F2 Flashcards
(97 cards)
1
Q
Amortization of capitalized software costs equals the greater of:
A
Stralight line amortization- Costs/Years
Sales revenue from the software for the period
Total projected sale
2
Q
Interest expense
Even if a loan begins in one year and ends in the same year, the interest expense is still not considered a full years worth.
A
If the loan is a six month loan that began in 1/1 and matured on 6/31 interest expense still would be
6/12 for the year.
3
Q
For payroll taxes:
What is included in payroll tax liability?
What about payroll tax expense
A
- **Payroll tax liability- **ALL of the taxes owed by both the employer and employee. This includes both FICA taxes paid by the employer and employee and federal income taxes witheld.
- **Payroll tax expense- **Just the employer portion of the FICA percentage that is due multiplied by total wages.
4
Q
When interest per annum (year) is compuounded annually, you will take the original principal and multiply it by interest rate to get the years interest expense.
You then the will add the interest expense for that year to the principal, and for next year multiply the principal + previous years interest expense by the interest rate. to get years interest expense.
A
If asked for accured, add the two years expenses together. Make sure and look out for months!!
$100,000, compunded annually at 10% per annum. Interest expense for year 2:
Year 1= $100,000 x 10%= $10,000 (int exp)
Year 2= $110,000 x 10%= $11,000 (int exp)
**Accured interst= $21,000. **
5
Q
For IFRS-
Impairment loss for goodwill, calcualtion if CGU (Cash-Generating-Unit)?
A
One step approach.
Recovable amount of CGU- carrying value of CGU (all parts, not just goodwill).
6
Q
Which understates net income for a cash basis taxpayer compared to accural?
Accounts receiveable
Accured expenses
A
- Accounts receivable- No. Cash collected, but no revenue.
- Accured expenses- Cash paid, but no expenses.
7
Q
If note receivable for 4 years is dated June 30, Year 1 and payments are payable each year on July 1, starting in year 2, how do you compute what is a current asset for notes receivable on the June 30, year 3 balance sheet?
A
This is a tricky question where you would divide up the interest.
Since the note receivable is dated one year apart and will be due in full on June 30, you would record a full year of interest receivable.
In June 30, Year 3, you would have only received 1 interest payment- July 1, Year 2. The next day, July 1, year 3 would be the next payment due.
LOOK AT THOSE LITTLE TRICKS!!!
8
Q
When doing adjustments when the questions state “there are $400,000 before any neccessary adjustments,” what do you do?
A
Do the necessary T account, and find the adjustsments. If the adjustments equal additions of $100,000. then start with the balance and add.
$400,000
+$100,000
$500,000
Do the same for subtractions
9
Q
The advance payments of goods before year end does not warrant a A/P entry.
A
10
Q
When revenue is collected “evenely, througout the year, then July 1 will be the average date.
A
So if 30% of revenue is collected in year one and 70% in year two, then deferred revenue will be,
Current year deferrall xxx
less: Earned in year xxx (xxx x 30% x 1/2)
Deffered reveune at end of year 1
11
Q
Initial cash investments
and
Draws against capital accounts
How do they effect income?
A
They don’t, they are just distractors
Not revenues or expenses, they are equity accounts.
12
Q
Costs to develop computer software for interanal use would not be considered a research and development activity.
A
Niether would costs of market research activities.
13
Q
For patents, how should legal costs incurred to successfully defend a patent be treated?
A
They should be amoritized over the **lesser of **
The patents useful economic life
or
The patents legal life
14
Q
If increase in accounts receivable from year 1 to year 2, and decrease in accounts payable from year 1 to year 2, how does this affect net income is going from cash basis to accural basis?
A
Remember to start at cash basis, then add adjustments.
- Increase in accounts receivable- increases income
- Decrease in accounts payable- increases income
15
Q
Fees that have already been recorded for a contract do not need an adjutment at year end.
A
$90,000 of $100,000 tech expert fees were recorded at year end.
No year end adjustment for fees needed.
16
Q
Remember the BASE formula can be very useful for certain situations.
A
Beginning balance
+ Additions
-Subtractions
Ending balance
17
Q
T accounts, asking for revenue and they give cash collections
A
Do you T account adjustment, and if it is a recievable and there is an increase then
Cash collections
+increase in reciveable
Revenue-Accural
18
Q
What do increases in debits in liablity accounts do to accural income?
A
Increases it
19
Q
BASE Formula for revenues and expenses
A
Cash collected and paid are both subtractions.
Revenues and expenses are both additions.
20
Q
Remember when payements on notes are due in installments, the second payment of interest will be
A
Principal
less: installment payment
Remainder Note payable
x interest rate
Interest payment
21
Q
If question asks for accured interest payment at 12/31, make sure you do what?
A
Take the number of months/12
22
Q
If a salepersons commission sales do not exceed their fixed salary, it is not included in commissions payable. They just get their fixed salary for the month.
A
For commisions that do exceed:
Commission earned
less: fixed salary
Commisssion payable
23
Q
Sales revenue formula
and
Sales tax payable formula
A
Sales tax reveune
Credits to sales revenue account
Sales tax rate + 1
Sales tax payable
Sales revenue x tax rate - advance payments= sales tax payable
24
Q
When there is an unlimited right of return, income will be recorded when:
A
- The sales price is substanitally fixed
- The buyer assumes all risk of loss
- The buyer has paid some form of consideration
- The amount of returns can reasonably estimated
If not, no income is recorded
25
Internal use software
Software costs in preliminary stage?
After preliminary stage?
* For software developed internally, costs incured in preliminary stage are all **expensed. **
* After the preliminary stage, they are **capitilazied over the econoimic life**
26
If a patents useful economic life is 10 years and on 12/31/Year 4, it is found to be permantely impaired, how many years of deprecation would be recognized to be charged against year 4 income?
3 Years.
Patent costs
_divided 10_
Yearly amortization
x 3= Pre-year amortization in year 4
Patent cost - cum dep= **carrying amount charged against income in year 4**
Note though another year of amortization would be expensed and then that would be written off.
27
When going from accural to cash, just make your T-Accounts for accural, and then the end adjustment will be your cash basis.
Don't overthink it
28
Remember in regards to A/R and A/P, how are these accounts treated when going from accurral to cash?
* A decrease in A/R represents cash paid in the current peord on A/R from prior periods. Under the cash basis, the money be recorded as current period income but under the accural basis as prior period.
* An increase in A/P represents expenses incurred but not yet paid. Undter the cash basis, no expense would be recorded because cash has not been paid. under the accural basis, expenses are recorded when the payables are recorded.
29
Franchises, when do you count reveunue as earned?
In the year the services actually begin.
If in a year, an intial franchise fee is paid and a note is discounted for the rest of it, yet the services are not performed until year 2 then
Initial franchise fee + discounted note= unearned revenue
30
The matching principle matches?
Expenses against reveunes in the same accounitng period.
31
Under IFRS, VAT taxes are recongized as part of the patent. (similar to sales tax in the US.)
**_IFRS_**
## Footnote
Patent purchase price + Nonrefundable VAT taxes + Legal costs to register the patent= Patent asset
Remember, Research costs related to patent and training the staff on using the patent are NOT part of the patent asset.
32
Under IFRS, how ware developement costs inucrred in designing a product that has just been granted a patent treated?
They are capitalized, if certain criteria are met:
If the patent has been granted, it is generally apprpriate to capitalize the related design costs.
33
Under IFRS revaluation model, you can only reverse a loss to put into OCI to its previous fair value amount.
So if there is a patent with a $100,000 carrying value on 12/31/year 1 and a $80,000 fair value, you have a $20,000 loss on the income statement and the patent is written down to $80,000.
If on 12/31/ year two, that patent is now valued at $110,000, you would reverse the loss on the income statement of $20,000, and put the remaining $10,000 as a revaluation gain in OCI.
34
Under **U.S. GAAP,** the impairment test for recoverabilty is a two step process.
You first compare the net carrying value of an asset to the undscounted cash flows from the asset. If the net carrying value is less than the undiscounted cash flows, you have no impairment loss.
Net carrying value- $100,000
Undiscounted cash flows- $110,000
$0 impairment loss
35
Under IFRS, impairment test for goodwill is what?
* Recovorable amount* - Carrying value.
* Recovorable amount* is **greater** of:
Fair value less costs to sell
or
Cash flows expected from cash-generating unit
36
Under U.S. GAAP, how is the impairment loss for goodwill done?
First, compare the fair value of the unit to the carrying value. If the fair value is less, you have a loss.
If they are allocating assets and liablities other than goodwill to the FV, find the difference between those two.
Then take goodwill less that number and you have the impairment loss.
37
In accural accounting, how are prepaid expenses treated in comparision to cash basis?
* Predaid expenses represent assets where no benefit has been received yet. In accural accounting, they are not officially expenses until there is asociated benefit. Therefore, that needs to be subracted out of cash-basis accounting.
38
Remember, under IFRS, goodwill impariment test is just one step test.
Recovrable amount - carrying value= goodwill impairment loss, then STOP!!
Don't let the reported goodwill distract you.
39
Under IFRS, how are reserach and development costs associtated with the development of an internally developed patent treated?
Reserach and development costs associated with an internally devloped asset will always be expensed.
Under IFRS, they may be capitalized if the following criteria is met:
* Technical feasibilty has been established.
* The company intends to complete the asset
* The company has the ability to sell or use the asset.
* Sufficent resources are available to complete the development and sell/use the asset.
* The asset will genearte future economic benefits.
40
Percentage of completion
Steps to take
Step 1- Contract price - Total cost (costs to date and estimated costs to complete) = Gross profit
Step 2- Costs to date/ Total cost (costs to date and estimated costs to complete) = GP %
Step 3= Gross proft x GP%= GP earned to date
Step 4 (if needed)- GP earned to date- profit previously recongonized
41
Percentage of completion-
Example
Construction Contract- $18,000,000
Costs incurred- $5,400,000
Estimated costs to complete- $10,800,000
Gross profit- $18,000,000- $16,200,000= $1,800,000
GP percent- $5,400,000/ $16,200,000= 33%
Gross profit= 33% x $1,800,000= $600,000
42
Percentage of completetion-
Current assets and current liablities
* **Current asset**- Total costs to date + GP to date _exceed_ **cumulative** Progress billings
* **Current liability- Cumulative **Progress billings _exceed_ Total costs to date + GP to date
Gross profit is gross profit in year, not net of previous years.
Remember that progress billings are total to date!! Add them up!!
43
Installment sales
Forumula
**_Step 1 Gross Profit**_ _**Step 3 Earned GP_**
Sale on installment Sale on installment
_(COGS)_ _ (Ending Installment A/R)_
Total Gross profit Collections (less write offs)
**_Step 2 GP %_** _x GP %_
GP/Sale on installment GP Earned
**_Step 4-Deferred GP= _**Ending Installment A/RxGP%= Def. GP
44
Installment Sales
How is gross profit reconigized from year to year?
Add them together
45
Weird Installment method question
Sold plant for $1,500,000
Cost- $1,000,000
Cash in year of sale- $300,000
Note- $1,200,000, 12%, 4 annual inst, first payment made end of year for $444,000
What is amount of realized profit in year 1?
Cash collected + annual installment (the interest is recorded separately)
_x GP%_
**Gross Profit realized**
$300,000 (cash) + $300,000 (inst.)= $600,000
GP%= $500,000 (GP)/ $1,500,000 (sale)= 33%
**Gross profit realized**= $600,000 x .33= $200,000
46
What two items must a transaction have in order for no gain or loss in an exchange to happen?
* The transaction lacks commercial substance
* The exchange was made merely to facilitate sales to customers (such as inventory being traded)
47
IFRS- echanges of dissimaller assets, how are gains and losses reconginzed?
Under IFRS, exchanges of dissimmilar assets are regarded as exchanges that generate revenue and **all gains are losses** are reconigized.
So use common sense with FV given up and cash paid or received.
48
Commercial substance
Gain/loss reconginition?
In transactions that have commercial substance, gain is recongized in a nonmonetary exchange equal to the difference between the fair vaule of the asset given up and the book value of the asset given up.
**Gain/loss=** FV of asset given up - Carrying amount of asset given up
49
Asset reporting for Inventory and PP&E?
Current costs amounts of inventory and PP&E are measured the **lower of: **
**Current cost **
**or **
**Recovrable amount **
50
What are the four methods of measuring prices and the effects of the price changes?
* Historic cost/Nominal dollars
* Historic cost/Constant Dollars
* Current cost/Nominal dollars
* Current cost/Constant dollars
51
What are monetary assets and what will be the result of holding them during a period of inflation?
52
What are non-monetary assets are what is the effect of holding them during a period of inflation?
Nonmonetary assets and liablities fluctuate in value with inflation and deflation.
During a period of inflation, a **purchasing power gain** will be reflected.
Examples- Bonds-nonconvertible, Inventory, Investment in sub, PP&E, Intangible assets (patents, trademarks), Deferred charges and credits, preferred stock, common stock
53
Remeasurement method.
How are balance sheet, income statement and Gains losses reflected?
**B/S** -Monetary items=Current/Year end rat
- Nonmonetary items= Historical rate
**Income statement-**
Non balance sheet related items= weighted average rate
Balance sheet related items= Historical rate
**Remeasurement gain/loss**- Plug in I/S
54
Translation method
How are I/S, Balance sheet and translation gain/loss recorded?
**_Income Statement_**
All Income statement items= weighted average rate
Transfer net income to retained earngings
**_Balance sheet_**
Assets and liabilites= current/year end rate
Common Stock/APIC= Historical rate
Retained earnigns- Roll Forward
**_Translation gain or loss=_** Plug, goes in OCI
55
When doing foreign currency transactions, make sure to look for if you are buying or selling.
This will effect if you have a gain or loss.
Remember, year end is reported as spot rate at year end- spot rate at transaction.
Final gain/loss- Sale date spot rate- previous year end spot rate
56
Translation/remeasurement currency reporting
A subsidiary's finanical statements are usually maintaned in its local currency.
If the subs functional currency is its local currency, it is *translated* to the reporting currency. This result goes into OCI
If the subs functional currency is not the same as its local currency, it is *remeasured* into the functional currency. This result goes on the consildated I/S.
57
On adjusting J/E make sure to look out for dates.
For example, if they ask for quartely only and it starts on September 15, at year end only report October, November, December.
Don't divide in half.
58
30 day months?
* April
* June
* September
* November
Feburary- 28
59
If services are provided monthly, and payment is required the 15th day of the following month, what is journal entry at end of month assuming $3,000/month?
Cash $3,000 (previous month)
Accounts receivable $3,000 (previous month)
Accounts receivable $3,000
Service revenue $3,000
60
Retained earnings J/E
_Increase in retained Earnings_
Income xxx
Retained earnings xxx
_Decrease in retianed earnings_
Retained earnings xxx
Dividends payable xxx
61
If equipment is bought and deprecated, what is the initial J/E?
Equipment/Supplies xxx
Equipment/Supplies expense xxx
62
If a sale is made on that had a gross amount of $20,000 with net of $12,000, and it sold for $15,000, what is journal entry?
Cash $15,000
Accumulated dep. $8,000
Asset $20,000
Gain on sale $3,000
63
If company uses 5 year straight line for an asset that it buys in Jan 1, year 1, it reports quartely only, and it decides on July 1, that it will only last 4.5, what do you do?
First 6 months- Asset/5= deprecation
Next 6 months- Asset- acc. dep/4 (half year gone)
Quarterly- new annual deprecation x 1/4
12/31/Y1 J/E
Deprecation expense (new deprecaton + excess of new over old) xxx
Accumulated Deprcation xxx
64
Company receives $90,000 on March 1, Year 2 for work for 6 months. Fiscal year end is June 30. What will be on June 30, Year 3 finanicals?
Initial entry- March 1, Year 2
Cash $90,000
Unearned revenue $90,000
Year end, June 30 Year 2
Unearned revenue $60,000 (15,000 x 4 months)
Service Revenue $60,000
Year end, June 30, Year 3
Unearned revenue $30,000
Service revuene $30,000
65
If a question states inventory amount before an adjustments are made, what do you do with of inventory sold to customer F.O.B shipping point, in transit before year end, that cost company $50,000?
Nothing, you do not include it or subtract it from companies invetory.
Add inventory purchased F.O.B. shipping point before year end.
Add inventory that is still on consignment at year end.
66
YOU HAVE TO REMEMBER REVENUE RECONGNITION PRINCIPLE, NO MATTER WHAT MONTH CASH IS COLLECTED!!!!!!!!
If for example, franchise fees are reported a month after period performed and $50,000 is reported for year 1 and on Jan 2, year 2, $10,000 is received, $60,000 would be included in Dec 31, Year 1 balance sheet as it was all **_EARNED_** in Year 1
67
How are intial franchise fees reconigized as revenue?
In proportion to the amount of services performed.
If 60 percent of $1,000 has been performed, you would recongize $600 of revenue.
68
Remember that goodwill is expensed how?
Using an impariment approach by comparing the reduction in goodwill value and the end of year from beginning of year.
If imparied, that amount is shown as an expense on the income statement.
69
Translation method vs Remeausment
Income statment items
Income statement item reported using Translation?
Remeasurement?
* **Translation method-** All income statments are translated using the weigthed average rate.
* **Remeausurement method**- Deprecation expense is trasnlated at historical cost.
70
Translation method
* Use historical rate to translate common stock and APIC.
* Asset and liablity accounts- current year
* Roll forward the retained earnings account by transfering net income to this account.
* Converet all income statement items at weighted average
* Plug gains and losses into OCI.
71
Under IFRS, what is the correct methodolgy of accounting for a foreign entity that has experienced hyerinflation?
Restate the foreign subsidiary's financial statements for the effect of infllation,
then,
Convert all income statment and balance sheet to the _reporting currency_ using the _current year-end rate. _
72
On percentage of completetion, what do you go if gain in one year and loss in the next?
If gain in year 1 of say $1 million and loss in year 2 of $500,000, the total Gross profit would be-
$1,000,000
_($500,000)_
$500,000
Now, make sure you look for what they are asking. If they are asking for just year 2, it would be a $500,000 loss.
73
What methods for revenue recongtion are acceptable for construction contracts under IFRS?
The percentage of completion method is required unless the final outcome of the project cannot be reasonable estimated.
74
On foreign currency transactions, make sure it is denominated in US dollars if selling.
Example
If 1 US dollar can buy 0.60 Euros, convert it by the following:
$1/.60= $1.66
Use that to find gain/loss
75
Example
US company imported 50,000 euro.
_ Date _ _Exchange rate_
Dec 10, Y1 0.79 Euros
Dec 31, Y1 0.82 Euros
Jan 10, Y2 0.75 Euros
Gain or loss at year end?
1/0.79= $1.27. 50,000 x 1.27= $63,500
1/0.82= $1.22. 50,000 x 1.22 = $61,000
Gain of $2,500
76
How do you quote the exchange rate using the direct method?
Using the domestic price of one unit of another currency.
If Great Britian retailer would say, "0.63 pounds cost
1 U.S. dollar."
77
Forward exchange contracts?
Locks the rate at a current price.
Get that rate, even in the future.
78
REMEMBER, FOREIGN CURRENCY **_TRANSACTIONS _**GO WHERE ON FINANCIAL REPORTING??
**The Income statement. **
Foreign currency **Translations **go on in OCI.
79
Make sure you read the question in foreign currency, If a comapny is getting paid in its own currency, what is the result of the gain/loss?
There isnt a gain or loss
80
For gains losses on transactions, make sure you realize what currency you are receiving and the effects the apprecation/deprecation have?
* If you are a US company selling a product to Europe, and the euro deprceciates versus the dollar before the settlement date, you would book a loss, as you would be receiving less Euro's. (think of it from the other side, as they would be paying less.)
81
What happens if the day-to-day operations of a sub depend on the reporting currency.
The reporting currency is the funcitonal currency and the remeausrment method must be used.
Only need to translate if the functional currency is different from the reporting currency.
82
On involuntary loss, the loss would be what?
Carrying value
_+ any costs associated_
Loss on I/S
83
If asking for question like what amount of an decrease in property taxes prepaid taxes and increase in prepaid property taxes between 6 months, and a piece of property was purchases 2 months in to fiscal year, how would you calculate what is increase and decrease on payment of 4th month?
4 months/6 months= 66.7% decrease (since building was purchased 4 months in)
2 months/6 months= 33.33% increase (percentage that is left remaining)
84
With deferred and unearend revenue questions, be sure you have the dates correct and prior year revenue is recongized when earned.
Deferred revenue 1/1/Y2 $50,000
Orders received after 10/31 cutoff dates, held for next year
Cash collected throughout year is $1,200,000, evenly
Beg $50,000+ Total cash= $1,250,000
less: collections 11/1 Y1 -12/31 Y1=($200,000)
less: collections-11/1 Y1- 10/31= ($1,000,000)
Ending deferred revene= $200,000
85
Hw are non-refundable fees treated?
Deprecated over term of contract over the time of the contract.
Revenue is recongized each month
86
How is equipment treated that does not have any alternative use to a certain project?
It is expensed immediately.
It is only capitilized over its _useful life_ if it can be used for alternative projects
87
Commison expense calculation?
Sales x percent of commission.
Dont get fooled by distractors
88
Installment method, how to account for when a note is signed?
Sold equipment for $1,000,000 with carrying value of $800,000. Signed note for $900,000 to be paid in 3 equal installments. 12/31/Y2 recevies $300,000 in principal and $50,000 in interest.
GP= $1,000,000-$800,000= $200,000
GP%= $200,000/$1,000,000= 20%
Principal= $300,000 x .2= $60,000
plus: Full interest income= $50,000
Revenue recongized= $110,000
89
How do you find installment amount receivable from year to year?
Balance at year end
x
Year GP %
Do that for each year, then add them together.
90
How should the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date be reported?
In the current asset section as a contra account.
91
Formula for collections?
Gross profit/Gross profit rate
92
Alternative formula for installment sales receivable?
Installment sales - Collections on installment sales
93
How is cost recovery accounted for?
Profit is not reconigized until collections exceed cost of sales.
When a gain is realized, the prior deficit (loss) is subtracted from gain for total gross profit.
94
How is "holding gains" for inventory calculated?
Replacement cost
_less: Purchase price_
**Holding gain**
Selling price is not included in holding gains
95
Increase in current cost based on inventory formula?
Increase in nominal dollars (today's dollars)
_less: Increase in current cost (constant dollars)_
Inflation increase
96
Where should a company that wishes to disclose information about the effect of changing prices report this information?
**_Supplementary information_** to the financial statements
97
How is the agin or loss recongized for a forward exchange contract for speculation?
Forward rate of the date purchased
_less: Forward rate at the date of BS_
Gain or loss
