Timing Issues: Matching of Revenue and Expenses, Correcting and Adjusting Accounts Flashcards
Amortization of capitalized software costs
equals the greater of straight-line amortization or sales revenue from the software for the period ÷ total projected sale.
IFRS, goodwill impairment
is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount. An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss. This amount is first allocated to goodwill. Any remaining impairment loss would be allocated on a pro rata basis to the other assets of the cash-generating unit.
Under U.S. GAAP, Research and development
includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. This software is for internal use, unrelated to production and is not considered research and development. Market research is also not research and development because it is not aimed at discovery of new knowledge to develop a new product or service.
revenue from initial franchise fees
The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.” Macklin Co. will recognize the entire initial fee in the current year.
sales revenue four conditions
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
For software developed internally
costs incurred in the preliminary project stage are expensed under U.S. GAAP. In this question, the costs AFTER the preliminary project stage are capitalized and depreciated over the economic life of the product (3 years). Depreciation expense is thus $3,333,333.
start-up costs, including organizational costs
be expensed as incurred, without exception.
goodwill be tested for impairment
U.S. GAAP requires that goodwill be tested for impairment at the reporting unit level. The evaluation of goodwill impairment involves two major steps.
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.
Under IFRS, development costs may be capitalized if certain criteria are met. The research costs associated with an internally developed asset will always be expensed.
If the patent has been granted, it is generally appropriate to capitalize the related design costs.
criteria to capitalize development costs:
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.
IFRS 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 OR 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.
from cash-basis to accrual-basis
Add increases in current assets. For example, when AR increases, the increase is not considered to be income under the cash basis because the cash has not been collected, but the increase is income under the accrual basis.
Subtract decreases in current assets. Conversely, when AR decreases, then cash-basis counted it as revenue when the cash was collected, but under the accrual basis, the income was recognized in a prior period and should not be recognized again in the current period.
Add decreases in current liabilities. For example, when AP decreases, this represents a cash outflow that is recorded as an expense under the cash basis. However, under the accrual basis the paid expenses were recorded in a prior period and should not be recorded again in the current period.
Subtract increases in current liabilities. Conversely, when AP increases, this represents expenses incurred under the accrual basis method that have not been recorded under the cash basis method because they have not been paid.
“prepaid” current asset
The minimum operating cycle for purposes of reporting a “prepaid” current asset is one year (or 12 months).
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment
A company will perform impairment analysis and record necessary entries on all assets of the company prior to performing impairment analysis related to goodwill. Reporting units (segments) will be separately tested for impairment analysis. If the fair value of a reporting unit is less than the carrying value, the impairment is assumed to be due to the goodwill as all other assets of the reporting unit would already have been properly adjusted.
The recoverability test
A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life. The recoverability test compares undiscounted future cash flows to the carrying value of the asset. If the carrying value is greater, then a fair value test would be performed.
