I find that rule really weird especially since accounts payables exist. I had always thought expenditures are capitalized immediately and the carrying value goes up after the “addition” is added.

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

[Peterman25]

I'm with ya Oimie…

I would love to see any business capitalize an invoice for “various repairs”. That = maintenance which is expensed.

And since we have to assume that these invoices are going to be or are capitalized then why can't we assume that Rudd Co has a capitalization policy where anything under $1,000 is expensed?

BEC 7/14 - PASS
FAR 10/14 - PASS
AUD 1/15 - PASS
REG 4/15 - PASS

AZ license - Official 8/20/2015

[excel monkey]

I'm with Coquipr41 on this one, I get a $300 gain. Obviously the $500 various repairs is expensed, and won't effect gain/loss. For those of you who get $1000 what would the journal entries be for both the increase to the asset in May and then to record the invoice in July, since the problem clearly states the $700 invoice is not recorded until July 15?

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

[CM]

I remember seeing a similar question, if not the same question, in the Ninja MCQ, and I also chose the $1000 as the gain. However, the explanation stated that even though the $700 expense is supposed to be capitalized right away, it was not recorded until July 15. Therefore, the carrying amount of the asset was understated.

AUD - 80
BEC - 73
FAR - 78
REG - NINJA in Training

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I really cannot believe BEC is giving me such a hard time.

FAR: 78 (5x)
AUD: 80 (3x)
BEC: 9/07/2016
REG: 12/06/2016

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[Anonymous]

Oimie, i just think about it like a purchase of goods. They are recieved before the invoice but its not recorded in the books until the invoice is received.

[MrFish]

received and “recorded” a $700 “invoice”. Invoice is for accounts payable not payment. Accounts payable pairs with capitalization. Payment pairs with cash. They recorded the accounts payable / capitalization late. Since the situation states that they recorded the $700 capitalization late, the carrying value of $2,500 can't include the $700.

[Oimie]

@Mr. Fish so it cannot be something like this?:

May: Asset 700

---

A/P 700

July: A/P 700

---

Cash 700

The way I have been taught in college was always “Recognize revenues when earned and expenses when incurred” and not “Recognize revenue when invoice is sent, and expense when invoice is received.” Anyone have any reliable resources where it can clear up this matter? Or can anyone hit up a senior CPA and see what he/she says?

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

[Oimie]

@Coquipr41: So when you purchase goods and goods are received, but you have not received an invoice yet, you do not debit inventory and credit accounts payable?

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

[Anonymous]

Based on the posts in this thread, this question demonstrates very clearly how careful you must be about the assumptions you make on such questions.

The dilemma here is the $700 engine and whether the $2,500 included the capitalization for the new engine. In my studies for FAR the examiners seem to love questions like these where they can trick you into assuming that something that should've happened in fact did – in this case that the 700 was capitalized at the time the goods were delivered/services performed, but that didn't happen. In the question it says they didn't record the 700 until they received the invoice. They recorded the transaction late, but just because they recorded the transaction later than they should have doesn't mean it shouldn't be capitalized, therefore the adjusted book value of the truck would be the 3,200 resulting in the 300 gain at disposal.

You must read the questions very carefully. Taking them at their face value will be a much more effective approach than trying to assume your way towards the correct answer.

[Author]

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