Concepts CH 3

Question 1

Changes in Accounting Principle

Answer 1

Accounted For Retrospectively

Question 2

Type of Changes in Accounting Principle

Answer 2

Adopting Generally Accepted Principle from previously used one
Changes the Method of Applying GAAP
Change from Principle No longer accepted

Question 3

Retroactive Application

Answer 3

Required for all direct effects and relate income tax effects
Requires carrying amounts of 1) assets 2) liabilities 3) Retained earnings at beginning of first period to be adj net of cummulative effects (CE)
All periods adjusted for period specific effects (PSE)

Question 4

Changes in Accounting Estimate

Answer 4

Prospective Application - results from new information, reassessment of future status, benefits, obiligations, or assets & liabilities accounted for in

1) period of change
2) Any future affected periods
a) must be applied from beg of period
b) must not restate or retro adj prior period stmts

Question 5

Change in Estimate inseparable from change in principle

Answer 5

Accounted for as a change in estimate

Question 6

Change in Reporting Entity

Answer 6

Statements that are of those of a different entity

a) consolidated/combined replace individual

Question 7

Error Correction

Answer 7

a) Math Mistake b) Mistake of application of GAAP c) Oversight, misuse of facts when statements are prepared.
Must not be in net income

Question 8

Error correct after statements issued/available

Answer 8

Restate prior statements
a) carrying amounts of 1) assets 2) liabilities 3) retained earnings
beg period are adj for CE on prior periods

Question 9

Error correction single period statement

Answer 9

as an adjustment to opening retained earnings

Question 10

ASC 606

Answer 10

Single-principles based model for all entities regardless of industry

Question 11

ASC 606 Steps

Answer 11

1 - ID Contract with Customer
2 - ID Performance obligations
3 - Determine transaction price
4 - Allocate transaction price to performance obligations
5 - Recognize Revenue as Performance obligation is satisfied

Question 12

The income statement reports component results of operations including

Answer 12

1) Any gain or loss form measure component at fv - cost to sell
2) Any gain or loss on disposal in discountinued operations in the period in which they occur

Question 13

Discontinued Operation include a component that meets 2 criteria

Answer 13

1) it has been disposed of or held for sale

2) It disposal is a strategic shift that has a major effect on entity’s operations and financial results

Question 14

Material event or transaction that is unusual in nature, infrequent in occurrence or both must be

Answer 14

Reported as a separate component of income from continuing operations

Question 15

If incremental effect is > BEPS

Answer 15

The PCS is antidilutitive

Question 16

Dilution is a reduction in EPS (BEPS) resulting from assumption

Answer 16

1) Convertible Securities were converted
2) Options/Warrant were exercised
3) Contingent issuable shares were issued

Question 17

Input method recognizes revenue

Answer 17

1) The entity’s inputs relative to performance obligation

2) the total expected inputs to performance obligation

Question 18

An Accounting principle is changed

Answer 18

1) Transition to new pronouncement

2) when entity justifies the change on basis that it is preferable

Question 19

Corp Sells Inventory on account and has delivered goods

Answer 19

realized and earned

Question 20

Corp Rent extra space with yearly lease

Answer 20

Realizable

Question 21

Sells Inventory for cash but has not delivered goods

Answer 21

Realizable

Question 22

Corp have performed services but has not been paid

Answer 22

Realized and earned

Question 23

Corp agrees to perform services for Corp X at future time

Answer 23

Not realizable or earned

Question 24

Incremental cost of obtaining a contract with customer

Answer 24

must be capitalized if entity expects to recover them. These costs would not have been incurred if the contract had not be obtained

Question 25

The transaction price should be adjusted for the effect of

Answer 25

TMV when contract includes a significant financing component.

Question 26

A change is warranty cost is considered

Answer 26

A change in estimate and not an error correction. Thus it affects current and future income from operations

Question 27

Corrections of errors of prior periods must be accounted for

Answer 27

As prior-period adjustments and thus excluded from determination of net income for current period

Question 28

Comparative Prior Periods statements stock dividend

Answer 28

Prior period BEPS and DEPS figures for comparative purposes must be retroactively adjusted for the effects of a stock dividend and stock split

Question 29

Transaction Price

Answer 29

is the amount of consideration to which an entity expects to be entitled in exchange for transferring good/services to customers. It excludes amount collected on behalf of third parties

Question 30

If a customer obtains control of goods at contract inception

Answer 30

Revenue from contract is recognized at inception

Question 31

Transaction price should be allocated based on

Answer 31

the standalone prices

Question 32

Contracts - Revenue must be recognized must reflect the price that customer would have paid for G&S if

Answer 32

cash payment had been made when G&S were transferred to customer (cash selling price)

Question 33

The transaction price should be adjusted if

Answer 33

There is an effect for TMV (significant financing component) | Variable consideration - (discounts, incentives)

Question 34

Contracts - Must be amortized after initial capitalization

Answer 34

Incremental Costs | Cost incurred to fulfill the contract

Question 35

Variable consideration must be estimated applying one of two methods

Answer 35

Expected Value | Most likely amount

Question 36

When the outcome of the contract is not reasonably measurable, but cost incurred satisfy the performance obligation are expected to recovered

Answer 36

Revenue must be recognized only to the extent of cost incurred

Question 37

Six Criteria to be held for sale

Answer 37

1) Management has committed to plan to sell 2) To sold immediately in current condition 3) Actions have begun to complete plan 4) Completion of sale within 1 year is probable 5) Price reasonably related to current market 6) likelihood of withdrawal low

Question 38

When component is classified as held for sale it is measured at

Answer 38

Lower of Carrying amount or FV - Cost to sell

Question 39

Acceptable estimates when price is not observable

Answer 39

Adjusted Market Assessment | Expected Cost plus appropriate margin

Question 40

Consideration Payable to Customer

Answer 40

Reduces transaction price

Question 41

Transaction Price should not be be adjusted for TVM iff

Answer 41

1) Time between payment and delivery or G&S is 1 year or less 2) Customer paid in advance and transfer of goods is at customer's discretion 3) Substantial amount of consideration is variable and the amount or timing varies with future circumstances not within customer or entity control

Question 42

Variable Consideration - Contract price may vary because

Answer 42

1. Refunds due to right of return provided to customers 2. Sales incentives 3. Prompt payment discounts 4. Volume discounts 5. Other uncertainties in contract price based on occurrence or nonoccurrence of some future event

Question 43

VC - Expected value

Answer 43

Sum of probability weighted amounts in range of possible consideration amounts - may be applied if an entity has many contracts with similar characteristics

Question 44

VC - Mostly Amount

Answer 44

Is the single most likely amount in a range of consideration amounts. - May be used if contract has only 2 outcomes

Question 45

VC - Constraint

Answer 45

Revenue from variable consideration is recognized only to the extent it is probable that a significant reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved

Question 46

Volume Discount

Answer 46

1. Prospective discount that provides a material right to the customer is accounted for as a separate performance obligation in the contract 2. Retrospective application are accounted for a variable consideration. The uncertainty of contact price for current goods sold is based on the occurrence or nonoccurrence of some future event

Question 47

Standalone price not observable - Adjusted Market Assessment

Answer 47

An entity evaluates the market in which it sells G & S and estimates the price a willing customer would pay

Question 48

Standalone price not observable - Estimated cost plus margin

Answer 48

An entity forecasts its expected costs to satisfy performance obligation and adds an appropriate margin

Question 49

Standalone price not observable - Residual

Answer 49

An entity estimates standalone prices by reference to total transaction price minus sum of observable standalone selling prices of other G & S promised in contract. Used in limited circumstances

Question 50

Performance obligations can be satisfied either

Answer 50

Over time | At a Point in time

Question 51

For Revenue Recognition over time a entity must meet one of the following criteria

Answer 51

i. The customer simultaneously receives and consumers the benefits provided by the entity’s performance as the entity performs. Cleaning service ii. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. Construction on land iii. The asset created has no alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. Aerospace satellite

Question 52

Revenue Recognition at point in time

Answer 52

When performance obligation is not satisfied over time, | 1) When customer obtains control over promised G/S

Question 53

Revenue Recognition at point in time - Transfer of control should be considered

Answer 53

1. The entity has a present right to payment for the asset. 2. The customer has legal title to the asset. 3. The entity has transferred physical possession of the asset. 4. The customer has the significant risks and rewards of ownership of the asset. 5. The customer has accepted the asset.