F4 Working Capital and Fixed Assets

Question 1

When can a short term obligation be included in noncurrent liabilities?

Answer 1

If the Co. intends to refinance debt on a long-term basis and the intent is supported by the ability to do so as evidenced by:

• actual refinancing prior to the issuance of the financial statements, or;
• existence of a non-cancelable financing agreement from a lender having the financial resources to accomplish the refinancing.

Question 2

Using the allowance method, give two JE’s to provide for and then to write off an uncollectible account.

Answer 2

Provide for:
Dr. Bad debt expense
Cr. Allowance for uncollectible accounts

Write-off:
Dr. Allowance for uncollectible accounts
Cr. Accounts receivable

Question 3

During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income? Which inventory method is prohibited under IFRS?

Answer 3

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

LIFO = Lowest

LIFO is prohibited under IFRS

Question 4

Explain the difference between periodic and perpetual inventory methods.

Answer 4

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 5

Describe an inventory consignment arrangement.

How are the consigned goods carried on the parties’ B/S’s?

Answer 5

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 B/S of the consignor.

Question 6

How is an impairment loss reported in the F/S?

Answer 6

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

Question 7

Name several retail inventory methods.

Answer 7

• conventional retail
• cost retail
• FIFO/cost
• LIFO/cost
• Dollar value LIFO/cost

Question 8

How is impairment evaluated under IFRS?

Answer 8

Under IFRS, impairment exists if the carrying value of the fixed assets exceeds the higher of:

• Fair value - costs to sel
• Value in use (PV of FCF)

Question 9

Give examples of costs to be capitalized as land.

Answer 9

• acquisition price
• closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
• any mortgage, liens, or encumbrances on the land which the buyer assumes
• preparation costs, such as surveying costs, leveling costs, tree removal
• costs of razing and existing building, in getting land into condition for intended use
• improvements with indefinite live
• 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 10

How is market calculated in the US GAAP lower of cost of market method?

Answer 10

Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

• ceiling; NRV (estimated net selling price less completion and disposal costs)
• floor; NRV minus normal profit margin

Question 11

If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?

Answer 11

• account for transfer as a secured borrowing w/ pledged collateral
• recognize the appropriate asset/liability amounts and interest revenue/expense amounts.

Question 12

How is investment property defined and reported under IFRS?

Answer 12

Investment property - land and or buildings held to earn rental income or for capital appreciation is reported using one of two models:

Cost Model: Carrying value = historical cost - accumulated depreciation

Fair Value model: Reported at FV and not depreciated. G/L from FV adjustments are reported on the income statement.

Question 13

Describe the impairment test for recoverability under US GAAP

Answer 13

sum of undiscounted expected FCF is less than the carrying amount, an impairment loss needs to be recognized.

Question 14

Describe the computational steps required in “discounting a note”

Answer 14

• compute maturity value (including interest)
• compute the “discount” (use maturity value)
• get proceeds by subtracting discount from maturity value
• compute interest income as difference between proceeds and face of note

Question 15

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

Answer 15

Direct write-off: weaknesses - bad debts are not matched to sales and AR are overstated; not GAAP
Dr. bad debt expense
Cr. A/R

Allowance Method: strengths - matches bad debts w/ credit sales; AR fairly stated; required by GAAP
Dr. Allowance for uncollectible accounts
Cr. A/R

Question 16

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

Answer 16

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

Question 17

How is the carrying value of fixed assets computed under US GAAP and IFRS?

Answer 17

GAAP: Historical cost - accum. depr. - impairment (if applicable)

IFRS:

• using GAAP method or revaluation model = FV on revaluation date - subsequent accum depr. - subsequent impairment
• revaluation gains are reported in OCI
• revaluation losses are reported on the I/S

Question 18

Give some examples of capitalizable costs for:

• acquisition of equipment
• acquisition of building

Answer 18

Acquisition of equipment:
Purchase price, freight in, installation, testing, taxes, less and cash discounts allowed

Acquisition of building:
Purchase price, deferred maintenance, alterations, improvements, architects fees*

• if equipment or building is constructed by company, capitalized cost could include construction period interest

Question 19

State the rules for computing depletion on natural resources

REAL

Answer 19

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

((Cost of land + extraction development costs + anticipated restoration costs - residual value) / estimated recoverable units) * units extracted

Question 20

Noted receivable may be discounted “with” or “without” recourse - what is the difference?

Answer 20

discounting w/ recourse: holder remains contingently liable

Discounting w/out recourse: the holder assumed non further liability after discounting

Question 21

For capitalizing interest, when does the capitalization period begin?

Answer 21

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

When are losses on firm purchase commitments recognized?

Answer 22

Losses are recognized in the period when the price declines
Dr. Estimated loss on purchase commitment
Cr. Estimated liability on purchase commitment

Question 23

Is restoration of impairment losses permitted under US GAAP & IFRS

Answer 23

GAAP:
Restoration (reversal of impairment losses) is permitted for assets held for sale; restoration is prohibited for assets held for use

IFRS:
Restoration is always permitted

Question 24

Name three methods for estimating uncollectible accounted

Answer 24

• percentage of credit sales
• percentage of AR at year end
• Aging of accounts receivable at YE

Question 25

If control of a financial asset is surrendered, what is the accounting treatment of the transfer?

Answer 25

No continuing involvement: recorded as a sale w/ appropriate reduction in receivables and recognition of any G/L

Continuing involvement:

• asset for which there is no retained interest is recorded as a sale using the financial-components approach
• assets for which there is retained interest is carried on the books of transferor and allocated a BV based on relative value of all transferred assets @ the date of transfer

Question 26

Explain the different approaches to depreciation under IFRS and GAAP

Answer 26

Under IFRS, depr method should match expected pattern of fixed asset consumption (not required under GAAP)

Under IFRS, component depreciation is required (not required under GAAP)

Question 27

How is NRV calculated in the IFRS lower of cost or NRV method?

Answer 27

NRV is the net selling price less completion and disposal costs.

Question 28

Name the three conditions that must exist for control of a financial asset to be considered surrendered.

Answer 28

• transferred assets have been isolated from the transferor
• transferee has the right to pledge or exchange the asset
• transferor does not maintain control over transferred assets under a repurchase agreement

Question 29

Describe the proper accounting for ordinary versus extraordinary repairs

Answer 29

Ordinary repairs are expensed as repair and maintenance. Extraordinary repairs either increase the life or utility of the asset.

• if extraordinary repair increases the life of the asset, it is recorded by reducing accum depr.
• if extraordinary repair increases utility of asset, it is capitalized to the FA account

Question 30

When does the title to goods pass for each of the following?

FOB Destination
FOB Shipping point
COD
Consigned goods

Answer 30

• FOB destination - when received by buyer
• FOB shipping point - when given to a common carrier
• COD - when received and paid for by a buyer
• Consigned goods - when sold to a third party by consignee

Question 31

What is the difference between factoring w/ recourse and w/out recourse?

Answer 31

w/ Recourse; factor may return the account to the company if it proves to be uncollectible. Potential liability & risk of loss remains w. the company

w/ out recourse; the factor assumes the risk of loss if the account is uncollectible

Question 32

State two rules concerning capitalizing interest

Answer 32

• 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)