Section 3G,H,I,J

Question 1

START NONRECIPROCAL TRANSFER

Answer 1

a

Question 2

Gourmet Corporation was considering cash saving strategies and decided to issue a property dividend instead of a cash dividend. The assets to be distributed had a fair value of $320,000 and a carrying value of $444,000. When accounting for the property dividend, which of the following statements is correct?

1. Retained earnings will be debited for $444,000 as part the entries to record the property dividend.
2. Gourmet will report a loss on the write-down of $124,000 on the assets being distributed in the property dividend.
3. Gourmet will value the dividend at $444,000.
4. The assets do not need to be written down prior to being distributed.
   5.

Answer 2

Gourmet will report a loss on the write-down of $124,000 on the assets being distributed in the property dividend.

FASB ASC 845-10-30-1 requires that “a transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.”

Since the market value of the merchandise was less than its carrying amount, Gourmet should report the resulting loss as a reduction in income ($444,000 − $320,000 = $124,000).

Question 3

Property dividends are rare. They are paid in the form of some ___asset, such as merchandise, investments, or fixed assets.

A property dividend is a ___transfer of nonmonetary assets to the owners.

Accordingly, it should be accounted for on the basis of the ___of the assets transferred, with ___gain or loss recognized.

Answer 3

noncash , nonreciprocal, FV, unrealized

Question 4

A ___transfer is a transfer of assets or services in one direction, either from an enterprise to its owners or another entity or from owners or another entity to the enterprise.

In general, ___transactions involving nonreciprocal transfers should also be based on the fair values of the assets involved.

A nonmonetary asset received in a nonreciprocal transfer should be recorded at the __of the asset received.

A transfer of a nonmonetary asset to a ___or to another enterprise in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the ___of the asset.

Answer 4

nonreciprocal

nonmonetary

fair value

stockholder, dispostion

Question 5

nstead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be:

reported as a reduction in income.

reported as an ordinary loss, net of income taxes.

reported as a separately disclosed reduction of retained earnings.

ignored.

Answer 5

reported as a reduction in income.

FASB ASC 845-10-30-1 requires that “a transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.”

Since the market value of the merchandise was less than its carrying amount, Evie Corp. should report the resulting loss as a reduction in income.

Question 6

here are three exceptions cases in which a nonmonetary exchange should be recorded based on the recorded amount (carryover amount) rather than fair value:

1. Fair value is not __
2. Exchange transaction to facilitate sales to __
3. Exchange transaction that lacks ___

f the fair value is not determinable within reasonable limits (exception case 1.), the transferor should record a nonmonetary exchange based on the ___value of the asset transferred

Answer 6

determinable

customers

commercial substance

book

Question 7

Deed Co. owns 2% of Beck Cosmetic Retailers. A property dividend by Beck consisted of merchandise with a fair value lower than the listed retail price. Deed in turn gave the merchandise to its employees as a holiday bonus.

How should Deed report the receipt and distribution of the merchandise in its income statement?

By disclosure only

At fair value for both dividend revenue and employee compensation expense

At fair value for dividend revenue and listed retail price for employee compensation expense

At listed retail price for both dividend revenue and employee compensation expense

Answer 7

At fair value for both dividend revenue and employee compensation expense

FASB ASC 845-10-30-1 provides that “a nonmonetary asset received in a nonreciprocal transfer should be recorded at the fair value of the asset received. A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred.”

Both receipt of the dividend and the distribution of the merchandise to employees should be recorded at fair value as dividend revenue and employee compensation expense.

Question 8

___of nonmonetary assets to monetary assets are monetary transactions for which gain or loss must be recognized even though an enterprise reinvests the monetary assets in replacement nonmonetary assets.

However, this basic position (i.e., that the involuntary conversion is a monetary transaction) does not apply to an involuntary conversion of a ___inventory for which replacement:

a. is made by year-end or
b. is intended but not made by year-end, provided the enterprise does not recognize a gain on the involuntary conversion for income tax purposes.

Answer 8

Involuntary conversions

LIFO

Question 9

START R&D COSTS

Answer 9

a

Question 10

Which of the following is an example of activities that would typically be excluded in research and development costs?

Testing in search for, or evaluation of, product or process alternatives

Design, construction, and testing of preproduction prototypes and modes

Quality control during commercial production, including routine testing of products

Laboratory research aimed at discovery of new knowledge

Answer 10

Quality control during commercial production, including routine testing of products

Question 11

“The following activities typically would be considered research and development within the scope of this Topic (unless conducted for others under a contractual arrangement—see [FASB ASC 730-10-15-4(a)]):

1. “Laboratory __aimed at discovery of new knowledge
2. “Searching for __of new research findings or other knowledge
3. “Conceptual formulation and design of possible product or process ___
4. “Testing in search for or ___of product or process alternatives
5. “___of the formulation or design of a product or process
6. “Design, construction, and testing of pre-production prototypes and models
7. “Design of tools, jigs, molds, and dies involving new technology
8. “Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the enterprise for commercial production
9. “___activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture
10. “___used to facilitate research and development or components of a product or process that are undergoing research and development activities

Answer 11

research

applications

alternatives

evaluation

modification

True

True

Engineering

Tools

Question 12

Research and development (R&D) costs are identified in five categories.

1. __,__,___ used in R&D activities
2. __l engaged in R&D activities
3. ___purchased or developed for use in R&D activities
4. ___services acquired and used in conjunction with R&D activities
5. ___costs reasonably allocable to R&D activities

Answer 12

Materials/equipment/faciliteis

Personnel

Intangibles

Contract

Indirect

Question 13

If research and development (R&D) (e.g., machinery, equipment, patent) has an alternative, the cost is __as a tangible or intangible asset and depreciated or amortized.

No asset identified as research and development (R&D) should appear on the ___

___is made in the financial statements of the total R&D cost charged to expense in each period for which an income statement is presented.

Answer 13

capitalized

balance sheet

Disclosure

Question 14

Which of the following expenditures qualifies for asset capitalization?

Cost of materials used in prototype testing

Legal costs associated with obtaining a patent on a new product

Costs of testing a prototype and modifying its design

Salaries of engineering staff developing a new product

Answer 14

Legal costs associated with obtaining a patent on a new product

Assets are probable future economic benefits obtained or controlled by a particular enterprise as a result of past transactions or events. (SFAC 6.25)

The incorrect answer choices are research and development costs. Since there is a great deal of uncertainty about the future benefit of these costs, they must be expensed. (FASB ASC 730-10-05-3)

Question 15

Answer 15

$650,000

Research and development is defined as a planned search aimed at discovery of new knowledge and translation of the research findings into a plan or design. The research and development costs are incurred prior to commercial production of the product. R&D costs are reported as an expense, not an asset.

Salaries $250,000 + Design $400,000 = Total $650,000

Question 16

• On January 1, year 1, a company with a calendar year-end began developing a software program that it intends to market and sell to its customers.
• The software coding was completed on March 31, year 1, at a cost of $200,000, and the software testing was completed on June 30, year 1, at a cost of $100,000.
• The company achieved technological feasibility on July 31, year 1, at which time the company began producing product masters at a cost of $125,000.

What amount should the company report for the total research and development expense for the year ended December 31, year 1?

$300,000

$200,000

$100,000

$425,000

Answer 16

$300,000

1. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product.
2. Technological feasibility is established on completion of a detailed program design or completion of a working model.
3. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value.
4. The company should report $300,000 ($200,000 + $100,000) for research and development expense.

Question 17

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until ___has been established for the product. ___is established on completion of a detailed program design or completion of a working model.

After ___has been established, all software production costs are ___and subsequently reported at the lower of unamortized cost or net realizable value

. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

Answer 17

technological feasibility , technological feasibility

technological feasibility . capitalized

Question 18

Which of the following is a research and development cost?

Development or improvement of techniques and processes

Market research related to a major product for the company

Offshore oil exploration that is the primary activity of a company

Research and development performed under contract for others

Answer 18

Development or improvement of techniques and processes

• FASB ASC 730-10-20 defines research and development as follows: “Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique in bringing about a significant improvement to an existing product or process.
• Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.”

Question 19

During 20X1, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1, 20X1. Costs of registering the patent equaled $34,000. The patent’s legal life is 17 years, and its estimated economic life is 10 years. In its December 31, 20X1, balance sheet, what amount should Jase report as patent, net of accumulated amortization assuming no impairment?

$33,000

$165,000

$32,300

$161,500

Answer 19

$32,300

Correct

FASB ASC 730-10-25-1 provides that research and development costs be “charged to expense when incurred.” The $34,000 cost of registration would be capitalized and amortized over the 10-year economic life.

20X1 amortization = ($34,000 / 10 years) x (6/12)
= $1,700
Carrying value of patent on December 31, 20X1
= Costs of patent - Patent amortization
= $34,000 - $1,700
= $32,300

Question 20

Which of the following activities typically would not be considered research and development?

Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the entity for commercial production

Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture

Troubleshooting in connection with breakdowns during commercial production

Tools used to facilitate research and development or components of a product or process that are undergoing research and development activities

Answer 20

Troubleshooting in connection with breakdowns during commercial production

Costs incurred after commercial production has begun are not research and development costs. FASB ASC 730-10-55-2 gives examples of those types of activities that are not research and development activities:

1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production including routine testing of products
3. Troubleshooting in connection with breakdowns during commercial production

LOT MORE

Question 21

Costs incurred after commercial production has begun are not research and development costs. FASB ASC 730-10-55-2 gives examples of those types of activities that are not research and development activities:

1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production including routine testing of products
3. Troubleshooting in connection with breakdowns during commercial production
4. Routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product
5. Adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity
6. Seasonal or other periodic design changes to existing products
7. Routine design of tools, jigs, molds, and dies
8. Activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than (1) pilot plants and (2) facilities or equipment whose sole use is for a particular research and development project
9. Legal work in connection with patent applications or litigation, and the sale or licensing of patents

Answer 21

h

Question 22

During 20X8, Detrusions Corporation incurred research costs of $178,000 and development costs of $256,000 in creating a new process for taking biopsies for cancer testing. The patent was granted on June 21, 20X8, and the patent was officially registered on July 1, 20X8. The costs to register the patent equaled $45,500. The patent’s legal life is 20 years, and its estimated economic life is 7 years. In its December 31, 20X9, balance sheet, what amount should Detrusions report as patent, net of accumulated amortization, assuming no impairment?

$39,000

$35,750

$42,250

$45,500

Answer 22

$35,750

FASB ASC 730-10-25-1 provides that research and development costs be “charged to expense when incurred.” The $45,500 cost of registration would be capitalized and amortized over the 7-year economic life.

20X8 amortization = ($45,500 ÷ 7 years) × (6/12)
= $3,250
20X9 amortization = ($45,500 ÷ 7 years)
= $6,500
Carrying value of patent on December 31, 20X9
= Costs of patent − Patent amortization
= $45,500 − $3,250 − $6,500
= $35,750

Question 23

Which of the following would be considered research and development costs to be expensed during the period?

Changes to a product to make it align with the theme of a new movie to be released

Modifying a prototype based on results from initial testing

Adapting an existing instrument manufactured by the company so it can be used in extreme climates

Preparing changes to a product for regular seasonal changes

Answer 23

Modifying a prototype based on results from initial testing

Research and development costs relate to activities identified with the period prior to the beginning of commercial production. A prototype is a working sample or mock-up, which is pre-production, so it is the only choice which meets the R&D criteria.

Question 24

Stam Co. incurred the following research and development project costs during the current year:

1. equip purchased for current and future projects 100k
2. equip purchased for current projects only 200k
3. R&D salaries for current projects 400k
4. Legal fees to obtain patent 50,000
5. Material and labor costs for prototype product 600k

The equipment has a 5-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year-end?

$1,220,000

$450,000

$1,350,000

$1,000,000

Answer 24

$1,220,000

Depreciation on equipment with
an alternate use ($100,000 / 5) $ 20,000
Equipment for current project 200,000
Research and development salaries 400,000
Material and labor costs 600,000
Total $1,220,000

Research and development costs are identified in five categories:

1. Materials, equipment, and facilities used in R&D activities
2. Personnel engaged in R&D activities
3. Intangibles purchased or developed for use in R&D activities
4. Contract services acquired and used in conjunction with R&D activities
5. Indirect costs reasonably allocable to R&D activities

Question 25

Which of the following costs should not be included in research and development?

Administrative costs

Personnel costs

Facility costs

Indirect costs

Answer 25

Administrative costs

Administrative costs are not considered to be research and development (R&D) costs. R&D costs can be classified into five categories:

1. Materials, equipment, and facilities used in R&D activities
2. Personnel engaged in R&D activities
3. Intangibles purchased or developed for use in R&D activities
4. Contract services acquired and used in conjunction with R&D activities
5. Indirect costs reasonably allocable to R&D activities

Question 26

Answer 26

$150,000

Question 27

Which of the following statements concerning patents is correct?

1. Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life.
2. Research and development contract services purchased from others and used to develop a patented manufacturing process should be capitalized and amortized over the patent’s economic life and not assessed for impairment.
3. Legal fees and other direct costs incurred in registering a patent should be capitalized and amortized on a straight-line basis over a 5-year period.
4. Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over 17 years.

Answer 27

Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life.

1. FASB ASC 730-10-55-2. In a listing of examples of activities to be excluded from research and development treatment (i.e., expensed when incurred) is “i. Legal work in connection with patent applications or litigation, and the sale or licensing of patents.”
2. This means that legal costs related to the successful defense of internally developed patents should be capitalized and amortized over the patent’s remaining economic life.
3. FASB ASC 350-30-35-14 requires that intangibles subject to amortization also be assessed for impairment.

Question 28

How should NSB, Inc., report significant research and development costs incurred?

Expense all costs in the year incurred

Capitalize the costs and amortize over a 40-year period

Capitalize the costs and amortize over a 5-year period

Expense all costs 2 years before and 5 years after the year incurred

Answer 28

Expense all costs in the year incurred

Expenditures can be capitalized only if the expenditure is expected to provide benefits in the future. Since there is doubt as to the outcome of research and development expenditures, they are expensed immediately.

Question 29

A company’s research department incurred $1,000,000 in material, labor, and overhead costs to construct a prototype of a new product and $100,000 to test and modify the prototype. Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company?

Expense $1,100,000 as incurred.

Capitalize $1,100,000 and amortize it over the life of the prototype.

Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred.

Capitalize $1,100,000 and amortize it over the expected sales life of the new product.

Answer 29

Expense $1,100,000 as incurred.

A prototype is a preliminary or first model, often built for demonstration purposes (not production) from which other forms are copied or developed. Both the $1,000,000 and the $100,000 qualify as R&R cost and should therefore be expensed as incurred.

The remaining answer choices are all incorrect as the items cannot be capitalized.

Question 30

Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

Either capitalized or expensed, but not both, depending on the term of the research and development project

Capitalized and depreciated over its estimated useful life

Expensed in the year in which the research and development project started

Capitalized and depreciated over the term of the research and development project

Answer 30

Capitalized and depreciated over its estimated useful life

Only equipment that has an alternative use is capitalized and depreciated. Other expenditures should be expensed immediately.

Question 31

Which of the following items would be classified as a research and development cost?

Periodic design changes to an existing product

Testing in search of product or process alternatives

Engineering follow-up in an early phase of commercial production

Legal work in connection with a patent application

Answer 31

Testing in search of product or process alternatives

Research and development is a process to discover new knowledge, which would include testing in search of product or process alternatives.

Periodic design changes to an existing product, engineering follow-up in an early phase of commercial production, and legal work in connection with a patent application are not involved in discovering new knowledge.

Question 32

Answer 32

$275,000

1. FASB ASC 730-10-20 defines research and development as the planned search and critical investigation aimed at the discovery of new knowledge and ultimately a new product.
2. Computer software costs follow this definition. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product.
3. After feasibility has been established, all software costs are capitalized. Based on the definition, research and development expense includes planning, design and testing of $275,000 ($50,000 + 150,000 + 75,000).

Question 33

Which of the following methods should be used to account for research and development costs with no alternative future use?

Capitalizing costs specified by management and charging all other costs to expense

Capitalizing all costs when incurred

Accumulating all costs in a separate component of stockholders’ equity until the existence of future benefits can be determined

Charging all costs to expense when incurred

Answer 33

Charging all costs to expense when incurred

The future benefits associated with research and development (R&D) expenses are expenditures that are uncertain; therefore, GAAP requires that all R&D be charged to expense as incurred.

There are limited exceptions to the rule, including capitalization of the expenses when the cost relates to tangible assets which have alternative future uses.

Question 34

Which of the following activities typically would be considered research and development?

Routine design of tools, jigs, molds, and dies

Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture

Troubleshooting in connection with breakdowns during commercial production

Seasonal or other periodic design changes to existing products

Answer 34

Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture

Question 35

Which of the following should a company classify as a research and development expense?

Legal work on patent applications

Routine design of tools, jigs, molds, and dies

Redesign of a product prerelease

Periodic design changes to existing products

Answer 35

Redesign of a product prerelease

1. Research is a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process
2. . Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
3. A useful way to analyze activities to determine if their costs are research and development (R&D) costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production.
4. Only the redesign of a product prerelease qualifies as an R&D expense.

Question 36

West, Inc., made the following expenditures relating to Product Y:

1. Legal costs to file a patent on Product Y—$10,000. Production of the finished product would not have been undertaken without the patent.
2. Special equipment to be used solely for development of Product Y—$60,000. The equipment has no other use and has an estimated useful life of four years.
3. Labor and material costs incurred in producing a prototype model—$200,000.
4. Cost of testing the prototype—$80,000.

What is the total amount of costs that will be expensed when incurred?

$280,000

$295,000

$350,000

$340,000

Answer 36

$340,000

The $10,000 patent cost will be capitalized as an intangible asset in accordance with the provisions of FASB ASC 350-30-25-1.

The remaining costs are considered to be research and development costs, as defined in FASB ASC 730-10-55-1.

Special developmental equipment and prototypes are addressed in FASB ASC 730-10-55-1. They are considered to be research and development costs which “shall be charged to expense when incurred.”

Thus the entire $340,000 ($60,000 + $200,000 + $80,000) would be expensed.

Question 37

Answer 37

$150,000

R&D (research and development) should be expensed if doubt exists as to whether any future benefits will be received, so both projects should be expensed. Miley should report $150,000 ($100,000 + $50,000) as R&D expense in its income statement for the year.

Question 38

During 20X1, Orr Co. incurred the following costs:

Research and development services performed by Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes
and 200,000
Testing in search for new products or process alternatives 175,000

In its 20X1 income statement, what should Orr report as research and development expense?

$200,000

$350,000

$525,000

$150,000

Answer 38

$525,000

Each of the costs incurred by Orr Co. is cited in FASB ASC 730-10-55-1 as examples of items that would be considered research and development expenses.

Orr’s 20X1 research and development expense
= $150,000 + $200,000 + $175,000
= $525,000

Question 39

Brill Co. made the following expenditures during 20X1:

Costs to develop computer software
for internal use in Brill’s general
management information system $100,000
Costs of market research activities 75,000

What amount of these expenditures should Brill report in its 20X1 income statement as research and development expenses?

$100,000

$0

$175,000

$75,000

Answer 39

$0

Neither of these costs meets the definition of research and development cost:

• Development of software for internal use is likely excluded from the applicability of FASB ASC 730-10-15-5.
• Marketing research is specifically excluded from the definition of research and development by FASB ASC 730-10-15-4.

Research and development costs are defined as the “planned research…for new knowledge” and “the translation of research findings…into a…design for a new product or process.” (FASB ASC 730-10-20)

Question 40

Brand Co. incurred the following research and development project costs at the beginning of the current year:

1. equip purchased for current and future projects $100,000
2. equip purchased for current projects only 200,000
3. R&D salaries for current project 400,000

Equipment has a 5-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31?

$0

$140,000

$60,000

$20,000

Answer 40

$20,000

Only the equipment that has an alternative use is capitalized and depreciated. The depreciation is $100,000 ÷ 5 = $20,000. The other expenditures should be expensed immediately.

Question 41

STARt SOFTWARE COSTS

Answer 41

a

Question 42

• Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally.
• The package was completed during the year and is expected to have a 4-year useful life. Yellow has a policy of taking a full-year’s amortization in the first year.
• After the development stage, $50,000 was spent on training employees to use the program.

What amount should Yellow report as an expense for the current year?

$6,012,500

$6,050,000

$2,000,000

$1,600,000

Answer 42

Costs incurred to develop software for internal use are capitalized after the application development stage is reached (in accordance with FASB ASC 350-40-35-4). The costs are amortized over the benefited period—four years in this case. Costs incurred prior to the application development stage are expensed, as are training costs incurred after the development stage. Therefore, the amount expensed is:

Pre-development stage $4,000,000
Amortization of capitalized costs:
$8,000,000 / 4 years 2,000,000
Training costs 50,000
Total expenses $6,050,000

Question 43

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until____ has been established for the product.

Technological feasibility is established on completion of a detailed program __or completion of a ___model.

Answer 43

technological feasibility

design , working

Question 44

After technological feasibility has been established, all software production costs are __and subsequently reported at the lower of unamortized cost or net realizable value.

Capitalized computer software costs are __on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

Answer 44

capitalized

amortized

Question 45

Answer 45

The capitalized costs here are generally the costs incurred after attaining technological feasibility.

Hence, the coding and testing costs of $24,000 and $20,000 are capitalized, but also the costs of the product masters for training of $15,000.

Thus, a total of $59,000 would be capitalized, and the rest would be expensed as research and development.

Question 46

• On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over five years.
• The carrying value of the software costs on January 1, year 3, was $60,000.
• As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000.

What amount should the company expense related to the software costs for the year ended December 31, year 3?

$18,400

$20,000

$45,000

$37,000

Answer 46

$45,000

Software production costs are capitalized and reported at the lower of unamortized cost or net realizable value (NRV) once technological feasibility has been met.

The unamortized cost is $60,000 and the NRV is $15,000 ($23,000 − $8,000); therefore, the software should be written down by $45,000 (i.e., expensed) to the NRV of $15,000.

Question 47

• Madison Limited is in need of new transaction processing software to be used internally. Madison decided to develop this software themselves and spent $7,914,000 during 20X5 developing its new software package.
• Of this amount, $2,934,000 was spent before it was at the application development stage. The package was completed during 20X5 and is expected to have a 3-year useful life.
• Madison has a policy of taking a full year’s amortization in the first year.
• After the development stage, $31,000 was spent on training employees to use the program.

What amount should Madison report as an expense for the current year?

$2,934,000

$1,660,000

$4,594,000

$4,625,000

Answer 47

4,625,000
Costs incurred to develop software for internal use are capitalized after the application development stage is reached The costs are amortized over the benefited period—3 years in this case. Costs incurred prior to the application development stage are expensed, as are training costs incurred after the development stage. Therefore, the amount expensed is:

Pre-development stage costs $2,934,000
Amortization of capitalized costs:
$4,980,000* ÷ 3 years 1,660,000
Training costs 31,000
Total expenses $4,625,000

Costs incurred to develop software for internal use are capitalized after the application development stage is reached The costs are amortized over the benefited period—3 years in this case. Costs incurred prior to the application development stage are expensed, as are training costs incurred after the development stage. Therefore, the amount expensed is:

Pre-development stage costs $2,934,000
Amortization of capitalized costs:
$4,980,000* ÷ 3 years 1,660,000
Training costs 31,000
Total expenses $4,625,000

Question 48

On December 31, 20X4, Jefferson Corporation had capitalized costs for a new computer software product with an economic life of 4 years.

Sales for 20X5 were 27% of expected total sales of the software. On December 31, 20X5, the software had a net realizable value equal to 80% of the capitalized cost.

What percentage of the original capitalized cost should be reported as the net amount on Jefferson’s December 31, 20X5, balance sheet?

80%

75%

73%

50%

Answer 48

73%

FASB ASC 985-20-35-1 provides: “The annual amortization shall be the greater of the amount computed using (a) The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on.”

Ratio of current to total revenues (given) = 27%

Straight-line rate = 1/4 = 25%

The greater of these, 27%, would be used in computing 20X5 amortization, leaving a net amount of 73% (100% − 27%) to be shown on Jefferson’s December 31, 20X5, balance sheet.

Question 49

FASB ASC 985-20-35-1 provides: “The annual amortization shall be the greater of the amount computed using (a) The ratio that current ___for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on.”

Answer 49

gross revenues

Question 50

XL Software Company is developing a new software product. During 20X1, monthly costs of the project were $100,000 per month. A detailed program design was completed on August 31. How much of the development costs would be capitalized?

$0

$400,000

$800,000

$1,200,000

Answer 50

$400,000

Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses. The costs after August 31 (4 × $100,000) would be capitalized.

Question 51

Bytter Tools began developing a software program it intends to market and sell to its customers. The project began on April 15, 20X2, and the coding was completed on July 31, 20X2, at a cost of $380,000. The software testing was completed on October 14, 20X2, at a cost of $145,000. The company achieved technological feasibility on November 2, 20X2, at which time the company began producing product masters at a cost of $207,000. An additional feature was added by December 15, 20X2, at a cost of $39,000.

What amount should the company report for the total research and development expense for the year ended December 31, 20X2?

1. $670,000
2. $732,000
3. $771,000
4. $525,000

Answer 51

$525,000

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value.

The company should report $525,000 ($380,000 + $145,000) for research and development expense.

Question 52

A corporation is in the final stages of developing a computer software program that will be sold to the general public. The company’s costs related to the software are as follows:

1. Development of a working model of the software $4 million
2. Customer support and training 2 million
3. Product master production 1 million

The costs associated with the product master production were incurred after the establishment of technological feasibility. What amount, if any, should the corporation expense against earnings?

1. $4 million
2. $5 million
3. $0
4. $6 million

Answer 52

$6 million

1. All of the costs an entity incurs to develop the technological feasibility of computer software are expensed ($4 million + $2 million = $6 million).
2. Technological feasibility has occurred when the software is ready to be sold or leased to customers. Customer support and maintenance costs are also expensed.
3. The costs of producing product masters after technological feasibility is achieved are capitalized.

Question 53

What expenses and/or losses result from the development and production of software to be sold or leased?

Research and development expense

Impairment loss

Amortization expense

All of the answer choices are possible expenses or losses.

Answer 53

All of the answer choices are possible expenses or losses.

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.

After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

An impairment loss would be recognized if the net realizable value was determined to be less than the amortized cost.

Question 54

• On December 31, 20X1, Bit Co. had capitalized costs for a new computer software product with an economic life of 5 years. Sales for 20X2 were 30% of expected total sales of the software.
• On December 31, 20X2, the software had a net realizable value equal to 90% of the capitalized cost.

What percentage of the original capitalized cost should be reported as the net amount on Bit’s December 31, 20X2, balance sheet?

80%

90%

72%

70%

Answer 54

70%

FASB ASC 985-20-35-1 provides: “The annual amortization shall be the greater of the amount computed using (a) The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on.”

Ratio of current to total revenues (given) = 30%

Straight-line rate = 1/5 = 20%

The greater of these, 30%, would be used in computing 20X2 amortization, leaving a net amount of 70% (100% − 30%) to be shown on Bit’s December 31, 20X2, balance sheet.

Question 55

Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years. What amount of expense should Standard report on its income statement for the first full year?

$3,333,333

$0

$2,000,000

$10,000,000

Answer 55

$3,333,333

Costs incurred to develop software for internal use are capitalized after the application development stage is reached (in accordance with FASB ASC 350-40-35-4). The costs are amortized over the benefited periods—three years in this case.

Question 56

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?

$270,000

$200,000

$250,000

$320,000

Answer 56

$200,000

• The three stages for internally developed software are the preliminary project stage, the application development stage, and the post-implementation-operation stage.
• All costs in this stage, including the investigation the feasibility of developing its own software, should be expenses.
• Costs incurred in the application development stage, including writing the code, are usually capitalized, except for training costs, which are expensed.
• The company should only capitalize the $200,000 paid to the developers.

Question 57

Internal and external costs incurred to develop internal-use computer software during the application development stage shall be __.

Costs to develop or obtain software that allows for access to or conversion of old data by new systems shall also be __. Training costs are not internal-use software development costs and, if incurred during this stage, shall be __as incurred.

a. Capitalization of costs begins when the __project stage is complete. If it becomes probable that the software project will no longer be completed and placed in service, no further costs should be capitalized.
b. Capitalization shall ___no later than the point at which a computer software project is substantially complete and ready for its intended use
c. When an entity replaces existing software with new software, unamortized costs of the old software shall be __when the new software is ready for its intended use.

Answer 57

capitalized

capitalized, expensed

preliminary

cease

expensed

Question 58

The three stages for internally developed software are the __project stage, the ___development stage, and the ___-___operation stage

Answer 58

preliminary

application

post-implementation

Question 59

Costs incurred to develop software for internal use are capitalized after the __development stage is reached

Answer 59

application

Question 60

• A company began developing computer software to be sold as a separate product on January 1, year 1. During the planning, coding, and testing phases, the company incurred $1,300,000 of costs. On June 30, year 1, the product was determined to be technologically feasible.
• The company began producing product masters of the software and incurred an additional $750,000 of costs from July 1, year 1, through September 30, year 1.
• After the software was available for release on October 1, year 1, the company incurred an additional $275,000 of costs relating to maintenance and customer support.

What amount of software-related costs should be capitalized?

1. $2,050,000
2. $275,000
3. $750,000
4. $1,300,000

Answer 60

$750,000

• Costs for computer software to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.
• After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value.
• Maintenance and customer support costs are not production costs, and are expensed.
• The company should capitalize $750,000 (for producing product masters of the software) in software-related costs.

Question 61

If a computer software arrangement does not require significant production, modification, or customization of software, when will revenue be recognized?

All of the answer choices are necessary.

When the vendor’s fee is fixed or determinable, and collectibility is probable

When delivery has occurred

When persuasive evidence of an arrangement exists

Answer 61

All of the answer choices are necessary.

If a computer software arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of these criteria are met.

Question 62

If the software arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of the following criteria are met:

a. Persuasive evidence of an ___exists.
b. ___has occurred.
c. The vendor’s fee is fixed or ___.
d. Collectibility is __.

Answer 62

arrangement

delivery

determinable

probable

Question 63

On January 1, 20X6, Trigogistics Corporation capitalized $249,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over 6 years.

As of December 31, 20X9, the estimated future gross revenue to be generated from the sale of the software is $107,000, and the estimated future cost of disposing of the software is $16,900.

What amount should Trigogistics expense related to the software costs for the year ended December 31, 20X9?

1. $41,500
2. $7,100
3. $16,900
4. $17,500

Answer 63

$41,500

• Software production costs are capitalized and reported at the lower of unamortized cost or net realizable value (NRV) once technological feasibility has been met.
• The unamortized cost is $83,000 at the end of 20X9 ($249,000 – (annual amortization of $41,500 × 4 years)). The NRV is $90,100 ($107,000 − $16,900).
• Since the amortized cost of $83,000 is less than the NRV of $90,100, the software expense for 20X9 would be the annual amortization expense of $41,500. (The software does not need to be written down.)

Question 64

XL Software Company is developing a new software product. During 20X1, monthly costs of the project were $100,000 per month. A detailed program design was completed on August 31. How much of the development costs would be expensed as research and development expenses?

$800,000

$1,200,000

$400,000

$0

Answer 64

$800,000

1. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product.
2. Technological feasibility is established on completion of a detailed program design or completion of a working model.
3. Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses.

Question 65

BEGIN SUBSEQUENT EVENT

Answer 65

a

Question 66

Subsequent events take place:

after the formal balance sheet date.

after the balance sheet is issued.

Both I and II

II only

Neither I nor II

I only

Answer 66

I only

FASB ASC 855-10-20 defines subsequent events: “Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.”

Question 67

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events:

1. The first type consists of events or transactions that provide additional evidence about conditions that ____ at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
2. The second type consists of events that provide evidence about conditions that ___ ____ at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).

Answer 67

existed

did not exist

Question 68

• During 20X1, Leader Corp. sued Cape Co. for patent infringement. On December 31, 20X1, Leader was awarded a $500,000 favorable judgment in the suit.
• On that date, Cape offered to settle out of court for $300,000 and not appeal the judgment. In February 20X2, after the issuance of its 20X1 financial statements,
• Leader agreed to the out-of-court settlement and received a certified check for $300,000. In its 20X1 financial statements, how should Leader have reported these events?

1. As a disclosure in the notes to the financial statements only
2. As a receivable and deferred credit of $300,000
3. It should not be reported in the financial statements.
4. As a gain of $300,000

Answer 68

As a disclosure in the notes to the financial statements only

As of December 31, 20X1, the gain from the infringement action (regardless of whether the amount is $500,000 or $300,000) is a gain contingency because the settlement offer could be revoked or rejected and an appeal could still occur

Question 69

An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that __ at the date of the ___, including the estimates inherent in the process of preparing financial statements. The following are examples of recognized subsequent events:

1. If the events that gave rise to ___had taken place before the balance sheet date and that __is settled, after the balance sheet date but before the financial statements are issued or are available to be issued,
2. Subsequent events affecting the realization of assets, such as receivables and inventories or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time.

Answer 69

existed , balance sheet

litigation

receivables, inventories

Question 70

Which of the following subsequent events must not be recognized in the financial statements?

1. The events that gave rise to litigation took place before the balance sheet date and that litigation is settled, after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts.
2. Loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued
3. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
4. Shortly before financial statements are issued, the actual loss of plant or inventories as a result of fire or natural disaster that occurred before the balance sheet date is determined to be greater than the loss that was originally estimated.

Answer 70

Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued

The correct answer is “loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued.”

An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.

Question 71

Some events provide evidence regarding conditions that did not exist on the balance sheet date, but arose subsequently and do not require an adjustment of the balance sheet. Assuming that the item is material, an example of a subsequent event that requires adjustment is:

loss on account receivable resulting from customer’s bankruptcy.

sale of bonds.

stock splits.

loss from inventory fire.

Answer 71

loss on account receivable resulting from customer’s bankruptcy.

The loss on account receivable resulting from a customer’s bankruptcy relates to an account that existed on the balance sheet date and an adjustment is needed.

Question 72

Which of the following types of events must be recognized in the financial statements?

1. Neither events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date nor events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
2. Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date
3. Events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
4. Both events that provide evidence about conditions that did not exist at the date of the balance sheet and events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements

Answer 72

Events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements

Under FASB ASC 855-10, there are two types of subsequent events:

The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).

The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).

Question 73

1. Carl Company was a defendant in a lawsuit brought against it by an employee. By the end of 20X1, the lawsuit had proceeded to the point where Carl Company determined a loss to be probable.
2. The amount of the loss can be reasonably estimated and so Carl Company recorded a contingent liability related to the lawsuit. In January of 20X2, the judge determined the damages to be paid by Carl Company.

How should this event be reported by Carl Company in 20X1?

The event should be neither accrued nor disclosed.

The event should both be accrued and disclosed.

The event should be accrued but not disclosed.

The event should not be accrued but it should be disclosed.

Answer 73

The event should both be accrued and disclosed.

The event occurring in January provided new information about a financial statement item that existed at the end of the prior year. Therefore, the effect of this event needs to be recorded in the financial statements to be issued later in the year.

Because the amount of damages that must be paid is now known, an entry should be made to adjust the litigation loss and the litigation liability. Additional information about this event should also be disclosed in the notes to the financial statements

he event occurring in January provided new information about a financial statement item that existed at the end of the prior year. Therefore, the effect of this event needs to be recorded in the financial statements to be issued later in the year.

Because the amount of damages that must be paid is now known, an entry should be made to adjust the litigation loss and the litigation liability. Additional information about this event should also be disclosed in the notes to the financial statements.

Question 74

An entity must disclose the __through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were __or the date the financial statements were __to be issued.

Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity shall disclose the following:

a. The __of the event
b. An ___of its financial effect, or a statement that such an estimate cannot be made

Answer 74

date , issued , avail

Nature

Estimate

Question 75

An entity shall consider supplementing the historical financial statements with __financial data. Occasionally, a nonrecognized subsequent event may be so significant that disclosure can best be made by means of __financial data. Such data shall give effect to the event as if it had occurred on the balance sheet date.

Under certain circumstances an entity may have to reissue financial statements. An entity must not recognize events occurring between the time the financial statements were issued or available to be issued and the time the financial statements were reissued unless the adjustment is required by GAAP or regulatory requirements. T/F

Answer 75

pro forma , pro forma

True

Question 76

Some events provide evidence regarding conditions that did not exist on the balance sheet date but arose subsequently and do not require an adjustment of the balance sheet. Other types of subsequent events do require an adjustment to the financial statements. Assuming that the item is material, an example of a subsequent event that requires adjustment is:

a settlement of an IRS judgment in which the final amount due is determined.

a business combination.

the issuance of additional shares of common stock.

a loss from the damage caused by an earthquake.

Answer 76

a settlement of an IRS judgment in which the final amount due is determined.

The loss on account receivable resulting from a customer’s bankruptcy relates to an account that existed on the balance sheet date and an adjustment is needed. FASB ASC 855-10 provides guidance as to subsequent events that require recognition:

“An entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements…Subsequent events affecting the realization of assets, such as receivables and inventories or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time. For example, a loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued ordinarily will be indicative of conditions existing at the balance sheet date. Thus, the effects of the customer’s bankruptcy filing shall be considered in determining the amount of uncollectible trade accounts receivable recognized in the financial statements at the balance sheet date.” (FASB ASC 855-10-25-1 and 55-1) (Emphasis added)

The other three answer choices did not exist as of the balance sheet date and therefore would not require a financial statement adjustment. If material, they would require a note disclosure.

The loss on account receivable resulting from a customer’s bankruptcy relates to an account that existed on the balance sheet date and an adjustment is needed. FASB ASC 855-10 provides guidance as to subsequent events that require recognition:

“An entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements…Subsequent events affecting the realization of assets, such as receivables and inventories or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time.

Question 77

Answer 77

Loss on tax settlement 55,000
Tax liability 55,000

The event occurring on February 14, 20X8, provided new information about a financial statement item that existed at the end of 20X7. Therefore, the effect of this event needs to be recorded in the financial statements to be issued in March of 20X8.

Because the amount of tax Ballard must pay increased, an additional loss of $55,000 ($535,000 − $480,000) needs to be recorded along with an additional liability of $55,000. Additional information about this event should also be disclosed in the notes to the financial statements.

Question 78

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. When are financial statements considered available to be issued?

When either they are complete in a form and format that complies with GAAP or all approvals necessary for issuance have been obtained

When they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained

When all approvals necessary for issuance have been obtained

When they are complete in a form and format that complies with GAAP

Answer 78

When they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained

1. Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.
2. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained, for example, from management, the board of directors, and/or significant shareholders.
3. An entity that has a current expectation of widely distributing its financial statements to its shareholders and other financial statement users must evaluate subsequent events through the date that the financial statements are issued

Question 79

Town, Inc., is preparing its financial statements for the year ended December 31, 20X1. On January 5, 20X2, prior to the issuance of the financial statements, Town redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds. What is the appropriate reporting requirement?

Neither accrual nor disclosure

Both accrual and disclosure

Disclosure only

Accrual only

Answer 79

Disclosure only

Information which becomes known after the balance sheet date, but before the financial statements are issued, should be disclosed to keep the financial statements from being misleading. The gains or losses associated with the redemption and issuance of the bonds would be reported and disclosed in the 20X2 financial statements.

Question 80

Which of the following subsequent events must be recognized in the financial statements?

1. Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
2. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
3. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
4. Loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued

Answer 80

Loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued

1. The correct answer is “loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued.”
2. An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.

Question 81

On March 21, Year 2, a company with a calendar year-end issued its Year 1 financial statements. On February 28, Year 2, the company’s only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company’s Year 1 financial statements?

1. Accrue and disclose the property loss with no accrual or disclosure of the business disruption loss
2. Provide no information related to the storm losses in the financial statements until losses and expenses become fully known
3. Accrue and disclose the property loss and additional business disruption losses in the financial statement
4. Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements

Answer 81

Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements

An entity must not recognize events that arose after the balance sheet date but before the financial statements are issued. One of the events specifically mentioned in FASB ASC 855-10-55-2 is the loss of plant as a result of fire or other natural disaster. However, this event must be disclosed in the notes to the financial statements.

FASB ASC 855-10-55-2 states: “The following are examples of nonrecognized subsequent events addressed in [FASB ASC] 855-10-25-3:

“Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
“A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued ([FASB ASC] 805 requires specific disclosures in such cases.)
“Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
“Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
“Losses on receivables resulting from conditions (such as a customer’s major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
“Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
“Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.”

ASB ASC 855-10-55-2 states: “The following are examples of nonrecognized subsequent events addressed in [FASB ASC] 855-10-25-3:

“Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued

Question 82

In year 1, a corporation incurred $3,500,000 of costs related to the development of a new software product. Of these costs, $1,000,000 was incurred after technological feasibility was established. The product development was completed and the product was available for sale to customers early in year 2. The corporation estimated that revenues from the sale of the new product would be $1,200,000 over five years. What amount of expense should the company report for year 1?

$3,500,000

$2,500,000

$700,000

$500,000

Answer 82

$2,500,000

Once feasibility is established, internally developed software costs can be capitalized. Therefore, of the $3.5 million in costs incurred in year 1, the first $2.5 million ($3.5 million total − $1 million post-feasibility) would be expensed as incurred in year 1 and the remaining $1 million would be capitalized and amortized beginning once the product was ready for sale in year 2.

Question 83

On January 1, year 1, a company appropriately capitalized $40,000 of software development costs for computer software to be sold. The company estimated an economic life of 2 years for the software and believes that it will generate $500,000 in total software sales. It had software sales of $300,000 in year 1. What amount of software amortization expense, if any, should the company report in its financial statements for the year ended December 31, year 1?

$0

$24,000

$40,000

$20,000

Answer 83

Capitalized computer software costs are amortized on the basis of current and future revenue with the minimal amortization being equal to straight-line amortization over the remaining life. Through the first year of the software’s life, the company has earned 60% ($300,000 ÷ $500,000) of the revenue expected to be generated by the software. Year 1 amortization will then be $24,000 (60% × $40,000).

Question 84

Answer 84

The capitalized costs here are generally the costs incurred after attaining technological feasibility. Hence, the coding and testing costs of $24,000 and $20,000 are capitalized, but also the costs of the product masters for training of $15,000. Thus, a total of $59,000 would be capitalized, and the rest would be expensed as research and development.

Question 85

Answer 85

The only cost that is associated with a future benefit is the $44,000 in coding and testing costs incurred after feasibility was established. This amount would be capitalized as software costs on the balance sheet.

The remaining $25,000 costs represent research and development costs. These costs relate to activities identified with the period prior to the beginning of commercial production and feasibility and are expensed as incurred because their ability to provide future benefits is still uncertain. Once feasibility is reached, the costs are capitalized.

Question 86

Answer 86

Question 87

If a computer software arrangement does not require significant production, modification, or customization of software, when will revenue be recognized?

When persuasive evidence of an arrangement exists

All of the answer choices are necessary.

When the vendor’s fee is fixed or determinable, and collectibility is probable

When delivery has occurred

Answer 87

All of the above.

If a computer software arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of these criteria are met.

Question 88

On January 1, 20X6, Trigogistics Corporation capitalized $249,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over 6 years. As of December 31, 20X9, the estimated future gross revenue to be generated from the sale of the software is $107,000, and the estimated future cost of disposing of the software is $16,900.

What amount should Trigogistics expense related to the software costs for the year ended December 31, 20X9?

$17,500

$7,100

$41,500

$16,900

Answer 88

Software production costs are capitalized and reported at the lower of unamortized cost or net realizable value (NRV) once technological feasibility has been met. The unamortized cost is $83,000 at the end of 20X9 ($249,000 – (annual amortization of $41,500 × 4 years)). The NRV is $90,100 ($107,000 − $16,900).

Since the amortized cost of $83,000 is less than the NRV of $90,100, the software expense for 20X9 would be the annual amortization expense of $41,500. (The software does not need to be written down.)

Question 89

What expenses and/or losses result from the development and production of software to be sold or leased?

Amortization expense

Impairment loss

All of the answer choices are possible expenses or losses.

Research and development expense

Answer 89

All of the above.

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.

After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

An impairment loss would be recognized if the net realizable value was determined to be less than the amortized cost.

Question 90

XL Software Company is developing a new software product. During 20X1, monthly costs of the project were $100,000 per month. A detailed program design was completed on August 31. How much of the development costs would be expensed as research and development expenses?

$0

$400,000

$800,000

$1,200,000

Answer 90

800,000

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.

Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses.

Question 91

On January 1, year 1, a company has capitalized software costs of $1,200,000 related to software that it intends to begin selling in year 1. The company estimates that the software has an economic life of four years, and will generate $3,000,000 of sales and leasing revenue over the next four years. In year 1, the company earned $1,000,000 in sales and leasing revenue related to the software. What amount of expense should be recognized from amortizing the software costs for the year ended December 31, year 1?

$300,000

$400,000

$1,200,000

$350,000

Answer 91

Capitalized software costs are amortized based on their current and future revenue, subject to at least matching straight-line amortization in the earlier years. In this case, the company has recorded 1/3rd ($1M ÷ $3M total) of the revenue related to the software. Therefore, the software has been used for 1/3rd of its life and amortization should be $400,000 ($1.2M × 1/3).

Note: The $400,000 exceeds straight-line amortization of $300,000 ($1.2M ÷ 4 years) so meets the floor for recognition.

Question 92

Answer 92

DR Loss on tax settlement 55,000
CR Tax liability 55,000

The event occurring on February 14, 20X8, provided new information about a financial statement item that existed at the end of 20X7. Therefore, the effect of this event needs to be recorded in the financial statements to be issued in March of 20X8.

Because the amount of tax Ballard must pay increased, an additional loss of $55,000 ($535,000 − $480,000) needs to be recorded along with an additional liability of $55,000. Additional information about this event should also be disclosed in the notes to the financial statements.

Question 93

Little Corp. is preparing its December 31 current-year financial statements, which will be issued March 15 of the subsequent year. On March 1 of the subsequent year, Little issued 50,000 shares of its $1 par common stock for $40 per share. Little incurred transaction costs of $100,000 related to the stock issuance. How should Little report the stock issuance on its December 31 current-year financial statements?

As a note disclosure only

As an increase of paid-in capital of $2,000,000

As an increase of paid-in capital of $1,900,000

As an increase of paid-in capital of $50,000

Answer 93

As a note disclosure only

The correct answer is “as a note disclosure only.” Since the stock issuance occurred after the balance sheet date, which is December 31, the issuance is considered a subsequent event. According to FASB ASC 855-10-25, if a subsequent event provides additional information about conditions that existed at the date of the balance sheet, the entity should recognize the effects of the event in its financial statements. However, if a subsequent event does not provide additional information about conditions that existed at the date of the balance sheet, no adjustments should be made to the financial statements, and a note disclosure is required.

In this case, the stock issuance does not provide any additional information about conditions that existed at the date of the balance sheet, since it occurred after the balance sheet date. Therefore, Little Corp. should disclose the stock issuance in a note to the financial statements, but it should not adjust its December 31 current-year financial statements for the issuance.

The other answer choices (as an increase of paid-in capital of $50,000, $1,900,000, or $2,000,000) are incorrect. The current year’s financial statements should not be adjusted since the stock issuance occurred after the balance sheet date