Technical Accounting & Reporting Flashcards
What kind of intangibles are patents, copyrights, and franchise?
Specifically identifiable
What kinds of intangible is goodwill?
Not specifically identifiable
Criteria of having an indefinite life
No contractual, legal, economic, or other factors that limit the useful life
What is the carrying amount of an intangible asset with an indefinite life?
Cost incurred to acquire - impairment
T/F amortization is included in intangible assets
F - intangibles don’t have a useful life to amortize
How is goodwill recognized as a product of a business combination?
Asset on BS
How is goodwill that is generated internally capitalized?
It is not
Acquisition method goodwill
excess of an acquired entity’s FV over the FV of the entity’s net assets
Equity method goodwill
excess of the stock price over the FV of net assets acquired
How is goodwill maintained?
costs to maintain, develop, or restore goodwill are expensed
How often are intangible assets with indefinite useful lives tested?
Annually
impairment
fair value less the carrying amount
how is impairment loss recorded?
component of income from continuing operations before income taxes
T/F restoration of the previously recognized impairment loss is allowed until the asset is held for disposal
F- restoration of previously recognized impairment loss is prohibited, unless asset is held for disposal
What level is goodwill impairment calculated at?
reporting unit level
How are R&D costs recorded?
Expensed
How are materials, equipment or facilities that have alternative uses recorded?
capitalized and depreciated over the useful lives
How are research and development costs undertaken on behalf of others under a contractual agreement treated?
cost of sales by the provider
How are in process R&D costs associated with the purchase of one company by another company treated?
capitalized
T/F These items are treated as R&D
Routine periodic design changes
marketing research
quality control testing
reformulation of a chemical compound
depreciation on equipment used
consulting fees paid to outsiders
Routine periodic design changes - F
marketing research - F
quality control testing -F
reformulation of a chemical compound - F
depreciation on equipment used - T
consulting fees paid to outsiders -T
how are computer software development costs that are incurred until technological feasibility incurred recorded?
Expense
How are items not considered research or development recorded?
Product cost or selling and admin
how are computer software development costs that are incurred after technological feasibility incurred recorded?
Capitalize
technological feasibility
completion of a detailed program design or working model
% of revenue
total capitalized amount x (Current gross revenue for period/ total projected gross revenue for product)
Straight line
total capitalized amount x (1/estimate of economic life)
How is amortization of capitalized software costs recorded?
greater of % of revenue vs straight line
inventory costs for software
costs incurred to actually produce the product are product costs charged to inventory
when does amortization begin for software costs?
once product is released for sale
Expense or capitalize?
Direct cost of materials
training and maintenance
cost of employees directly associated
preliminary project state
interest costs incurred
Direct cost of materials - C
training and maintenance - E
cost of employees directly associated - C
preliminary project state - E
interest costs incurred - C
how should capitalized costs be amortized?
Straight line basis
recognition for software previously developed for internal use being sold to outsiders?
applied first to carrying amount of software and then recognized as revenue once carrying amount reaches 0
Revenue recognition steps
identify contract
identify separate performance obligations in the contract
determine transaction price
allocate the transaction price to the separate performance obligations
recognize revenue
Construction contract revenue is recognized over time if either ___________ or ___________ is met
entity’s performance creates or enhances value
entity’s performance doesn’t create an asset with alternative use
Annual service contract, subscription services, etc are examples of
creation or enhancing value
Input method (over time)
% if estimated total income - cost now to total costs
CIP account
construction costs and estimated gross profit are accumulated here
Billings
costs accumulated
Current asset accounts
Receivables
costs and estimated earnings of uncompleted contracts in excess of progress billings (haven’t billed out yet)
Current liability accounts
progress billings in excess of cost and estimated earnings on uncompleted contracts (paid in advance)
Journal entry for estimated gross profit earned in each period
DR. CIP
CR. Gross profit
Step 1: Calculate Gross profit of completed contract
Contract price - Estimated total cost
Step 2: % of completion
Total cost to date/ Total estimated cost of contract
Step 3: Compute gross profit earned (PTD)
Step 1 X Step 2
Step 4: Compute gross profit earned for current year
Profit to Date (PTD) at current Year End -PTD at beginning of period
how are losses recorded?
recorded immediately
how are losses recorded when there were previously profits?
reverse previously recorded revenue to record total current period loss
LT construction contracts recognized at a point in time
revenue and gross profit are recognized when the contract is complete
journal entry to record costs incurred
Dr. CIP
Cr. materials, cash
journal entry to record payments received
Dr. Cash
Cr. AR
journal entry to record estimated GP during construction (recognizing over time)
Dr. Cost of LT construction contract
Dr. CIP
Cr. Revenue from LT construction contract
journal entry to record estimated GP during construction (recognizing at a point in time)
N/A
CIP > Progress Billings
Current asset; cost of uncompleted contracts in excess of progress billings
Progress Billings > CIP
Current liability; progress billings on uncompleted contracts in excess of costs
What makes up CIP
cost incurred + estimated gross profit earned to date*
*only cost incurred for revenue recorded at a point in time
journal entry to close construction accounts (over time)
Dr. Progress billings
Cr. CIP
journal entry to close construction accounts (at a point in time)
Dr. Progress billings
Cr. Revenue
Dr. Cost of LT construction contract
Cr. CIP
obligation to repurchase an asset
forward
right to repurchase an asset
call
obligation to repurchase the asset at the customers request
put
Forward/Call Option contract:
repurchase price < original selling price
lease
Forward/Call Option contract:
repurchase price > original selling price
financing arrangement
journal entry to record a financing arrangement
Dr. Cash
Cr. Financial liability
journal entry to record the interest on a financing arrangement
Dr. Interest
Cr. Financial liability
journal entry to record an option lapse
Dr. Financial liability
Cr. revenue
Put option contract:
significant economic incentive
lease
Put option contract
No significant economic incentive
sale with right of return
Put option contract:
repurchase price > expected market value
financing arrangement
Put option contract:
repurchase price < expected market value
sale with right of return
stock option
right to purchase shares of a corporation’s capital stock under fixed conditions
compensatory
in lieu of a salary; accrue for compensation expense;
noncompensatory
along with a salary; no expense; journal entry until employee buys the stock
compensatory expense
allocating compensation expense over service/vesting period; use FV of options
journal entry to allocate compensation expense
Dr. Compensation expense
Cr. APIC - stock option
Compensation expense
total FV/ # years
journal entry to record the exercise of the option
Dr. Cash (shares x strike price)
Dr. APIC - stock options (amount recorded)
Cr. stock (at par)
Cr. APIC excess of par (plug)
journal entry to record expiration of options
Dr. APIC - stock options
Cr. APIC - expired stock options
How is NCI reported on the BS?
at FV in the equity section separate from parent
Who is the primary beneficiary of the VIE
entity that has power to direct the activities of a variable interest entity
T/F primary beneficiary absorbs VIE losses and received expected VIE residual returns
T
journal entry to record the acquisition for cash
Dr. Investment in subsidiary
Cr. Cash
Journal entry to record the acquisition for parent common stock
Dr. Investment in subsidiary
Cr. Common stock (par)
Cr. APIC (FV)
what is eliminated in the acquisition method?
Subsidiary equity
What is the parent’s basis
FV = Acquisition Price = Investment in sub
What is the consolidated workpaper eliminating JE
Dr. CS - subsidiary
Dr. APIC - subsidiary
Dr. Retained earnings - subsidiary
Cr. Investment in sub
Cr. NCI
Dr. BS adjustments to FV
Dr. Identifiable intangible assets
Dr. Goodwill
How do you back into the retained earnings at purchase date amount?
Beg RE
+ Income
-Dividends
Ending RE
How are direct out of pocket expenses and stock registration/issuance costs related to business combination expenses treated?
Direct out of pocket - Dr. Expense
Issuance costs - Dr. APIC
Monetary items
assets and liabilities that are fixed or denominated in dollars regardless of changes in specific prices
Nonmonetary items
assets and liabilities that fluctuate in value with inflation
AR is a (monetary/nonmonetary ) item?
Monetary
Buildings are (monetary/nonmonetary) items?
Nonmonetary
Marketable CS is (monetary/nonmonetary) items?
Nonmonetary
Nonconvertible bonds are (monetary/nonmonetary) items?
Monetary
PS/CS are (monetary/nonmonetary) items?
Nonmonetary
Remeasurement
financial statements of the foreign subsidiary are not in the subsidiary’s functional currency
How are monetary and nonmonetary BS items recorded for remeasurement?
Monetary - current/year end rate
Nonmonetary - historical rate
How are BS related Income statement items/ and Non BS related income statement items recorded for remeasurement?
Non BS - Weighted average
BS - historical rate
how are currency gain/losses accounted for remeasurement?
plugged in to get net income to the required amount needed to adjust RE
Translation Method
financial statements of the foreign subsidiary are in the subsidiary functional currency
How are IS items recorded using translation?
Weighted average rate
net income transfered into RE
How are BS items recorded using translation
Assets/Liabilities - current/year end rate
Commonstock/APIC - historical rate
RE - roll forward
Translated RE
beginning translated RE + translated net income for the current period - translated dividends declared
How is translation adjustment recorded?
Plugged to OCI; equal to the difference between debits and credits
where do gain/losses get recorded in translation?
OCI
where to gain/losses get recorded in remeasurement?
Net income
functional currency
currency of the primary economic enviroment in which the entity operates
reporting currency
currency ultimately reporting financial results
capital accounts are translated at which rate?
historical exchange rate
what are capital accounts?
CS and APIC
Match the Nonmonetary and Monetary BS items
AR
Inventory
Fixed Assets
LT debt
CS
AR - M
Inventory - NM
Fixed assets - NM
LT debt - M
CS - NM
underlying
specified price, rate or other variable such as interest rate, security or commodity price, foreign exchange rate, or index of prices that include a scheduled event that may or may not occur
Notional amount
specified unit of measure
value or settlement amount of a derivative
notional amount x underlying
payment provision
determinable settlement that is to be made if the underlying behaves in a certain way
heding
use of a derivative to offset anticipated losses or reduce earnings volatility
call option
gives the option holder a right to buy from the option writer at a specified price during a specified period
put option
gives the holder the right to sell to the option writer at a specified price during a specified period of time
option contracts
gives one party the right to buy or sell something to another party at a specified price and the option buyer or holder must pay a premium to the seller to enter
futures contract
an agreement to exchange a commodity, currency, or other asset a specified price on a specified future date
long position
party that agrees to buy the item
short position
party that agrees to sell the item
what is the difference between option and futures contracts>
both parties are obligated to perform to the terms of the futures contract (often made through a clearing house) whereas options are used at the discretion of the option buyer
Forward contract
privately negotiated futures contracts with no standardized notional amounts or settlement dates
Swap contract
private agreement generally assisted by an intermediary to exchange future cash payments
Market Risk
risk that the entity will incur a loss on the derivative contract
Credit Risk
risk that the other party will not perform
How are derivatives measured on the BS?
FV as an asset or liability
Gains or losses on a derivative instrument not designated as a hedging instrument are recognized in ______
earnings on the income statement
What are the two types of finance leases
Sales type and direct financing lease
What are the criteria for a lease to be classified as a sales-type lease
-Ownership
-Written option
-Net PV of lease payments or guaranteed residual value = or exceeds substantially all of the underlying asset’s FV
-lease represents a significant economic life
What are the criteria for a lease to be classified as a direct financing lease?
NONE of the OWNES criteria met and both
-PV of the sum of the lease payment exceeds the underlying assets FV
-collection of lease payments is probable
Sales type lease
lessee gains control of the underlying asset and derecognizes the asset and recognizes a net investment in the lease as well as a profit or loss
how are lease payments treated in a sales type lease if collection is not probable
deposit liabilities
Journal entry to record sales type lease
Dr. lease receivable
Cr. fixed asset
Cr. gain or dr loss
Journal entry to record sales type lease payments
Dr. cash
Cr. interest income
Cr. lease receivable
How do you set up the amortization schedule for lease receivable?
Lease Payment (constant)
Interest receivable (payment x %)
Lease receivable change
Lease receivable carrying value
direct financing lease
lessee doesn’t gain control of the underlying asset and derecognizes the asset and recognize a net investment in the lease
what does the net investment for a direct financing lease comprise?
lease receivable and a residual asset
how are initial indirect costs, gains and losses treated in direct financing lease arrangements?
indirect costs and gains are deferred and amortized and losses are recognized immediately
how is interest income recorded in a direct financing lease?
interest income is equal to the discount rate applied
Operating lease
Any lease that doesn’t qualify as a sales type or direct financing lease; keep asset on BS which includes depreciation and impairment changes
journal entry to record operating lease
Dr. Cash
Cr. Rental Income
Dr. Depreciation
Cr. Accum. Depr
Sales leaseback
when one party that has control of an asset transfers it to another party, with a subsequent lease of the same asset where the seller becomes the lessee and the buyer becomes the lessor
T/F Segment reporting applies to public and private companies
F - public only
Operating segment characteristics
-engages in business activities from which it may earn revenue and incur expenses
-operating results are regularly reviewed
-discrete financial info is available
10% size test
segment revenue, including both sales to external customers and intersegment sales or transfers is 10% or more of the combined revenue
absolute amount of the segment’s reported profit or loss is 10% or more of the greater of combined reported profit and combined reported loss
segment identifiable assets are 10% or more of the combined assets of all operating segments
75% test
if total external revenue reported by operating segments constitues less than 75% of external revenue, additional operating segments are reportable even if they don’t meet the 10% size test
how should operating segments that were deemed to be reportable in the immediately preceding period but not in the current period be reported?
continue to be reported separately based on management judgment
how should operating segments that were not deemed reportable in prior periods but now meets criteria for reportability be presented?
prior periods should be restated to reflect newly reportable segment as a separate segment
Segment profit or loss calculation
Revenue
-directly traceable cost
-reasonably allocated costs
operating profit (loss)
items that are excluded from segment profit
general corporate revenue/expenses
interest
income tax
equity in earnings
gains or loss from discontinued operations
minority interest
Regulation S-X
content requirements for interim and annual financial statements to be filed with SEC
BS Requirements of regulation S-X
Balance sheet as of the most recent fiscal quarter and as of the end of the preceding fiscal year
IS requirements of regulation S-X
Income statements for the most recent fiscal quarter, for period between the end of preceding fiscal year and most recent fiscal quarter, and corresponding periods
Statement of cash flows requirements for regulation S-X
For the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter or cumulative 12 month period
Regulation S-K
Outlines how registrants should disclose significant qualitative descriptions of their business in statements, reports, and filings
What are the statements for defined benefit pension plans?
Statement of net assets available for benefits (Assets - BS)
Statement of changes in net assets available for benefits (IS)
Statement of Accumulated Plan Benefits (Liability - BS)
Statement of changes in Accumulated plan benefits (Change in liabs)
T/F SOCF is required for defined benefits pension plans
F
Defined Benefit Plan
provide benefits as a certain % of the employee’s salary
risk on the employer - must have sufficient plan assets to service the defined benefit when it comes due
What are liabilities in a defined benefit plan called?
Accumulated Plan Benefits
Defined Contribution Plan
Employee has to contribute money
Net Assets available for Plan Benefits
Plan Benefits - Plan Liabilities
What are included in plan liabilities
Admin costs, pension fund management cost
What are accumulated plan benefits comprised of?
retired employees
employee beneficiaries
current employees
employees who vested in the plan but are no longer with the company
what are the statements for defined contribution plan?
Plan assets > Plan liability
Overfunded - low risk of distress
Plan assets < Plan liability
Underfunded - high risk of distress
