Chapter 3 FAR

Question 1

Computing depletion on Land, remember 4 components (REAL)

Answer 1

1. Residual value (subtract)
2. Extraction/Development cost
3. Anticipated restoration cost
4. Land purchase price

Question 2

Which depreciation method doesn’t require to subtract salvage value?

Answer 2

Declining balance

Question 3

If salvage value is excluded from depreciation computation, how it will impact net income?

Answer 3

1. Straight-Line Method (net income will be understated)
2. Production method (or use method) - net income will be overstated
3. Sum-of-year’s digits method will have net income overstated too,

Question 4

Which facts concerning fixed assets should be included in the summary of significant accounting policies?

Answer 4

Depreciation method - Yes

Composition of fixed assets - NO

Question 5

Depletion Formula

Answer 5

Purchase price + developmnt costs + estmt restoration costs - less the expected salvage value

Question 6

Double Declining Method

Answer 6

Ignore Salvage Value. Just multiply straight line method by 2.

Question 7

Annual Depreciation formula

Answer 7

(Est. cost - Salvage Value)/ Useful life = Annual Depreciation;

Question 8

Composite life formula

Answer 8

(Est. cost - Salvage Value)/ Useful life = Depreciation cost;
Depreciation cost/Annual depreciation;

Question 9

Straight Line Depreciation Formula

Answer 9

(Cost - Salvage Value)/ Useful Life

Question 10

When a fixed asset is sold how record it on an income statement?

Answer 10

Gain or loss is recognized (proceeds vs. Carrying amount) as part of income from continue operations.

Question 11

The carrying amount of replacement property must match ?

Answer 11

is equal to the FV of the consideration paid for it.

Question 12

Which cost associated with developing a new product should capitalized?

Answer 12

All cost associated with product after establishing technological feasibility was established till the product released for sale.

Question 13

Which cost associated with developing a new product should expensed?

Answer 13

All cost incurred before technological feasibility date; all cost during the preliminary project state); cost for training and maintenance.

Question 14

How to record legal cost during developing a new product?

Answer 14

Legal costs (including successfully defend the rights of the patent agains competitors) should be capitalized. And other costs associated with registering a patent.

Question 15

Amortization resulting from the percentage of revenue approach VS straight line approach

Answer 15

(Software sales to date/Expected software sales)cost of the software : (300/500)40,k =24k;
straight-line approach: software cost/useful life = 40/2=20k. Pick the highest amount, which is 24k.

Question 16

Cost for research and development work for the government to be reimburse by government should be capitalized or expensed?

Answer 16

Capitalized

Question 17

Intangible assets recorded at cost or fair value?

Answer 17

Cost

Question 18

How to record as restoration of previously recognized impairment loss in the current year?

Answer 18

Reversal of an impairment loss is prohibited under US GAAP (unless asset held for disposal)

Question 19

To determine impairment loss on an intangible asset

Answer 19

Fair value of asset is LESS than the carrying amount . Report on income statement

Question 20

Which of the tangible asset that is subject to the recoverability test when testing for impairment?

Answer 20

A patent is type of intangible asset that has a limited useful life. The recoverability test is only performed on asset with limited life (which compare undercounted future cash flows to the carrying value)

Question 21

Steps of the test for recoverability

Answer 21

1. Compare net carrying value to undiscounted future cash flows. If net carrying value is higher, record impairment loss.
2. Imp. loss equal to the difference between the carrying value and fair value.

Question 22

Under the lower of cost or marker rule

Answer 22

Celling - Net Realizable Value
Market floor- (NRB-profit margin)
The cost which will be in between (for example replacement cost), will consider market value of the inventory.

Question 23

Per allowance method for recognizing uncollectible account, how it effect specific accounts?

Answer 23

Net Income and working capital are not affected. Net AR remains the same.
1. Allowance for uncollected AR (Debit)
AR (Credit)
2. Bad Debt Expense (Debit)
AR (Credit)

Question 24

how Avoidable interest should capitalized

Answer 24

Capitalized interest can not exceed the actual interest incurred for the period. Example: Avoidable intr is $47k is less than interest incurred of $67k. Capitalized interest will be 47L