Section 3G,H,I,J Flashcards
G - Reciprocal H -R&D Cost I - Software Cost J - Subsequent Event
START NONRECIPROCAL TRANSFER
a
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?
- Retained earnings will be debited for $444,000 as part the entries to record the property dividend.
- Gourmet will report a loss on the write-down of $124,000 on the assets being distributed in the property dividend.
- Gourmet will value the dividend at $444,000.
- The assets do not need to be written down prior to being distributed.
5.
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).
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.
noncash , nonreciprocal, FV, unrealized
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.
nonreciprocal
nonmonetary
fair value
stockholder, dispostion
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.
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.
here are three exceptions cases in which a nonmonetary exchange should be recorded based on the recorded amount (carryover amount) rather than fair value:
- Fair value is not __
- Exchange transaction to facilitate sales to __
- 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
determinable
customers
commercial substance
book
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
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.
___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.
Involuntary conversions
LIFO
START R&D COSTS
a
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
Quality control during commercial production, including routine testing of products
“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)]):
- “Laboratory __aimed at discovery of new knowledge
- “Searching for __of new research findings or other knowledge
- “Conceptual formulation and design of possible product or process ___
- “Testing in search for or ___of product or process alternatives
- “___of the formulation or design of a product or process
- “Design, construction, and testing of pre-production prototypes and models
- “Design of tools, jigs, molds, and dies involving new technology
- “Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the enterprise for commercial production
- “___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
- “___used to facilitate research and development or components of a product or process that are undergoing research and development activities
research
applications
alternatives
evaluation
modification
True
True
Engineering
Tools
Research and development (R&D) costs are identified in five categories.
- __,__,___ used in R&D activities
- __l engaged in R&D activities
- ___purchased or developed for use in R&D activities
- ___services acquired and used in conjunction with R&D activities
- ___costs reasonably allocable to R&D activities
Materials/equipment/faciliteis
Personnel
Intangibles
Contract
Indirect
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.
capitalized
balance sheet
Disclosure
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
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)
$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
- 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
$300,000
- 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 $300,000 ($200,000 + $100,000) for research and development expense.
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.
technological feasibility , technological feasibility
technological feasibility . capitalized
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
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.”
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
$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
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
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:
- Engineering follow-through in an early phase of commercial production
- Quality control during commercial production including routine testing of products
- Troubleshooting in connection with breakdowns during commercial production
LOT MORE
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:
- Engineering follow-through in an early phase of commercial production
- Quality control during commercial production including routine testing of products
- Troubleshooting in connection with breakdowns during commercial production
- Routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product
- Adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity
- Seasonal or other periodic design changes to existing products
- Routine design of tools, jigs, molds, and dies
- 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
- Legal work in connection with patent applications or litigation, and the sale or licensing of patents
h
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
$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
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
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.
Stam Co. incurred the following research and development project costs during the current year:
- equip purchased for current and future projects 100k
- equip purchased for current projects only 200k
- R&D salaries for current projects 400k
- Legal fees to obtain patent 50,000
- 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
$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:
- Materials, equipment, and facilities used in R&D activities
- Personnel engaged in R&D activities
- Intangibles purchased or developed for use in R&D activities
- Contract services acquired and used in conjunction with R&D activities
- Indirect costs reasonably allocable to R&D activities
Which of the following costs should not be included in research and development?
Administrative costs
Personnel costs
Facility costs
Indirect costs
Administrative costs
Administrative costs are not considered to be research and development (R&D) costs. R&D costs can be classified into five categories:
- Materials, equipment, and facilities used in R&D activities
- Personnel engaged in R&D activities
- Intangibles purchased or developed for use in R&D activities
- Contract services acquired and used in conjunction with R&D activities
- Indirect costs reasonably allocable to R&D activities
$150,000
Which of the following statements concerning patents is correct?
- Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life.
- 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.
- 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.
- Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over 17 years.
Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent’s remaining economic life.
- 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.”
- 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.
- FASB ASC 350-30-35-14 requires that intangibles subject to amortization also be assessed for impairment.
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
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.
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.
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.
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
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.
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
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.
$275,000
- 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.
- 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.
- 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).