F2

Question 1

Revenue Recognition: What are the four criteria that are needed? (US. GAAP)

Answer 1

1. Persuasive evidence of an arrangement exists (Signed Contract)
2. Delivery has occurred or services have been rendered (Risk-Reward transfered)
3. The price is fixed and determinable- no price contingencies
4. Collection is reasonably assured

Question 2

Revenue Recognition (IFRS): What are the 4 categories of Revenue?

F2-4

Answer 2

1. Sale of Goods
2. Rendering of Services
3. Revenue from Interest, Royaltyies and dividends
4. Construction Contracts

Question 3

4

IFRS: Sales from goods are recognized?

F2-4

Answer 3

• Revenue/ costs incurred for the transaction can be MEASURED RELIABLY
• Probable that ECONOMIC BENEFITS from the transaction will flow to the entity
• The entity has transferred to the buyer the significant RISKS AND REWARDS
• The entity does not retain managerial Involvement to the degree associate with ownership or control over the goods sold

Question 4

What is the Correct Entry for collecting and recognizing Royalties?

F2-9

Answer 4

• Debit: Cash
  
  • Credit: Unearned Royalty
• Debit Unearned Royalty
  
  • Credit Earned Royalty.

Question 5

Recognition of Right to Return Sale?

F2-10

Answer 5

Must meet five conditions:

1. The sales price is substantially fixed at the date of the sale
2. The buyer assumes all risks of loss because the goods are considered in the buyer’s possession
3. The buyer has paid some form of consideration
4. The product sold is substantially complete
5. The amount of future returns can be reasonably estimated.

Question 6

Franchise accounting involves 2 types of Fees?

F2-11

Answer 6

1. **Initial Fees **- Fees are paid by the franchisee for receiving initial services from the franchisor
2. **Service Fees **- Fees should be reported by the Franchisor as revenue when they are earned.

Question 7

3 Franchisor

Earned revenue for Franchise accounting?

F2-11

Answer 7

1. Franchisor has no obligation to refund any payment
2. Initial services required of the franchisor have been performed
3. All other conditions of the sale have been met

Question 8

Intangible assets purchased from other entities should be?

Answer 8

Recorded at costs (US GAAP)

Question 9

Internally Developed intangible Assets

Answer 9

Expensed. (US GAAP) does not allow for the capitalization of R & D

Question 10

4

Costs that can be capitalized and are specifically identifiable.

Answer 10

1. Legal Fees and other costs related to a Successful Defense of the Asset
2. Registration or consulting fees
3. Design Costs (Trademark)
4. Other Direct Costs to secure the Asset

Question 11

5

IFRS: intangible asset capitalization exceptions?

Answer 11

Research costs must be expensed, but an intangible asset arising from development is capitalized if:

• Technological Feasibility has been established
• The entity intends to complete the intangible asset
• The entity has the ability to use or sell the intangible
• The intangible will generate future economic benefits
• Has the resources to complete the development.

Question 12

Capitalization of Costs to acquire an intangible.

Answer 12

• The amount of cash disbursed OR the FV of the other assets
• The PV of amounts to be paid for liabilities incurred
• The FV of consideration received for stock issued

Question 13

A patent is amortized over…?

Answer 13

SHORTER of Estimated life OR Remaining legal life

Question 14

Goodwill must be?

Answer 14

Tested for impairment each year

Question 15

Impairment of intangible asset (GAAP)?

Answer 15

Compare between the difference of Fair Value and Undiscounted cash flows.

FV > Undiscounted Cash flows

Reduce Book value to Fair value and the difference is the impairment to be recognized in the period.

Question 16

Under IFRS, impairment is tested?

Answer 16

For a cash generating unit.

Question 17

Under GAAP, impairment is tested under?

Answer 17

Each reporting unit

Question 18

Calculation

Impairment of Goodwill (IFRS)

Answer 18

Recoverable Amount

= GREATER of
FV Less costs to sell OR Value in use (PV cash flow)

Less: Carrying Value
Equals: Impairment loss amount.

Question 19

Convert from Cash to Accural

Answer 19

1. Add increases in current assets
2. Subtract decreases in current assets
3. Add decreases in current liabilities
4. Subtract increases in current liabilities.

Question 20

Formula

Completed contract calculation?

Answer 20

Step 1: Gross Profit
Contract Price - Total Costs to Complete

Step 2: % of Completion
% = Cost to date/Estimated costs of contract

Step 3: Gross profit earner
Step 1 x Step 2 = Profit to Date (PTD)

Step 4: Gross Profit for current year:
PTD - Prior PTD = Current GP

Question 21

Net Asset of Liability Formula

Completed contract statement of financial position issues?

Answer 21

Cumulative costs incurred
Add: cumulative gross profit recognized
Less: cumulative billings
Net Asset of Liability

Question 22

Installment Sales: When to recognize revenue?

Answer 22

Only when cash is actually collected, in proportion.

Question 23

A/R

Installment Sales: Balance Sheet representation?

Answer 23

Account Receivable
Less: Deferred GP
Equals: A/R Balance

Deferred GP is a contra account to Receivables.

Question 24

Cost Recovery method: When to recognize revenue?

Answer 24

At the time of sale, expected profit is recorded as Deferred GP.

Cash collections are first applied to recover product costs. Only after all costs are recovered is Profit recognized.

Most conservative method.

Question 25

Only use Cost Recovery or Installment Sales when?

Answer 25

There’s NO reasonable basis for estimating recovery, or revenues collectibility.

Question 26

4, Boot Paid/Received

Non-monetary exchanges: When to recognize gains?

Answer 26

1. No Boot = No Gain
2. Boot is Paid = No Gain
3. Boot Received is LESS than 25% = Recognize Proportional Gain
4. Boot Received is 25% or MORE = 100% Gain

Question 27

Non monetary Exchanges: Less than 25% rule?

Answer 27

Recorded Gain = (Boot / Consideration Given) x Total Gain

Total Gain = FV Asset Given Up - NBV

Question 28

4 simple definitions

Reporting change in prices

Answer 28

1. Historical cost - actual exchange value $ when asset acquired/liability assumed
2. Current cost (replacement cost) - cost incurred at present time. Use recoverable amount if lower.
3. Nominal $ - unadjusted for changes in purchasing power
4. Constant $ - $ restated based on CPI ratio calculation

Question 29

4 combinations

Measurement Methods and Current cost Determination

Answer 29

1. Historical Cost/Nominal Dollars: Neither.
2. Historic Cost/ Constant Dollars: Adjusts for Inflation
3. Current Cost/Nominal Dollars: Adjusts for Appreciation
4. Current Cost/Constant Dollars: Adjusts for either Appreciation or Inflation.

Question 30

Exchange Rate Representations

(Foreign Currency Translation)

Answer 30

Direct method: Domestic Price for 1 unit of Currency

Indirect Method: Foreign Price for 1 Unit of Domestic Currency (Euro = $)

($= Euro)

Question 31

Forward Exchange Rate

Answer 31

**A Bet: **exchanging currencies now for a Future Amount

Question 32

Historical Exchange Rate

Answer 32

Use Frequently:
Rate in effect at the date of issuance of stock or acquisition of Assets

Question 33

Weighted Average Rate

Answer 33

Used for Financial Statements:
Takes into account the Exchange rate fluctuations at the during the period.

Question 34

3

Function Currency qualifications?

Answer 34

1. The foreign operations are relatively self-contained and integrated within the country
2. Daily operations of the Foreign unit do not depend on the Currency of the domestic parent
3. Economy of the foreign unit is not highly inflationary - 100% over 3 years

Question 35

Remeasurement method

Answer 35

“Dysfunctional”
Financial statements of the Foreign Unit are not in a functional currency.

Question 36

Remember the CHART!

Foreign Curency: Remeasurement (Temporal) vs. Translation (Current Rate) Methods

Balance Sheet Presentation

Answer 36

Remeasurement (Temporal)

• Monetary A&L = Current/Year-end rate
  (A/R, N/R, LTD)
• Non-monetary A&L&E= Historical Rate
  (Inventory, Fixed Assets, Common stock)

Translation (Current)

• Monetary A&L = Current
• Non-monetary A&L = Current
• Common Stock = Historical

Question 37

Remember the CHART!

Foreign Curency: Remeasurement (Temporal) vs. Translation (Current Rate) Methods

Income Statement Presentation

Answer 37

Remeasurement (Temporal)

• Revenue, SG&A, Tax = W. Average
• Cost of Goods Sold = Historical
• Depreciation, Amortization = Historical

Translation (Current)

• Revenue, SG&A, Tax = W. Average
• Cost of Goods Sold = W. Average
• Depreciation, Amortization = W. Average

Question 38

What is a common modification used to prepare modified cash basis financial statements?

Answer 38

Capitalizing inventory

Question 39

Monetary Assets & Liabilities

Answer 39

Fixed or denominated in $ regardless of changes in specific prices or general price level.

Inflation
Monetary Liability = Purchase Power Gain
Monetary Asset = Purchase Power Loss

Cash, A/R (Allowance), L/T Receivable
A/P, N/P, Accrued expense, Bond payable

Question 40

Non-monetary Assets & Liabilities

Answer 40

Fluctuate in value with inflation/deflation, affected by CPI.

Marketable common stock, inventory, Investment in subsidiary, PP&E (depreciation), Intangible assets
Deferred charges/credits, preferred and common stock