Assets & related topics Flashcards
Define Cash & Cash equivalents
-Cash incudes both currency and demand deposits with banks and/or other financial institutions.
-Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value.
Name two methods of accounting for the recognition of credit loss adjustments (write-offs) of outstanding accounts recievable
Direct Write off
Debit Bad debt (or credit loss) expense
Credit AR
Weakness (bad debt (or credit loss) expense is not matched to sales, and accounts receivable are overstated. Not allowed under GAAP
Current Expected Credit loss (CECL) method
Debit Allowance for credit losses
Credit Accounts receivable
Strengths: Matches credit loss adjustments with credit sales. Accounts receivable fairly stated. Required by US GAAP.
Name 2 methods for estimating credit losses
-Percentage of Accounts receivable at year-end
- aging of accounts receivable at year-end
Using the current expected credit loss (CECL) method, give 2 journal entries to recognize the estimated credit losses and then to adjust expected credit losses for write-offs of outstanding accounts receivable
Recognize estimated credit losses
Debit Credit loss expense
Credit Allowance for credit losses
Adjust credit losses for write offs
Debit Allowance for credit losses
Credit Accounts receivable
What is the difference between factoring with recourse and without recourse
With recourse
- The factor may return the account to the company if it subsequently requires a credit loss adjustment. Potential liability and risk of loss remains with the company.
Without recourse
- The factor assumes the risk of loss if the account requires a credit loss adjustment (write-off)
At what value should non-interest-bearing promissory notes be recorded?
At the Present value of all future payments required by the note. The payments should be discounted at the market interest rate.
Notes receivable may be discounted “with” or “without” recourse, what is the difference
Discounting with recourse
- The holder remains contingently liable.
- Company bears risk of uncollectables
Discounting without recourse
- The holder assumes no further liability after discounting
-Factor bears the risk of uncollectibles
Describe the computational steps required in “discounting a note”
- Compute maturity value (remember to include interest to maturity).
- Compute the “discount” (remember to use maturity value).
- Get proceeds by subtracting discount from maturity value.
- Compute interest income as the difference between proceeds and face of note.
When does the title to goods pass for each of the following:
- FOB destination
- FOB shipping point
-Consigned goods
-FOB destination- when received by the buyer
- FOB shipping point- when given to common carrier
- Consigned goods- when sold to a 3rd party by consignee
Describe an inventory consignment arrangement. Also how are the consigned goods carried on the parties’ balance sheets?
Consignor gives goods to consignee for sale to 3rd parties. Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.
How is net realizable value calculated in the lower of cost and net realizable value method?
Net realizable value is the net selling price less completion and disposal costs.
Under US GAAP, how is market calculated int he lower of cost or market method?
In the lower of cost of market method, “Market” generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.
- Ceiling- Net realizable value (estimated net selling price less completion and disposal costs).
- Floor- Net realizable value minus normal profit margin.
Explain the difference between periodic and perpetual inventory methods
Periodic
- The quantity of inventory is determined only by physical count.
- Ending inventory is physically counted and priced.
Perpetual
- Inventory is updated for each purchase and for each sale.
- keeps a running total of inventory balances.
Name several cost flow methods for inventory
-Specific identification
- FIFO
- LIFO (Specific goods and dollar value)
-Averaging
- Weighted average (associated with periodic)
- Moving average (associated with perpetual)
During periods of rising prices, the use of LIFO vs. FIFO has what effect on the valuation of ending inventory and reported net income?
Both ending inventory and net income will be lower when LIFO is used during a period of rising prices
LIFO= Lowest
When are losses on firm purchase commitments recognized?
Losses are recognized in the period in which the price declines.
debit estimated loss on purchase commitment
Credit Estimated liability on purchase commitment
How is fixed -asset carrying value computed under US GAAP?
Carrying value=Historical cost- ACC depreciation- impairment
Give examples of costs to be capitalized as land
Acquisition price
- closing costs such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
- any mortgages, liens, or encumbrances on the land which the buyer assumes
Preparation costs, such as surveying costs, leveling costs, tree removal
- Cost of razing an existing building, in getting land into condition for intended use.
- LESS: Proceeds from sale of assets on land
NOTE- Excavating costs for a building and cost of improvements with a definite life are not included in land.
Give some examples of capitalizable costs for:
- Acquisition of equipment
- Acquisition of bulding
Acquisition of equipment
- Purchase price
freight-in
installation
testing
taxes
LESS any cash discounts allowed. *
Acquisition of building
- Purchase price
-deferred maintenance
-Alterations
- improvements
- architect’s fees.*
- If equipment or building is constructed by company, capitalized costs could include construction period interest.
Describe the proper accounting for ordinary vs. extra ordinary repairs
Ordinary repairs
- are expensed as repairs and maintenance, They do not increase the life or utility of the asset.
Extra ordinary repairs
- either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. IF the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.
State 2 rules concerning capitalizing interest
- Only capitalize interest on money actually spent, not on amount borrowed.
- The amount of capitalized interest is the lower of:
-Actual interest cost incurred
- Computed capitalized interest (Avoidable interest)
For capitalizing interest, when does the capitalization period begin?
It begins when 3 conditions are met:
1. Expenditures for the asset have been made.
2. Activities that are necessary to get the asset ready for its intended use are in progress.
3. Interest cost is being incurred.
Ends when the asset is substantially complete and ready for its intended use.
Name the most common depreciation methods.
Straight-line
Sum-of-years digits
Double Declining Balance
Units of Production
Straight-line
(Cost-Salvage)/Useful life
Sum-of-years digits
Sum of years=n(n+1)/2
(Cost-Salvage) * (years remaining)/ (Sum of years)
Double Declining balance
2* straight-line rate * Net book value of asset
*no deduction for salvage to determine the depreciable base. Depreciate down to salvage value.
Units of Production
(Cost-Salvage)/ Estimated hours * Actual hours for period.
State the rules for computing depletion on natural resources.
Remember it is REAL property
R- Residual value (Subtract)
E- Extraction/ development cost
A- Anticipated restoration cost
L- Land purchase price
Cost of land + Extraction Dev. Costs+ Anticipated restoration costs- residual value * Units extracted= Depletion
What is the calculation for impairment losses for property, plant, and equipment under US GAAP?
The amount by which the carrying amount exceeds the fair value of the asset.
Is restoration of impairment losses permitted under US GAAP?
Restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use.
How are purchased intangible assets and internally developed intangible assets recorded under US GAAP?
Purchased intangible assets
- recorded at cost, including legal and restoration fees.
Internally developed intangible assets:
- Legal fees, cost of successful defense, registration fees, consulting fees, and design fees can be capitalized.
- Most research and development costs must be expensed.
What is the maximum period over which an identifiable intangible asset ( not goodwill) should be amortized?
The shorter of its estimated useful economic life and its remaining legal life (as in a copyright, franchise, or patent).
How are intangible assets reported under US GAAP?
Reported at cost less amortization (finite life intangibles only) and impairment.
What is the 2 step impairment test for the impairment of intangible assets with finite lives under US GAAP?
1Step - The carrying amount of the asset is compared with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.
#2 Step- If the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value recorded.
What intangible assets with finite lives are subject to the impairment test?
-intangible and fixed assets to be held and used.
- Intangible and fixed assets slated for disposal.
NOTE- intangible assets with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
For intangible assets, how is the impairment loss reported in the financial statements?
As a component of income from continuing operations before income taxes.
The carrying amount of the asset is reduced.
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by the franchisee?
They should be recorded at their present value as an intangible asset.
