Matching of Revenue and Expenses

Question 1

What shall “revenue for Y2” apply to?

Answer 1

Only money attained in Y2. Doesn’t matter when it’s PAID. (Accrual).

Question 2

How to solve for R&D and amortization costs…

Plus Amortization Rule

Answer 2

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)

Question 3

Is Goodwill amortized?

Answer 3

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.

Question 4

IFRS Goodwill impairment test

Answer 4

Carrying Amount - Recoverable Amount of CGU

Question 5

Current Asset for Interest

Answer 5

Balance of the Note at the TIME (eg 100K remaining) times int. percentage

Question 6

Solve for Deferred [Service Contract] Revenue?

Answer 6

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

Question 7

Define R&D Under US GAAP?

Answer 7

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

Question 8

What are copyrights reported as?

Answer 8

Intangible Assets

Question 9

When should you capitalize a patent cost?

Answer 9

As long as it has been successfully defended.

Question 10

Accrued interest payable?

Answer 10

Annual int. x % months remaining in the year

Question 11

Calculate sales rev. net of tax?

Answer 11

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.

Question 12

When there is unlimited right of return, nothing should be recorded as sales revenue UNLESS:

(hint: 4 conditions, all must be satisfied)

Answer 12

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

Question 13

When do franchise fees become revenue?

Answer 13

When the material conditions of the sale have been “Substantially performed”

Question 14

Organizational activities - capitalized or expensed?

Answer 14

Expensed

per US GAAP

Question 15

Spot a potential goodwill impairment?

Answer 15

If fair val (or undiscounted future cash flows) is LESS THAN the carrying amnt.

Question 16

When can you reverse an intangible asset impairment loss?

Answer 16

When said asset is held for sale.

Question 17

Revenue Recognition

MOST IMP. RULE

Answer 17

Revenue cannot be recognized until services have been performed.

Question 18

Define “Matching Principle”

Answer 18

Matches Expenses against Revs. in the same accounting period

Question 19

How to recognize “Patent Asset” for IFRS

Answer 19

Purch Price + VAT Tax + Legal cost

eg.

300k + 3K + 20K

(vat tax, or Value Added Tax, is like an international equivalent to Sales Tax.)

Question 20

Goodwill tested at what “levels” for GAAP and IFRS?

Answer 20

GAAP: at “Reporting Unit” level
IFRS: “Cash Generating Unit” or CGU

Question 21

IFRS Goodwill impairment loss?

Answer 21

Recoverable amount* - carrying value

*where Recoverable Amount is GREATER of asset fair val (Less) costs to sell, or value in use.

Question 22

When a current payment can be applied against a future payment, what is it recorded as?

Answer 22

Deferred Revenue

Question 23

COMPLETED CONTRACT METHOD

Steps

(GAAP method 1 of 2)

ARB 45

Answer 23

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.

Question 24

PERCENTAGE-OF-COMPLETION METHOD

Steps

(GAAP method 2 of 2)

ARB 45

Answer 24

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.

Question 25

What counts as “Income Recognized” under percentage-of-completion method?

(LT Contracts)

Answer 25

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.

Question 26

For percentage completion, how do you recognize in final year?

Answer 26

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

Question 27

INSTALLMENT SALES METHOD of accounting for sales

hint.. GP, GP rate, deferred gross profit

Answer 27

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)

Question 28

How is gross profit on installment sales recognized as income?

Answer 28

In proportion to cash collection

Question 29

COST RECOVERY METHOD

Answer 29

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)_

Question 30

How to calculate Deferred Rev. under Installment Sales?

Answer 30

Receivable at YE * GP%
EG:

Inst Rec: 60K
(Less) Collections: (35K)
Write-offs: (5K)
Receivables YE: 60-35-5=20K

20K * .3 = 6000

Question 31

Deferred Gross Profit on Y2 Sales…

Answer 31

= Accounts Receivable for Y2 Sales x Gross Prof. Percentage for Y2 Sales

Question 32

When should installment sales method be used?

Answer 32

When installment sales are material, and when there is no reasonable basis for estimating collectability.

Question 33

How is gross profit on installment sales recognized?

Answer 33

In proportion to cash collected.