F3 Assets

Question 1

F3 M1
Cash and Cash Eq items to know

Answer 1

• cash in bond sinking fund is restricted cash
• An overdraft i.e. negative balance must be reported as current liability
• If GL balance is provided than reconcile other items, but if bank statement is provided than to determine net cash balance the ignore bank errors and reconcile deposits in transit/outstanding checks
• if check not disbursed than added back to checkbook balance

Question 2

F3 M2
Determine Ending balance allowance for uncollectible

Answer 2

= beginning balance allowance for uncollectible + uncollectible account expense - account write off…E = B +A -S also know as BASE

• Recoveries are included as an addition.
• Unearned fees is subtracted from collection fees and collections total is subtracted in BASE formula like a write off
• net realizable value of AR end is included in question subtract amount from AR year end to have the total ending balance to use in formula
• Identifying service revenue from AR using BASE formula

Question 3

Explain difference between entry to write off uncollectible account using “allowance method” and “direct write off method”

Answer 3

a) “Allowance method” DR allowance uncollectible AR and CR AR. entries are net in AR ie no impact to NI or Assets account
- under GAAP, accrual accounting allows method
b) “Direct write off method” DR bad debt expense and CR AR.. These entries reduce NI and working capital
- Under GAAP, method is prohibited

Question 4

When is the entry when pledging receivables as collateral?

Answer 4

There is no AR entry. Entry is DR cash and CR notes payable when receive cash along with required note disclosure

Question 5

What is difference between factoring receivable with recourse vs no recourse

Answer 5

Recourse is a sales transaction while no recourse transfers risk to the buyer.

Question 6

How to record adjustment to allowance for uncollectible accounts under percentage of receivables method?

Answer 6

Step 1: Determine estimated uncollectible amount by multiplying AR and estimated % uncollectible
Step 2: Use BASE formula to identify adj i.e expense?
Entry adj: DR bad debt expense and CR Allowance for uncollectible

Question 7

Explain difference between Allowance for uncollectible v bad debt

Answer 7

• unadjusted credit balance is does not included in allowance for uncollectible, rather its adj in bad debt expense for the year
• Previous write off collected or becomes collectible, and provisions recorded will increase allowance for bad debt. Uncollectible written off will decrease allowance for bad debt
• Methods of estimating uncollectible accounts emphasize on different areas, such as? Aging the receivables focused on balance sheet and emphasizes the valuation of assets by estimating bad debts on aging analysis; gross sales and credit sales less returns and allowances emphasize income statement because estimates of bad debts is based on sales. Finally the Direct write off is a bad matching and overstates.

Question 8

Identifying amount for allowance for discounts

Answer 8

Step 1: what are discount terms i.e 2% discount in 15 days
Step 2: locate the AR aging that applies in table i.e. $100K amount for 0 to 15 days bucket
Step 3: multiply % of customers that use discount by discount amount i.e 50% customers use discount * 2% discount = 1%
Step 4: multiply amount in aging bucket by % calculated i.e $100K * 1%

Question 9

F3 M3
During rising pricies

Answer 9

a) best inv method is FIFO b/c 1st purchased are fist out = lower COGS and higher NI
b) LIFO last cost purchased are first transferred to COGS = higher COGS and lower NI
c) periodic inv system weighted ave. methods = NI lower than FIFO & higher than LIFO NI
d) FIFO method of Perp and periodic will have same ending inv cost

Question 10

How are the following cost categorized

Answer 10

• inventory costs: anything to get inv in state where ready to be sold ready for sale like import duty
  Related manufactured inventory costs: raw materials, direct labor, and factory overhead
• Freight IN increases inv b/c cost of inv and Interest on inv loan doesn’t effect inv cost b/c its a expense for period
• Cost must be unusual cost to be inventory: warehouse cost and freight OUT charges

Question 11

Explain difference between periodic and perpetual method

Answer 11

Periodic method is traditional way of calculating using $$ of purchased on sold depending on last in or last out; but Perpetual method uses $$ purchase at time of sale (timing of sale does not matter)

Question 12

Calculate periodic v perpetual method

Answer 12

Periodic weighted average inventory balance
Step 1: calculate # of units in end of inventory= total purchased minus available for sale
Step 2: weighted average purchase price: price by average of beg inv and each purchase i.e (units * $$)+( units * $$$) / (total units available for sale)
Step 3: take # of units end of inv * weighted average purchase price”

Periodic weighted average COGS
Step 1: cost per unit = total cost of beg and purchased inv divided by total # of units beg and purchasing inv
Step 2 cost per unit * # of units sold

Calculate Inventory balance by using Perpetual and Periodic LIFO method. Periodic is less than perpetual
First determine perpetual inv balance and if there is a SOLD than determine pricing based on LIFO
2nd determine periodic which is take units end balance and multiply with oldest cost

Question 13

Additional characterics of inventory

Answer 13

• LIFO COGS > FIFO COGS; while ending inv balance LIFO less FIFO b/c oldest goods and higher expense = income tax expense lower = tax liab lower
• same dollar valuation of ending Inv = FIFO periodic and FIFO perpetual
• same dollar is best method
• Moving-average method for inventory balance is after each sold and purchase determine balance till no more transactions and each purchase and issue are priced at latest weighted average cost

Question 14

Calculate inv value with a average market up cost:

Answer 14

Markups will be incorporated by: COGS / (1+markup %)

Question 15

Explain how to calculate Lower of Cost and Net Realizable Value (NCNRV) (used in IFRS)

Answer 15

Need: cost of inventory (amount paid to purchase), selling price, and completion and disposal cost

Step 1: calculate NRV: selling price - completion & disposal costs
Step 2: Carrying amount is determined by lesser of cost and NRV
If cost exceeds NRV write down invenotry to its NRV

Question 16

Explain how to calculate Lower of Cost or Market (LCM) (used in GAAP)

Answer 16

Need: inventory cost (FIFO,LIFO, or Ave cost) , replacement cost, selling price, and completion & disposal cost

Step 1: NRV= selling price - completion & disposal cost
Step 2: Market Value for LCM: lower of replacement cost and NRV
Step 3: Carrying amount is lower of inventory cost and Market Value

Question 17

F3 M3
To Begin interest capitalization, 3 conditions must be necessary:

Answer 17

a) expenditures for building have been made
b) interest cost is being incurred
c) permits have been filed
* it ends when asset complete and ready for use

Question 18

How are PPE cost categorized

Answer 18

• Cost of equipment: invoice price, freight-in; must be incurred before depreciation begins
• Capitalizing interest cant be recognized on regular manufactured inventory items. Ordinary delays i.e. waiting to obtain permits to complete construction is best time to capitalize interest costs.
• During the construction period of machinery to be a fixed asset interest costs should be capitalized as part of the historical cost of acquiring assets. After construction period, interest costs on fixed assets should be expensed
• ordinary repairs are expensed, while additions or improve efficiencies are to be capitalized expenditures
• all costs necessary to put fixed asset in place to its intended use should be capitalized
• costs that improve quality, efficiency, or productivity of fixed asset should be capitalized
• Income received on unused portion of specific loan cant be used to reduce capitalized interest costs for pd

Question 19

Calculate amount to record building:

Answer 19

Step 1: calculate total cost of building (cash + Mortgage=$750K + $250K = $1M)
Step 2: identify allocation % for building
Step 3: multiply 1 and 2

Question 20

Calculate capitalized interest costs recorded by company

Answer 20

step 1 identify expenditures
step 2: interest capitalized = * expenditures by interest rate for amount of interest capitalized * add totals
step 3: if capitalized amount is less than actual interest accrued than full amount is capitalized

• Identify interest rate to calculate capitalized interest -> determine if borrowings given are tied to construction. If not, than take weighted average interest rate
• recorded capitalization interest cost can not exceed actual interest costs incurred for period
• interest rate is applied to average accumulated expenditures not amount borrowed
• The capitalized interest amount for period can not exceed the total interest costs actually incurred during period i.e limited to max of actual interest costs

Question 21

Capitalization of interest during Construction period interest is capitalized based on weighted average of accumulated construction expenditures

Answer 21

during construction period, Capitalized interest is recognized on borrowed funds used to finance the weighted average accumulated expense for a qualifying asset

Question 22

Calculate weighted average of PPE Cost

Answer 22

step 1: take each financing cost and divide by total cost to identify % of total
step 2: take % of finance for each cost and * with rate and add all i.e (15% rate) (75%) + (10% rate) (25%)

• the weighted average interest rate on entity other debt is used after all available funds under specific construction borrowings are used to calculate excess cost

Question 23

Explain how land costs work?

Answer 23

• include the cost of getting land ready for intended use including land, demolition, legal fees, and title insurance. Salvaged materials is also included but is subtracted from total

Question 24

How does component method work?

Answer 24

Component method is loss in the amount of carrying value of damages must be recognized and refurbishing costs to create new assets is capitalized. This is applicable when carrying value of damaged portion of building is known and uninsured

Question 25

Other PPE Cost characteristics

Answer 25

• If assets purchased at fixed payments than asset is valued at present value of all future payments i.e. annuity
• Income received on unused portion of specific loan cant be used to reduce capitalized interest costs for pd

Question 26

F3 M4
Calculate double-decline depreciation method, when apply a factor of 2/n to total cost and n is the useful life of asset

Answer 26

Salvage value is not used rather a benchmark for value of asset to never fall below salvage value
Step 1: Y1 calculate depreciation expense take original cost * (2/useful life years). Then subtract original cost from Y1 depreciation expense for the adjusted balance carrying amount
Step 2: Y2 calculation depreciation expense take Y1 adj balance carrying amount and multiply (2/useful life years). Then subtract Y2 depreciation expense from the Y1 adj balance carrying amount for the Y2 adj balance carrying amount

Question 27

What are the difference PPE depreciation methods?

Answer 27

1) Units of production depreciation method is used when assets service potential declines with use
2) Straight line depreciation method is used when an assets service potential declines with the passage of time
3) Accelerated depreciation method is used when an asset is subject to rapid obsolescence or incurs increasing repairs and maintenance with use

Question 28

Calculate PPE carrying amount

Answer 28

a) machine:
Step 1: Calculate remaining balance over remaining life= reasonable estimate to be recovered / adj useful life i.e. original useful life minutes year adj needed
Step 2: calculate carrying amount = reasonable estimate to be recovered minus remaining balance over remaining useful life

b) building:
Rule: Property build on leased land is depreciated over life of property or term of lease whichever shorter
Step 1: calculate annual depreciation= building cost minus remaining term of land lease
Step 2: carrying amount = building cost - annual depreciation

Question 29

Calculate PPE impairment loss

Answer 29

Step 1: test fixed asset for impairment by checking if sum of undiscounted expected future cash flows is less than carrying amount than impairment loss needs to be recognized.

Step 2: if there is an impairment loss, calculated by taking carrying amount amount fair value minus i.e. carrying amount exceeds fair value of asset

Question 30

Calculate PPE gain/loss

Answer 30

a) reported on I/S on sale of machinery = selling price minus carrying amount
Selling price, if there is a bearing note is determine the present value of note = multiply amount of non interest bearing note by PV % for the 3 periods
b) disposal of asset = Adj NBV - insurance proceed. Repairs are expensed, not part of NBV
Step 1: calculate adj NBV = carrying value i.e NBV + add cost of new engine
Step 2: = disposal = adj NBV minus insurance proceeds

Question 31

Calculate accumulated depreciation with straight-line depreciation method

Answer 31

• BV is reduced and loss is recorded when a permanent impairment occurs
  Calculate new BV depreciating over new life by finding end of year accumulated depreciation= beginning of year accumulated depreciation + loss or depreciation for year
• Loss = (original cost - beginning accumulated depreciation) - carrying value
• Depreciation for year is calculated by carrying value divided by new remaining useful life
• BV is reduced with credit to accumulated depreciation when a permanent impairment occurs

Question 32

Calculate depreciation expense using double decline depreciation method

Answer 32

when asset is purchased during the year. Depreciation will only be counted for # of months asset was available to company
Formula : cost * (2/useful life years) * (# of months in service/ 12 months of full year)

• After 2 years, sum of the years digits depreciation method has higher NBV than double declining balance depreciation method meaning decreased gain or increased loss

Question 33

What is JE showing realization of cash received from asset sale

Answer 33

• DR: Cash (Amount sold for) and Accumulated depreciation (Gross amount minus net amount)
• CR: Printing equipment (original i.e gross amount of asset cost) and Gain on sale (cash received minus net amount)

Question 34

F3 M5
Calculate patent amortization expense

Answer 34

if amortized is updated to less than its estimated life or remaining useful life. Expenses that increase the useful life of patent needs to be added to annual amortization.
= (patent asset value + additional cost to extend) / (less of legal or useful life

Question 35

Intangibles w Finite Lives, calculate gain/loss from sale:

Answer 35

Basic formula = sale price - carrying value before sale

Step 1: carrying value = original patent cost - ((yrs used/ useful life)*original patent cost)
Step 2: carrying value before sale = carrying value + successful legal fees
Step 3: gain/loss from sale = sales price - carrying value before sale

Question 36

Calculate intangible asset franchise amount in yearly balance sheet

Answer 36

= subtract franchise cost minus amortization cost. Amortization cost is calculated by straight line line amortization yearly cost
- A franchise additional fee like % of franchise operations revenue is an operating expense, unrelated to intangible asset balance

Question 37

Calculate amount in I/S of permanent impairment that is a loss equal to carrying amount

Answer 37

= Patent cost minute pre amortization cost. Pre amortization cost (cost/useful life)* yrs consumed
- For further breakdown, a) expense will be annual amortization straight line and written off would be the total minus annual

Question 38

Other Characteristics of PPE Intangibles w Finite Lives

Answer 38

• GAAP requires start-up costs including org costs be expensed, without exceptions
• under US GAAP, subsequent reversal of intangible assets impairment losses is prohibited unless held for disposal
• defending patents, only successful legal fees are to be capitalized