FAR 25

Question 1

On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over five years. The carrying value of the software costs on January 1, year 3, was $60,000. As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000. What amount should the company expense related to the software costs for the year ended December 31, year 3?

Answer 1

As of January 1 of year 3, there are 3 years that remain on the software’s expected life and with a remaining carrying value of $60,000, amortization would be $20,000, which would reduce the carrying value to $40,000. In addition, however, the resulting carrying value is compared to the net realizable value that will be derived from sales of the software. Future sales will generate $23,000 in revenues at a cost of $8,000, making the net realizable value $15,000. The software will be written down to that amount, requiring an additional reduction of $25,000 and a total expense of $45,000.On

Question 2

Roth, Inc. received from a customer a one year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?

Answer 2

Roth will first calculate the maturity value of the note, which is the face of $500,000 plus one year’s interest at 8% or $40,000. Since the note is being discounted after 6 months, the bank will receive $540,000 after six months. The discount will be $540,000 x 10% x 6/12 or $27,000. As a result, Roth will receive $540,000 - $27,000 or $513,000 from the discounting

Question 3

Does IFRS allow internally generated goodwill to be capitalize?

Answer 3

No - similar to GAAP it is only recognized when there is a business combination

Question 4

When can you use the revaluation model for intangibles - IFRS

Answer 4

It may only be used when there is an active market for an intangible

• if one asset within that class is accounted for under the revaluation model - then all intangibles within that class must revaluate using the revaluation model as well

Question 5

What happens when a notes receivable is sold with recourse

Answer 5

When a note receivable is sold with recourse, it is treated as if the entity borrowed funds from the bank, using the receivable as collateral. In such a case, the proceeds are recognized as a liability, and the receivable is reclassified, decreasing notes receivable and increasing notes receivable discounted.

Question 6

What do you do when a loan receivable is impaired

Answer 6

the receptor will reduce the carrying value to the receivable to either:

-loans observable market price

or

-the fair value of the collateral if the loan is secured

If foreclosure is probable - the receivable will be written down to NRV of the collateral

Question 7

How are notes receivable record

Answer 7

• They are recorded at present value
• If there is a deferred charge - this is considered a prepaid expense and is rated at as asset on the balance sheet
• It is carried forward until used

Example: you get a 10% discount on the future purchase of a fixed amount of merchandise over next three years - this is considered a prepaid expense, it is recorded as a deferred charge

Question 8

What is reciprocal inter fund activity

Answer 8

it includes inter fund loans and inter fund services used

Example: billings by the internal service funds to departments financed by the general funs

Question 9

What is a nonreciprocal transfer

Answer 9

• these include inter fund transfers to establish new fund and routine inter fund reimbursements

Example:
Transfer of $200,000 from the general fund to establish a new enterprise fund.
Routine transfer of $50,000 from the general fund to the debt service fund.

Question 10

What are the characteristics that GASB reported should processes

Answer 10

• understandability
• reliability
• relevance
• timeliness
• consistency
• comparability

Question 11

MD&A What is the required information to be included in here

Answer 11

• Information on a comparative basis with the prior year, overall and individual fund financial statements, variance allowance information and info about long-term activities and expected events.

Question 12

Under the installment method of accounting how is gross profit percentage calculated

Answer 12

You multiply the gross profit percentage by amounts collected = revenue that is recognized

Revenue therefore is recognized in proportion to collections

Question 13

Can you us ether installment method under GAAP for financial reporting?

Answer 13

No - but it is still allowable for tax purposes

Question 14

How do you calculate the installment method of accounting

Answer 14

Gross profit % * amounts collected = amount of revenue recognized

Revenue is recognized in proportion to collections

Question 15

What are the two primary characteristics that are emphasized on interim financial reporting

Answer 15

Interim financial reporting are designed to provide users with timely information

useful in the making of decisions at the sacrifice of reliability

Question 16

Is interim reporting doen on an independent basis?

Answer 16

No - it is done part of the annual period rather than as a period that is independent to itself

Question 17

What tax rate will you use when calculating the income tax provision for second quarter of 200X when doing interim reports

Answer 17

• Each interim period is considered an integral part of the annual period
• expectations for the annual period are reflected in the interim period
• The income tax expense is calculated using the estimated annual effective tax rate
• The estimated tax rate should be updated as of the end of each interim period (second quarter in this case)

Question 18

How do you handle declines in inventory evaluates on interim financial statements

and gains in inventory value

Answer 18

• If inventory declines are NOT expected to be recovered during the rest of the year - RECOGNIZE the loss in that interim period
• If there is an inventory loss and you expected them to be recovered before the end of the year - DO NOT recognize the loss
• If later you decide the inventory loss if NOT recoverable - recognize the loss then
• If there are gains - do NOT recognize the gain

Question 19

when preparing interim financial statements the entity should:

Answer 19

• use the same acct principles used in preparing its latest F/S (exception - if there was a change in acting policy the current year)

Expenses - if YES expected to benefit more than one period in the in the sale year then allocate evenly over REMAINING interim period

• Expenses and Revenue - ALL in the same quarter in which they occurred

Question 20

What tax rate do you use to calculate income tax for an interim financial statement

Answer 20

• you use the rate that is EXPECTED to apply for the entire annual period.

for the first quarter: the effective income tax rate = 15%, last years effective income tax was 30%, the expected income tax rate is 25%.

Use 25% because it is the expected rate for the entire year