FAR 2

Question 0

Completed Contract Method

Answer 0

Revenue is not recognized until the project is complete.
Profit/Loss = Contract Price - Total Costs
WIP is recorded on the Balance Sheet as an asset.
IFRS does not permit the use of this method.

Question 1

% of Completion for Contracts

Answer 1

1.Compute Gross Profit of Completed Contract
Contract Price

Gross Profit

2. Compute % of Completion
   Total Cost to Date /
   Total Estimated Costs
3. Compute Gross Profit Earned (profit to date)
   Step 1 x Step 2
4. Compute Gross Profit earned for current year. (cumulative of prior periods)
   PTD at current FYE

Current YTD Gross Profit

Question 2

How do you calculate GP from Installment Sales?

Answer 2

#1.  Gross Profit
Sale on Installment
-CGS
Total Gross Profit
#2. Gross Profit %
Gross Profit / Sales Price
#3 Earned GP
Cash Collections (Sale on Installment less ending installment AR)
x GP %
#4. Deferred GP
Ending Installment Receivable
* GP %

Question 3

What are the requirements for Revenue Recognition?

Answer 3

Contracts & Services
1-Persuasive evidence of an arrangement exists
2-Delivery has occurred or services have been rendered.
3-The price is fixed and determinable
4-Collection is reasonably assured.
Sales of products or disposal of other assets
1-Delivery of goods
2-Transfer of legal title.
3-Revenue that stems from allowing others the use of the entity’s assets.
4-Revenue from the performance of services is recognized in the period the services have been rendered and are able to be billed by the entity.

Question 4

How do you calculate royalty income?

Answer 4

Royalty Collections
+ Reduction in unearned royalties
- Reduction in royalties receivable
= Royalty Income

Question 5

What types of expenses pertaining to internally developed intangibles should be expensed?

Answer 5

1-Trademarks
2-Goodwill from advertising
3-Cost of developing, maintaining, or restoring goodwill.
Exceptions:
1-Legal fees related to a successful defense of the asset.
2-Registration or consulting fees.
3-Design Costs
3-Other direct costs to secure the asset.
**IFRS-Research costs must be expensed.

Question 6

How do you determine if an intangible asset is impaired?

Answer 6

Compare the book value to the fair market value. If the BV is more than the FMV then the asset is impaired and a mark down is required. If the BV is greater than the FMV then no entry is done.

Question 7

What is the valuation of intangible assets?

Answer 7

US GAAP
Cost less amortization and/or impairment.
IFRS
Cost Model-Cost adjusted for amortization and impairment
Revaluation Model-Revaluation model carrying value=FV on revaluation date=Subsequent amortization-Subsequent impairment.

Question 8

How are gains/losses recorded (IFRS) under the Revaluation Model?

Answer 8

Revaluation Model-Revaluation model carrying value=FV on revaluation date=Subsequent amortization-Subsequent impairment
Losses-are recorded on the income statement. Unless it reverses a previously recognized gain, then it is under OCI.
Gains-are recorded under OCI. Unless is reverses a previously recognized loss, then is it under the income statement.
Impairment-1st reduce any surplus in equity to zero then report it on the income statement.

Question 9

Are organizational (start-up) costs expensed or capitalized?

Answer 9

They are expensed.

Question 10

What is the accounting treatment for R&D costs?

Answer 10

They are expensed except for:
1-Materials, equipment, or facilities that have alternate future uses. ie. building. Those are capitalized and and depreciated over their useful lives.
2-R&D cost of any nature undertaken on behalf of others under a contractual arrangement.

Question 11

What items are not considered R&D?

Answer 11

1-Routine periodic design changes to old products or troubleshooting in production stage.
2-Marketing Research
3-Quality Control Testing
4-Reformulation of a chemical compound.

Question 12

What is the proper accounting for computer software that internally developed?

Answer 12

1-Expense costs incurred until technological feasibility has been established.
2-Capitalize costs incurred after technological feasibility has been established up to the point the product is released for sale.

Question 13

When is technological feasibility established?

Answer 13

1-A detailed program design, or

2-Completion of a working model.

Question 14

How is amortization of capitalized software costs calculated?

Answer 14

Greater of…
% of Revenue=
Total Capitalized Amount
x Current Gross Revenue for the period / Total Projected Gross Revenue for product.

Straight-Line=
Total Capitalized Amount
x 1/Estimate of Economic Life

Question 15

How do you report an impairment for intangible assets?

Answer 15

W/indefinite life - FMV less than CV, if FMV is less than CV you book an impairment.
W/finite life - CV is compared to undiscounted cash flows expected. If CV exceeds undiscounted cash flows then the asset is impaired. The loss is the difference between the CV and the FMV.

Question 16

How do you Calculate profit using the cost recovery method (installment sales)?

Answer 16

Deferred GP is booked until all cost recovery receivable has been received. At that time realized profit is booked.

Question 17

How do you calculate gain/loss on exchanges with “commercial substance? What is the basis of the newly acquired asset?

Answer 17

Difference between the FV and the BV of the asset given up.
The basis of the new asset is going to equal the BV +/- any gain or loss + any cash paid.

IFRS - exchanges of dissimilar assets are treated the same as GAAP. Exchanges of similar assets, no gain is recognized.

Question 18

How do you calculate gains when exchanges lack “commercial substance?”

Answer 18

1- If no boot is received = No gain.
2-Boot is paid = No gain.
3-Boot is received = Recognize Proportional gain (<25%)
4-Boot is 25% or more of total consideration given. Gain and losses are recognized.