F3 Assets and Related Topics

Question 1

Define Cash and Cash Equivalents

Answer 1

-Cash includes both currency and demand deposits wit banks and/or other financial institutions

-Cash equivalents include short-term, highly liquid investments that are both readily convertible 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

Direct Write-off
Dr Allowance for uncollectible accounts
Cr Accounts receivable
Weaknesses: Bad debts are not matched to sales, and accounts receivables are overstated. Not GAAP

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

Question 3

Name two methods for estimating uncollectible accounts.

Answer 3

Percentage(%) of accounts receivable at year end

Aging of accounts receivable at year end

Question 4

Give examples of costs to be capitalized as land

Answer 4

-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 5

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

Answer 5

Acquisition of Equipment
Purchase price, freight-in, installation, testing, taxes, less
any cash discounts allowed.*
Acquisition of Building
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 6

Describe the proper accounting for ordinary versus extraordinary repairs.

Answer 6

-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 7

State two rules concerning capitalizing interest.

Answer 7

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

Question 8

For capitalizing interest, when does the capitalization period begin?

Answer 8

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 9

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

Answer 9

Straight Line:
(Cost - Salvage Value)/Useful Life

Sum-of-the-Years’ Digits:
sum of years=n(n+1)/2
(Cost-Salvage) x (Years remaining)/(Sum of years)

Double-Declining Balance:
2 x Straight-line rate x NBV of asset
*No deduction for salvage to determine the depreciable base. Depreciate down to salvage value.

Units of Production:
(Cost-Salvage)/Estimated hours x Actual hours for period

Question 10

State the rules for computing depletion on the natural resources.

remember it is REAL property.

Answer 10

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

Depletion:
((Cost of land + Extraction dev costs + Anticipated restoration costs - Residual value)/Est. recoverable units)*units extracts

Question 11

When will an asset exchange have commercial substance under U.S. GAAP?

Answer 11

An asset exchange generally has commercial substance when the entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.

Question 12

How are gains/losses on nonmonetary exchanges recognized under U.S. GAAP?

Answer 12

Exchange has commercial substance- always recognize gains and losses on the exchange equal to the difference between the FV of what is given up and the carrying value of what is given up.

Exchange does not have commercial substance or the new asset’s fair value is not determinable (and the FV of the asset given up is unknown)-no gain on exchange is recognized unless boot is received, and losses are recognized in full (if losses exist because an impairment loss was not previously recognized).

If booth received is greater than 25% of total consideration, all gains and losses are recognized by both parties to the exchange just as in a monetary transaction that has commercial substance.

Question 13

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

Answer 13

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 14

When should the costs of developing computer software for resale, lease, or licensing be capitalized under U.S. GAAP?

Answer 14

After technological feasibility has been established and before the product is released for sale.

Question 15

How should the costs of capitalized computer software developed for resale be amortized under U.S. GAAP?

Answer 15

Annual amortization is the greater of:
Percentage of Revenue Method
Total capitalized amount x
(current gross revenue for the period /
Total projected gross revenue for product)
Straight-Line
Total capitalize amount x ( 1 / Est. of economic life)

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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

Question 18

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

Answer 18

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

Question 19

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

Answer 19

• 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.

Question 20

What is the proper treatment of research and developmental costs under U.S. GAAP?

Answer 20

Research and developmental costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and developmental undertaken on behalf of others under a contractual arrangement.

Question 21

List some items not considered research and developmental costs.

Answer 21

-Routine periodic design changes
- Marketing research
- Quality control testing
- Reformulation of a chemical compound

Question 22

Outline the treatment of computer software developed internally or obtained for internal use only under U.S. GAAP.

Answer 22

• Expense costs incurred in the preliminary project state and
  costs incurred in training and maintenance.
• Capitalize costs incurred after preliminary project state
  and for upgrades and enhancements.
• Capitalized costs should be amortized on a straight-line
  basis.

Question 23

What is the test of recoverability for the impairment of intangible assets other than goodwill under U.S. GAAP?

Answer 23

Finite Life:
if undiscounted future cash flows expected from use of asset and eventual disposal is less than the carrying value, recognize loss on impairment.
Indefinite Life:
If fair value is less than the carrying value, recognize loss on impairment.

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

What assets are subject to the impairment test?

Answer 25

• Intangibles (including goodwill) and fixed assets to be
  held and used.
  
  • Intangibles (including goodwill) and fixed assets slated
    for disposal.
    Note: The test must be done at least annually.

Question 26

Describe the impairment test for recoverability under U.S. GAAP.

Answer 26

If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized.

Question 27

How is the impairment loss reported in the financial statements?

Answer 27

As a component of income from continuing operations before income taxes.

The carrying amount of the asset is reduced.

Question 28

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

Answer 28

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

Question 29

Name the two rules for performing impairment calculations under U.S. GAAP.

Answer 29

Determining Impairment:
Use the undiscounted future net cash flows. An
impairment loss exists if total undiscounted cash flows are
less than the carrying value.
Amount of impairment:
Use the fair value of asset:
Impairment Loss = Fair Value - Carrying Value

Question 30

How do you find impairment loss?

Answer 30

Fair Value - Carrying Value

Question 31

Name Examples of Cash and Cash Equivalents?

Answer 31

• Coin and currency on hand (including petty cash)
• Checking accounts
• Savings accounts
• Money market funds
• Deposits held as
  compensating balances
  against borrowing
  arrangements with a
  lending institution that are
  not legally restricted.
• Negotiable Paper

Question 32

What are the two general forms of bank reconciliation?

Answer 32

1. Simple reconciliation
2. Reconciliation of cash
   receipts and
   disbursements

Question 33

What are accounts receivables?

Answer 33

Oral promises to pay debts and are generally classified as current assets.
- Trade receivables
AR from purchasers
of the companys
goods and services
- Nontrade receivables
AR from persons other than customers.

Question 34

What are Notes Receivable?

Answer 34

They are written promises to pay a debt.
The document used is called a promissory note.

Question 35

What are the types of inventories?

Answer 35

1. Retail Inventory-
   inventory that is resold in
   substantially the same
   form in which it was
   purchased.
2. Raw Materials Inventory-
   inventory that is being
   held for use in the
   production process.
3. Work in Process
   Inventory- inv. in
   production
   but
   incomplete.
4. Finished Goods Inventory- production
   inventory that is
   complete and
   ready for sale.

Question 36

Two types of FOB (Free on Board)

Answer 36

1. FOB Shipping Point:
   title passes to the
   buyer when the
   seller delivers the
   goods to a common
   carrier. Goods
   included in the
   buyers inventory
   upon shipment.
2. FOB Destination:
   Title passes to the
   buyer when the
   buyer receivers the
   goods from the
   common carrier.

Question 37

What is the Periodic Inventory COGS Formula:

Answer 37

Beg. Inv.
+ Purchases
____________
COGS available for sale
- End. Inv. (physical count)
_____________
Cost of goods sold

Question 38

How to calculate weighted average method of inventory?

Answer 38

total costs of inventory available/ total # of units of inv. available

Question 39

Dollar Value LIFO

Answer 39

Inventory is measured in dollars and is adjusted for changing price levels.

Question 40

What is the price index formula?

Answer 40

End. Inv. at current year cost/End Inv. at base year cost

Question 41

What PPE costs are capitalized or expensed?

Answer 41

Capitalized:
Additions(increase
quantity)
Improvements&
Replacements
increase life (reduce
accu. depr.)
increase usefulness
Extraordinary Repairs

Question 42

Two rules of capitalized interest.

Answer 42

1. Only capitalize interest on money actually spent, not on the total amount borrowed.
2. The amount of capitalized interest is the lower of:
   
   • Actual interest cost
     incurred
     or
   • Computed capitalized
     interest (avoidable
     interest)

Question 43

Whare of the two types of depreciation?

Answer 43

1. Physical
2. Functional

Question 44

Definition of Salvage Value (Residual Value)

Answer 44

estimate of the amount that will be realized at the end of the useful life of a depreciable asset.

Question 45

Definition of Estimated Useful Life?

Answer 45

The period of time over which an asset’s cost will be depreciated.

Question 46

Units of Production (Productive Output) Depreciation

Answer 46

Step 1:
Rate Per Hour:
Depreciable Base/Est. units/hours
Step 2:
Depr. Expense:
Rate per unit(hour) x # of units produced(hours worked)

Question 47

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

Answer 47

Provide For:
Dr Bad Debt Expense
Cr Allowance for uncollectible accounts

Write off:
Dr Allowance for uncollectable accounts
Cr Accounts receivable

Question 48

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

Answer 48

With Recourse:
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.

Without Recourse:
The factor assumes the risk of loss if the account is
uncollectible.

Question 49

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

Answer 49

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

Question 50

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

Answer 50

Discounting With Recourse:
The holder remains contingently liable.

Discounting Without Recourse:
The holder assumes no further liability after discounting.

Question 51

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

Answer 51

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 52

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

Answer 52

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 53

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

Answer 53

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 54

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

Answer 54

Net realizable value is the net selling price - completion and disposal costs.

Question 55

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

Answer 55

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 (est. net selling price minus
completion and disposal costs).
Floor: Net realizable value minus normal profit margin.

Question 56

Explain the difference between periodic and perpetual inventory methods.

Answer 56

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 57

Name several cost flow methods for inventory.

Answer 57

-Specific identification
- FIFIO (First In First Out)
- LIFE (unit and dollar value)
- Averaging:
- Weighted average (associated with periodic)
- Moving average (associated with perpetual)

Question 58

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 58

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

LIFO=Lowest

Question 59

When are losses on firm purchase commitments recognized?

Answer 59

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

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

Question 60

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

Answer 60

Carrying Value = Historical cost - Accu. depr. - Impairment