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CPA > FAR - Becker F2 > Flashcards

FAR - Becker F2 Flashcards

1
Q

Before technological feasibility is established, computer software development costs are expensed as research development? T/F?

A

True

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2
Q

Amortization of capitalized software costs equals:

A
  1. The greater of straight-line amortization

OR

  1. The greater of sales revenue from the software for the period / total projected sales
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3
Q

On March 1, year 1, Fine co borrowed $10,000 and signed a 2-year NOTE BEARING interest at 12% per annum COMPOUNDED ANNUALLY. Interest is payable in fully at maturely on Feb 28, year 3. What amount should Fine report as a liability for accused interest in year 2?

A

$1,320

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4
Q

Report royalty revenue when it is?

A

EARNED, not when it is received (oil well example F2.1 HW #00541)

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5
Q

Legal cost associated in successfully defending an attempted infringement of the patent is?

A

Added back into the carrying value

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6
Q

Should research and development costs be capitalized as a part of the cost of a patent?

A

NO

  • research and development costs should be expensed
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7
Q

Amortization should be calculated based on the LESSER of:

A
  1. Legal life

OR

  1. Economic life
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8
Q

Royalties paid should be reported as expense?

A

In the period it is incurred for accrual

And when paid for cash method

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9
Q

Expenditures used to maintain goodwill is?

A

Expensed and not capitalized

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10
Q

Good will has indefinite life so?

A

It does not get amortize, but is subject to impairment loss

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11
Q

First payment for a contest is expensed in the year the contest winner is chosen, even if it is on Dec 31? T/F?

A

TRUE

For accrued. So you would expense it on your books

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12
Q

Under US GAAP, what research and development costs are expensed?

A
  • r&d contracted out to 3rd party
  • preproduction prototypes and models costs
  • costs for searching for new products or new process alternatives
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13
Q

What happens with a patent that has been impaired?

A

A loss equal to its carrying amount should be recorded

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14
Q

The intangible asset balance for a franchise will generally be?

A

The purchased price minus the amortization amount

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15
Q

Compared to the accrual basis of accounting , the cash basis of accounting understates income by the net decrease during the accounting period of:

A

No- accounts receivable

Yes- accrued expenses

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16
Q

Costs of goodwill is only capitalized when?

A

Goodwill is incurred in the purchase of another entity.

Maintaining and developing good will get expensed

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17
Q

Under US GAAP, research and development includes cost prior to technological feasibility for developed software that is to be sold, leased, or marketed? T/F?

A

True.

Technological feasibility is established upon completion of a detailed program design or, in its absence, complete ion of a working model.

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18
Q

Software development that is for internal use and market research that is not aimed to discover new knowledge to develop a new product or service is considered as R&D?

A

False

These items do not get expensed as research and development

Unless, the software developed cost is incurred AFTER the preliminary project stage, then it is capitalized and depreciated over the economic life of the product

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19
Q

Legal fees and other costs associated with registering a patent is?

A

Capitalized under US GAAP

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20
Q

Legal costs to successfully defend a patent should be?

A

Capitalized and amortized on a straight-line basis over the lesser of the patent’s useful Economic life or its legal life

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21
Q

Research and development costs are expensed wether they are incurred internally or by contract with outside firms under US GAAP? T/F?

A

True

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22
Q

How do successful and unsuccessful defense of patents get reported?

A
  • successful defense patents include legal fees to carrying value and it is CAPITALIZED
  • unsuccessful defense patents include legal fees, but it gets EXPENSED
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23
Q

Sales revenue equals?

A

Credit to sales revenue / sales tax plus one

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24
Q

How is service revenue recognized under US GAAP vs IFRS?

A
  • US GAAP service revenue is recognized with the passage of time over the life of the service contracts.
  • IFRS service recognized using the percentage of completion method
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25
Q

Does both deferred and service revenue increase when a service contract is sold?

A

No,

ONLY deferred revenue is increased. Service revenue will be recognized when the services get performed over time.

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26
Q

Amortization over 60-months for organization costs is NO LONGER APPLICABLE? T/F?

A

True.

Also, organization costs are immediately expensed under US GAAP

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27
Q

How should organization cost at the beginning of first year operations be treated?

A

They should be expensed immediately

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28
Q

When should franchiser report revenue from in total franchise fees?

A

When all material conditions of the sale have been “substantially performed”

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29
Q

Revenues should be recognized in the period in which they were earned and realized or realizable? T/F?

A

True

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30
Q

Expenses are recognized when an entity’s economic benefits are:

A

used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major on central operations

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31
Q

Items not considered research and development include:

A
  • routine periodic design changes to old products or troubleshooting in production stage
  • marketing research
  • quality control testing
  • reformulation of a chemical compound
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32
Q

The matching principle:

A

Matches EXPENSES against REVENUES in the same accounting period

Note: losses are NEVER MATCHED against gains

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33
Q

For accounting US GAAP purposes, costs to develop computer software for ultimate sale BEFORE technological feasibility is established should be?

A

Be expensed if they are relevant design costs incurred before technological feasibility is established.

AFTER technological feasibility is established, all relevant costs are CAPITALIZED until the product is released for sale. At this point, all relevant costs are included in “inventory” and charged to “COGS”” when sold.

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34
Q

When there is an unlimited right of return, NOTHING should be recorded as sales revenue unless 4 conditions are satisfied. These conditions are:

A
  1. The sales prices is substantially fixed
  2. The buyer assumes all risk of loss
  3. The buyer has paid some form of consideration
  4. The amount of returns can be reasonably estimated
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35
Q

Examples of NON research and development cost:

A
  • research and development PERFORMED under contract FOR OTHERS
  • market research related to a major product for the company
  • offshore oil exploration that is the PRIMARY ACTIVITY of a company
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36
Q

Franchisor SHOULD NOT report any franchise revenue in till services for agreement are completed? T/F?

A

TRUE

Even if, the franchisee pays the first installment of the initial franchise fee during agreement signing.

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37
Q

How should cost incurred to develop a NEW Software program before development stage and cost incurred to train employees be treated?

A

They should be expensed and the remaining amount AFTER (preliminary stage) should be capitalized and amortized/depreciated.

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38
Q

Which level should goodwill be tested for value impairment under US GAAP?

A

At each REPORTING UNIT.

The evaluation of goodwill impairment involves 2 steps.

Step 1- identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill

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

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39
Q

Step 1 of evaluating goodwill impairment:

A
  1. Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units
  2. Determine the FV of the reporting units and of the assets and liabilities of those reporting units
  3. If the FV of a reporting unit is less than its CV, 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)
  4. If the FV of a reporting unit is more than its carrying amount, there is NO goodwill impairment and step 2 is not necessary
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40
Q

Step 2 of evaluating goodwill

Impairment:

A
  1. 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
  2. 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 that its carrying amount, recognize a goodwill loss

Once the goodwill impairment loss has been fully recognized, it cannot be reversed

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41
Q

How to find cash-basis service Renee when accrual-receivables is given?

A

Calculated by analyzing the changes in the service fees receivable:

Beginning service receivable
+ accrual service revenue
- cash collections (answer is a squeeze)
= ending service receivable

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42
Q

Under US GAAP, subsequent reversal of intangible assets impairment losses is PROHIBITED, unless?

A

The intangible asset is held for sale

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43
Q

Legal fees associated with obtaining a patent on a new product are CAPITALIZED? T/F?

A

True

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44
Q

Research and development costs related to developing a new product:

  • prototype testing
  • design modifications
  • engineering salaries

Are treated how?

A

They are expensed

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45
Q

Interest free payments must be:

A

Discounted and reported at present value. ( franchise example)

$100,000 initial fee, paid $40,000 at signing. $60,000 INTEREST FREE NOTE over three annual installments. Present value of note was $48000

So 40,000 + 48,000 = 88,000

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46
Q

Legal fees to obtain a patent are CAPITALIZED as a/an ?

A

Intangible asset

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47
Q

When a patent is revalued under IFRS, the carrying value becomes the ?

A

Fair value at the time of revaluation

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48
Q

Under IFRS, the goodwill impairment test is one-step in which?

A

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 FV less cost to sell OR its value in use (PV of future cash flows expected from the CGU)
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49
Q

Under IFRS, the cash generating unit (CGU) is applied first to the:

A

Goodwill of the CGU

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50
Q

Under IFRS, value added tax (VAT) and legal fees to register patents are:

A

Capitalized

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51
Q

Under IFRS, research and development costs, staff training, and administrative salaries are:

A

Expensed

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52
Q

Examples of costs related to internally generated intangible assets that are EXPENSED according to US GAAP and IFRS:

A
  • cost incurred to maintain goodwill
  • legal costs related to unsuccessful defense of patent
  • research cost associated with development of a new trademark
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53
Q

Under IFRS, If a patent had been granted for a product, the development cost associated are:

A

Capitalized

  • IFRS has certain criteria for capitalizing development cost
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54
Q

According to IFRS revaluation method, if revaluation gains will offset revaluation losses, so?

A

The amount of gain equal to amount of prior revaluation loss will be reported on the income statement

AND the remaining gain will be reported on OCI

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55
Q

Where are revaluation gains and losses reported, under IFRS?

Revaluation only applies to IFRS

A

Revaluation losses are reported on the INCOME STATEMENT

Revaluation gains are reported in OTHER COMPREHENSIVE INCOME

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56
Q

Under US GAAP, impairment analysis begins with a test for RECOVERABILITY so,

A

The net carrying value of the asset is compared to the undiscounted cash flows expected from the asset.

If carrying value is LESS, then there IS NO impairment loss

If carrying value is GREATER, then there IS impairment loss

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57
Q

At which level is goodwill impairment tested under US GAAP and IFRS?

A

Reporting unit - US GAAP

cash generating unit - IFRS

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58
Q

Tip for converting from cash-basis to accrual basis:

A
  1. ADD increases in current assets
  2. SUBTRACT decreases in current assets
  3. ADD increases in current liabilities
  4. SUBTRACT decreases in current liabilities
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59
Q

The 5 criteria for internal development cost to be be capitalized under IFRS:

  • research costs associated with an internally developed asset will ALWAYS be expensed
A
  1. Technical feasibility has been established
  2. The company intends to complete the asset
  3. The company has the ability to sell or use the asset
  4. Sufficient resources are available to complete the development and sell or use the asset
  5. The asset will generate future benefits

US GAAP, all research and development costs are expensed

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60
Q

Gross profit equals :

A

Sales - COGS

sales less COGS

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61
Q

Development cost of a new product idea/patent is:

A

A direct expensed and SHOULD NOT be capitalized

62
Q

Software modifications that will increase the functionality of the software is treated how?

A

Capitalized and amortized

63
Q

Goodwill is recognized in the balance sheet when it has been created from a business acquisition? T/F?

A

True

Under the acquisition method.

Cost associated with developing and maintaining goodwill is not capitalized

NOR

is expecting future benefits from the creation of goodwill

64
Q

Under the completed contract method, revenue is recognized when the contract is complete, however, expected LOSSES are:

A

Recognized IMMEDIATELY

+Contract price
- costs incurred
- estimated cost to complete
= loss

65
Q

Contract price less estimated costs (costs incurred + estimated cost to complete) equals?

A

Estimated profits

66
Q

How do you calculate gross profit for percentage of completion?

A

Costs incurred/total of (costs incurred + estimated costs to complete). Gives you percentage of completion.

After that, you multiple the percentage by the estimated gross profit

67
Q

A company used the percentage of completion method of accounting for a 5-year construction contract. Which of the following items will the company use to calculate the income recognized in the third year?

Process billings to date? Y/N

Income previously recognized? Y/N

A

Process billings to date? NO

Income previously recognized? YES

68
Q

When is revenue recognized for completed contract and percentage of completion?

A

Completed contract- is when the job is COMPLETED, but loss is expensed immediately.

Percentage of completion- engineering estimates of completion or “costs incurred to date” vs “total estimated costs”, not profess building

69
Q

Percentage of completed formula:

A

Total cost to date/total estimated cost of contract

70
Q

If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, then:

A

The excess is reported as a current asset

71
Q

If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognized, then:

A

The difference is reported as a current liability

72
Q

How do you calculate deferred gross profit on installment saleS?

A

Find GP first
1. Sales - cost of sales

Next,
Find gross profit rate
2. GP/sales

Finally,
Find deferred gross profit
3. GP rate*receivable account

73
Q

Revenue can be recognized prior to the completion of a long term project but generally not prior to a merchandise sale? T/F?

A

TRUE

74
Q

The installment sales method delays revenue recognition by:

A

Recognizing revenue as cash is cooled rather than accelerating revenue recognition

75
Q

The cost recovery method delays revenue recognition until:

A

All costs have been collected rather than accelerating revenue recognition

76
Q

When is the cost recovery method appropriate in for an installment sale?

A

When there is NO reasonable basis for estimating collectibility

77
Q

Is cash collections critical for income recognition for the cost recovery method and the installment method?

A

Yes

Under cost recovery method- revenue is recognized after cash equaling the cost of the item is collected

Under installment method, gross profit is recognized as a gross profit percentage times the cash collected from the sale

78
Q

How is deferred revenue calculated for he installment method?

A

Unrealized profit from sale - realized profits (collections) - uncollectible accounts (write offs)

79
Q

The installment sale method of recognizing revenue SHOULD ONLY be used when:

A

When it is impossible to establish a reasonable bad debt percentage

If the amount ultimately collectible cannons be estimated

80
Q

If collection is in doubt for an installment sale, which method should be used?

A

The cost recovery method

81
Q

The installment sales method is not a normal elective GAAP method? T/f?

A

True

82
Q

Gross profit percentage for multiple years in an installment sale has to be?

A

They have to be accounted for separately.

So just take the deferred gross profit of that year and DIVIDE it by the receivable account

83
Q

When would a company use the installment sales method of revenue recognition?

A

When installment sales are material and there is NO REASONABLE basis for estimating collectibility

84
Q

A nonmonetary exchange that lacks commercial substance under US GAAP is?

A

An exception to the general rule of basing the measurement value of the exchange on fair value

If cash (boot) is received as well and is less than 10% of the total consideration, then a proportional amount of the gain is recognized

85
Q

Fair value is not used to value an exchange that lacks:

A

Commercial substance

86
Q

When there is NO BOOT for an exchange that lacks commercial substance, then it is recorded at what value?

A

Carrying value and no gain is recognized for accounting purposes

87
Q

In order to have commercial substance for an exchange there needs to be:

A
  1. The risk, timing, and amount of the expected future cash flows from the asset transferred differs significantly from the risk, timing, and amount of the expected future cash flows from the asset received.

OR

  1. The entity-specific value (based on the company’s expectations of value of the asset and not that of the marketplace) of the asset received differs significantly (in relation to the fair values of the assets exchanged) from the asset transferred.
88
Q

When a nonmonetary transaction has commercial substance, gains and losses are recognized based on?

A

On the difference between the fair value and the book value of the asset given up

89
Q

When an exchange has commercial substance, then?

A

The entire gain is recognized

90
Q

Gains are only recognized in proportion to the cash received when?

A

When cash is received and not paid and the exchange lacks commercial substance

91
Q

Under the rule of conservatism, losses are recognized in all nonmonetary exchanges when?

A

When the book value exceeds the fair value of the asset given up

92
Q

Under IFRS, gains on nonmonetary exchanges of dissimilar assets are recognized in full. No gains are recognized on nonmonetary exchanges for similar assets? T/F?

A

True

93
Q

Under IFRS, exchanges of dissimilar assets are regards as?

A

Exchanges that generate revenue and all gains and losses are recognized

94
Q

Nonmonetary exchanges with commercial substance recognized gains and losses, when?

A

Immediately

95
Q

Losses in an exchange are NEVER what?

A

Losses are NEVER deferred

96
Q

A portion of a gain can only be deferred for nonmonetary exchanges that:

A

DO NOT contain commercial substance and only if boot is RECEIVED as a minor component (less than 25%) of the transaction

97
Q

If a company pays boot for an exchange that lacks commercial substance, then?

A

No gain can be recognized, because boot was given and not received

98
Q

Historical cost/constant dollar method includes:

A

General price level changes

99
Q

Historical cost/nominal dollar method includes:

A

No price level changes

100
Q

Current cost/constant dollar method includes:

A

Both specific and general price level changes

101
Q

Current cost/nominal dollar method includes:

A

Specific price leave changes (specific price indexes)

102
Q

Monetary assets that remains constant during inflation has:

A

A loss in purchasing power

103
Q

Monetary liabilities increase in purchasing power when there is:

A

Inflation

104
Q

Nonmonetary assets do not have changes in purchasing power because:

A

Because they change in value as price levels change during inflation and deflation

105
Q

Under current cost accounting:

A

Specific price indexes may be used to restate financial statements items

106
Q

Under fair value accounting:

A

Individual fair market values are identified for each item. No specific price indexes are applied

107
Q

General purchasing power accounting DOES NOT apply specific price indexes to expenses? T/F?

A

True

General prices are used to adjust statement items

108
Q

Under current cost/General purchasing power accounting:

A

General price indexes are used to adjust financial statement items

109
Q

Disclosed supplementary information about current cost are measure at:

A

Measured at current cost OR lower recoverable amount at the measurement date

110
Q

Income tax-basis financial statements recognize events when:

A

When taxable income or deductible expenses are recognized on the entity’s tax return.

111
Q

In financial statements prepared on the income tax basis, the non deductible portion of expenses (such as meals and entertainment) should be included:

A

Included in the expense category in the determination of income

112
Q

On a personal statement of financial condition, estimated income taxes EQUALS:

A

Equals the difference between fair values and tax bases of assets and liabilities

113
Q

On personal financial statements, all items are reported at:

A

Their FMV(estimated current values)

114
Q

Personal financial statements usually include:

A
  • a statement of financial condition (similar to a balance sheet)
  • statement of changes in net worth (similar to an income statement)
115
Q

Historical coast are NOT USED or additionally disclosed for?

A

Personal financial statements

116
Q

Should OCBOA financial statement disclosures be similar to GAAP?

A

Yes.

But, OCBOA financial statement titles should differentiate the financial statements from accrual basis financial statements

117
Q

OCBOA has what financial

Statements?

A
  • balance sheet
  • income statement

Note: statement of cash flow isn’t required

118
Q

A statement of financial position is an accrual basis financial statement prepared by a:

A

Not for profit organization

119
Q

Common modifications used to prepare modified cash basis financial statements:

A
  • capitalizing inventory
  • accrual of income taxes
  • recording long term liabilities
120
Q

The fictional currency of a company may be:

A
  1. A foreign entity’s local currency, which is typically the one in which the entity keeps its books
  2. The currency in which the financial statements will be presented, which is the currency of the parent company
  3. A foreign currency other than the one in which the foreign entity maintains its books
121
Q

The foreign subsidiary’s functional currency is:

A

The currency of the environment in which the subsidiary primarily generates and expends cash

122
Q

Gains and losses resulting from foreign exchange transactions that are an “extension” of the parent’s domestic operations are included:

A

As a component of “income from continuing operations “ in the period in which they occur

123
Q

Translation adjustments are not included in determining net income for the period but are:

A

Disclosed and accumulated as a component of other comprehensive income

124
Q

Gains and losses from remeasuing the foreign subsidiary’s financial statements from the local currency to the functional currency should be included in:

A

Income from continuing operations of the parent company

125
Q

Foreign currency transaction gains and losses are included in:

A

Operating income for the period in which exchange rates change

126
Q

Foreign exchange translation gains and losses are generally included as:

A

A component of other comprehensive income in stockholder’s equity

127
Q

Balance sheet accounts are generally included at the current exchange rate, except for:

A
  1. Self contained subsidiary with a 3 year inflation rate of 100% or more (hyperinflation economy)
  2. A foreign entity which does not maintain its account in a foreign functional currency
128
Q

If the subsidiary’s functional currency is its local currency, then the financial statements are:

A

Are simply “translated” to the reporting currency and reported in other comprehensive income

129
Q

If the subsidiary’s functional currency is not the same as its locally currency (the functional currency may be the reporting currency or another currency), then the financial
Statements are:

A

Remeasured into the functional currency and is reported in the consolidated income statement

130
Q

The rate to be used to translate all assets and all liabilities from the functional currency to the reporting currency is the:

A

The current rate, that is, the exchange rate in effect at the balance sheet date

131
Q

Under the translation method, all income statement items are translated using the:

A

The weighted average exchange rate for the current year

132
Q

When is the translation method used for foreign exchange?

A

When.

  1. A foreign subsidiary’s local currency is the functional currency
  2. Economy of the foreign entity is not highly inflationary
133
Q

What exchange rates are used for all assets and liabilities, and common stock and additional
PIC when the translation method is used?

A
  • all assets and liabilities are translated to the reporting currency using the CURRENT(years end) EXCHANGE RATE
  • common stock and APIC are translated using HISTORICAL EXCHANGE RATES
134
Q

Foreign currency translation gains and losses are reported in:

A

Other comprehensive income and recognized as a separate component of stockholder’s equity

135
Q

When a fixed asset is sold (voluntarily or involuntarily) gain or loss is recognized as:

A

Part of income from continuing operations

Carrying value(BV) plus any cost associated with the transaction( cleanup cost) - fair value or amount given

136
Q

The carrying amount of the replacement property for asset sell is:

A

Equal to the FV of the consideration paid for it.

So, excess of replacement cost over the old carrying value

137
Q

Deferred charge is often used to report:

A

Long term prepayments made to others.

Deferred charge is an asset

138
Q

Deferred credit represents:

A

Future income contracted for and/or collected in advance, but which has not yet been earned by the passing of time or other criteria.

Similar to unearned revenue

139
Q

Nonrefundable fees for leases should be:

A

Allocated over the life of the lease

140
Q

If an equipment can be ONLY USED FOR A CERTAIN PROJECT, then it would be:

A

Expensed immediately for the total cost of the equipment

Note: had the equipment been allowed to be use for other projects, then you would capitalize over its useful life

141
Q

If sales are for a generic product and not custom produced for a specific customer, then revenue is recognized based on:

A

When the product has been shipped, regardless of the payment terms.

NOTE: if they were custom, then revenue would be recognized based on production

142
Q

Current cost financial statements reporting holding gains for goods sold during the period and holding gains on inventory at the end of the period. T/F?

A

True

They also include holding gains and losses on all other accounts in the financial statements

143
Q

Under “current cost accounting” holding gain on inventory is the excess of:

A

Replacement cost at the balance sheet date - the original purchase price

144
Q

Changes in current cost of nonmonetary assets such as equipment and land are NOT included in “current cost” income from continuing operations, but instead are classified as:

A

Holding gains or losses, in the current cost statements

145
Q

Warranty obligations are NONMONETARY? T/F?

A

TRUE

146
Q

Equity investment in unconsolidated subsidiaries is MONETARY? T/F?

A

False

147
Q

Nominal dollars and constant dollars is when?

A

Nominal dollars = today’s

Constant dollars = last year

148
Q

A company that wished to disclose information about the effect of changing prices should report this information in:

A

The notes to the financial statements.

While, management reports to the shareholders can discuss the impact of changing prices

149
Q

Gains or losses on hedges of firm commitment’s for a future purchase (or sale) be recognized in current income. In addition, the firm commitment must be adjusted to fair value with the resulting gain or loss recognized in current income

Continue……

A

The difference between the gain or loss on the hedge contract and the gain or loss on the firm commitment is the net effect on current income

150
Q

A gain or loss from a forward exchange contract for speculation is equal to:

A

The difference in the forward rate at the date the contract is purchased and the forward rate at the balance sheet date

CPA (15 decks)

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