F3

Question 1

Define cash and cash equivalents.

Answer 1

• Cash includes both currency and demand deposits with banks and/or other financial institutions.
• Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value.

Question 2

Name two methods of accounting for the write-off of uncollectible accounts.

Answer 2

DirectWrite-off
Dr Bad debt expense
Cr Accounts receivable
Weaknesses: Bad debts are not matched to sales, and accounts receivable are overstated. Not GAAP.

AllowanceMethod
Dr Allowance for uncollectible accounts
Cr Accounts receivable
Strengths: Matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP.

Question 3

Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.

Answer 3

ProvideFor
Dr Bad debt expense
Cr Allowance for uncollectible accounts

Write-off
Dr Allowance for uncollectible accounts
Cr Accounts receivable

Question 4

What is the difference between factoring with recourse and without recourse?

Answer 4

WithRecourse
The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company.

WithoutRecourse
The factor assumes the risk of loss if the account is uncollectible.

Question 5

At what value should non-interest-bearing promissory notes be recorded?

Answer 5

At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.

Question 6

Notes receivable may be discounted “with” or “without” recourse. What is the difference?

Answer 6

DiscountingWithRecourse
The holder remains contingently liable.

DiscountingWithoutRecourse
The holder assumes no further liability after discounting.

Question 7

Describe the computational steps required in “discounting a note.”

Answer 7

1. Compute maturity value (remember to include interest to maturity).
2. Compute the “discount” (remember to use maturity value).
3. Get proceeds by subtracting discount from maturity value.
4. Compute interest income as the difference between proceeds and face of note.

Question 8

When does the title to goods pass for each of the following?
FOB destination FOB shipping point Consigned goods

Answer 8

FOB destination—When received by buyer.

FOB shipping point—When given to a common carrier.

Consigned goods—When sold to a third party by consignee.

Question 9

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?

Answer 9

Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.

Question 10

How is net realizable value calculated in the lower of cost and net realizable value method?

Answer 10

In the lower of cost or nrv method:

Net realizable value (NRV) is the net selling price less completion and disposal costs.

Question 11

Under U.S. GAAP, how is market calculated in the lower of cost or market method?

Answer 11

In the lower of cost or market method, “market” generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

Ceiling—Net realizable value (estimated net selling price less completion and disposal costs).

Market–Current replacement cost

Floor—Net realizable value minus normal profit margin.

Step 1. choose the middle value
Step 2. choose lower of historical cost or middle value determined in step 1.

Question 12

Explain the difference between periodic and perpetual inventory methods.

Answer 12

Periodic
The quantity of inventory is determined only by physical count. Ending inventory is physically counted and priced.

Perpetual
Inventory is updated for each purchase and for each sale. Keeps a running total of inventory balances.

Question 13

Name several cost flow methods for inventory.

Answer 13

• Specific identification
• FIFO
• LIFO
• (unit and dollar value) Averaging
• Weighted average (associated with periodic)
• Moving average (associated with perpetual)

Question 14

During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income?

Answer 14

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.
LIFO = Lowest

Question 15

When are losses on firm purchase commitments recognized?

Answer 15

Losses are recognized in the period in which the price declines.

Dr Estimated loss on purchase commitment
Cr Estimated liability on purchase commitment

Question 16

How is fixed-asset carrying value computed under U.S. GAAP?

Answer 16

Carrying value = Historical cost – Accumulated depreciation – Impairment

Question 17

Give examples of costs to be capitalized as land.

Answer 17

• Acquisition price
• Closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
• Any mortgages, liens, or encumbrances on the land which the buyer assumes Preparation costs, such as surveying costs, leveling costs, tree removal
• Cost of razing an existing building, in getting land into condition for intended use Less: Proceeds from sale of assets on land
• Note: Excavating costs for a building and cost of improvements with a definite life are not included in land.

Question 18

Give some examples of capitalizable costs for:
—Acquisition of equipment
—Acquisition of building

Answer 18

AcquisitionofEquipment
Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed.*
AcquisitionofBuilding
Purchase price, deferred maintenance, alterations, improvements, architect’s fees.*

*If equipment or building is constructed by company, capitalized cost could include construction period interest.

Question 19

Describe the proper accounting for ordinary versus extraordinary repairs.

Answer 19

Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset.

Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.

Question 20

State two rules concerning capitalizing interest.

Answer 20

1) Only capitalize interest on money actually spent, not on amount borrowed.
2) The amount of capitalized interest is the lower of:
actual interest cost incurred; or
computed capitalized interest (avoidable interest).

Question 21

For capitalizing interest, when does the capitalization period begin?

3 to start and 1 to end

Answer 21

It begins when three conditions are met:

• Expenditures for the asset have been made.
• Activities that are necessary to get the asset ready for its intended use are in progress.
• Interest cost is being incurred.

Ends when the asset is substantially complete and ready for its intended use.

Question 22

Name the most common depreciation methods. Give the basic formula for calculating each method.

Answer 22

Straight-Line
(Cost − Salvage) / Useful life

Sum-of-the-Year’s-Digits
Sum of years = n(n+1) / 2
(Cost − Salvage) × [(Years remaining) / (Sum of years)]

Double-DecliningBalance
2 × Straight-line rate × Net book value of asset*
*No deduction for salvage to determine the depreciable base. Depreciate down to salvage value.

UnitsofProduction
[(Cost − Salvage) / Estimated hours] × Actual hours for period

Question 23

State the rules for computing depletion on natural resources.

Remember it is REAL PROPERTY

Answer 23

Residual value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price

[(COST OF LAND+EXTRACTION DEV COSTS+ANTICIPATED RESTORATION COSTS-RESIDUAL VALUE)/EST RECOVERABLE UNITS)]*UNITS EXTRACTED=DEPLETION

Question 24

What is the calculation for impairment losses for property, plant, and equipment under U.S. GAAP?

Answer 24

The amount by which the carrying amount exceeds the fair value of the asset.

Question 25

Is restoration of impairment losses permitted under U.S. GAAP?

Answer 25

Restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use.

Question 26

How are purchased intangible assets and internally developed intangible assets recorded under U.S. GAAP?

Answer 26

Purchased intangible assets:
Recorded at cost, including legal and registration fees.

Internally developed intangible assets:

Legal fees, costs of successful defense, registration fees, consulting fees, and design fees can be capitalized.

Most research and development costs must be expensed.

Question 27

What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized?

Answer 27

The shorter of its estimated useful economic life and its remaining legal life (as in a copyright, franchise, or patent).

Question 28

How are intangible assets reported under U.S. GAAP?

Answer 28

Reported at cost less amortization (finite life intangibles only) and impairment.

Question 29

What is the two-step impairment test for the impairment of intangible assets with finite lives under U.S. GAAP?

Answer 29

Step 1: The carrying amount of the asset is compared with the sum of the undiscounted cash flows expected to result from the use of the asset and it eventual disposition.
Step 2: If the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value is recorded.

Question 30

What intangible assets with finite lives are subject to the impairment test?

Answer 30

Intangibles and fixed assets to be held and used. Intangibles and fixed assets slated for disposal.

Note: Intangible assets with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Question 31

For intangible assets, how is the impairment loss reported in the financial statements?

Answer 31

As a component of income from continuing operations before income taxes. The carrying amount of the asset is reduced.

Question 32

How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by the franchisee?

Answer 32

They should be recorded at their present value as an intangible asset.

Question 33

Define start-up costs. What is the accounting treatment of start-up costs?

Answer 33

Costs incurred for one-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation.
Start-up costs are expensed in the period incurred.