FAR 3 & 4

Question 1

How are gains in nonmonetary exchange transactions that have commercial substance handled?

Answer 1

FV of the asset given up - BV of the asset given up

Question 2

What is a nonmonetary exchange?

Answer 2

when an asset is exchange for another asset

Question 3

What is commercial substance in a nonmonetary exchange?

Answer 3

the transaction will significantly change the cash flows to the company

Question 4

How to calculate dollar value lifo price index?

Answer 4

current year cost ending inventory / base year cost ending inventory
then multiply that x the new layer of that year

Question 5

How do you handle lower of cost or net realizable value? lower of cost or market?

Answer 5

A. lower of actual inventory costs and net realizable value ( selling price - costs to complete sell)
B. lower of actual cost or replacement cost, and market ( net realizable value - ceiling or floor - NRV minus normal profit margin)

Question 6

Would expenditures made to rearrange an area and remove a wall to install equipment be capitalized even if it does not increase the useful life?

Answer 6

Yes it will be capitalized, because it is cost that is necessary to get the asset to its intended use

Question 7

What are costs that are not considered research and development expenses?

Answer 7

Quality control
routine testing
R & D services performed for others

Question 8

How is an exchanged that lacks commercial substance handled?

Answer 8

will only recognize a gain if boot is received not paid
if boot is received, you must see if it is more than 25% (ratio of total boot received/total consideration received) if less than 25% only portion of gain is recognized, if greater than it will be a monetary exchange and recognized in full
if paid, no gain is realized. the new book value of asset would be CV of old asset plus boot paid

Question 9

If you purchased land in which you sold the existing building on property and had it moved to build something else, how would the proceeds of the sale of building be handled?

Answer 9

the proceeds would be deducted from the cost of the land.

-cost of land includes all costs necessary to put the land in condition for construction minus any proceeds from sales of buildings, timber, scraps

Question 10

How do discounting note receivable to a bank work?

And are discounted notes receivable proceeds calculated?

Answer 10

you own a note receivable with an original interest rate and date of maturity (usually in 90 days)
you discount the note to the bank at a higher discount rate so they can make money
first, you would calculate the payoff value which is the original face value of the note plus the interest to maturity ( in days ie. 90/360).
this is where the bank makes the money off discounting you note. you multiply their discount create x the days they hold the note (60/360) x the maturity pay off value of the note. this equal this interest they will make
the amount of money you receive is the difference between the payoff maturity value less the banks discount interest.

the discount rate x maturity value

Question 11

How do you calculate construction period interest with expenditures at different times of the year?

Answer 11

you calculate the interest on the construction note and compare it to the total weighted avg expenditures for the year (ie from month spent to end of year 4/12). if it if the construction loan doesnt cover total year expenditures, you then use other borrowings cover the excess and interest is calculated on that excess amount.
if multiple other borrowings, you must get weighted avg interest rate ( total interest/total borrowings) and multiply that rate times the excess and you would have total interest (avoidable) for the year

Question 12

Does the likelihood of future benefits effect whether or not research and development expenses can be reported?

Answer 12

No, regardless of the likelihood it will be expensed, unless it has alternative future uses or is on behalf of others

Question 13

If you purchases a patent for 50k from outside and incur costs of 35k in developing the patent, what would be capitalized as a intangible asset?

Answer 13

only the 50k, the cost of purchasing to intangible would be capitalized, the 35k would be expensed

Question 14

How do you determine if goodwill and indefinite life intangibles is impaired under gaap?

Answer 14

gaap- FV is compared to CV, if less the impairment is equal to the difference

Question 15

How do you determine if PPE and finite intangible asset is impaired under gaap?

Answer 15

two step test-
finite and PPE- CV compared to the sum of undiscounted future cash flows, if CV exceeds there is impairment loss. the loss is equal to the CV-FV (present value of future cash flows)
if held for disposal, add estimated costs to sell and restoration is permitted(only if held for disposal)
loss goes on income statement

Question 16

What does gaap allow to be capitalized for intangibles?

Answer 16

• only software, not hardware
• technological feasibility must be met to capitalized
• anything before is expensed as R & D costs

Question 17

What does the entry for an acquisition-business combination look like? and how are cost associated with the aquisition handled such as legal and consulting fees and registration and issuance costs?

Answer 17

legal and consulting fees are expensed, while registration and issuance costs are recorded as direct reduction of APIC
legal exp xx
investment in S xx
cash xx cash paid for legal exp and registration fees
c/s xx par value
apic xx reduction of registration fees

Question 18

What are liquidating dividends? where are they reported?

Answer 18

they are considered return of capital not reported on income statement, instead the balance sheet reducing investment account

Question 19

How are investment handled under the fair value option?

Answer 19

income is calculated based on dividend received plus any investment appreciation for the year
-no income from the investment will be reported under fair value method, only that of dividend and appreciation

Question 20

How to calculate goodwill under GAAP for an acquisition?

Answer 20

amount paid for sub/acquired %, this gives you FV of the entire sub (implied total value).
then you find the difference between FV and BV of the sub, the difference will be allocated to the new FV of assets given. whatever is left over will be goodwill
if there is any excess, it is reported as a gain on current income

Question 21

How are gains realized under a bargain purchase business acquisition?

Answer 21

the gain is in earnings at the date of acquisition

Question 22

What is the acronym for the JE for acquiring under the consolidation method?

Answer 22

CAR IN BIG
C - c/s stock of sub - to remove 
A - APIC  of sub - to remove
R - Retained Earnings of sub - to remove
     I - investment in sub - amount paid at acquisition (price at acquisition x amount of shares)
    N - noncontrolling interest if any
B - balance sheet adjustment for FV of assets
I - identifiable intangibles assets FV
G - goodwill is the remaining

all of subs equity accounts are eliminated and only parents are reported in balance sheet

Question 23

How to calculate goodwill under IFRS partial gw method?

Answer 23

take your acquisition cost and subject the % of FV of net assets acquired, any remainder will be goodwill

Question 24

What are characteristics used to determine the primary beneficiary of a variable interest entity?

Answer 24

the right to receive expected VIE residual returns
power to direct activities of VIE
obligation to absorb expected losses of VIE

Question 25

If a company on 70% of another company, who also owns a majority of another company, what will the initial parent company do?

Answer 25

consolidate both parents sub and whoever the sub owns 50% of

Question 26

If given a separate consolidated balance sheet, how do you determine the amount of payables relating to intercompany sales?

Answer 26

you look at the accounts receivable and add the a/r for both parent and sub, then subject out the reported consolidated amount and the remaining would be the payable for intercompany sales

Question 27

How are equity earnings and dividends received under the equity method handled to determine income for income statement?

Answer 27

equity earnings are properly included in income under the equity method, while dividends are not

Question 28

What is the JE to record unrealized gains and losses for securities?

Answer 28

dr/cr valuation account

dr cr unrealized gain or loss on trading, available for sale