Matching Revenue & Expenses

Question 1

costs to develop computer software for ultimate sale

Answer 1

All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in “Inventory” (normal product costs) and charged to “Cost of Goods Sold” when sold.

Question 2

Impairment analysis for U.S. GAAP

Answer 2

Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value ($500,000) and fair value ($495,000) of the asset. In this problem, the carrying value of $500,000 is less than the undiscounted future cash flows of $515,000, so no impairment loss is recorded.

Question 3

intangible life span

Answer 3

Intangible assets should be amortized over the lesser of the useful economic life or the legal life.

Question 4

R&D under IFRS

Answer 4

The research costs associated with an internally developed asset will always be expensed. Assuming a company can reliably measure the costs associated with each component, under IFRS the development costs may be capitalized if all of the following criteria are met:

• Technical feasibility has been established.
• The company intends to complete the asset.
• The company has the ability to sell or use the asset.
• Sufficient resources are available to complete the development and sell / use the asset.
• The asset will generate future economic benefits.

Question 5

Gross profit calculation

Answer 5

Gross profit is calculated as sales less cost of goods sold.
Net sales
$ 500,000
Cost of sales
100,000
Gross profit
$ 400,000

Question 6

Defining commercial substance

Answer 6

In order to have commercial substance, either (1) the risk, timing, and amount of the expected future cash flows from the asset transferred differs significantly from the risk, timing, and amount of the expected future cash flows from the asset received, or (2) the entity-specific value (based on the company’s expectations of value of the asset and not that of the marketplace) of the asset received differs significantly (in relation to the fair values of the assets exchanged) from the asset transferred.
In this case, inventory was traded for inventory, and only $1,000 of cash was paid in the transaction. The future cash flows configuration does not appear to be affected (as both assets are inventory and the $1,000 cash is not significant), nor would it appear that the entity-specific value of the assets received compared to the assets transferred differs much (and is certainly not significant in relation to the fair value of the assets exchanged).
Further (and perhaps even more compelling for the exchange to be treated as lacking commercial substance), the exchange is inventory for inventory, and inventory is a product that is ordinarily held to be sold to customers. One of the three exceptions (the second one) to the general rule of valuing a transaction at fair value is if the exchange was made solely to facilitate a sale to a third party that is not a party to the exchange (such as a customer). Remember that lack of commercial substance was the third exception.
It appears that this exchange “lacks commercial substance” or falls under the “exchange that facilitates the sale” rules and, since boot was paid, there would be no gain recognized for accounting purposes. Since the fair value of the inventory relinquished exceeded the carrying amount of that inventory, there would be no loss either.