F2

Question 1

research and development costs

Answer 1

are expensed whether they are incurred internally or by contract with outside firms under US GAAP

Question 2

Patent amortization

Answer 2

once the patent is established, legal costs to successfully defended the patent should be capitalized and amortized over the lesser of the patent’s useful life or its legal life.

Question 3

Royalty Expense and Intangible Asset

Answer 3

purchased intangible assets should be capitalized as cost. Internally developed IA should be expenses (R and D).

Question 4

common IA

Answer 4

patents, copyrights, franchises, trademarks, and goodwill

• any purchased IA should be capitalized.
• any internally developed IA should be expensed.

Question 5

Exceptions that certain costs associated with IA should be capitalized

Answer 5

• legal free to successful defense
• registration and consulting fees
• design costs (trademark)
• other direct costs to secure the asset

Question 6

goodwill

Answer 6

goodwill is capitalized in its purchase price. internally maintaining or developing goodwill is cost. dont capitalize.

Question 7

Substantially performed and initial fee

Answer 7

the franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed”. Will recognize the entire initial fee in the current year.

Question 8

which should exclude from R and D?

Answer 8

Excluded - quality control during commercial production, including routine testing of product.

Research is the planned efforts of a company to discover new information that will help either create or improve a new product, service, process, or technique. Items not considered R and D include - any costs during production stage, marketing research, quality control testing, reformulation of a chemical compound.

Question 9

Contingency sales with unlimited return - Revenue recognition

Answer 9

must satisfy the following four conditions - (ALL)

• the sales price is substantially fixed
• the buyer assumes all risk of loss
• the buyer has paid some form of consideration
• the amount of returns can be resonsably estimated.

Question 10

preliminary stage (internal use computer software)

Answer 10

costs expensed before “preliminary stage”

costs capitalized after “preliminary stage”

Question 11

amortization and impairment (IA and GW)

Answer 11

• intangible asset is a finite life intangible asset which is amortized over the period of lesser of economic life or finite life.
• good will is not amortized but periodically for impairment test.

Question 12

start-up cost

Answer 12

GAAP requires that start-up costs, including organizational costs, be expensed as incurred, without exception.

organization costs expensed for GAAP financial income (no asset) but deducted in later years for tax purpose. (Defer tax asset）

Question 13

Goodwill impairment testing GAAP and IFRS

Answer 13

GAAP - Reporting unit level

IFRS - Cash Generating Unit Level (CGU)

Question 14

reversal of intangible asset

Answer 14

GAAP - subsequent reversal of intangible asset impairment losses is prohibited unless the IA is held for sale.

Question 15

unearned initial franchise fee

Answer 15

Unearned initial franchise fee = cash payment +PV of future payment

Question 16

equipment purchased for current and future projects

equipment purchased for current project only

R and D

Answer 16

• equipment purchased for current and future will be capitalized, but related depreciation cost will be allocated to R and D.
• equipment purchased for current project only, fully expensed R and D

Question 17

matching principle

Answer 17

matches expenses against revenues in the same accounting period.

Question 18

Computer software development costs

key points - 
technological feasibility (software for sale)
preliminary stage (software for internal use)

Answer 18

• computer software for sale
  1. expense cost - 2. technological feasibility - 3. capitalized cost (amortization, greater of % of revenue or straight-line) - 4.Inventory (release product for sale)
• computer software for internal use
  1. expense cost - 2. preliminary project state - 3. capitalized cost (straight - line amt)

Question 19

R and D in IFRS

Answer 19

Under IFRS, development costs may be capitalized if certain criteria are met. if the patent has been granted, it is generally appropriate to capitalize the related design costs.

Research = 100% expense

Under GAAP, R and D 100% expensed

Question 20

Impairment in IFRS and GAAP

Answer 20

• IFRS: impairment loss
  carrying amount - GREATER of “Fair Value - Estimated costs to sell” or PV of future cash flow
• GAAP impairment loss
  Carrying amount - undiscounted future cash flow

Question 21

IFRS - Development costs may be capitalized if all of the following criteria are met

Answer 21

1. technical feasibility has been established;
2. the company intends to complete the asset
3. the company has the ability to sell or use the asset;
4. sufficient resources are available to complete the development and sell / use the asset;
5. the asset will generate future economic benefits.

Question 22

gross profit

Answer 22

gross profit = sales - COGS

Question 23

equipment used in R and D with current and future use

Answer 23

equipment used in R and D that has alternative future uses is capitalized and depreciated over its useful life.

Question 24

Core formula for installment sales

Answer 24

1. Gross Profit = Sales - Cost of sales
2. Gross Profit % = GP / Sales
3. Deferred GP = Installment receivables (sales) x GP%
4. realized GP = cash collected x GP%

Question 25

installment sales and cost recovery sales are appropriate for …

Answer 25

there is no reasonable basis for estimating collectibility.

under cost recovery method, revenue is recognized after cash equaling the cost of the item is collected.

under the installment method, gross profit is recognized = GP% x cash collected.