CPA FAR - In My Words - Set4 Flashcards
What’s the most authoritative source for government accounting standards?
- Statements issued by the Governmental Accounting Standards Board (GASB)
The GASB establishes accounting and reporting standards for governments. GASB statements and interpretations are the most authoritative source of government accounting standards.
The GASB is the equivalent of the FASB, and its statements and interpretations are considered the most authoritative.
Capitalized Interest
Once a constructed asset is complete and ready for use the interest is expensed and no longer capitalized.
When an entity builds or remodels a building or other type of asset, a loan is commonly the source of the funds. Loans have an interest. GAAP refers to this interest as avoidable interest and is capitalized during the time frame associated with constructing the asset. Once the asset is complete and ready for use the interest is no longer capitalized.
[FYI: Only the interest incurred should be capitalized during the construction of the asset before the asset is ready for use. Once the asset is complete and ready for use, the interest will be expensed]
The formula to calculate the capitalized interest is a weighted-average accumulated expense and comparison to actual interest. The lesser of the calculations become the capitalized interest.
When a company sells an asset, they take it off the accounting records. Depending on when they dispose of the asset, they may have to record a gain or loss on the transaction.
How would you account for the gain or loss on the disposal?
Subtract the fixed asset cost and the accumulated depreciation from each other—the difference results in either a gain or a loss. The net disposal proceeds minus the net book value (NBV) will figure the gain or loss on disposal.
For partial year straight-line depreciation, divide the total projected depreciation for the entire year by 12 to get the monthly depreciation on the asset. Next, multiply the monthly depreciation amount by the number of months of the fiscal year the asset was owned. This will provide the total amount of depreciation for the partial year.
-Gem of the question-
Gain/Loss on the disposal of an asset = the difference between the NBV (net book value) and the selling price.
Partial-year depreciation: requires the entity to prorate the depreciation based on the number of months in the year the asset was on the books.
Sample question:
What amount of current income tax expense should be reported on the income statement? Pretax income was given along with other information - to compute the provision for federal income taxes….
(if the financial statement income is provided, taxable income will need to be determined)
You need to figure out the taxable income if this is not given: Pretax Financial statement income + rent received in advance - excess depreciation - interest income rec on state FL bonds (municipal bond interest income)
Then the current tax expense is computed by multiplying the current year’s tax rate times the corporation’s taxable income.
What’s the primary objective of accounting for income taxes?
To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.
*If an entity has a temporary difference between book and tax income with more current than taxable income, that is considered a deferred tax liability (DTL).
In simpler words:
DTL reflects a temporary difference between book and tax where there are less current taxes payable today but eventually more taxes payable in the future.
*If an entity has a temporary difference between book and tax with more current taxable income than book income, that is a deferred tax asset (DTA).
In simpler words:
DTA reflects a temporary difference between book and tax where there are more taxes to be paid currently and a tax benefit of less taxes to be paid in the future.
Deferred taxes shortcut
BOTL: Temporary difference (B)ook income (O)ver (more than) (T)ax income = (L)iability
TOBA: Temporary difference (T)ax income (O)ver (more than) (B)ook income = (A)sset
Schedule M-1 & Deferred taxes shortcut
Schedule M-1
-Reconcile book income with taxable income
-Taxable income uses cash basis
-Temporary differences
–Accelerated tax depreciation, tax-deductible
–Warranty liability, excess accrual
Deferred taxes shortcut:
–BOTL: Temporary difference Book income Over (more than) Tax income = Liability
–TOBA: Temporary difference Tax income Over (more than) book income = Asset
–Temporary difference × the current tax rate = deferred tax
Temporary differences VS Permanent differences
Temporary differences
-Timing differences, but over time they equal out
-Future taxable
–Prepaid insurance
–Installment method of sales
–Accelerated tax depreciation
-Future deductible
–Warranty payable
Permanent differences
-Do not reverse over time
-Muni bond interest, tax-deductible
-Tax penalties
For a long-term construction contract being accounted for using the percentage of completion method, the construction in progress account is debited for:
-Construction costs incurred
-Profit from the construction contract recognized to date
BOTH:
-Construction costs incurred
-Profit from the construction contract recognized to date
When costs are incurred, the construction in progress account is debited and cash or accounts payable is credited.
When profit is recognized, the construction in progress account is debited and revenue is credited.
The gross method …
The gross method means recording the sale without taking the cash discount into consideration.
(List price - trade discount = balance)
The journal entry would include a debit to accounts receivable and a credit to sales of $49,000.
Figuring out the ending balance in the allowance account
The results of the aging schedule will determine the ending balance in the allowance account.
The aging schedule results in a balance of $4,600 determined as follows:
[amount x estimated uncollectible]:
$50,000 × 0.03 = $1,500;
plus $10,000 × 0.06 = $600;
plus $2,500 = $4,600.
Therefore, the ending balance in the allowance for doubtful accounts equals $4,600 credit. Notice that when using the aging schedule approach, what results is the ending balance of the allowance for doubtful accounts.
This is known as a balance sheet approach. Under this approach, any prior balance in the allowance account is ignored for purposes of determining the ending balance in the allowance account.
For this reason, the $700 credit balance is not taken into consideration for determining the ending balance in the allowance account.
SIMS Question:
Impairment of a manufacturing facility:
An impairment test is performed when, due to changes, it appears the carrying amount of a long-lived held-for-use asset of the company is unrecoverable.
The first step would be to check for recoverability, where the carrying value (CV) would be compared to the fair value represented by undiscounted future expected cash flows if the CV is higher, representing an impairment loss.
(In this SIMS example, the CV was given in the problem but you need to use the resources available to get the undiscounted cash flows amount…in this case, had to reference exhibit 1)
Also pay attention to the present value of net cash flow amount if given (aka the fair value)–this will be needed for the next step
Step 2: recognize an impairment loss, which is the difference between the future value or present value of future cash flows (fair value) and the net carry value of the asset.
Per the resource provided [cash flow analysis of the manufacturing facility exhibit], the asset’s CV is $1,238,000 and the present value of the net cash flows at 8% (given from the chart) = $500,000. Thus the total impairment loss would be the difference between those two figures = $738,000 impairment loss.
SIMS Question:
Written down fixed asset impairment losses
Written down fixed asset impairment losses are booked on the income statement as a part of continuing operations. In financial accounting, discontinued operations refer to components of a company’s core business or product line that have been divested or shut down and which are reported separately from continuing operations on the income statement, thus “discontinued operations” is not relevant to fixed asset impairments and automatically eliminates any option with those words.
SIMS Question:
A company purchased land, which was paid in full with cash. The company will build a new facility on the land. What costs associated with the purchase of the land are included in the letter from the company’s attorney?
Acquisition costs of property, plant, and equipment (PPE) are capitalized on the balance sheet and include all costs necessary to prepare for its intended use.
Per the attorney’s letter, the land costs include the purchase of the land for $500,000 on September 30, year 7, the closing costs of $6,000, the transfer tax of $5,000, and the cost to remove the old building of $8,000. Those are the straightforward costs to be capitalized.
But what about the delinquent property taxes, also known as “back taxes”, totaling $2,200? Are they included? Are those costs necessary to bring the land for its intended use? Yes. So, in that case, they should be included.
Also, the cost calculation should be reduced by the proceeds from the sale of materials salvaged $1,500.
This brings the total land cost to $519,700.
The fourth quarter property tax of $1,100 should be expensed and not capitalized since it was incurred after the closing and is not necessary for the intended use.
