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FAR > F2 TIMING ISSUES MATCHING REVENUES AND EXPENSES , CORRECTING AND ADJUSTING ENTRIES > Flashcards

F2 TIMING ISSUES MATCHING REVENUES AND EXPENSES , CORRECTING AND ADJUSTING ENTRIES Flashcards

1
Q

Amortization of Capitalized Software Costs

A

= Greater of Straight Line Amortization OR (Sales Revenue from the software for the period/ total projected sale)

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2
Q

Payroll Tax Liability and Payroll Tax Expense

A
  • employees and employers have to pay 7% on total wages
  • so there is two portions of FICA paid on side from employee and one from employer
  • you add that to the amount that is withheld for federal income taxes and that is Total Payroll Tax Liability
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3
Q

Employer Payroll Tax Entries

A

DR -
Wage Expense
Employer FICA tax expense
CR -
Federal Income Tax Withheld
FICA tax withheld (employee)
Employer FICA tax liability
accrued payroll liability

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4
Q

Interest due at Maturity Note

A
  • you must calculate the interest due each year before maturity
  • the interest of that year adds to the liability balance
  • you calculate the interest due the following year based on the note balance + the interest owed
  • the total interest will make up your accrued interest liability
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5
Q

Patents - calculating gain and loss from sale

A

Do not forget to deduct amortization from the capitalized asset balance and add in any capitalized costs toward the patent such as legal fees and then you can calculate the gain or loss from the sale.

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6
Q

Patent Amortization

A

Patents are amortized based on the LESSOR of legal life and economic life

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7
Q

Research and development Costs

A

Under current US GAAP research and development costs should be expensed

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8
Q

Royalties

A

Should be reported as an expense in the period incurred

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9
Q

Goodwill

A
  • Goodwill is capitalized as a component of a purchase
  • you expense any maintenance to goodwill
  • goodwill is NOT amortized but is subjected to impairment testing
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10
Q

Revenue Recognition- Annual fees

A

When a customer pays an annual fee ,you recognize the revenue from that fee as the work is being performed

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11
Q

Franchise Cost

A

The Franchise cost is capitalized as an asset on the balance sheet.

  • you do amortize this asset
  • franchise fees are expense as an operating expense
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12
Q

Cash Basis VS Accrual Basis

A

When comparing the effect on net income of cash basis vs accrual basis , you must take the following into consideration.
Examples of a net decrease in AR and a net decrease in accrued expenses.
Cash Basis- a net decrease in AR would mean cash collected is higher than revenue recorded on the accrual basis , therefore income would be overstated on the cash basis accounting vs. accrual basis accounting
- a net decrease in accrued expenses , under cash basis would mean that cash paid under cash basis was more than under accrual basis , therefore income would be understated on the cash basis in comparison to accrual

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13
Q

Gift/Prize Expense

A

first payment + PV of remaining purchased

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14
Q

Royalties

A

royalty revenue is documented when incurred

- NOT based on collections

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15
Q

IFRS - cash generating units

A

impairment under IFRS, is a one step process where you compare the carrying value of the entire cash generating unit (including goodwill) to its recoverable amount. If there impairment you first allocate it to goodwill then any remaining impairment would be allocated on a pro rate basis to other assets of the cash-generating unit

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16
Q

Goodwill Capitalization

A

Goodwill is only capitalized when it is incurred in the purchase of another entity
- goodwill developed internally is expensed
Costs incurred from maintaining or developing goodwill are expensed

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17
Q

Intangibles with a definite life -amortization

A

Always use cost as basis

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18
Q

Accounts Payable

A

advance payments should be recorded as a prepaid asset

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19
Q

Service Contracts

A
  • when you have a service contract sale you must report the entire amount sold as deferred service revenue
  • revenue is recognized as service is performed
  • revenue is recognized and deferral is reduced as revenue is performed
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20
Q

Cash vs Accrual accounting

A
  • investments and drawing from capital accounts has no effect on income
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21
Q

Research and Development

A
  • includes costs incurred prior to technological feasibility for developed software that is to be sold, leased or marketed
  • if the software is for internal use, unrelated to production than it is not R&D
  • market research is not R&D b/c it is not gaining a new product
  • research and development costs whether they are incurred internally or by contract of outside firms are expensed under US GAAP
22
Q

Patent Accounting

A
  • legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patents economic life
  • amortization should be done using straight line depreciation with the lessor of economic useful life or legal life
23
Q

Adjusting entries

A
  • for adjusting entries remember that you incur an expense and a liability during some transactions, even if they occur after balance sheet date
  • example of this is bonuses
24
Q

Patent Capitalization

A
  • you do not capitalize unsuccessful patents
25
Q

deferred service revenue

A
  • you recognize the total amount of revenue first ( amt sold)
  • then you subtract out any portion of work that has been incurred
  • if the work is done evenly then July 1st is the average date and you must multiply work percentage by 1/2
26
Q

Calculation of Interest Revenue

A
  • to get interest revenue you must back into it from having a beginning balance in interest receivable and an ending balance
  • Interest receivable increases with interest revenue and decreases with interest collections
27
Q

BASE formula for adjustments

A 
Beginning balance 
Add payments 
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Subtotal 
Less Expense 
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Ending Balance
28
Q

accrual basis -rental revenue

A 
BASE - formula 
Beginnng Balance in Rents Receivable 
Add: Billings Accrued ( rent revenue)
Subtotal 
Less Cash collections 
Write offs 
ending balance
29
Q

accrued salaries payable

A

Beg Balance - Accrued Salaries Payable
Add - Salaries expense during the year
_________________________________________
Subtotal
Less : salaries paid during the year (gross)
___________________________________________
Ending balance

30
Q

Calculates Sales Revenue

A 
if given sales revenue acct you take 
credit to sales revenue acct 
(divided by)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
sales tax rate plus one
31
Q

Franchisor Revenue reporting

A

the franchisor should report revenue from the initial franchise fees when all material conditions of the sale have “substantially performed”

32
Q

Not included in Research and Development

A
  • routine and periodic design changes to old products or troubleshooting in production stage
  • marketing research , quality control testing and reformulation of a chemical compound
  • r&d performed under contract for others
33
Q

unlimited right of return revenue recognition

A

When there is an unlimited right of return, nothing should be recorded as revenue unless 4 conditions are satisfied;

  • 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 reasonably estimated
34
Q

Software developed internally

A
  • expensed - during preliminary stage

- capitalized after prelim stage and depreciated over economic life

35
Q

Franchise fee

A

if services were not completed no revenue is recognized

36
Q

Collections for service contracts

A
  • collections for service contracts should be recorded in a deferred service revenue account
37
Q

Start up activities and organizational costs

A

should be expensed

38
Q

Cash Basis Vs. Accrual Basis

A

Cash Basis : AR decrease means that cash collected was recorded that period as revenue
Accrual Basis: that revenue would have been recorded in prior periods when it hit AR
Cash Basis: AP increase would mean expenses incurred but not yet paid , under cash basis the expenses would not show until they were paid out

39
Q

R&D expense

A
  • R&D expense does not include the amount paid for the equipment for alternate future and current uses, this type of equipment would be capitalized
  • the depreciation on this equipment will be expensed as R&D, while the equipment is being used for R&D
  • after a product is sold all costs are just expensed….
40
Q

Matching Principle

A
  • expenses incurred to generate revenues
  • all expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded
41
Q

IFRS patent capitalization

A
  • includes purchase price
  • VAT taxes
  • legal costs to register the patent
  • if the patent is granted you can generally capitalize related design costs
  • research expenditures are expensed under IFRS and GAAP
  • IFRS development costs may be capitalized if certain criteria are met
42
Q

IFRS- revaluation gain

A
  • you show on the income statement to the extent of your prior loss
    -the rest of the amount hits OCI
    IFRS calls Income stmt gain -revaluation gain
    IFRS calls OCI gain revaluation surplus
43
Q

US GAAP- Impairment loss

A
  • test for recoverability
  • net carrying value is compared to undiscounted cash flows
  • if the net carrying value is more than undiscounted cash flows then you record an impairment loss by the amount that the carrying value exceeds the fair value
44
Q

Impairment Testing

A
  • US GAAP- at reporting unit

- IFRS- each cash generating unit

45
Q

IFRS -Goodwill impairment test (one step)

A
  • carrying value of CGU is compared to CGU’s recoverable amount
  • recoverable amount = greater of the CGU’s FV less cost to sell or value in use ( PV of future cash flows expected from CGU )
46
Q

Cash Basis vs Accrual

A

Prepaid Expenses - under cash basis represent assets where no benefit has been received
- under accrual they are not expensed until the benefit is received
Accrued Liability: represents a benefit received but no cash paid out yet
- expense should be booked when liability is created

47
Q

Converting Method of Cash Basis to Accrual

A
  • Add increases in current assets
  • Subtract decreases in current assets
  • Add decreases in current liabilities
  • Subtract increases in current liabilities
48
Q

IFRS Research and Development

A
  • Under IFRS , research is always expensed
  • Development may be capitalized if these ALL these conditions met;
    technological feasibility is established
    the company intends to complete the asset
    the company has the ability to sell or use the asset
    sufficient resources are availible to complete development and sell/use the asset
    the asset will generate future economic benefits
49
Q

Prepaid assets

A

the minimum operating cycle for a prepaid assets is 12 months

50
Q

Ordering of shit

A
  • do revaluing for impairment loss before amortization

FAR (14 decks)

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