Matching of Revenue and Expenses Flashcards
What shall “revenue for Y2” apply to?
Only money attained in Y2. Doesn’t matter when it’s PAID. (Accrual).
How to solve for R&D and amortization costs…
Plus Amortization Rule
R&D must be expensed, so ignore it for purposes of “Net accumulated amortization under US GAAP”
Amortize, per month, anything else (EG legal costs)… Capitalize and amortize over LESSER of legal or economic life!
(EG.. 6/12 months * 34K legal fees / 10 yrs)
Is Goodwill amortized?
No.
It is subject to the impairment test.
ALSO, expenses related to internal development of goodwill are NOT CAPITALIZABLE expenses.. therefor they are written off as an expense in that year.
NOTE: Goodwill can be capitalized when part of the purchase of another entity, but not internally generated.
IFRS Goodwill impairment test
Carrying Amount - Recoverable Amount of CGU
Current Asset for Interest
Balance of the Note at the TIME (eg 100K remaining) times int. percentage
Solve for Deferred [Service Contract] Revenue?
If contracts are sold “Evenly throughout the year” you will recognize as revenue, half of what was performed in the current year.
EG deferred earnings total: 600K
1/2 of the 40%*600K was earned in the current year.
600K - 120K = 480K Deferral
Define R&D Under US GAAP?
R&D includes costs incurred PRIOR TO technological feasibility!
If it is for internal use, and NOT mainstream production, development costs are not R&D costs.
R&D performed for others – CONTRACT COST not R&D cost!
includes depreciation for Current and Future Products
What are copyrights reported as?
Intangible Assets
When should you capitalize a patent cost?
As long as it has been successfully defended.
Accrued interest payable?
Annual int. x % months remaining in the year
Calculate sales rev. net of tax?
Credits To Sale Revenue / ST Rate + 1
EG: 28K / 1.06
When you multiply the sales rev. net of tax times ST rate, you get sales tax COLLECTED.
When there is unlimited right of return, nothing should be recorded as sales revenue UNLESS:
(hint: 4 conditions, all must be satisfied)
1) Sales price substantially fixed
2) Buyer assumes all risk of loss
3) The buyer has paid some form of consideration
4) amnt. of returns easily estimated
When do franchise fees become revenue?
When the material conditions of the sale have been “Substantially performed”
Organizational activities - capitalized or expensed?
Expensed
per US GAAP
Spot a potential goodwill impairment?
If fair val (or undiscounted future cash flows) is LESS THAN the carrying amnt.
When can you reverse an intangible asset impairment loss?
When said asset is held for sale.
Revenue Recognition
MOST IMP. RULE
Revenue cannot be recognized until services have been performed.
Define “Matching Principle”
Matches Expenses against Revs. in the same accounting period
How to recognize “Patent Asset” for IFRS
Purch Price + VAT Tax + Legal cost
eg.
300k + 3K + 20K
(vat tax, or Value Added Tax, is like an international equivalent to Sales Tax.)
Goodwill tested at what “levels” for GAAP and IFRS?
GAAP: at “Reporting Unit” level
IFRS: “Cash Generating Unit” or CGU
IFRS Goodwill impairment loss?
Recoverable amount* - carrying value
*where Recoverable Amount is GREATER of asset fair val (Less) costs to sell, or value in use.
When a current payment can be applied against a future payment, what is it recorded as?
Deferred Revenue
COMPLETED CONTRACT METHOD
Steps
(GAAP method 1 of 2)
ARB 45
Under Completed Contract, revenue is recognized when contract is complete; however expected losses are recognized IMMEDIATELY in their entirety.
Contract Price - Costs Incurred in Year X - Estimated Costs to Complete = amnt. of (possible Loss) reported on Income Statement
**important NOTE: it is only losses on projects that are recognize. if you note a supposed “Gain” on the proj., this revenue will only be realized on the inc. statement when contract is COMPLETE.
(things that DON’T matter under this method: billings to customers, $ received from customers)
Rev. from $ collected ONLY recognized when project is completed.
PERCENTAGE-OF-COMPLETION METHOD
Steps
(GAAP method 2 of 2)
ARB 45
You can net Gains and Losses this one.
To see Costs Incurred:
Contract Price - (costs inc. + Estimated costs) = Exp Profit.
[eg: 420K - (240K+120K) = 60K]
Then get PERCENTAGE COMPLETION: eg, costs incurred/[costs inc. + exp costs] = 240K/ {240K+120K) = 240/360 = 2/3…
$60K * 2/3 = percentage completion prof, to be netted with any losses for income statement.
What counts as “Income Recognized” under percentage-of-completion method?
(LT Contracts)
Only INCOME actually previously recognized.
NOT progress billings to date.
Calcing Income to be Recognized in Current year:
Cumulative GP to date as per % completion method LESS income previously recognized, to attain income recognized in current year.
For percentage completion, how do you recognize in final year?
Whatever “%” has not yet been completed in previous years… EG if you were only up to 70% last year, then the 30% recognized this year is multiplied times actual GP as calculated.
EG: 500K * 30% remaining in completed contract method
INSTALLMENT SALES METHOD of accounting for sales
hint.. GP, GP rate, deferred gross profit
Gross Profit = Sales- Cost of Sales (per year)
Gross Profit Rate = Gross profit/sales (per year)
Deferred gross profit = GP rate x Installments Receivable, Year in Question (add years together)
How is gross profit on installment sales recognized as income?
In proportion to cash collection
COST RECOVERY METHOD
Under cost recovery method, revenue is recognized only to the extent of receipts. So in Q1 revenue recognized is $3 million which is matched with cost of $3 million resulting in zero gross profit.
In Q2 revenue recognized is $6 million matched with $6 million cost resulting in zero gross profit.
IS APPROPRIATE WHEN there is no reasonable basis for determining collectability
(Accountingexplained.com)_
How to calculate Deferred Rev. under Installment Sales?
Receivable at YE * GP%
EG:
Inst Rec: 60K
(Less) Collections: (35K)
Write-offs: (5K)
Receivables YE: 60-35-5=20K
20K * .3 = 6000
Deferred Gross Profit on Y2 Sales…
= Accounts Receivable for Y2 Sales x Gross Prof. Percentage for Y2 Sales
When should installment sales method be used?
When installment sales are material, and when there is no reasonable basis for estimating collectability.
How is gross profit on installment sales recognized?
In proportion to cash collected.
