Chapter 3 FAR Flashcards
Computing depletion on Land, remember 4 components (REAL)
- Residual value (subtract)
- Extraction/Development cost
- Anticipated restoration cost
- Land purchase price
Which depreciation method doesn’t require to subtract salvage value?
Declining balance
If salvage value is excluded from depreciation computation, how it will impact net income?
- Straight-Line Method (net income will be understated)
- Production method (or use method) - net income will be overstated
- Sum-of-year’s digits method will have net income overstated too,
Which facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation method - Yes
Composition of fixed assets - NO
Depletion Formula
Purchase price + developmnt costs + estmt restoration costs - less the expected salvage value
Double Declining Method
Ignore Salvage Value. Just multiply straight line method by 2.
Annual Depreciation formula
(Est. cost - Salvage Value)/ Useful life = Annual Depreciation;
Composite life formula
(Est. cost - Salvage Value)/ Useful life = Depreciation cost;
Depreciation cost/Annual depreciation;
Straight Line Depreciation Formula
(Cost - Salvage Value)/ Useful Life
When a fixed asset is sold how record it on an income statement?
Gain or loss is recognized (proceeds vs. Carrying amount) as part of income from continue operations.
The carrying amount of replacement property must match ?
is equal to the FV of the consideration paid for it.
Which cost associated with developing a new product should capitalized?
All cost associated with product after establishing technological feasibility was established till the product released for sale.
Which cost associated with developing a new product should expensed?
All cost incurred before technological feasibility date; all cost during the preliminary project state); cost for training and maintenance.
How to record legal cost during developing a new product?
Legal costs (including successfully defend the rights of the patent agains competitors) should be capitalized. And other costs associated with registering a patent.
Amortization resulting from the percentage of revenue approach VS straight line approach
(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.
Cost for research and development work for the government to be reimburse by government should be capitalized or expensed?
Capitalized
Intangible assets recorded at cost or fair value?
Cost
How to record as restoration of previously recognized impairment loss in the current year?
Reversal of an impairment loss is prohibited under US GAAP (unless asset held for disposal)
To determine impairment loss on an intangible asset
Fair value of asset is LESS than the carrying amount . Report on income statement
Which of the tangible asset that is subject to the recoverability test when testing for impairment?
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)
Steps of the test for recoverability
- Compare net carrying value to undiscounted future cash flows. If net carrying value is higher, record impairment loss.
- Imp. loss equal to the difference between the carrying value and fair value.
Under the lower of cost or marker rule
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.
Per allowance method for recognizing uncollectible account, how it effect specific accounts?
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)
how Avoidable interest should capitalized
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
