My FAR 2

Question 1

What are the 4 criteria that must be met for revenue to be recognized? This is also GAAP’s definition of a sale

Answer 1

Evidence of an arrangement (Signed contract)
Delivery has occurred
Price is fixed and determinable (no price contingencies)
Collection is reasonably assured

Question 2

According to U.S. GAAP when should revenue be recognized?

Answer 2

When it is realized (cash) or realizable (a/r) and when it is earned.

Question 3

When should the sale of a product be recognized and what are the 4 criteria that must apply for a sale to take place?

Answer 3

It should be recognized in the date of sale
Delivery of goods or setting aside goods
Transfer of legal title
Revenue that stems from allowing others the use of the entity’s assets
Revenue from the performance of services is recognized in the period the services have been rendered and are able to be billed by the entity

Question 4

What is IFRS’ definition of a sale?

Answer 4

Revenue and costs incurred for the transaction can be measured reliably.
It is probable that economic benefits from the transaction will flow to the entity.
The entity has transferred to the buyer the significant risk and rewards
The entity does not retain managerial involvement to the degree associated with ownership.

Question 5

Under IFRS, how is revenue from rendering of services recognized?

Answer 5

It is recognized using the percentage of completion method and
Revenue and costs incurred for the transaction can be measured reliably
It is probably that economic benefits from the transaction will flow to the entity
The stage of completion of the transaction at the end of the reporting period can be measured reliably.

Question 6

When is an expected loss on a construction contract recognized?

Answer 6

It is recognized immediately as an expense

Question 7

What is a multiple element arrangement and how is revenue recognized?

Answer 7

It is a sales contract that includes multiple products or services.

Revenue is recognized separately for each element based on the revenue recognition criteria appropriate for each element.

Question 8

What is a deferred credit?

Answer 8

It is when cash is received before it is earned. It’s a liability

Question 9

What are the two exceptions and other special accounting treatments that are not GAAP?

Answer 9

Installment sales and cost recovery method

Question 10

When would you recognize revenue for a percentage of completion contract accounting?

Answer 10

Revenue is recognized as production takes place for long term construction contracts.

Question 11

What is the matching principle?

Answer 11

Expenses must be recognized in the same period in which the related revenue is recognized.

Most important principle

Question 12

What is accrual accounting?

Answer 12

Required by GAAP

it records transactions as they occur, not when cash is received.

Question 13

What is the GL for accrued assets of interest income?

Answer 13

Debit a/r interest (b/s)

Credit deferred rev (I/s)

Question 14

What is the GL for accrued liabilities of interest expense?

Answer 14

Debit interest expense

Credit interest payable

Question 15

What are expired costs?

Answer 15

They are an expense and its costs that expire during the period and have no future benefit. Go on income statement

Question 16

What are unexpired costs?

Answer 16

Assets or deferred charges. Stay in balance sheet. These should be capitalized and matched against future revenues.

Question 17

What is the GL for prepaid expenses?

Answer 17

Debit prepaid
Credit cash

Balance sheet only

Question 18

What is the GL for deferred charges?

Answer 18

Debit deferred charge
Credit cash or asset

Balance sheet

Question 19

What is the GL for deferred credits?

Answer 19

Debit cash
Credit unearned or deferred revenue

Balance sheet

Located in the liability section

Question 20

What are the GL’s for collection and recognizing earned royalties?

Answer 20

Collection
Debit cash
Credit unearned royalty

Recognizing earned royalties
Debit unearned royalty
Credit earned royalty

Question 21

When do u recognize unearned revenue when you are a franchise?

Answer 21

Unearned revenue is recognized as revenue once substantial performance on future services has occurred.

Question 22

When should a franchisor report revenue?

Answer 22

Franchisor has no obligation to refund any payment
Initial services required of the franchisor have been performed
All other conditions of the sale have been met

Question 23

How do you treat internally developed intangible assets?

Answer 23

They should be expenses against income when incurred bc US GAAP prohibits the capitalization of research and development costs

Question 24

What is the exception to the rule for capitalizing on internal intangible assets? (Research and development)

Answer 24

Costs can be capitalized for legal fees and other costs related to a successful defense of the asset.

If its unsuccessful, expense the costs and the asset would be impaired.

Question 25

When should an asset be amortized?

Answer 25

It should be amortized if it has a finite life (end of life)

Question 26

When should a patent be amortized?

Answer 26

It should be amortized over the shorter of its estimated life or remaining legal life

Question 27

What is the general rule for applying amortization?

Answer 27

Companies should use straight-line unless they can demonstrate that another systematic method is more accurate

Question 28

What are some miscellaneous rules for amortization?

Answer 28

Write off the entire remaining cost to expense of an intangible asset becomes worthless
Write down the intangible asset and recognize an impairment loss if an intangible asset becomes impaired
Change in useful life, prospective
Sale, gain or loss in period sold

Question 29

How much money can a business deduct for each of the organizational expenditures and start ups costs?

Answer 29

$5,000. Each $5,000 is reduced by the amount by which the organizational expenditures or star at up costs exceeds $50,000 any excess organizational expenditures or start up cost is amortized over 180 months (15 years)

Question 30

What is the acquisition method of goodwill?

Answer 30

It is the excess of an acquired entity’s fair value over the fair value of the entity’s net assets.

Question 31

What is the equity method of goodwill?

Answer 31

Involves the purchase of a company’s capital stock. The excess of the stock purchase price over the fair value of the net assets.

Question 32

How are the costs associated with goodwill treated?

Answer 32

All costs are expensed.

Question 33

What are the only costs that are not expensed for research and development costs?

Answer 33

Materials, equipment, or facilities that have alternate future uses. They are capitalized and you depreciate the assets over their useful lives

Question 34

How do you handle research and development costs of any nature undertaken on behalf of others under a contractual agreement?

Answer 34

The purchaser (buying the R&D) will expense as research and development the amount paid.

The buyer (performing the R&D) will expense the costs as incurred as cost of sales.

Question 35

What are items that are not considered R&D?

Answer 35

Routine periodic design changes
Marketing research
Quality control testing
Reformulation of a chemical compound

Question 36

How do you account for costs for computer software developed to be sold, leased or licensed?

Answer 36

You would expense costs incurred until technological feasibility has been established for the product. (Planning, design, coding, testing)

Technological feasibility means a detailed program design has been completed or completion of a working model

You would capitalize costs after technological feasibility has been established up to the point that the product is released for sale. (Coding, testing, producing product masters)

Question 37

How do you amortize capitalized software costs?

Answer 37

You amortize it on the greater of percentage of revenue or straight line.

% of revenue - total capitalized amount X current gross revenue for period divided by total projected gross revenue for product.

Straight line - total capitalized amount X 1 divided by estimate of economic life

Question 38

How do you impair an intangible asset with a finite life (won’t last forever)?

Answer 38

Step 1 - the carrying amount of the asset is compared to the sum of the u discounted cash flows expected to result from the use of the asset.

Step 2 - if the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and it’s fair value is recorded.

Question 39

How do you impair an asset with an indefinite life (will last forever)?

Answer 39

Compare the assets fair value of the intangible asset to carrying amount. If the assets fair value is less than its carrying amount, an impairment loss is recognized as the difference