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FAR Module 11 Flashcards

0
Q

The depreciation costs for fixed assets is deferred to future periods in compliance with what

A

Matching principle

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1
Q

These represent the capitalized amount of expenditures made to acquire tangible property which will be used for a period of more than one year

A

Fixed assets

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2
Q

Land, buildings, equipment, or any other property that physically exists are examples of what

A

Tangible property

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3
Q

T/F

All of the costs necessary to get an asset to the worksite and to prepare it for use are capitalized. This includes the cost of negotiations, sales taxes, finders fees, razing (demolishing) an old building, shipment, installation, preliminary testing, and so forth

A

TRUE

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4
Q

What is a classic example of a fixed asset that is not depreciable?

A

Land

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5
Q

Charges for self constructed fixed assets includes what?

A

Direct materials, direct construction labor, variable overhead, and a fair share of fixed overhead

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6
Q

Assets received through donation should be recorded at what measurement basis? Is there an exception to this rule?

A

Fair value, unless undeterminable in which case use book value

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7
Q

What assets allow for capitalization of interests?

A

Assets which require a period of time to be prepared for use

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8
Q

How much interest should be capitalized on assets which require a period of time to be prepared for use

A

The amount of interest to be capitalized is the amount which could’ve been avoided if the project had not been undertaken. The formula for the average interest is as follows:

Average accumulated expenditures during construction * interest rate * construction period

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9
Q

After computing the average interest that can be capitalized, if you are presented with two options: the actual interest or the weighted-average interest, which should you capitalize under GAAP? Under IFRS?

A

The lower number of the two, to follow conservatism. This is under US GAAP

under IFRS, you just do the weighted average

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10
Q

T/F under GAAP; T/F under IFRS

Often, the funds borrowed to finance the construction project are temporarily invested until needed. The interest earned on these funds does not need to be recognized as revenue. It can be offset against the interest expense to be capitalized

A

FALSE

Such earned interest must be recognized as revenue and may not be offset against the interest expense that is to be capitalized. This follows US GAAP.

ON THE OTHER HAND, IFRS allows you to net together the interest earned and the interest expense. This is a major difference between US GAAP & IFRS

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11
Q

What is the ASC topic number for Non-monetary Transactions

A

845

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12
Q

What are the rules in recording nonmonetary exchanges

A

1) losses are always recognized
2) gains are recognized if the exchange is measured at fair value, which is generally required
3) there is a list of 3 criteria that if met mean the asset can be exempt from the fair-value measurement requirement and thus valued at book value. Under this circumstance no gain is recognized unless boot is involved (see below)
4) if no boot is involved, no gain is recognized. If boot is given, no gain is recognized and the new asset is recorded at the book value of the exchanged asset plus the boot given. If boot is received, a portion of the gain is recognized

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13
Q

What are the three conditions for exemption from fair value treatment that non-monetary assets may or may not meet?

A

1) fair value of asset received and asset given up are both unknown
2) the exchange transaction is done to facilitate sales
3) the transaction lacks commercial substance: cash flows do not change in their risk, timing, & amount; do not include tax effects when considering the cash flow

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14
Q

What does realized mean

A

It happened

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15
Q

What does recognized mean

A

Journal entries were recorded in reaction to the event

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16
Q

If the non-monetary asset does not meet one of the three criteria for fair value exemption what valuation method do you use?

A

The fair value method

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17
Q

If the non-monetary asset does not meet one of the three criteria for fair value exemption, do you calculate the realized gain/loss?

A

Yes.

You almost always calculate the realized gain/loss unless you have no way of knowing the fair value of the assets involved (criteria #1 for exemption)

The issue is whether or not that gain/loss should be recognized.

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18
Q

If the non-monetary asset does not meet one of the three criteria for fair value exemption, how do you calculate the realized gain/loss?

A

Fair value of assets given up - carrying value of assets given up

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19
Q

If the non-monetary asset does not meet one of the three criteria for fair value exemption, how do you calculate the realized gain/loss if you do not know the fair value of assets given up?

A

Just use the fair value of the assets received. Thus the equation to calculate realized gain/loss would be:

Fair value of assets received - carrying value of assets given up

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20
Q

If the non-monetary asset does not meet one of the three criteria for fair value exemption, do you recognize the realized gain/loss? Why/Why Not?

A

You always recognize any realized losses because of conservatism.

You also recognize realized gains because the exception criteria were not met. As stated before, gains are recognized if the exchange is valued at fair value. If none of the exemption criteria are met then the exchange will be valued at fair value.

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21
Q

If the non-monetary asset does not meet one of the three exception criteria for fair value exemption, what is the required journal entry?

The concept here is whether or not a gain/loss will be involved in the entry.

A 
Debit: Asset Received (FV)
Debit: Loss
Debit: Accumulated Depreciation 
Credit: Asset Given (HC)
Credit: Gain
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22
Q

If the non-monetary asset meets one of the three criteria for fair value exemption, what valuation method do you use?

A

The carrying value method / book value

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23
Q

If the non-monetary asset meets criteria one of the three criteria for fair value exemption, do you calculate a realized gain/loss?

A

No, thus no gain/loss is recognized either. Everything is done at carrying value. This is because the fair value of both the asset given and received is unknown (criteria #1)

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24
If the non-monetary asset meets criteria one of the three criteria, what is the required journal entry? Is there a gain/loss involved in the entry?
Debit: Asset Received Debit: Accumulated Depreciation Credit: Asset Given (HC)
25
If the non-monetary asset meets criteria two or three of the three criteria, and no boot is paid or received, do you calculate a realized gain/loss?
Yes - you still calculate a realized gain/loss, the issue is whether or not you should recognize it
26
If the non-monetary asset meets criteria two or three of the three criteria, and no boot is paid or received, how do you calculate a realized gain/loss?
Fair value of assets given up - carrying value of assets given up
27
If the non-monetary asset meets criteria two or three of the three criteria, and no boot is paid or received, how do you calculate a realized gain/loss if you don't know the fair value of the assets given up?
Just use the fair value of the assets received. Thus the equation to calculate realized gain/loss would be: Fair value of assets received - carrying value of assets given up
28
If the non-monetary asset meets criteria two or three of the three criteria, and no boot is paid or received, do you recognize the realized gain/loss? Why/Why Not?
You recognize the realized loss because of conservatism You do not recognize a realized gain because the exception criteria are met. As stated before, you only recognize a realized gain when the fair value is used for measurement. Since the exemption criteria are met the fair value option will not be used.
29
If the non-monetary asset meets criteria two or three of the three criteria, and no boot is paid or received, what is the required journal entry? Is there a gain/loss involved in the entry?
Debit: Asset Received Debit: Loss Debit: Accumulated Depreciation Credit: Asset Given (HC)
30
If the non-monetary asset meets criteria two or three of the three criteria, and boot is paid/received, do you calculate a realized gain/loss?
Yes - again you almost always calculate the realized gain/loss. The question is whether you should recognize it or not
31
If the non-monetary asset meets criteria two or three of the three criteria, and boot is paid/received, how do you calculate a realized gain/loss?
Fair value of asset given up - carrying value of assets given up
32
If the non-monetary asset meets criteria two or three of the three criteria, and boot is paid/received, how do you calculate a realized gain/loss if you do not know the fair value of assets given up?
Just use the fair value of the assets received. Thus the equation to calculate realized gain/loss would be: Fair value of assets received - carrying value of assets given up
33
If the non-monetary asset meets criteria two or three of the three criteria, and boot is paid/received, do you recognize the realized gain/loss?
You recognize the realized loss whether boot is paid or received. You do not recognize the realized gain if boot is given. On the other hand, if boot is received you do recognize some realized gain pro rata using this formula: Realized Gain * (fair value of boot / (fair values of both boot & asset received))
34
If the non-monetary asset meets criteria two or three of the three criteria, and boot is paid, what is the expected journal entry? Is there a gain/loss in the entry?
``` Debit: Asset Received Debit: Loss Debit: Accumulated Depreciation Credit: Asset Given (HC) Credit: Cash ```
35
If the non-monetary asset meets criteria two or three of the three criteria, and boot is received, what is the expected journal entry? Is there a gain/loss in the entry?
``` Debit: Cash Debit: Asset Received Debit: Loss Debit: Accumulated Depreciation Credit: Asset Given (HC) Credit: Gain ```
36
How should costs be allocated when purchasing a group of fixed assets (basket purchase)? Why is this important to do?
Allocate costs based on the relative market value by using the following formula: Cost of all assets acquired * (market value of A/market value of all assets acquired) This is important because you will depreciate all the items differently based on different useful lives, salvage values, etc.
37
How do you calculate depreciation using the sum of years digits method?
1) First you need to assemble a fraction. The numerator changes each period and is the number of periods in the assets useful life, working backwards (5, 4, 3, 2, 1) The denominator is calculated as: n*(n+1) / 2 where N is the total periods in the assets useful life 2) Multiply this fraction by (HC - Salvage Value) for each period to find that periods depreciation cost
38
This depreciation method is based on activity or output
Physical usage depreciation
39
What is the formula for physical usage depreciation
Annual depreciation = | (current activity or output / total expected activity or output) * depreciation base
40
What are the three options for fractional year depreciation
1) a whole years depreciation in the year of acquisition and none in year of disposal 2) one half years depreciation in year of acquisition and year of disposal 3) depreciation to nearest whole month in both year of acquisition and year of disposal
41
How is the term "group" different from the term "composite"
The term "group" is used when the assets are similar. The term "composite" is used when the assets are dissimilar.
42
What is the depreciation formula for composite/group depreciation
Sum of annual straight-line depreciation of individual assets / total asset cost
43
This depreciation method is basically a weighted average of a group of assets
The composite/group depreciation method
44
T/F There is no gain/loss when disposing of an asset that was part of a group/composite unless the entire group/composite was disposed of, which is unlikely
TRUE
45
Which depreciation methods are less likely to report a loss
Any accelerating depreciation methods (double declining balance, sum of the years' digits). This is because with faster depreciation, the carrying value will be much lower much faster and it will be easier to find a replacement cost that will not result in a loss. Also, keep in mind that a composite/group depreciation method never results in a loss unless the entire composite/group is disposed of, which is unlikely
46
When one asset of a composite/group is retired, the net carrying amount of the composite/group asset accounts would be decreased by what amount?
Cash proceeds received for the one retired asset
47
The entry to record a retirement on an asset that is part of a composite/group asset account is what?
Debit: Cash/Other Consideration (amount received) Debit: Accumulated Depreciation (plug) Credit: Asset (original cost)
48
What are the circumstances that may indicate impairment (4)
1) decline in demand/inability to keep up with technology/competition 2) decline in fair value or change in the way the asset is used 3) current or projected net operating loss or negative cash flows 4) unfavorable changes in the regulatory, legal, or business environment
49
What ASC topic number is tangible assets?
360
50
What ASC topic number is intangible assets?
350
51
What are the two categories of tangible assets
Held for use, held for sale
52
What are the two categories for intangible assets
Finite life, indefinite life
53
When a tangible asset is held for use, how do you account for it?
You depreciate it and frequently test for impairment
54
How do you know when the tangible asset held for use is impaired
If the carrying value is greater than the non-discounted future cash flows then the item is impaired
55
How do you measure the impairment loss for a tangible asset held for use? Where is the loss recorded?
Compare the carrying value with the fair value. The loss goes into income of continuing operations. If you are publicly traded it goes under operating expenses; if you are not publicly traded it goes under other expenses/losses
56
After recognizing an impairment loss on a tangible asset held for use what happens
You may continue to depreciate, but depreciation will be less. You cannot write up again if it recovers
57
When a tangible asset is held for sale, how do you account for it?
You do not depreciate held for sale tangible assets. You simply write it down as a loss when the time occurs.
58
How do you measure the impairment loss for a tangible asset held for sale? Where is the loss recorded?
Compare the carrying value with the NRV (fair value - costs to sell). The loss goes into discontinued items/operations unless it is immaterial in which case it goes into income for continuing operations
59
After recognizing an impairment loss on a tangible asset held for sale what happens
Don't depreciate (same as before) You can write up again if it recovers
60
What journal entry do you make to recognize an impairment loss for tangible assets that are both held for use & and held for sale
Debit impairment loss | credit accumulated depreciation
61
T/F an impairment can be considered extraordinary if the situation is right
FALSE Writing down assets is never considered extraordinary
62
When an intangible asset has a finite life how do you account for it?
You amortize it and frequently test for impairment
63
When an intangible asset has a finite life how do you know if it is impaired
If the carrying value is greater than the non-discounted future cash flows then the item is impaired. You must measure the impairment loss
64
When an intangible asset has a finite life how do you measure the impairment loss? Where is the loss recorded?
Compare the carrying value vs. the fair value. The loss goes into discontinued operations for material discontinued items. If the item is immaterial it goes into income continuing operations
65
After recognizing an impairment loss on an intangible asset that has a finite life what do you do?
Continue to amortize the asset but amortization will be less. You cannot write up again if it recovers
66
When an intangible asset has an indefinite life how do you account for it?
You do not amortize. However you do test frequently for impairment
67
When an intangible asset has an indefinite life how do you test for impairment?
Compare the carrying value vs the fair value
68
When an intangible asset has an indefinite life how do you measure the impairment loss? Where did the loss go?
Compare the carrying value vs. the fair value. The loss goes into discontinued operations for material discontinued items. If the item is immaterial it goes into income continuing operations
69
After recognizing an impairment loss on an intangible asset that has an indefinite life what do you do?
You don't amortize (you didn't amortize to begin with). You cannot write up again if it recovers
70
What is the optional qualitative assessment for intangible assets (excluding goodwill) that both have finite and indefinite lives?
1) general economic, industry, or market factors 2) entity specific factors such as financial performance, contractual, regulatory, or legal factors 3) if not more likely than not (50%) that impairment has occurred, then perform the quantitative impairment tests.
71
When an intangible asset is goodwill how do you account for it?
Don't amortize it. Simply test for impairment
72
When an intangible asset is goodwill how do you test for impairment?
Test Step 1 1) if the carrying value of the reporting unit with Goodwill is > zero AND the carrying value of the reporting unit with Goodwill is > the fair value reporting unit with Goodwill THEN the goodwill of the reporting unit may be impaired. Continue to Test Step 2 2) if the carrying value of the recording unit with Goodwill is greater than the implied fair value of goodwill alone THEN Goodwill is impaired. Measure the impairment loss.
73
What is the formula for the implied fair value of goodwill
The fair value of the entire unit - the fair value of all items except Goodwill
74
When an intangible asset is goodwill how do you measure impairment loss? Where does this loss go?
The carrying value of goodwill alone - the implied fair value of goodwill alone Loss goes into income of continuing operations
75
After recognizing an impairment loss on goodwill what do you do?
You don't amortize (you didn't amortize to begin with). You cannot write up again if it recovers
76
What is the optional qualitative assessment for goodwill?
1) the same qualitative assessment for intangible assets 2) other entity specific factors, such as the loss of key personnel/customers, declines in share price, increases in costs, or a subsidiary recorded an impairment loss 3) if not more likely than not (50%) that impairment has occurred, then perform the quantitative impairment tests.
77
This is the depreciation of natural resources
Depletion
78
These costs are one time activities related to opening a new facility or new class of customer, initiating a new process in an existing facility, or some new operation.
Start up costs
79
These costs are referred to as preopening costs, pre-operating costs, and organization costs
Start up costs
80
T/F start up costs are expensed as incurred
TRUE
81
T/F Routine ongoing efforts to improve existing quality of products, services, or facilities are start up costs
FALSE
82
T/F Research and development costs are capitalized
FALSE they are expensed as incurred
83
T/F machinery purchased for research and development should be capitalized
Depends If the machine will only be used for one research and development project it should not be capitalized. If the machine will be used for multiple research and development projects it can be capitalized
84
List common R&D expenses (6)
New knowledge, new technology, reformulation of process, prototype, model, application of new research findings
85
What are NEVER R&D expenses (4)
Commercial production, commercial activity, routine, seasonal
86
What are the two types of computer software?
1) software developed for sale/lease | 2) software developed for internal use
87
What ASC topic number is computer software costs for software that is developed for sale/lease?
985
88
What ASC topic number is computer software costs for software that is developed for internal use?
350 This is under the intangibles section
89
What are the three phases associated with developing software for sale or lease
1) the first phase is from the start until the software has reached technical feasibility 2) the second phase is from technical feasibility to market feasibility and the general release of the software 3) the third phase is from the market feasibility and general release of the software until the end
90
How is software developed for sale or lease treated in phase 1
It is treated as a research and development expense in the accounting period incurred (expense as incurred)
91
How is software developed for sale or lease treated in phase 2
You capitalize the costs incurred as software
92
How is software developed for sale or lease treated in phase 3
You treat duplication and packaging costs as inventory. Once sold it becomes cost of goods sold. You treat maintenance and customer support as other expenses. You take the greater amortization between: 1) the straight-line method or 2) the following ratio: Current revenue this acct period / total estimated revenue over life
93
How do you report software developed for sale or lease
Report at the lower of carrying value or net realizable value (where NRV = Selling Price - disposal costs) If CV > NRV, do a write down of the software.
94
T/F once you write down software developed for sale or lease you can write it back up again if it recovers
FALSE you cannot write it up again
95
What are the three phases associated with software developed for internal use
1) the preliminary stage is from the start of the project to the probable completion where management commits funds. Under this phase you are undergoing concept formulation, design, testing of alternatives, and vendor selection 2) the development stage is from when the software is completed to when it is implemented. 3) the post implementation phase is from implementation until the end
96
How is software developed for internal use treated in the first phase
Similar to research and development expense (expensed as incurred)
97
How is software developed for internal use treated in the second phase
Capitalize costs
98
How is software developed for internal use treated in the third phase
Amortize capitalized costs under the straight-line method. Expense training costs. Expense maintenance costs
99
What ASC topic number is development stage enterprises
915
100
How is a development stage enterprise defined
1) devotes substantially all of its efforts to establishing a new business 2) planned principle operations have not commenced OR planned principal operations have commenced but there has been no significant revenue
101
T/F A development stage enterprise issues an income statement that is the same as an established operating enterprise and shows cumulative amounts from the enterprise's inception as additional information
TRUE
102
Under IFRS you choose the model of valuation for PP&E by...
CLASS, not by the individual assets
103
Under IFRS you revaluate the valuation for PP&E by...
CLASSES of assets. You do not revaluate on an individual asset basis
104
For companies preparing financial statements in accordance with IFRS, PP&E should be valued using which models ?
Cost model & revaluation model
105
How often do PP&E need to be revalued under the revaluation model for IFRS
There is no rule for the frequency or date of revaluation
106
When the revaluation model is used for reporting PP&E, the gain/loss from the revaluation should be included where on the income statement
A revaluation surplus account in other comprehensive income
107
Under IFRS how should you depreciate a machine that has different components? How is this different from GAAP?
As much as possible depreciate the different components separately. Under US GAAP this is optional, but not required
108
For companies preparing financial statements in accordance with IFRS, investment property should be valued using which models ?
The fair value method | The cost method
109
Does US GAAP have an investment property section?
No
110
Define investment property under IFRS
Property held to earn rentals, capital appreciation, or both. Cannot be used in production or supply of goods or services, or for administrative purposes, or for ordinary sales
111
When the fair value model is used for reporting investment property, any changes in the value should be included where on the income statement
Changes in fair value are reported as profit or loss in the current period
112
For companies preparing financial statements in accordance with IFRS, intangible assets should be valued using which models ?
Cost model | Revaluation model
113
Under IFRS, development costs may be recognized as an intangible asset if what six criteria are met
1) technological feasibility of completing the asset for use or sale has been achieved 2) the entity intends to complete and use or sell the asset 3) the entity has the ability to use or sell the asset 4) the entity understand how the asset will generate probable future economic benefits 5) technical, financial, and other resources are available to complete development of the asset 6) the entity has the ability to reliably measure the expenditures
114
How are intangible assets recorded when they are acquired and identifiable
At cost
115
How are intangible assets recorded when they are acquired in a business combination and identifiable
Fair value, separate from goodwill
116
Under IFRS an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if...
An active market exists for the intangible asset
117
When capitalizing an intangible asset under IFRS what do you include in the capitalization price
The one time purchase price, taxes, legal costs incurred to register the intangible assets
118
T/F An important difference between US GAAP and IFRS is that IFRS allows reversal of previously recognized impairments. If the historical cost method is used these would be recorded on the income statement. However if the revaluation method is used, the recovery of impairments is recognized in other comprehensive income.
TRUE
119
T/F The normal balance for the revaluation surplus account is a debit
FALSE No debit balance is allowed in the revaluation surplus account
120
Under IFRS intangible assets with indefinite lives are tested for impairment when?
Annually at the annual reporting date
121
T/F US GAAP does not have a biological asset account, but IFRS does
TRUE
122
Biological assets are measured how?
At NRV (fair value - cost to sell at harvest)

FAR Personal Flashcards (34 decks)

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