Timing issues Flashcards
Lyle, Inc. is preparing its financial statements for the year ended December 31, Year 1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:
At December 31, Year 1, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle's specifications. Checks in the amount of $100,000 were written to vendors and recorded on December 29, Year 1. The checks were mailed on January 5, Year 2.
What amount should Lyle report as accounts payable in its December 31, Year 1, balance sheet?
1- 50,000 debit balance is recorded as an asset (prepaid expense).
the correct JE should be
dr: prepaid expense 50
cr: cash 50
so the 50,000 debit must be added back to Acct payable balance.
2- because the checks were mailed in Jan. 2, that means it has no impact on the acct payable balance as of 12/31/Y1
to total acct payable balance = 360+50+100=
Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?
When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly during the year (July 1 is average date), only ½ of the 40% of repairs will be in the current year.
Current year deferral ($600 x 1,000) $ 600,000
Earned in the current year (600,000 x 40% x 1/2) (120,000)
Deferral 12-31 $ 480,000
How to account for R&D under US GAAP
Expense every direct costs except:
- Materials, Equipment and Facilities that have alternate future use ( instead capitalise and depreciate over theiruseful life
- if you’re doing R&D for someone else
-
What is not R&D under US GAAP
Marketing Research Quality Control testing routine design testing reformulation of chemical compound Also any software cost that is internally developed for in-house use. Although it is expensed, it's not considered R&D
What is Computer Software expense under US GAAP
nder U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. not for those intended for interanal use.
How to account for costs related to Computer software development cost
expense any cost incurred until software is technically feasible, capitalize the rest until the software is ready to be sold
How to account for intangible assets
1- if Purchased then capitalize and amortize over the patent useful life’
2- if internally developed, then expense everything except
a- legal fees of successful defense of the patent
b-registration or consulting fees
c-design cost
d- Other direct costs to secure asset
Note: Expense all costs associated with a Patent that you didn’t defend successfully, even if bought.
how to convert from cash basis accounting to accrual basis acounting when account receivable and account payable are given
1- start with Cash basis income
2- add increase in account receivable
3- add decrease in account payable
On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense?
Royalty expense is the larger of minimum royalties of $60,000, or 10% of $800,000 sales, $80,000.
Dana Co.’s officers’ compensation expense account had a balance of $224,000 at December 31, Year 1, before any appropriate year-end adjustment relating to the following:
No salary accrual was made for December 30-31, Year 1. Salaries for the two-day period totaled $3,500. Year 1 officers' bonuses of $62,500 were paid on January 31, Year 2.
In its Year 1 income statement, what amount should Dana report as officers’ compensation expense?
Compensation
Expense
Compensation exp. before year-end adjustments $ 224,000
Add: Salary accrual for Dec. 30-31, Year 1 3,500
Add: Year 1 bonuses not paid until Jan. 31, Year 2 62,500
Note: Y1 bonuses are added here because they are being recognized.
Compensation exp. after year-end adjustments $ 290,00
On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent’s Year 2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, Year 1, the balance in the escrow account was $3,000. On September 30, Year 2, what amount should Bell show as an escrow liability to Kent?
Escrow
Liability
Begin balance 12/31/ Year 1 $ 3,000
Add deposits ($2,500 x 9 months) 22,500
Sub Total 25,500
Deduct payments ($28,000/4 qtrs x 3 payments) (21,000)
Ending balance 9/30/ Year 2 $ 4,500
How to find revenue using receivables
beg Receiv.
add reveunue (X)
substract amount collected
= ending receivable
How to account for goodwill
if acquired through purchase then capitalize at acquisition cost
if incurred internally, then expense
Note any cost associated with maintaining goodwill is expensed.
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, Year 2. Additional information is as follows:
Rents receivable - November 30, Year 2 $ 1,060,000
Rents receivable - November 30, Year 1 800,000
Uncollectible rents written off during the fiscal year 30,000
Under the accrual basis, Marr should report rental revenue of:
Rents receivable at begin 11/30/Year 1 $ 800,000
Add: Billings accrued 2,500,000
Sub Total 3,300,000
Less: Cash collections (2,210,000)
Write-offs (30,000)
Rents receivable at end 11/30/Year 2 $ 1,060,000
Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara's balance sheets contained the following data: Rent Receivable Year 1$ 9,600 $ 12,400 Year 2 Unearned Rent Year 1 32,000 Year 2 24,000 During Year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for Year 2?
start with beg rec+ (-cash collection) + add decrease in liabilities( unearned revenue)+ SQZ earned revenue = ending receivables
On December 31, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work-in-process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31 balance sheet?
understated accrued liab. and No effect in Retained Earnings. Since the unrecorded liability affects work-in-process inventory (rather than cost of sales/retained earnings), there is no effect on retained earnings, but accrued liabilities (and inventory) are understated.
how to calculate accrued liabilities during the year
beg acct payable
add any expenses that can increase the payable
deduct any payment made
ending payable
At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.’s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three equal annual payments of $400,000. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note?
1- remove the capital amount paid for Y1 = 1200 - 400= 800
calculate total interests to be paid for the year (800.15)= 120,
remove interest accrued as f 12/31 (1203)/12
how to find sales net of taxes when sales with taxes are provided
(sales inclusive of tax)/1.06 if 6% is sales tax rates
then calculate tax paid,
when to recognize revenue when there is an unlimited right of return
When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:
The sales price is substantially fixed (it seems like it is in this question). The buyer assumes all risk of loss (no information). The buyer has paid some form of consideration (no information). The amount of returns can be reasonably estimated (which they can in this question)
Franchise revenue
recognize revenue when the service is rendered.
Jersey, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Jersey sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in a:
Collections received for service contracts should be recorded as an increase in a “deferred revenue account.”
what is the impact of service contract on deferred revenue and Service revenue
When service contracts are sold, deferred revenue increases, but service revenue does not increase until services are performed.
What are Start-up costs and how are they accounted for ?
they are expenses incuured in the formation of a corporation. they should be always expensed.
n January 2, Year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, Year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during Year 4, assuming amortization is recorded at the end of each year?
1- calculate depreciation for 3 years (90/10)*3 =27
Calcualte depreciation for year 4 = 9000
the rest should be written off 90-9-63=54
total to be charged against income is 54 000 written off+ 9000 depreciation expense for the year.
Goodwill should be tested for value impairment at which of the following levels under U.S. GAAP?
Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill.
Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units. Determine the fair values of the reporting units and of the assets and liabilities of those reporting units. If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit's goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill). If the fair value of a reporting unit is more than its carrying amount, there is no goodwill impairment and Step 2 is not necessary.
Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
Allocate the fair value of the reporting unit to all assets and liabilities of the unit. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit. Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.
Tech Co. bought a trademark on January 2, two years ago. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should Tech report as amortization expense for the current year?
e carrying amount of both tangible and intangible assets held for use needs to be reviewed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The future cash flows expected to result from use of the asset and its eventual disposition need to be estimated. If this sum of undiscounted expected (future) cash flows is less than the carrying amount, an impairment loss or expense needs to be recognized. Tech Co anticipates that cash flow will be generated indefinitely at the current level resulting in no impairment. No expense is recognized.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct under U.S. GAAP?
under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue.
what is the journal entry to record the sale
DR: Cash 20000
CR: sales revenue 18000
cr deferred revenue 2000
As services are provided on the contract over the two years, deferred revenue will be debited and sales revenue will be credited.
On December 31, Year 1, Moon, Inc. authorized Luna Co. to operate as a franchisee for an initial franchise fee of $100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in three annual installments of $20,000 each, beginning December 31, Year 2. On December 31, Year 1, the present value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in Year 2. In its December 31, Year 1, balance sheet, what amount should Moon report as unearned franchise fees?
Choice “d” is correct. The franchise fee will not be earned until Year 2 when the services for the initial fee will be performed. Therefore, the total (discounted) amount of the fee must be reported as unearned franchise fees:
Unearned franchise fees = $40,000 cash payment + $48,000 PV of future payments = $88,000
he unearned franchise fee will not be reported at $100,000 because the 3 installments of $20,000 are interest free payments. Interest free payments must be discounted and reported at present value. Therefore, the unearned franchise fee is:
Unearned franchise fees = $40,000 cash payment + $48,000 PV of future payments = $88,000
Definition of the matching principle:
Matches expenses against revenues of the same period in which they occur.
xpenses are necessarily incurred to generate revenues. All expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded
Which of the following expenditures related to internally generated intangible assets is most likely to be capitalized, rather than expensed as incurred, under IFRS?
Development costs incurred in designing a product that has just been granted a patent.
Under IFRS, development costs may be capitalized if certain criteria are met. If the patent has been granted, it is generally appropriate to capitalize the related design costs.
Cash vs Accrual
Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of
Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of
- Accrued Expenses because a decrease in accrued expense means higher cash paid for expense
- an Increase in account receivable means less revenue recorded
in December 31, Year 1, an entity adopted the IFRS revaluation model for reporting its long-term assets and revalued a patent with a carrying value of $85,000 and a 10 year life to its fair value of $75,000. On December 31, Year 2, before recording any amortization, the entity determined that the patent had a fair value of $90,000. In its December 31, Year 2 financial statements, the entity will report a revaluation gain of:
The total Year 2 revaluation gain is $15,000 ($90,000 fair value on 12/31/Y2 - $75,000 fair value on 12/31/Y1). $10,000 of the revaluation gain will be recognized on the income statement to reverse the revaluation loss of $10,000 ($75,000 fair value - $85,000 carrying value) reported on the income statement in Year 1.
accounting for impairment of intangible assets with finite lives (US GAAP)
1 substract FV of undiscounted Casf flow from CA, if + = no impairment
2- If negative= Impairment exists
3- calculate impairment to be reported (CA-FV)
Accounting for goodwill impairment
only step 2 (CA-FV)
Goodwill under IFRS is tested a which level
at cash generating unit
how is goodwill impairement loss calculated under IFRS
under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the fair value less costs to sell of $955,000 is the recoverable amount because it exceeds the value in use of $940,000. The impairment loss is:
Impairment loss = Recoverable amount - Carrying value
Impairment loss = $955,000 - $1,015,000 = $(60,000)
Under IFRS, the CGU impairment loss is applied first to the goodwill of the CGU.
On December 31, an entity had a reporting unit that had a book value of $3,450,000, including goodwill of $225,000. As part of its annual review of goodwill impairment, the entity determined that the fair value of the reporting unit was $3,310,000. Star assigned $3,170,000 of the reporting units fair value to its assets and liabilities other than goodwill. What is the goodwill impairment loss to be reported on December 31 under U.S. GAAP?
hoice “b” is correct. Under U.S. GAAP, goodwill impairment exists because the $3,310,000 fair value of the reporting unit is less than its $3,450,000 carrying value of the reporting unit. After allocating $3,170,000 of the fair value of the reporting unit to its assets and liabilities other than goodwill, the $140,000 ($3,310,000 - $3,170,000) unallocated fair value is the implied fair value of the goodwill and the goodwill impairment loss is:
Impairment loss = Goodwill implied fair value - Goodwill book value
Impairment loss = $140,000 - $225,000 = $85,000
How to calculate operating expenses from cash basis to accrual basis
1- Start with Cash paid for expenses (asset move inversely)
2 - Add decrease in prepaid expense or subtract increase in prepaid expense
3- add increase in accrued liab or substract decrease in accrued liab.
On December 31, Year 1, Classic Company revalued a patent under IFRS. On that date, the patent had a carrying value of $250,000, a fair value of $200,000, and a remaining useful life of 5 years. On December 31, Year 2, the patent’s fair value was $175,000. In its December 31, Year 2 financial statements, Classic will report a current period revaluation
During Year 2, Classic will record amortization on the patent of $40,000 ($200,000 revalued patent / 5 years). The carrying value of the patent on December 31, Year 2 will be $160,000 ($200,000 fair value on revaluation date - $40,000 amortization) and a revaluation gain of $15,000 will be recorded in Year 2 income to adjust the patent to its December 31, Year 2 fair value of $175,000. This represents a revaluation gain that partially offsets a previously recorded revaluation loss, so this is an income statement item
R&D accounting under IFRS
The research costs associated with an internally developed asset will always be expensed. Assuming a company can reliably measure the costs associated with each component, under IFRS the development costs may be capitalized if all of the following criteria are met:
Technical feasibility has been established.
The company intends to complete the asset.
The company has the ability to sell or use the asset.
Sufficient resources are available to complete the development and sell / use the asset.
The asset will generate future economic benefits.
Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. What amount should Alta capitalize related to the patent?
Development costs of a new product idea are a direct expense. Legal fees incurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset.
retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?
eferred revenue represents future income collected in advance. When the gift certificates are sold, deferred revenue is increased.
When the certificates are redeemed, the revenue is earned and shown in the income statement. Deferred revenue is decreased.
When the certificates lapse, the company has no further liability and revenue is earned. Deferred revenue is decreased.
On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1?
he software maintenance costs are expensed, and the software modification costs are capitalized and amortized using the straight line method over five years. Thus, the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1, will be an expense related to the software maintenance cost in the amount of $12,500 ($15,000 ÷ 12 = $1,250 per month × 10 months) plus amortization expense of $1,000 ($5,000 ÷ 5 years = $1,000 per year).
A company should recognize goodwill in its balance sheet at which of the following points?
goodwill is recognized in the balance sheet when it has been created from a business acquisition.
Under the acquisition method, goodwill is a representation of an acquired company’s fair value over the fair value of the entity’s net assets and is not recognized solely because the fair market value of a company’s assets exceeds the book value of the company’s assets.
Under IFRS, which of the following statements about intangible assets is correct?
.
Intangible assets within a class may be measured differently using either the cost model or the revaluation model.
b.
Internally generated goodwill cannot be recognized as an asset.
c.
Intangible assets with indefinite lives must be amortized annually.
d.
Research and development costs are capitalized as incurred.
Choice “b” is correct. Goodwill generated internally cannot be capitalized; it will be treated as an expense in the period incurred. Choice “a” is incorrect. Under the revaluation model, if one asset within a class is accounted for using this model, then all assets within the same class must follow this model.
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?
Choice “d” is correct. There are two components to expense related to this software in Year 3:
$20,000 in amortization expense (based on the original $100,000 in cost amortized straight-line over five years).
$25,000 in impairment loss (based on a carrying value of $40,000 at the end of Year 3 versus a fair value of $15,000. The fair value is the estimated future gross revenue of $23,000 less the disposal cost of $5,000).
The $20,000 in amortization expense plus the $25,000 in impairment losses total $45,000 in expense.
