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CPA > FAR - Becker F4 > Flashcards

FAR - Becker F4 Flashcards

1
Q

Factoring receivables without recourse is a:

A

Sales transaction

Factoring without recourse transfers the risk of uncollectible accounts to the buyer

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2
Q

Pledging receivables is the process of:

A

Obtaining a loan using the receivables as collateral

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3
Q

Assigning receivables is the process of obtaining a loan by:

A

transferring to the lender the debtor’s right to cash collected on receivables

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4
Q

When the ALLOWANCE METHOD of recognizing uncollectible accounts is used, the entry to record the write off of a specific account:

A

Debit allowance for uncollectible accounts and credit the specific accounts receivable

  • resulting in decreases to both accounts
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5
Q

Under the aging method of calculating uncollectible accounts, the balance in the allowance account is determined by:

A

Multiplying receivables by the uncollectible percentage.

If asked for AUA expense, then use the amount in the existing balance plus the new calculated uncollectible amount

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6
Q

Short-term debt that is expected to be refinanced is classified as:

A

Long term to the extent of post-balance sheet refinancing. Support must exist for the refinancing

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7
Q

FOB destination are fees that are:

A

Paid by the seller, prepaid for buyer, buyer does not have to pay. Title transfers when buyer receives item

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8
Q

FOB shipping point are fees that are:

A

Paid by buyer, not prepaid, title belongs to buyer once item is shipped

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9
Q

Under the percentage of receivables method, the ending balance in the allowance account is:

A

Equal to the total estimated uncollectible amount

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10
Q

Are ALLOWANCE and DIRECT WRITE OFF method of recording uncollectible accounts expense consistent with accrual accounting?

A

Allowance is consistent with accrual, but direct write off is NOT

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11
Q

Deferred tax liability that are classified based on the classification of the related asset or liability, are reported as:

A

Noncurrent liabilities

(Fixed assets are noncurrent assets) so deferred tax on depreciation would be noncurrent liability

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12
Q

Current ratio=

A

Current assets (cash, A/R, inventory)

DIVIDENDED BY

current liabilities

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13
Q

Quick ratio =

A

(Cash + net receivables + marketable securities)

/

Current liabilities

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14
Q

How should a negative balance checking account bee reported?

A

As a current liability

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15
Q

Are ballon notes more than 1 year considered a current liability?

A

No.

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16
Q

FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory? T/F?

A

True

LlFO AND AVERAGE, periodic and perpetual will not

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17
Q

Price index calculation for LIFO =

A

Current year cost/base year cost

The price index x base year cost = LIFO layer

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18
Q

Perpetual inventory is a updated:

A

Continuously, after every purchase and sale

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19
Q

Period inventory only updates:

A

At the end

So, you take the ending amount of units and multiply that to the (oldest cost) inventory

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20
Q

Deferred tax liability that are classified based on the classification of the related asset or liability, are reported as:

A

Noncurrent liabilities

(Fixed assets are noncurrent assets) so deferred tax on depreciation would be noncurrent liability

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21
Q

Current ratio=

A

Current assets (cash, A/R, inventory)

DIVIDENDED BY

current liabilities

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22
Q

Quick ratio =

A

(Cash + net receivables + marketable securities)

/

Current liabilities

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23
Q

How should a negative balance checking account bee reported?

A

As a current liability

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24
Q

Are ballon notes more than 1 year considered a current liability?

A

No.

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25
Q

FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory? T/F?

A

True

LlFO AND AVERAGE, periodic and perpetual will not

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26
Q

Price index calculation for LIFO =

A

Current year cost/base year cost

The price index x base year cost (of layer cost) = LIFO layer

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27
Q

Perpetual inventory is a updated:

A

Continuously, after every purchase and sale

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28
Q

Period inventory only updates:

A

At the end

So, you take the ending amount of units and multiply that to the (oldest cost) inventory

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29
Q

Costs associated with costs of good sold:

A 
= beginning inventory
\+ purchases
- purchase discount 
\+ freight in
- ending inventory
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30
Q

How to approach lower of cost or market method valuation:

A

Lists cost in descending sequence from highest to lowest and assign arbitrary dollar values in descending sequence

“Rule of thumb”

Market( take middle of three)

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31
Q

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change in ending inventory and net income in the year of the change?

A

Ending inventory- decrease

Net income - decrease

Under LIFO, ending inventory has a lower valuation than under FIFO since older, lower costs are assigned to ending inventory. Similarly, under FIFO, costs of goods sold has a huger valuation than under FIFO since recent , higher costs are assigned to goods
Sold. This higher costs of goods sold means that net income under LIFO decreases

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32
Q

Consign or mist include consigned goods (in the hands of the consignee) in his own inventory, at his cost PLUS:

A

Warehousing costs of consignee before goods are transferred to consignee PLUS shipping costs to consignee

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33
Q

What inventory method adjusts inventory retail prices and ending inventory cost for price level changes?

A

The dollar value LIFO

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34
Q 
Applying the lower of cost or
Market rule (item by item) separately to "each item" results in the lowest inventory amount? T/F?
A

True

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35
Q

LIFO reserve require balance calculation:

A

Inventory of (other method) - inventory of LIFO

If there are balances in the LIFO reserve already, then net the amounts out

Debit- COGS
CREDIT - LIFO reserve

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36
Q

Ceiling of net realizable is:

A

Expected selling price - cost of selling

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37
Q

Floor, net realizable profit =

A

Net realizable (ceiling) - profit

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38
Q

Replacement cost cannot be less than the:

A

Floor, which is NRV less profit

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39
Q

Rule of thumb: lower of cost or

Market

A

Compare “floor” with “ceiling” and “replacement cost” ( pick the middle amount out of the 3)

THEN, compare that amount to cost and use the lower of the 2

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40
Q

Consignee does not include inventory on their books and do not record a payable until:

A

The goods are sold

Goods sold - commission = accounts payable

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41
Q

Write off of Obsolete inventory is treated as an:

A

Operating loss and not as COGS

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42
Q

A probable loss from a purchase commitment is calculated by:

A

Minimum annual purchase (x) years remaining (x) change in price

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43
Q

How to calculate COGS and pro bases when given gross margin?

A

COGS = sales x (1-gross margin given)

Then use BASE to find purchases

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44
Q

Consigned inventory remains on the balance sheet of the:

A

Cosignor.

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45
Q

How to determine COGS for average pricing method under the periodic method?

A

Periodic is only calculated at the end, so add up beginning inventory + purchases - sales, to find remaining inventory

Next,

Add up the cost of beginning and purchased inventory then. DIVIDED it by (total inventory amount before a sale)

Finally,

Multiply the cost to the remaining inventory to find COGS

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46
Q

During periods of rising prices, LIFO compared to FIFO, would have:

A

Lower current tax liability and costs of goods sold is higher

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47
Q

Overstatement of ending inventory does what to current assets and gross profit?

A

Current assets is OVERSTATED

Gross profit is overstated
(Because overstated ending inventory, understates COGS)

*SALES - COGS = gross profit

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48
Q

Freight in, cost to make product saleable, and insurance cost are all included to:

A

The cost of inventory

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49
Q

Shipping costs from importers should be:

A

Allocated between ending inventory and COGS

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50
Q

What happens when the current market value of the inventory is LESS than the fixed purchase price in a purchase commitment?

A

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss

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51
Q

Measurement of carrying value for US GAAP vs IFRS

A

US GAAP = lower of cost or market

IFRS = lower of cost or net realizable value

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52
Q

Floor (NRV-profit margin), and replacement cost is not part of IFRS? T/F?

A

True

Only for US GAAP

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53
Q

IFRS states that the inventory accounting method used by an entity should match the actual flow of goods, so which inventory accounting method is acceptable under IFRS?

A
  • FIFO
  • moving average
  • specific identification

NOTE: LIFO is not permitted, because it rarely reflects the actual flow of goods

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54
Q

Goods considered not shipped should not be included in:

A

Accounts payable

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55
Q

Inventory turnover ratio is:

A

COGS/(average inventory)

Under FIFO, COGS is lower during inflation. Inventory would be higher

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56
Q

Excavation costs are treated as part of the cost of a:

A

Building

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57
Q

The proper way to capitalize to land is:

A

Land price + cost to raze a building - sale of scrap materials

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58
Q

Any cost incurred to acquire and make ready a company/plant asset is:

A

Capitalized

Even if it’s, insurance during transit and testing and preparation cost

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59
Q

Smaller of total interest incurred or avoidable interest gets:

A

Capitalized

Total interest could be: specific debt and borrowings

Avoidable interest could be: interest on the weighted average amount of accumulated expenditures

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60
Q

When the carrying value of the damaged portion of a building is known and is insured, what method is used?

A

The component method

A loss in the amount of the carrying value of the damaged portion of the building must be recognized.

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61
Q

Demolition cost to old buildings to get the land ready for intended use, should be:

A

Added as a part of land cost

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62
Q

Interest cost incurred DURING the construction period of a machinery for own use is:

A

Should be capitalized as part of the historic cost of acquiring the fixed assets. (Capitalized based on the weighted average of accumulated Expenditures)

Rule: interest AFTER construction will be expensed on the income statement

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63
Q

All interest incurred for machinery held for sale to customers are:

A

Expensed in the income statement for the period incurred

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64
Q

Cost of equipment includes:

A

All expenditures related directly to the acquisition or construction including invoice price less cash discounts and other discounts, freight-in, installation charges and sales and federal excise taxes

Also, cost necessary to get the asset to its proper place, at the intended time and in condition for its intended use

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65
Q

Interest cost incurred BEFORE and AFTER construction, as well as during intentional delays in construction, should be:

A

Expensed to income statement

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66
Q

How to calculate AVOIDABLE interest?

A

Take the average of accumulated expenditures of the construction and MULTIPLY it to the % borrowed

If multiple expenditures were incurred during the year, then only multiple the cost over the months the expenditure was for (or until the next expenditure was incurred)

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67
Q

Should, interest on loan to buy land, architect fees, and installation of sewage system cost be added to land?

A

No.

  • architect fees are building cost
  • sewage is land improvements
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68
Q

Leasehold improvement costs should be capitalized and amortized over:

A

The LESSER of the life of the improvements or the remaining term of the lease

So that, the lessee takes full benefit of the improvement

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69
Q

All notes payable are required to be reported at:

A

The present value of the payments to be made, computed using the market rate of interest

NOTE: if a company pays cash and acquire a notes payable, be sure to capitalize the present value of the note

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70
Q

If a revaluation asset becomes impaired, the impairment is:

A

Record by first reducing and revaluation surplus(gain) to zero, and report the remaining impairment loss(if any left) to income statement

71
Q

Under IFRS, investment property is defined as;

A

Land and building held by an entity to earn rentals or for capital appreciation

72
Q

When investment property is reported at cost less accumulated depreciation, fair value MUST be:

A

Disclosed

73
Q

The best evidence of investment property fair value is:

A

Current prices in an active market for similar property in the same location and condition

74
Q

Gains and losses from investment property fair value adjustments are reported on:

A

The income statement

75
Q

When Investment property is reported at fair value, it is NOT:

A

Depreciated

76
Q

If borrowings are not tied specifically to the construction of an asset, the weighted average interest rate for the other borrowings of the company should be used. The weighted average interest rate is calculated:

A

[(Face value/total face value) x %]

+

[(Face value/total face value) x %]

77
Q

Construction period interest is capitalized based on the weighted average of accumulated construction expenditures. The interest rate paid on borrowing specifically for asset construction is used first to determine the amount of interest cost capitalized. If the average accumulated expenditures outstanding exceed the amount of the specific new borrowing, then:

A

Interest on the excess is computed based on the interest rate for other borrowings of the company

78
Q

Steps to determine capitalization of interest rate on construction:

A

Step 1: calculate weighted average accumulated expenditures

Step 2: compute the capitalized interest by

multiplying the appropriate interest rate x the
weighted average accumulated expenditures

NOTE: if weighted average accumulated expenditures are LESS than the amount borrowed), then the interest rate to use is the rate on the borrowed funds

Step 3: compare the capitalized interest to the actual interest.

  • the interest amount to capitalize is “the amount LESSER of actual interest or capitalized interest” *
79
Q

The depletion base equals:

A

The purchase price + the development costs + the estimated restoration costs - the expected salvage level

Depletion base x tons sold = depletion expense

80
Q

The double declining balance rate is 50%. Also, salvage value is:

A

Not included!!

81
Q

200% double declining depreciation method calculation:

A

2 x (1/year of useful life) x carrying value

82
Q

When switching depreciation method:

A

Book value (not original cost) and remaining life (not original life) should be used to calculate depreciation

83
Q

Depreciation calculations are based on what value?

A

Fair value - salvage value

84
Q

Units of production method reflects that:

A

An asset’s service potential declines with use

85
Q

Straight line depreciation method reflects that:

A

An asset’s service potential declines with the passage of time

86
Q

An accelerated depreciation method would reflect that:

A

An asset is subject to rapid obsolescence and incurs increasing repairs and maintenance with use

87
Q

Both group and composite depreciation are based on the:

A

Straight line depreciation method

88
Q

When a permanent impairment occurs, the book value is reduced and a loss is recorded. The loss is credited to accumulated depreciation. In addition, the current year’s depreciation expense should be added. The new book value is depreciated over the new life.

Info

A

Info

Original cost - accumulated depreciation - carrying value

89
Q

How to calculate sum of the year’s digit ?

A

Example 4 year life

= 4+3+2+1 = 10

So first year you would
Use 1/10 , 2nd use 2/10

Multiply that to the depreciation base

90
Q

Composite life of assets calculation is:

A

Total depreciable cost / total annual depreciation

91
Q

Depreciable assets SHOULD NOT depreciate below:

A

Salvage value under any depreciation method

92
Q

IFRS requires component depreciation. Under depreciation,

A

The equipment, component, and inspection cost are recognized and depreciated separately

93
Q

If carrying value is less than undiscounted expected future cash flows, then there is no

A

Impairment under US GAAP

94
Q

Under IFRS, impairment exist when:

A

Carrying value is greater than the fixed asset’s recoverable amount.

Recoverable amount = greater of fair value - costs to sale or present value of future cash flows

95
Q

Reversal of impairment loss is permitted for both US GAAP and IFRS?

A

False

IFRS prohibits impairment reversal

96
Q

The carrying amount of fixed assets should be tested for recoverability at least annually or:

A

Whenever events or changes in circumstances indicate the carrying value amount may not be recoverable

97
Q

Are assets held for use allowed to restore the impairment of carrying values?

A

No, they are only limited to reverse the impairment

But held for disposal is allowed to restore carrying value

98
Q

Classification of short term obligations to be refinanced can be classify as long term under GAAP of:

A
  1. Refinancing happens before issuance of f/s
  2. The existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing

NOTE: IFRS does NOT allow short term expected to be financed to be classify as long term until it is actually done

99
Q

Working capital is a measure of:

A

Solvency, the ability to pay debt as due, short term risk

100
Q

Cash surrender value of life insurance is current asset if:

A

The owner surrenders in the normal operating cycle

101
Q

Restricted cash is:

A

Cash set aside for specific use or purpose

  • relates with assets and liabilities
    Ex. Fixed asset would be noncurrent
102
Q

Adjustments made to bank balance how?

  • deposits in transit
  • outstanding checks
  • errors
A
  • deposits in transit is ADDED to bank
  • outstanding check is SUBTRACTED from bank
  • errors is either
103
Q

Adjustments to cash balance is made how?

  • service charges
  • bank collections from customer
  • error
  • NSF
  • interest income
A
  • service charges SUBTRACT
  • bank collections from customer ADD
  • error EITHER
  • NSF SUBTRACT
  • interest income ADD
104
Q

Accounts receivable t account?

A

+. A/R. -
_____________________________
+ beg. - write offs
+ credit sales. - convert to note
- cash collected
—————————————
End

105
Q

A/R is reported on the balance sheet at:

A

Net realizable value

A/R - (sales discounts, allowances, uncollectibles, etc)

106
Q

Sales discount taken is what kind of account?

A

Contra revenues

107
Q

Speed discounts are:

A

Net and gross methods

Net- expect customers to take discounts ( adjustments are needed if customers do not take discount, CR sales discount taken)

Gross - do not expect customers to take discounts ( adjustments are needed if customers end up taking discount, DR sales discount taken)

108
Q

Trade discounts are:

A

Quantity discounts and is applied sequentially ( do not added discount % together)

109
Q

Is direct write off

Allowed under us GAAP?

A

No!

Allowance method is

110
Q

Allowance methods:

A
  1. % of sales
  2. % of A/R - the amount of the estimated allowance is the ENDING BALANCE that should be in the allowance account on the B/S
  3. Aging schedule- the sum of the product for each aging schedule category will be the desired ending balance in the allowance account
111
Q

Allowance for uncollectible accounts t account:

A
  • ## Allow UA. +
                            \+ beg
  • write offs. + c/y bad debt exp
    + % sales/AR
                                         END
112
Q

Collection of write off a/r j/e:

A

Direct -
DR cash
CR AUA

Allowance -
DR A/R
CR AUA

DR Cash
CR A/R

113
Q

Pledging A/R requires FN disclosures? T /F?

A

True

114
Q

Factoring A/R could result in sale or loan if:

A

With recourse = a sales transaction

DR Cash
DR Due from factor
DR Loss on sale of A/R
CR A/R

Without recourse = sales or loan

115
Q

Factoring without resource is a sale when:

A
  1. The seller’s obligation for uncollectible accounts can be reasonably estimated
  2. Seller surrenders control of the future economic benefits of the A/R
  3. Seller cannon be required to repurchase the A/R, but may be required to replace the A/R with other similar A/

If conditions above are not met, then it results in a LOAN transaction

116
Q

How to calculate N/R back discount amount?

A

Amount of N/R(plus accrued interest) x days remaining over 360 x percentage of bank discount

117
Q

Types of inventories held for resale:

A
  1. Retail inventory(finished goods only) - substantially the same form in which it was purchased

Next 3 are part of manufacturing:
2. Raw materials - held for use in the production process

  1. Work in progress- inventory in production but not complete
  2. Finished goods- production inventory that is complete and ready for sale
118
Q

FOB =

A

Free on board

119
Q

Fob shipping point=

A
  • buyer pays
  • belongs to buyer at shipping point
  • freight in to buyer (include in inventory)
120
Q

Fob destination =

A
  • seller pays
  • belongs to seller until it reaches the destination
  • freight out to seller ( selling expense)
121
Q

If seller ships wrong goods, the inventory belongs:

A

To the seller

122
Q

If sale return can be reasonably estimated then:

A

The sale return should be included in allowance sales return

If it CANNOT be reasonably estimated, then the seller keeps the sale in inventory

123
Q

GAAP requires inventory to be stated at:

A

Cost, if estimated to sale at a profit.

Unless:

  1. It is expected to sale at a loss (LCM)
  2. Precious metals and farm products
124
Q

If a loss is expected, go ahead and;

A

Book the loss in the current period and use LCM to find inventory cost

125
Q

Separately applying LCM to each item results in the MOST:

A

Conservative ending inventory

126
Q

He write down of inventory to market is usually reflected in COGS, unless:

A

The amount is material, in which case the loss should be identified separately in the income statement

127
Q

Under GAAP, reversals of inventory write downs are:

A

PROHIBITED,

It is allowed in IFRS to the amount of original write down as a reduction of total inventory cost on income statement in the period of reversal

128
Q

Journey entry to write down to a separate account=

A

DR - inventory loss due to decline in market value

CR - inventory

129
Q

When market is lower than the cost, the NRV (ceiling) prevents a loss in future periods and the floor prevents:

A

Any future periods from realizing any more than a normal profit

130
Q

When losses are immaterial, then:

A

DR - COGS

CR - Inventory

131
Q

Period COGS is a plug:

A 
\+ beg inventory
\+ purchases (net of discounts)
= COGS AFS
- ending inventory (physical count)
= COGS
132
Q

When ending inventory is OVERSTATED, COGS and gross profit is:

A

COGS is understated

And gross profit is overstated

133
Q

If beginning inventory is UNDERSTATED. Then COGS and GROSS PROFT is:

A

COGS is understated

Gross profit is overstated

134
Q

Specific identification inventory method (no estimates) is used for:

A

Used for physically large or high value items

135
Q

FIFO has what during inflation prices:

A
  • higher inventory
  • higher tax liability
  • higher profit
  • lower COGS
136
Q

LIFO during inflation prices has:

A
  • lower ending inventory
  • higher COGS
  • lower profit
  • lower tax liability
137
Q

Weighted average is generally used with:

A

The periodic inventory method

138
Q

Moving average method is primarily use with:

A

The perpetual inventory method.

Moving average is calculated by:
Computing to weighted average cost after each purchase by dividing the total cost of inventory by total remaining inventory units

139
Q

If LIFO method is used for tax purposes, then it must be used:

A

In the GAAP F/S ( LIFO conformity value)

140
Q

Dollar value method (LIFO)

  • estimate of change in price levels require
  • inventory measures in dollars and is adjusted for changing price levels

Info

A

Info

141
Q

Price index x layer amount at base year=

A

At dollar value LIFO layer

142
Q

Expected loss for firm purchase commitments MUST BE:

A

Booked immediately

143
Q

Characteristics of fixed assets:

A
  1. Acquired for use and no resale
  2. Long term in nature and subject to depreciation
    3 they possess physical structure
144
Q

Under IFRS valuation, fixed assets are:

A

Initially recognized at the cost to acquire the cost

145
Q

Under US GAAP valuation, fixed assets are:

A

Recognized at historical cost, purchase price

Recognized on B/S at Net realizable value

146
Q

What are the IFRS valuation models?

A
  1. Cost - fixed assets are reported at

Historical cost - accumulated depreciation - impairment

  1. Revaluation (IFRS)

FV at revaluation date - subsequent accumulated depreciation- subsequent impairment

147
Q

Revaluation model: revaluation must be:

A
  • revaluation must be made frequently enough to ensure that carrying amount DOES NOT differ materially from FV at the end of the reporting period.

Revaluation loss - goes on I/S
Revaluation gain - goes on B/S
Impairment - net any revaluation surplus first, then report loss to (I/S), if losses remain

148
Q

Costs of equipment include:

A
  • invoice price
  • less cash discounts
  • add freight in
  • add installation cost
  • add sales tax
  • possible addiction of construction period interest
149
Q

Improvement and replacement ad fixed assets:

A
  1. If CV of old asset is KNOWN, remove it and recognize gain or loss, then capitalize the cost of the improvement
  2. If CV of old asset is UNKNOWN anda) the asset’s life is extended, then decrease depreciation by,
    DR - Accumulated depreciation
    CR - Cash/APb) the usefulness (utility) of the asset is increased, capitalize the cost of the improvement/replacement
150
Q

What repairs are expensed and capitalized?

A

Ordinary repairs are: EXPENSED

Extraordinary repairs that increase life or usefulness of the asset are : CAPITALIZED

151
Q

Land costs includes:

A
  • purchase price
  • brokers commission
  • title & recording fees
  • legal fees
  • draining of swamps
  • clearing of trees
  • site development (filling in or leveling land)
  • existing obligations assumed by buyer
  • costs of razing an old building (demolition)
  • LESS proceeds from sale of salvage parts
152
Q

Cost of building includes:

A
  • purchase price
  • repair charges neglected by previous owners
  • alterations and improvements
  • architect’s fees
  • possible addition of construction period interest
153
Q

Fixed assets constructed by a company costs includes:

A
  • direct materials & labor
  • repairs & maintenance
  • construction period interest on loans
  • DO NOT include profit
154
Q

Construction period interest should be capitalized based on:

A

Weighted average of accumulated expenditures

155
Q

Do not capitalize interest that is:

A
  1. Used to buy inventory
  2. Interest on fixed assets held before or after construction
  3. Interest on intentional delays
156
Q

Total capitalized interest costs for any particular period MAY NOT exceed:

A

The total interest costs actually incurred by an entity during that period

157
Q

Capitalization of interest period begins when 3 conditions are met:

A
  1. Expenditures for the asset have been made
  2. Activities that are necessary to get the asset ready for its intended use are in progress
  3. Interest cost is being incurred

NOTE: capitalization continues as long as the conditions are present and ends when construction is complete

158
Q

What is the definition of salvage value?

A

Salvage value is an estimate of the amount that will be realized at the end of the useful life of a depreciable assets

159
Q

Depreciable base =

A

Cost - Salvage value

160
Q

Under IFR S, depreciation method used should reflect the expected pattern of fixed assets consumption

T\F?

A

True

161
Q

Component depreciation is more accurate than composite depreciation? T/F?

A

True

162
Q

When a group or composite asset is sold or retired, the accumulated depreciation is treated differently then the accumulated depreciation of a single item:

A
  1. If the average service life of the group of assets has not been reached, then gain or loss should be absorbed in the accumulated depreciation

DR – accumulated depreciation or CR - original cost minus cash received
DR – cash
CR – cost

FORMULA: average composite life calculation

Total depreciable base ÷ total annual depreciation

FORMULA: average composite rate calculation (Rate of depreciation)

Total annual depreciation ÷ total cost

163
Q

What is the definition of salvage value?

A

Salvage value is an estimate of the amount that will be realized at the end of the useful life of a depreciable assets

164
Q

Depreciable base =

A

Cost - Salvage value

165
Q

Under IFR S, depreciation method used should reflect the expected pattern of fixed assets consumption

T\F?

A

True

166
Q

Component depreciation is more accurate than composite depreciation? T/F?

A

True

167
Q

When a group or composite asset is sold or retired, the accumulated depreciation is treated differently then the accumulated depreciation of a single item:

A
  1. If the average service life of the group of assets has not been reached, then gain or loss should be absorbed in the accumulated depreciation

DR – accumulated depreciation or CR - original cost minus cash received
DR – cash
CR – cost

FORMULA: average composite life calculation

Total depreciable base ÷ total annual depreciation

FORMULA: average composite rate calculation (Rate of depreciation)

Total annual depreciation ÷ total cost

168
Q

Straight line depreciation method:

A

(Cost-salvage value)/estimated useful life

169
Q

Sum of the year’s digits depreciation =

Accelerated method, provides higher depreciation in the early years and lower depreciation in the later years

A

N(N+1)
——— = sum of years digits
2

Depreciable base x (remaining life of asset/sum of the years digits)

Example 5 years

5(5+1) ÷ 2 = 15

50000 x 5/15
50000 x 4/15

170
Q

Declining balance depreciation

Assets subject to rapid obsolescence

A
  1. 200% double declining balance

FORMULA:
2 x 1/N x (cost-accumulated depreciation)

SALVAGE IS NOT USED TO CALCULATE DEPRECIABLE BASE!!

Depreciation expense cannon exceed salvage value

  1. 150% is the same but use 1.5 instead of 2
171
Q

Units of production depreciation

  • relates depreciation to the estimated production capability of an asset and is expressed in a rate per unit or our
A

FORMULA: 2-step method

  1. Cost - salvage value
    ———————– = rate per unit or hour
    Estimated units or hours
  2. Rate per unit or hour
    x # of units produced or worked
    = depreciation expense
172
Q

Depletion purchase cost includes:

A

Any expenditures necessary to purchase and then prepare the land for the removal of resources, such as drilling costs or the cost for tunnels or shafts for the oil industry or to prepare the asset for harvest

173
Q

Depletion methods:

A
  1. Cost depletion (GAAP) (recoverable unit)

FORMULA:

Depletion base ÷ Current estimated recoverable units

  1. Unit depletion rate

FORMULA:

Depletion base ÷ estimated removable units

  1. Percentage depletion (NOT GAAP) tax only

CPA (15 decks)

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