F3 Flashcards
(33 cards)
Rule of calculating depletion on natural resources
R E A L - Residual Value (subtract); Extraction/Development Cost; Anticipated restoration cost; Land purchase price.
Cost of land + extraction/dev. cost + anticipated restoration costs - residual value * units extracted = depletion
How to value year ending inventory using dollar value LIFO
- Convert year 2 balance back to base-year prices using index (Ending inv / index)
- Subtract converted inventory from base beginning inventory to find layer added
- Adjust incremental layer to new years prices (LIFO Layer) using price index (Layer * index)
- Added adjusted layer to beginning year 2 to get dollar value LIFO for year 2
Franchise Agreement with Future Service Components
Scenario:
Initial Franchise Fee: $150,000 (paid upfront).
Term: 10 years.
Ongoing Service Fee: $20,000 per year, payable at beginning of each year.
The ongoing fee covers services like brand marketing, software maintenance, and operational support.
🧾 Journal Entries – Franchisee
1. At Commencement (Initial Franchise Fee)
Dr. Franchise Rights (Intangible Asset) 150,000
Cr. Cash 150,000
- Annual Amortization of Franchise Rights
Dr. Amortization Expense 15,000
Cr. Accumulated Amortization 15,000
(Assuming straight-line over 10 years) - Annual Payment for Ongoing Services (Beginning of Year)
Dr. Prepaid Service Expense 20,000
Cr. Cash 20,000 - Monthly Recognition of Service Expense
Dr. Service Expense 1,667
Cr. Prepaid Service Expense 1,667
(Monthly over 12 months: $20,000 ÷ 12)
The initial fee is typically not expensed immediately, since it yields benefits over multiple periods (ASC 350).
Ongoing fees are recognized as expenses in the periods the services are received.
If any portion of the upfront payment relates to future services, that portion must be allocated and deferred accordingly.
Any prepaid expenses should be monitored for impairment if the franchise underperforms.
Capitalized interest equals
the smaller of the total interest incurred or the avoidable interest.
Total interest incurred equals the interest on the specific construction debt plus interest on other borrowing.
Avoidable interest equals the interest on the weighted-average amount of accumulated expenditures
A loss is only recorded under a purchase commitment in which
the purchaser is obligated to purchase a fixed number of units.
A company using a periodic inventory system must
estimate inventory and cost of goods sold in interim financial statements because periodic systems do not continuously update inventory amounts throughout the year.
The gross profit method is a way to estimate values under a periodic system using gross profit percentages from previous reporting periods and applying that percentage to current period sales revenue.
As a result, they estimates cost of goods sold and backs into ending inventory.
If an item in a purchase commitment goes obsolete the probable loss is
the minimum annual purchase committed times remaining length of agreement times agreed price less scrap value
Formula for production method of depreciation is
Depreciable cost (cost - salvage) / total estimated production/usage = depreciation per unit * units spent = depreciation expense
Internally developed intangible assets are an expense and are not capitalized except for
costs that can be specifically identified, such as design costs
Cost index for the current year =
current year cost/ base-year cost
A patent is amortized over
the shorter of its estimated life or remaining useful life.
Expenses that increase the useful life of the patent require adding amount to carry value before recalculating amortization expense
Interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset, should be
capitalized as part of the historic cost of acquiring the fixed asset.
Interest costs on the fixed asset subsequent to the construction period as well as all interest costs on the routine manufacture of machinery for sale to customers (inventory) should be
expensed in the income statement for the period incurred.
What conditions must be present for an entity to begin capitalizing interest?
- Expenditures for a qualifying asset have been made.
- All necessary permits (licenses) have been filed to prepare the asset for its intended use.
- Interest cost is being incurred.
under the current expected credit loss (CECL) method for recognizing credit losses, ignoring deferred taxes, the entry to record the credit loss adjustment for a specific account is
Neither net income nor working capital is affected, as the net AR remains the same.
The JE to write off a specific account under the CECL method for recognizing credit losses is:
debit allowance CECL
credit AR
A change from the cost approach to the market approach of measuring fair value is considered
a change in accounting estimate
Although a firm may not capitalize interest on its ordinary inventory production, it can capitalize interest on
special order goods on hand for sale to customers.
Temporary market declines in inventory need
not be recognized at interim when a turn-around can reasonably be expected to occur before the end of the fiscal year.
For a bill-and-hold arrangement revenue is recognized
when:
- items are build specific to
buyer - are separately identifiable
- cannot be directed to other buyer
- are complete and ready for transfer
How do we treat asset cost
Additions(increase quantity) - capitalize
Improve/replace- increase life - reduce accu. depre.
increase usefulness - capitalize
ordinary repairs - expense
extraordinary repairs - increase life reduce accu. depre.
increase usefulness - capitalize
Internally developed intangible assets can capitalize certain identifiable cost such as:
-legal fees
-registration or consulting fees
-legal fees or cost related to a successful -defense of the asset
-design cost
-other direct cost to secure the asset
Examples of Identifiable/finite life intangible assets would be:
patents, copyrights, franchises
Examples of Non-identifiable/indefinite life intangible assets would be:
goodwill, trademarks, licenses, and crypto assets
When recording intangible assets use
cash paid + PV of liabilities + FMV(stock issued)
