F3 - Deck 3

Question 1

Calculation of Sum-of-the-Year’s-Digits:

Answer 1

1. [N × (N+1)]/2, where N is the estimated useful life
2. Depreciable base (Cost - Salvage value)
3. Year 1, max life and Year 2, max life minus 1, etc. equal base.
4. 3 / 1 * 2 = Depr expense

Question 2

What does each depreciation method reflect about an asset’s service potential? Units-of-production, Accelerated depreciation, and Straight-line.

Answer 2

• Units-of-production method reflects decline with use.
• Accelerated depreciation reflects increasing repairs and rapid obsolescence.
• Straight-line method reflects decline with the passage of time.

Question 3

Double-declining method of depreciation, calculation:

Answer 3

Depr Exp = Purchase * (2 / n) * (number of months in service relative to a full year)

OR

1. S/L percentage, 1 / useful life
2. 2 * S/L percentage is double percentage
3. Double percentage * base depreciation = yearly expense

Question 4

Where is the net gain from the sale of a warehouse and purchase of a new warehouse reported on the income statement?

Answer 4

The net gain from the sale of a warehouse and purchase of a new warehouse is reported under continuing operations, specifically under “other” revenues and gains. It is not reported in other comprehensive income nor as a discontinued operation. The gain does not reduce the cost basis of the new warehouse.

Question 5

How is an old building being actively marketed for sale accounted for on the balance sheet?

Answer 5

An old building being marketed for sale is valued at the lower of its book value or net realizable value and reclassified as an “asset held for sale.” It is no longer depreciated and, if the sale is expected within one year, it is classified as a current asset.

Question 6

How should estimated restoration costs be accounted for in the depletable base of a natural resource?

Answer 6

Estimated restoration costs are added to the depletable base of the natural resource, ensuring that depletion expense includes the restoration costs over the life of the operation. These costs are capitalized and depleted, not depreciated, and should not be expensed as incurred.

Question 7

Depletion expense, calculation:

Answer 7

1. Depletion base = Purchase price + Development cost + restoration cost - sell of land
2. Depletion base / total tons estimated to be removed = Per ton
3. Per ton * current tons removed = depletion expense

Question 8

How is an impairment test performed on fixed assets?

Answer 8

The impairment test begins with a recoverability test, comparing the sum of undiscounted future cash flows to the carrying amount. If the undiscounted cash flows are less than the carrying value, an impairment loss is calculated based on the difference between the fair value and the carrying value of the assets. The loss is recorded after the recoverability test is performed.

Question 9

When should a long-lived asset be tested for recoverability?

Answer 9

A long-lived asset should be tested for recoverability when events or changes in circumstances indicate that its carrying amount may not be recoverable. This includes situations where the fair value has decreased but may still be above the carrying value.

Question 10

What is the first step in determining if a long-lived asset is impaired under U.S. GAAP?

Answer 10

Under U.S. GAAP, the first step is to compare the carrying amount of the asset to the undiscounted expected future cash flows. If these cash flows exceed the carrying value, there is no impairment.

Question 11

When is the recoverability test performed on intangible assets?

Answer 11

The recoverability test is performed on intangible assets with a limited useful life. It compares undiscounted future cash flows to the carrying value. If the carrying value exceeds the cash flows, a fair value test is then performed. It is not applicable to intangible assets with indefinite lives, such as goodwill or certain trademarks, nor to R&D costs which are expensed immediately.

Question 12

How are various costs and financial instruments accounted for?

Answer 12

Patents are capitalized as intangible assets, including legal and registration fees. Research and development costs are expensed immediately. Leasehold improvements are capitalized in property, plant, and equipment. Derivative securities are recognized as assets or liabilities depending on the contract.

Question 13

How are legal fees for defending a patent accounted for?

Answer 13

The accounting for legal fees in defending a patent depends on the outcome. If the defense is successful, the costs are capitalized as an asset. If unsuccessful, the legal fees are expensed on the income statement. Success of the defense determines whether the fees can be capitalized.

Question 14

How should legal fees and other costs incurred to successfully defend a patent be treated?

Answer 14

Legal fees and other costs incurred to successfully defend a patent should be capitalized. These costs are added to the patent account and amortized over the shorter of the patent’s estimated life or remaining legal life. They are not accounted for separately and do not reduce stockholders’ equity.

Question 15

Over what period should intangible assets be amortized?

Answer 15

Intangible assets should be amortized over the lesser of their useful economic life or legal life. If the useful life is considered to be infinite, the asset is not amortized.

Question 16

How should amortization expense be recorded for intangible assets with a finite life?

Answer 16

For intangible assets with a finite life, amortization expense is recorded annually using the straight-line method, unless another method better reflects the asset’s decline in value. Alternative methods like double-declining balance, sum-of-the-years’ digits, or productive use may be used if they more accurately represent the asset’s value decline.

Question 17

Over what period is an intangible asset such as a copyright or patent amortized?

Answer 17

An intangible asset with a finite life, like a copyright or patent, is amortized over the shorter of its estimated life or remaining legal life, using the straight-line method unless another method better reflects the pattern of economic benefit.

Question 18

What is the first step in testing a long-lived asset for impairment?

Answer 18

The first step is to compare the carrying amount of the asset to the sum of undiscounted future cash flows. If the carrying value is less than the sum of the cash flows, the asset is not impaired and no impairment loss is recorded.

Question 19

How are organization costs treated for GAAP financial reporting and tax purposes?

Answer 19

For GAAP financial reporting, organization costs are expensed when incurred and no asset is recognized.
For tax purposes, these costs may be deducted in later years, creating a temporary difference between book and tax income.