Chapter 2 - Matching, Foreign Currency, Other FS Presentation

Question 1

What is the criteria for revenue recognition of a contract?

Answer 1

Signed contract/written confirmation
Delivery of goods (risks/rewards transferred)
Price is fixed
Collection reasonably assured

Question 2

When do you recognize royalty revenue? Services? Unearned revenue?

Answer 2

As time passes (when earned)
When services rendered
Recognize as liability on BS

Question 3

What are start-up costs? How are they treated?

Answer 3

One time organizational costs for new businesses

Expenses when incurred (can write off $5k for taxes)

Question 4

How do you treat R&D costs (GAAP)? Any exceptions & their treatments?

Answer 4

Expensed when incurred
Exceptions: Tangible assets with alternative future uses (capitalize & depreciated over useful life)
R&D on behalf of others in contract

Question 5

How do you treat R&D costs (IFRS)?

Answer 5

All research costs expensed

Some development costs can be capitalized

Question 6

Which items are not considered R&D?

Answer 6

Periodic changes
Marketing research
QC testing
Staff training costs
Chemical compound reformation

Question 7

How do you treat costs related to computer software to be sold/leased?

Answer 7

Expense costs until technological feasibility

Capitalize costs after technological feasibility up until sold over GREATER of % of revenue or straight line

Question 8

What is the capitalization % of revenue & straight line formula?

Answer 8

% of Rev = Tot Cap. Amt. * (Curr. Gross Rev for period / Tot Proj. Gross Rev. for period)
Straight line: Totl. Cap. Amt * (1 / Est. Economic life)

Question 9

How do you treat costs related to computer software to be used internally? What if you then decide to sell the software?

Answer 9

Expense costs before prelim.project state (NOT R&D)
Capitalize costs after prelim. project state using straight line
Cost recovery method applied

Question 10

How are initial franchise fees recorded by the franchisor? Franchisee? When can revenue be earned?

Answer 10

Franchisor: unearned revenue (liability)
Franchisee: intangible asset & amortized over life Recognized fully when substantially complete (1st day of operations) even if not everything received

Question 11

How are continuing franchise fees recorded by franchisor? Franchisee?

Answer 11

Franchisor: unearned revenue until earned
Franchisee: expense as incurred

Question 12

How do you record & treat purchased intangible assets? Internally developed intangible asset?

Answer 12

record at cost & capitalize

expense cost when incurred (R&D NOT capitalized)

Question 13

Give examples of R&D that are expensed. Which ones can be capitalized (GAAP)?

Answer 13

Expensed: trademarks, GW from advertising, cost of developing/maintaining/restoring GW
Capitalized: successful legal fees, registration/consulting fees, design costs, other direct costs to secure asset

Question 14

How are intangible assets amortized? GW?

Answer 14

Indefinite lives are not amortized
Finite lives shorter of estimated life or remaining legal life (straight-line)
GW not amortized instead tested for impairment annually

Question 15

How do you value an intangible asset (GAAP)?

Answer 15

GAAP Finite life: Cost - Impairment

GAAP Indefinite life: Cost - Amortization - Impairment

Question 16

How do you value an intangible asset (IFRS)? How do you treat Gains & Losses?

Answer 16

IFRS Cost Model: Cost - Amortization - Impairment
IFRS Revaluation Model: FV on revaluation date - subsequent Amort. - subsequent impairment
Gains: reverse loss on IS then go to OCI
Loss: reverse gain on OCI then go to IS

Question 17

Formulas for Impairment (GAAP)?

Answer 17

Finite Life (2 step):

1) Undiscounted CF - CV
2) FV or PV Discounted CF - CV

Indefinite Life (1 step):
1) FV -CV

Question 18

What level do you report GW on? Formula for GW (GAAP)? How do you treat GW impairment?

Answer 18

Reporting-unit level
1) (For each reporting unit) FV unit - CV unit
2) (For each reporting units GW only) Implied FV GW - CV GW
Loss on IS that cannot write back up

Question 19

Formulas for Impairment (IFRS)?

Answer 19

One step Method
1) Recoverable Amount - CV
Recov. Amt = GREATER of (FV - Costs to sell OR PVFCF)

Question 20

What level do you report GW on? Formula for GW (IFRS)? How do you treat GW impairment?

Answer 20

Cash generating level
1) Recoverable Amount - CV
Recov. Amt = GREATER of (FV - Costs to sell OR PVFCF)
Loss allocated to GW first then pro-rata to other assets

Question 21

Formula to convert from accrual to cash basis? Convert from cash to accrual basis?

Answer 21

1) Cash = Liability - Other Assets

2) Cash = -Liability + Other Assets

Question 22

When do you use completed contract method? % of completion method?

Answer 22

1) Difficult to estimate costs, collection not assured, many contracts in progress
2) Collection assured, profit can be estimated

Question 23

Formula/steps for % of completion method?

Answer 23

1) GP = Contract $ - Estimated total cost
2) % of Complete = Total est. costs to date / Total est. cost of contract
3) Profit to Date = Step 1 * Step 2
4) CY GP = PTD CY - PTD PY

Question 24

When do you use the installment sales method?

Answer 24

no reasonable basis for estimating collect-ability

Question 25

Installment method formula.

Answer 25

1) GP = Sale - COGS 2) GP% = GP / Sales Price 3) Earned GP = Cash Collect * GP% 4) Deferred GP = Receivable * GP%

Question 26

What is an exchange with commercial substance? What is an exchange lacking commercial substance?

Answer 26

1) change in future CF's | 2) no change in future CF's or FV cannot be determined

Question 27

What approach is used for exchanges with commercial substance? How is G/L recognized?

Answer 27

Fair Value approach | G/L = FV (asset given up) - CV (asset given up)

Question 28

What approach is used for exchanges lacking commercial substance? How is G/L recognized?

Answer 28

Book value approach Loss recognized No boot received = NO gain Boot is paid = NO gain Boot received (< 25% of total consideration) = proportional gain Boot received (>25% of total consideration) = recognize entire gain

Question 29

What is the carrying amount of replacement property in a involuntary conversion?

Answer 29

The carrying amount of the replacement property is equal to the FV of the consideration paid for it.

Question 30

Under current cost accounting, what is the amount inventory holding gain?

Answer 30

Holding gain on inventory is the excess of replacement cost at the balance sheet date over the original purchase price.

Question 31

Where should a company disclose information about the effect of changing prices in FS?

Answer 31

Supplementary information

Question 32

Which types of price measurements are related to the following adjustments: Inflation only, appreciation only, neither, both.

Answer 32

Inflation only - Historic cost/constant$ appreciation only - current cost/nominal $ neither - historic cost/nominal $ both - current cost/constant $

Question 33

Define monetary & non-monetary assets?

Answer 33

Monetary: fixed & Non-monetary: fluctuate

Question 34

When do you use the translation & re-measurement methods?

Answer 34

Translation: going from functional (local) to reporting currency Re-measurement: the reporting currency is the functional currency.

Question 35

Steps for Re-measurement method? Where is the G/L reported?

Answer 35

1) B/S: monetary @ spot rate & non-monetary @ historical 2) I/S: @ weighted average & historical rate for b/s items 3) plug G/L so I/S fits into the RE plug 4) Income from Cont. Operations

Question 36

Steps for translation method? Where is the G/L reported?

Answer 36

1) I/S: @ weighted average 2) B/S: @ spot rate except C/S $ APIC @ historical; roll forward RE 3) Plug AOCI in Equity 4) Foreign translation in OCI

Question 37

How do you determine the basis of a asset acquired when it: lacks commercial substance? has commercial substance?

Answer 37

1) book value of the asset given up | 2) FV of the asset given up (unless FV of asset received is easier to determine)

Question 38

Name the two statements required in personal FS?

Answer 38

Statement of Financial Condition | Statement of Changes in Net Worth

Question 39

Combined statements may be used in which circumstances?

Answer 39

1) companies owned by one individual 2) companies under common management 3) unconsolidated subsidiaries

Question 40

For non-monetary exchanges with commercial substance, when are gains & losses recognized?

Answer 40

Gains and losses are recognized immediately

Question 41

Where do you report gains/losses under the remeasurement method?

Answer 41

Continuing income on income statement

Question 42

How do you find the net current asset or a net current liability under the construction activity?

Answer 42

Cumulative cost + Cumulative GP recognized - Cumulative billings = negative (liability) positive (assets)

Question 43

How do you calculate the g/l on an involuntary conversion?

Answer 43

= NBV of asset + any cost associated with conversion

Question 44

G/L resulting from foreign currency transactions are accounted for?

Answer 44

Income from continuing operations

Question 45

Under the construction % of completion method, how do you recognize a CL/CA?

Answer 45

``` CL = progress billings > actual costs + est. profit CA = progress billings < actual costs + est. profit ```