Fixed Assets

Question 1

Amount of interest to be capitalized

Answer 1

The lesser of the actual interest or the Average interest
Avg interest: Avg. accumulated expenditures during construction x Interest rate x Construction period

Avg accum exp during construction = exp at the beginning + expenses at the end of year/2

Question 2

Nonmonetary Transactions- Criteria

Answer 2

Nonmonetary transaction must meet one of the 3 following criteria:

1. FMVs of asset received and asset given up are both unknown; OR
2. The exchange transaction is done to facilitate sales; OR
3. The transaction lacks commercial substance:
   a) Cash flows do NOT change in their risk, timing, and amount; AND
   b) Do not include tax effects when considering the cash flows.

Question 3

Nonmonetary Transactions - Boot received, realized gain pro-rata (calculation)

Answer 3

When boot is received for a nonmonetary exchange you may recognize some of the realized gain pro-rata:
Realized gain x (FMV of Boot/FMV of Boot +FMV of asset Rec’d)

Exception- if boot is 25% or more of the FMV of the exchange recognize the entire gain.

Question 4

Purchase of groups of fixed assets (Basket Purchase)

Answer 4

Cost should be allocated based on relative value:

Cost of all assets acq x Market value of Asset A/ Market value of all assets acquired

Question 5

Capital Expenditures

Answer 5

are not normal, recurring expenses; they benefit the operatons of more than one period. (increase the CV of the asset)
Betterment - makes asset more efficient, productive, does not increase the life of the asset. JE: Dr. Asset Cr. Cash.
Major Repairs- does increase the life of the asset. JE: Dr. Accum Dep. Cr. Cash
Both cases the CV of the asset is increased.

Question 6

Revenue expenditures

Answer 6

normal recurring expenditures. Some capital expenses can be expensed as revenue exp. when immaterial.
“repairs and maintenance” acocunt would get rolled into “selling expense” if it was repairs and maintenance on a selling show room..etc.

Question 7

Straight line method

Answer 7

Historical cost - Salvage value / Useful life in years

Question 8

Declining balace method

Answer 8

1/life in years to convert to a %

Historical cost - Accum depn. x declining balance %

Question 9

Double declining balance

Answer 9

1/life in years to convert to a % x 2

Historical cost - Accum depn. x declining balance %

Question 10

Sum-of-the-years-digit (SYD)

Answer 10

n(n+1)/2  n= useful life in years 
this will give you a denominator 
Ex. Useful life 5, calculated denominator 15
Year 1: 5/15 x HC - SV 
Year 2: 4/15 x HC - SV
Year 3: 3/15 x HC - SV...

Question 11

Accelerated Depreciation

Answer 11

Justified by: (more depreciation at the beginning less towards the end)

1. Increased productivity when asset is new (better matching, more conservative)
2. Increasing maintenance charges with age
3. Risk of obsolescence

Question 12

SL Method in Units of Activity, production or output

Answer 12

Historical cost - Salvage Value/ Useful life in activity = Depreciation expense per unit.

Question 13

Composite (group) depreciation

Answer 13

Group: assets are similar - homogenous
Composite: assets are dissimilar - heterogeneous
No gains or losses are recognized on disposal of assets (only if the whole group or composite was disposed)
JE: Dr. Cash
Dr. Accum Dep (plug)
Cr. Asset (HC)
The net carrying amount of composite/group assets would decrease by the cash received on disposal of asset.

=Sum of annual SL depreciation of individual assets/Total asset cost

Question 14

Entry to record disposal of an asset

Answer 14

Dr. Cash
Dr. Accum Depn
Dr. Loss (plug figure to make it balance)
Cr. Old asset (HC)
Cr. gain (plug figure to make it balance)
depending on gain or loss on disposal of asset plug the figure in to balance the JE.

Question 15

Circumstances that may indicate that an impairment has occured - Tangible and Intangible assets (except Goodwill)

Answer 15

• Decline in demand, inability to keep up with technology/competition
• Net operating loss
• Decline in FMV
• Negative cash flow
• Change in regulatory or legal environment

Question 16

Test for impairment (tangible and intangible assets excluding goodwill)

Answer 16

Carrying Value vs. Non discounted Future Cash flows.

CV > Non discounted future CFs this item is impaired - measure the impairment loss

Question 17

Measure the impairment loss (tangible assets held for use and intangible assets finite and indefinite life)

Answer 17

Carrying value vs. FMV

Question 18

Intangible assets - indefinite life

Answer 18

Asset for which useful life is unknow, do not amortize. 
Test for impairment:
CV vs. FMV
Measure the impaierment loss 
CV vs. FMV

Question 19

Patents - amortization

Answer 19

Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life (shorter of the legal or useful life.)

R&D expenses (internal or external) are always expensed, never capitalized.

Question 20

Circumstances that may indicate that an impairment has occured - Goodwill impairment

Answer 20

• Decline in demand, inability to keep up with technology/competition
• Net operating loss
• Decline in FMV
• Negative cash flow
• Change in regulatory or legal environment

Question 21

Research and Development

Answer 21

R&D Expenses:
New knowledge 
New technology 
Reformation/ reformulating a process/modification
Prototype 
Model 
Application of research findings 

Never R&D:
Commercial production or activity
Seasonal
routine

Question 22

Development Stage Enterprise

Answer 22

devots substantially all of its efforts to establish a new business, planned principle ops have not started or they have started but there was been no significant revenue.
B/S should show cumulative losses since inception under SHE
I/S, Statement of CF current period and cumulative amounts since inception
Development stage enterprise must be identified on FS

Question 23

Leasehold improvements

Answer 23

properly capitalized and amortized over the remaining life of the lease, or the useful life of the improvements, whichever is shorter.

Question 24

Cost principle

Answer 24

requires that assets be recorded at historical cost.

Question 25

Demolition of building on land - Capitalization

Answer 25

Any proceeds from salvage of the old building that is demolished is netted against the cost, the net costs go to the land no the new building.

Question 26

Costs of internally developed software

Answer 26

after the development stage may be capitalized and amortized over the asset’s economic life.

Question 27

nonmonetary, nonreciprocal transfers (donations)

Answer 27

The gain or loss is calculated as the difference between the fair value of the nonmonetary asset transferred and its recorded amount at the date of donation. Gains or losses related to the nonreciprocal transfer of nonmonetary assets are recognized because they have been earned or incurred by the entity at the date of transfer.ASC Topic 958

Question 28

Legal fees from a successful defense of a patent suit

Answer 28

may be capitalized in the patent account because such a suit establishes the legal rights of the holder. It is irrelevant how the patent was acquired as long as there is ownership. (internally or purchased)

Question 29

ASC Topic 350 Goodwill testing periodically for impairment

Answer 29

At the operating segment level or one level below.
Also at the level of the reporting unit.
Good will is NEVER tested at the entity level.

Question 30

Accounting for development costs - IFRS

Answer 30

Development costs may be capitalized as an intangible asset if it meets 6 criteria

Question 31

Intangible assets with indefinite lives - IFRS

Answer 31

Must be tested annually at the annual reporting date.

Question 32

Gains on involuntary conversions

Answer 32

If the total proceeds of the gain are re-invested in a similar item, the gain is not taxable (deduct from the books)
Otherwise, they are to be recognized in the financial statements in the year they occur.

Question 33

Current portion of income tax

Answer 33

The current portion of income tax is calculated as taxable income multiplied by the current tax rate

Question 34

Deferred income tax expense or benefit

Answer 34

The net change during the year in an enterprise’s deferred tax liabilities or assets.

Question 35

Net operating loss carryforward

Answer 35

Amount of loss in prior year which may be carried forward to future years to offset the tax due in those years. The value of the carryforward is the net operating loss multiplied by the tax rate for the year in which the carryforward is expected to be realized.

Question 36

Income tax expense must be reported in two components

Answer 36

The amount currently payable (current portion) and the tax effects of temporary differences (deferred portion). The amount currently payable, or current income tax expense, is computed by multiplying taxable income by the current enacted tax rate