2 - Technical Accounting and Reporting (35-45%)

Question 1

In what cases the asst’s life is considered indefinite?

Answer 1

If an asset’s legal life is easily renewable, evidenced by low cost and/or effort to renew, it is assumed that the company will take the easy steps to renew it, hence, its life is considered indefinite until the facts and circumstances change materially.

Question 2

Impairment loss is recognized as:

Answer 2

Impairment loss is presented as part of income from operations, and is not presented as discontinued operations or cumulative effect of a change in accounting principle.

Question 3

At what level goodwill should be tested?

Answer 3

Goodwill should be tested for value impairment at each reporting unit or at one level below an operating segment. Goodwill must be tested for impairment at least annualy, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Question 4

Goodwill calculation

Answer 4

For calculation for goodwill impairment compare the year-end fair value of reporting unit with carrying amount including goodwill. If carrying amount including goodwill exceed the year-end FV, then record an impairment loss and reduce goodwill to the extent the difference does not exceed the carrying value of goodwill.

Question 5

Definite-life Intangible, is tested for impairment?

Answer 5

Intangilbe asset with limited-life are tested for recoverability. If the recoverability test indicates taht the book value will not be recoverable, then the second step needs to be carry out and recognized the impairment loss for the difference between the fair value and the carrying amount of the asset.

Question 6

Intangible assets: Impaired or amortized?

Answer 6

Intangible assets with finite life are amortized and are tested for recoverability. In opposite intangible assets with indefinite life are not amortized and therefore are not teste for recoverability. However, they are review for impairtment for at least annually.
So, patents are amortized and tested for recoverability.

Question 7

Annual lease payment, when there is purchase option

Answer 7

If there is a purchase option in a lease agreement, and it is reasonably to be excercised, the total payment are computed deducting the PV of the purchase option exercise price from the costo of the asset, and then divide that amount by the present value of the ordinary or annuity factor to compute the annual lease payment.

Question 8

Capitalized software amortization

Answer 8

Capitalized software costs are amortized based on their current and future revenue, subject to at least matching straight-line amortization in the earlier years. Meaning if the revenue method of amortization is equal or more than SL amortization, then use Revenue method to recognized the expense.

Question 9

Software for internal Use

Answer 9

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

Question 10

Acquisition Cost

Answer 10

The acquisition of the stock would be reported at cost—the amount paid for the stock. Future relocation costs would not be included in the current cost of the stock. Costs expected to be incurred are not liabilities and should not be included in the acquisition cost.

Question 11

Option Contract JE

Answer 11

1. Initial Purchase:

Debit: Call Option Asset ($600)
Credit: Cash ($600)

2. Adjustment to Fair Value at Year-End:

Calculate the intrinsic value and time value:

Intrinsic value: (Market price - Strike price) × Number of shares
Time value: Given
Intrinsic value: ($43 - $40) × 2,000 = $6,000
Time value: $400
Total fair value: $6,000 (intrinsic value) + $400 (time value) = $6,400

Adjust the call option asset to reflect the new fair value:

Debit: Call Option Asset ($6,400 - $600) = $5,800
Credit: Unrealized Gain on Option ($5,800)

3. Exercise the Option:

Calculate the total cost to exercise the option:
Exercise price per share × Number of shares = $40 × 2,000 = $80,000
Derecognize the call option asset (previously adjusted to $6,400).
Recognize the investment in shares at the exercise price.
Journal Entry:

Debit: Investment in Shares ($80,000)
Credit: Call Option Asset ($6,400)
Credit: Cash ($80,000 - $6,400)

Question 12

Leases Calculation

Answer 12

Fair Value of a Machine: $650.000
Estimated Residual Value: $70.000
9 year implicit rate 8%:
Lessor Calculation:
FV of the asset: 650.000
- PV Residual Value -35.014 (70.000 x PV factor)
= Amount to be recovered: 614.986
Divided by PV factor for 9 periods at 8% = 91.155
Amount of Receivable = Amount to be recovered + PV of Residual Value = 650.000. Generally is the same of asset FV.

Lessee Calculation:
Annualy payment times PV factor for 9 periods at 8% = 614.986 (amount of liability)
ROU Asset amortization is in STL basis over 614.986(Finance Lease).

Question 13

Goodwill Private Company

Answer 13

Private companies may elect to amortize goodwill for a maximum of 10 years.

Goodwill is tested for impairment only when a triggering event occurs that indicates the fair value of the entity (or reporting unit) may be below its carrying amount. This is different from the annual impairment testing required for public companies.