F3 - Assets and Related Topics

Question 1

Define cash and cash equivalents.

Answer 1

• Cash includes both currency and demand deposits with banks and/or other financial instituions.
• Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent significant risk of changes in value.

Question 2

Name two methods of accounting for the write-off of uncollectible accounts.

Answer 2

Direct Write-off

Dr Bad debt expense
Cr Accounts receivable

Weaknesses: Bad debts are not matched to sales, and accounts receivable are overstated. Not GAAP.

Allowance Method

Dr Allowance for uncollectible accounts
Cr Accounts receivable

Strengths: Matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP.

Question 3

Name two methods for estimating uncollectible accounts.

Answer 3

• Percentage of accounts receivable at year-end
• Aging of accounts receivable at year-end

Question 4

Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.

Answer 4

Provide For

Dr Bad debt expense
Cr Allowance for uncollectible accounts

Write-off

Dr Allowance for uncollectible accounts
Cr Accounts receivable

Question 5

What is the difference between factoring with recourse and without recourse?

Answer 5

With Recourse: The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company.

Without Recourse: The factor assumes the risk of loss if the account is uncollectible.

Question 6

At what value should non-interest-bearing promissory notes be recorded?

Answer 6

At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.

Question 7

Notes receivable may be discounted “with” or “without” recourse. What is the difference?

Answer 7

Discounting With Recourse: The holder remains contingently liable.

Discounting Without Recourse: The holder assumes no further liability after discounting.

Question 8

Describe the computational steps required in “discounting a note”.

Answer 8

1. Compute maturity value (remember to include interest to maturity).
2. Compute the “discount” (remember to use maturity value).
3. Get proceeds by subtracting discount from maturity value.
4. Compute interest income as the difference between proceeds and face of note.

Question 9

When does the title to goods pass for each of the following?
* FOB destination
* FOB shipping point
* Consigned goods

Answer 9

FOB destination - When received by buyer.
FOB shipping point - When given to a common carrier.
Consigned goods - When sold to a third party by consignee.

Question 10

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?

Answer 10

Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefore, the consigned items stay on the balance sheet of the consignor.

Question 11

How is net realizable value calculated in the lower of cost and net realizable value method?

Answer 11

Net realizable value is the net selling price less completion and disposal costs.

Question 12

Under U.S. GAAP, how is market calculated in the lower of cost or market method?

Answer 12

In the lower of cost or market method, “market” generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.
* Ceiling - Net realizable value (estimated net selling price less completion and disposal costs).
* Floor - Net realizable value minus normal profit margin.

Question 13

Explain the difference between periodic and perpetual inventory methods.

Answer 13

Periodic
* The quantity of inventory is determined only by physical count.
* Ending inventory is physically counted and priced.

Perpetual
* Inventory is updated for each purchase and for each sale.
* Keeps a running total of inventory balances.

Question 14

Name several cost flow methods for inventory.

Answer 14

• Specific identification
• FIFO
• LIFO (unit and dollar value
• Averaging: Weighted average (associated with periodic) & Moving average (associated with perpetual)

Question 15

During periods of risking prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income?

Answer 15

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.

LIFO = Lowest

Question 16

When are losses on firm purchase commitments recognized?

Answer 16

Losses are recognized in the period in which the price declines.
Dr Estimated loss on purchase commitment
Cr Estimated liability on purchase commitment

Question 17

How is fixed-asset carrying value computed under U.S. GAAP?

Answer 17

Historical cost - Accumulated depreciation - Impairment = Carrying value

Question 18

Give examples of costs to be capitalized as land.

Answer 18

• Acquisition price
• Closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
• Any mortgages, liens, or encumbrances on the land which the buyer assumes
• Preparation costs, such as surveying costs, leveling costs, tree removal
• Cost of razing an existing building, in getting land into condition for intended use
• Less: Proceeds from sale of assets on land

Note: Excavating costs for a building and cost of improvements with a definite life are not included in land.

Question 19

Give some examples of capitalizable costs for:
* Acquisition of equipment
* Acquisition of building

Answer 19

Acquisition of Equipment
Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed.*

Acquisition of Building
Purchase price, deferred maintenance, alterations, improvement, architect’s fees. *

*If equipment of building is constructed by company, capitalized cost could include construction period interest.

Question 20

Describe the proper accounting for ordinary versus extraordinary repairs.

Answer 20

Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset.

Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.

Question 21

State two rules concerning capitalizing interest.

Answer 21

• Only capitalize interest on money actually spent, not on amount borrowed.
• The amount of capitalized interest is the lower of:

1. actual interest cost incurred; or
2. computed capitalized interest (avoidable interest).

Question 22

For capitalizing interest, when does the capitalization period begin?

Answer 22

It begins when three conditions are met:
* Expenditures for the asset have been made.
* Activities that are necessary to get the asset ready for its intended use are in progress.
* Interest cost is being incurred.

Ends when the asset is substantially complete and ready for its intended use.

Question 23

Name the most common depreciation methods. Give the basic formula for calculating each method.

Answer 23

Question 24

State the rules for computing depletion on natural resources.
Remember it is REAL property.

Answer 24

Question 25

What is the calculation for impairment losses for property, plant, and equipment under U.S. GAAP?

Answer 25

The amount by which the carrying amount exceeds the fair value of the asset.

Question 26

Is restoration of impairment losses permitted under U.S. GAAP?

Answer 26

Restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use.

Question 27

How are purchased intangible assets and internally developed intangible assets recorded under U.S. GAAP?

Answer 27

Purchased intangible assets:
Recorded at cost, including legal and registration fees.

Internally developed intangible assets:
* Legal fees, costs of succcessful defense, registration fees, consulting fees, and design fees can be capitalized.
* Most research and development costs must be expensed.

Question 28

What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized?

Answer 28

The shorter of its estimated useful economic life and its remaining legal life (as in a copyright, franchise, or patent).

Question 29

How are intangible assets reported under U.S. GAAP?

Answer 29

Reported at cost less amortization (finite life intangibles only) and impairment.

Question 30

What is the two-step impairment test for the impairment of intangible assets with finite lives under U.S. GAAP?

Answer 30

Step 1: The carrying amount of the asset is compared with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.

Step 2: If the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value is recorded.

Question 31

What intangible assets with finite lives are subject to the impairment test?

Answer 31

• Intangibles and fixed assets to be held and used.
• Intangibles and fixed assets slated for disposal

Note: Intangible assets with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Question 32

For intangible assets, how is the impairment loss reporte din the financial statements?

Answer 32

As a component of income from continuing operations before income taxes.

The carrying amount of the asset is reduced.

Question 33

How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by the franchisee?

Answer 33

They should be recorded at their present value as an intangible asset.

Question 34

Define start-up costs. What is the accounting treatment of start-up costs?

Answer 34

• Costs incurred for one-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation.
• Start-up costs are expensed in the period incurred.