Chapter 3 Flashcards
Define cash and cash equivalents
Cash includes 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 write-off of uncollectible accounts?
Direct Write-off
Dr- bad debt expense
cr- accounts receivable
weakness: bad debts are not matched to sales, and accounts receivable are overstated. Not GAAP
Allowance Method
Dr allowance for uncollectible accounts
Cr accounts receivable
Strengths: matches bad debts with credit sales. Account receivable fairly stated. Required by GAAP
Name three methods for estimating uncollectible accounts:
% of credit sales, % of accounts receivable at year-end, aging of accounts receivable at year-end
Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account
Provide for:
Dr- bad debt expense
cr- allowance for uncollectible accounts
Write-off
Dr- allowance for uncollectible accounts
Cr- 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 prove to be uncollectible. Potential liability and risk of loss remains with the company
Without recourse:
The factor assumes the risk of loss if the account is uncollectible
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
Discounting without recourse:
The holder assumes no further liability after discounting
Describe the computational steps required in “discounting a note”
- compute maturity value (include interest to maturity)
- compute discount (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 of goods pass for each of the following? FOB destination, FOB shipping point, consigned goods
FOB destination- when received by buyer
FOB Shipping point- when given to a common carrier
consigned goods- when sold to a third party by consignee
Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?
Consignor gives good to consignee for sale to third parties. Title to his goods remains 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 U.S GAAP, how is the market calculated in the lower of cost or market method
in the lower of cost or market method “market” generally means current replacement cost, provided by 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 margins
Explain the difference between periodic and perpetual inventory methods
Periodic-
the quantity of inventory is determined by only physical count
ending inventory is physically counted and priced
perpetual
inventory is updated for each purpose and for each sale
keeps a running total of inventory balances
name several cost flow methods for inventory
specific identification fifo lifo (unit and dollar value) averaging (weighted vs moving) weighted average- periodic moving- 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? Which inventory method is prohibited under IFRS?
Both ending inventory and net income will be lower when LIFO is used during a period of rising prices
LIFO = Lowest
LIFO is prohibited under IFRS
When are losses on firm purchase commitments recognized?
losses are recognized in the period in which the price declines.
Dr- estimated loss on purchase commitment
Cr- estimated liability on purchase commitment
how is fixed asset carrying value computed under U.S GAAP and IFRS
U.S GAAP- carrying value = historical cost - accumulated depreciation - impairment
IFRS
under IFRS, carrying value can be calculated using the
U.S GAAP method above or can be calculated using the reevaluation model
Reevaluation model carrying value= fair value on revaluation date - subsequent accumulated depreciation- subsequent impairment
Revaluation gains are reported in OCI
Revaluation losses are reported on the income statement
Give examples of costs to be capitalized as land
- Acquisition price
- Closing costs such as real estate broker commissions, legal fees, escrow fees, guarantee insurance
- Any mortgages, liens, or encumbrances on the land which the buyer assumes
- Preperation 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 building
Equipment- Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed
Building- purchase price, deferred maintenance, alterations, improvements, architect’s fees*
*If equipment or building is constructed by company, capitalized cost could include construction period interest
Describe the proper accounting for ordinary versus extraordinary repairs
ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset.
Extraordinary repairs either increase the life or utility of the asset. if the extraordinary repair increases the life of the asset, it is recorded reducing accumulated depreciation. if the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset amount
state two rules concerning capitalizing interest
- only capitalize interest on money actually spent, not on amount borrowed
- the amount of capitalized interest in the lower of:
actual interest cost incurred; or
computed capitalized interest (avoidable interest)
For capitalizing interest, when does the capitalization peried begin?
it begins when these 3 conditions are met
- expenditures for the asset have been made
- activities that are necessary to get the asset ready for its intended use are in progress
- interest cost is being incurred
Ends when the asset is substantially complete and ready for its intended use
Explain the different approaches to depreciation under IFRS and U.S GAAP?
IFRS- the depreciation method used should match the expected pattern of fixed asset consumption (not required under U.S GAAP)
Under IFRS, component depreciation is required. (Not required under U.S GAAP)
Name the most common depreciation methods. Give the basic formula for calculating each method:
Straight line- (cost-salvage) / useful life
Sum of the year digits- sum of the year = n(n+1)/2
(cost-salvage) * (years remaining/(sum of years)
double declining method- 2* straight line rate * net book value of asset# #-no deduction for salvage to determine the depreciable base. Depreciable down to salvage value.
Units of production- (cost- salvage) / estimated hrs * actual hours for period
State the rules for computing depletion on natural resources - remember it is REAL property
Residual value
Extraction/Development cost
Anticipated restoration cost
Land purchase price
(Cost of land + extract cost + anticipated restore cost - residual value) / estimated recoverable units
*units extracted = depletion
When will an asset exchange have commercial substance under U.S GAAP
An asset exchange generally has commercial substance when the entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.
(Note that the FASB has not provided specific guidance, nor has it provided examples of transactions that would meet the criteria for commercial substance. Although it is not certain that will occur on the CPA exam, the question should make it clear whether an exchange has or lacks commercial substance
How are gains/losses on nonmonetary exchanges recognized under U.S GAAP?
Exchange has commercial substance- always recognize gains and losses on the exchange equal to the difference between the FV of what is given up and carrying value of what is given up
Exchange does not have commercial substance or the new assets fair value is not determinable (and the FV of the asset given up is unknown)- no gain on exchange is recognized unless boot is received, and losses are recognized in full (if losses exist because an impairment loss was not previously recognized)
IF boot received is greater than 25% of total consideration, all gains and losses are recognized by both parties to the exchange just as in a monetary transaction that has commercial substance
How are gains/losses on nonmonetary exchanges recognized under IFRS
exchange of similar assets- no gains recognized. losses recognized in full
exchange of dissimilar assets- all gains and losses recognized
How are purchased intangible assets and internally developed intangible assets recorded under IFRS AND US GAAP?
purchased intangible assets- recorded at cost, including legal and registration fees
internally developed intangible assets- legal fees, costs 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 U.S GAAP and IFRS?
US GAAP- reported at cost less amortization (finite life intangibles only) and impairment
IFRS- reported using the cost model (same as US GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation date less subsequent amortization and impairment
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
Define start-up costs. What is the accounting treatment of start-up costs
Costs incurred for one-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation.
Start-up costs are expensed in the period occured
what is the proper treatment of research and development costs under US GAAP & IFRS?
US GAAP- R&D costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and development undertaken on behalf of others under a contractual agreement
IFRS- research costs must be expensed. Development costs may be capitalized if they meet certain criteria
List some items not considered research and development costs?
routine periodic design changes, marketing research, quality control testing, reformulation of a chemical compound
when should the costs of developing computer software for resale, lease, or licensing be capitalized under US GAAP
After technological feasibility has been established and before the product is released for sale
how should the costs of capitalized computer software developed for resale be amortized under US GAAP?
Annual amortization is the greater of:
1.% of revenue method
total capitalized amount * (current gross revenue for period/total projected gross revenue for product)
2.Straight line
total capitalized amount * (1/estimate of economic life)
Outline the treatment of computers software developed internally or obtained for internal use only under US GAAP
Expense costs incurred in the preliminary project state and costs incurred in training and maintenance
Capitalize costs incurred after preliminary project state for upgrades and enhancements
Capitalized costs should be amortized on a straight-line basis
what is the test of recoverability for the impairment of intangible assets other than goodwill under US GAAP?
Finite life- if undiscounted future cash flows expected from use of asset and eventual disposal is less than the carrying value, recognize loss on impairment
indefinite life- if fair value is less than carrying value, recognize loss on impairment
How is impairment of intangible assets other than goodwill analyzed under IFRS?
compare the carrying value of the asset to the assets recoverable amount
the recoverable amount is the greater of the asset fair value less costs to sell and the assets value in use (PV of future cash flow)
what is the calculation for impairment losses for property, plant, and equipment under US GAAP and IFRS
US GAAP- the amount by which the carrying amounts exceeds the fair value of an asset
IFRS- the amount by which the carrying amount exceeds the assets recoverable amount
what assets are subject to the impairment test?
Intangibles (including goodwill) and fixed asset to be held and used
Intangibles (including goodwill) and fixed assets slated for disposal
Note: the test must be done at least annually
Describe the impairment test for recoverability under US GAAP
If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized
how is the impairment loss reported on the financial statements?
As a component of income from continuing operations before income taxes. the carrying amount of the asset is reduced
How is impairment evaluated under IFRS
under IFRS impairment exists if the carrying value of the fixed assets exceeds the higher of:
- fair value - costs to sell
- Value in case (present value of future cash flows)
is restoration of impairment losses permitted under US GAAP and IFRS?
US GAAP- restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use
IFRS- restoration is always permitted
Name the two rules for performing impairment calculations under US GAAP
Determining impairment- use the discounted future net cash flows. an impairment loss exists if total undiscounted cash flows are less than the carrying value
Amounts of impairment- use the fair value of asset
impairment loss = fair value - carrying value
