Chapter 2 - Matching (Revenue & Expense), Foreign Currency Accounting, and Other Financial Statement Presentations

Question 0

Under US GAAP, when is revenue from the sale of products recognized?

Answer 0

Date of Sale

Question 1

Criteria that must be met for each element of a contract before any revenue can be recognized under GAAP

Answer 1

(1) Persuasive evidence of arrangement exists - Signed contract
(2) Delivery has occurred or services have been rendered - Risk & Rewards transfer
(3) Price is fixed and determinable - No price contingencies
(4) Collection is reasonably assured - Standard collection terms

Question 2

Under IFRS, revenue from the sale of goods is recognized when the following conditions have been met:

Answer 2

(1) Revenue and costs incurred for transaction can be measured reliably
(2) Probable that economic benefits from transaction will flow to entity
(3) Entity transferred risks and rewards of ownership to buyer
(4) Entity does not retain managerial involvement

Question 3

Under IFRS, what method is used to recognize revenue from the rendering of services?

Answer 3

Percentage of completion method

Question 4

What are expired costs?

Answer 4

Expense on income statement - Insurance exp, COGS, period costs (selling, general & admin exp)

Question 5

What are unexpired costs?

Answer 5

Deferred charges

Question 6

How to record unearned royalty?

Answer 6

DR. Cash

CR. Unearned Royalty

Question 7

How to record royalty when it has been earned?

Answer 7

DR. Unearned Royalty

CR. Earned Royalty

Question 8

Revenue from a sales transaction where the buyer has the right to return the product shall be recognized at the time of sale only if what conditions are met

Answer 8

(1) Sale price is fixed at date of sale
(2) Buyer assumes all risks of loss
(3) Buyer has paid some form of consideration
(4) Product sold is substantially complete
(5) Amount of future returns can be reasonably estimated

Question 9

When are initial franchise fees recognized?

Answer 9

Recognized when “substantially performed.” Generally, conditions of sale are not considered substantially performed until franchisee’s first day of operations

Question 10

How should purchased intangible assets be recorded?

Answer 10

At cost

Question 11

How should internally developed intangible assets be recorded?

Answer 11

Expensed because US GAAP prohibits the capitalization of R&D costs

Question 12

Capitalize of Expense for costs associated with intangible assets?
Legal fees and other costs related to a successful defense of the asset

Answer 12

Capitalize

Question 13

Capitalize of Expense for costs associated with intangible assets?
Trademarks

Answer 13

Expense

Question 14

Capitalize of Expense for costs associated with intangible assets?
Other direct costs to secure asset

Answer 14

Capitalize

Question 15

Capitalize of Expense for costs associated with intangible assets?
Design Costs

Answer 15

Capitalize

Question 16

Capitalize of Expense for costs associated with intangible assets?
Goodwill from advertising

Answer 16

Expense

Question 17

Capitalize of Expense for costs associated with intangible assets?
The cost of developing, maintaining, or restoring goodwill

Answer 17

Expense

Question 18

Capitalize of Expense for costs associated with intangible assets?
Registration or consulting fees

Answer 18

Capitalize

Question 19

Under IFRS, how does their treatment of research costs differ from US GAAP?

Answer 19

IFRS - Expense research costs, Capitalize development costs

US GAAP - Expense R&D costs

Question 20

What should be done in the following situations:

• Intangible asset becomes worthless
• Intangible asset becomes impaired
• Life of intangible asset changes
• Sale of intangible asset

Answer 20

• Intangible asset becomes worthless - Expense
• Intangible asset becomes impaired - Expense
• Life of intangible asset changes - Recalculate amortization
• Sale of intangible asset - Calculate gain/loss

Question 21

Under US GAAP, intangible assets are reported at:

Answer 21

Cost - Amortization & Impairment

Question 22

Under IFRS, intangible assets are reported at:

Answer 22

(1) Cost Model = Cost - Amortization & Impairment
or
(2) Revaluation Model = FMV - Amortization & Impairment

Question 23

How are revaluation gains and losses reported and what are the exceptions?

Answer 23

• Revaluation gains are reported in OCI and accumulated in equity as revaluation surplus, unless revaluation gains reverses previously recognized revaluation loss. In this case, revaluation gains will be reported on I/S to extent they reverse previously recognized loss.
• Revaluation loss are reported in I/S, unless revaluation loss reverses previously recognized revaluation gain. In this case, revaluation loss will be recognized in OCI and decrease revaluation surplus to extent of previously recognized revaluation gain.

Question 24

How are impairments reported?

Answer 24

Reduce revaluation surplus to zero with further impairment losses reported in I/S

Question 25

How should franchisee report initial franchise fees?

Answer 25

Report as intangible asset and amortize

Question 26

How should franchisee report continuing franchise fees?

Answer 26

Expense as incurred

Question 27

Expense or capitalize?

Start-up costs

Answer 27

Expense

Question 28

What are the exceptions to expensing R&D costs?

Answer 28

(1) Materials, equipment, or facilities that have ALTERNATE FUTURE USES - Capitalize and depreciate over useful life
(2) R&D costs of an nature undertaken ON BEHALF OF OTHERS under a contractual arrangement - Expense as COGS

Question 29

What items are not considered as R&D costs?

Answer 29

Routine periodic design changes to old products or troubleshooting in production stage
Marketing research
Quality control testing
Reformulation of chemical compound

Question 30

Expense or Capitalize?

Computer software developed to be sold, leased, or licensed

Answer 30

Before technological feasibility established - Expense
Technological feasibility established –> Release for sale - Capitalize
After Sale - Amortization expense begins

Question 31

How do you know technological feasibility is established?

Answer 31

• Detailed program design
  or
• Completion of work model

Question 32

How to calculate amortization of capitalized software costs developed to be sold, leased, or licensed

Answer 32

Annual amortization is the greater of:

(1) Percentage of Revenue = Total Capitalized Amount * (Current Gross Revenue for period/Total Projected Gross Revenue for period)
(2) Straight Line = Total Capitalized Amount/Estimated Economic Life

Question 33

Expense or Capitalize?

Computer software developed for internal use

Answer 33

Before technological feasibility established - Expense

After technological feasibility established - Capitalize

Question 34

How to calculate amortization of computer software developed for internal use

Answer 34

Straight Line = Total Capitalized Amount/Estimate of economic life