F3 Assets and Related Topics

Question 1

Depreciation - Double-declining balance method

Answer 1

Depreciation rate = 1/useful life * 100

Depreciation formula = 2 x Cost of the asset x Depreciation rate

Note: This method ignores salvage value in the expense calculation.

Question 2

Factoring without recourse

Answer 2

Factoring receivables without recourse is a sales transaction. Factoring without recourse transfers the risk of uncollectible accounts to the buyer.

Question 3

Factoring with recourse

Answer 3

Factoring receivables may be treated as a sales transaction. Factoring with recourse leaves the risk of uncollectible accounts with the seller.

Question 4

Subsequent reversal

Answer 4

Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for disposal.

Question 5

Consigned goods

Answer 5

Consigned goods are not included in inventory by Alt and a payable is not recorded until the goods are sold.

Question 6

Under U.S. GAAP, during periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods?

Answer 6

FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory. LIFO or average, perpetual versus periodic will not.

Question 7

Unit of Production Depreciation

Answer 7

Depreciation Per Unit = Cost - Salvage Value / Total Estimated Production Unit

Depreciation Expense = Depreciation Rate Per Unit x Unit Produced in a Particular Year

Note: Units-of-production depreciation method reflects that an asset’s service potential declines with use.

Question 8

Amortization of intangible assets

Answer 8

Intangible assets should be amortized over the LESSER of the useful economic life or the legal life.

Question 9

Lower of Cost or Market (LCM)

Answer 9

The “lower of cost or market (LCM) rule is an accounting principle that requires businesses to write down the value of inventory on their balance sheets if the inventory’s current market is lower that its historical cost.

Question 10

Impairment Analysis

Answer 10

Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset.

Question 11

Double-extension method

Answer 11

Under the “double-extension” method, the quantity of each item in the closing inventory would be extended at both base-year unit cost and current-year unit cost.

Index = Ending Inventory at Current Year Cost / Ending Inventory at Base Year Cost

Question 12

Periodic inventory system

Answer 12

Under a periodic inventory system, the following relationship holds:

Beginning inventory + Purchases = Ending inventory + Cost of goods sold (COGS)

Question 13

Impairment Analysis

Answer 13

Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset. In this situation, the carrying value of $500,000 is less than the undiscounted future cash flows of $515,000, so no impairment loss is recorded.

Question 14

Impairment Loss (Important)

Answer 14

Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset.

Question 15

Initial measurement of an Asset Retirement Obligation (ARO)

Answer 15

The initial measurement of an ARO is based on the present value of expected future cash flows necessary to settle the obligation.

Question 16

Aging method

Answer 16

With the aging method, the company estimates bad debts based on the age of each receivable. Here, 2% of $100,000 is $2,000. This is the estimated amount that will not be collected and should be the balance in the allowance account.

Question 17

How is the carrying amount of a finite-lived intangible asset calculated?

Answer 17

original cost of the asset minus any accumulated amortization and any impairment losses that have been recognized.

Question 18

Shipping cost s for inventory

Answer 18

Consignor includes consigned goods in the hands of the consignee (potential buyer) at consignor’s cost plus shipping costs to the consignee.

Question 19

Liquidating dividend

Answer 19

Amount in excess of retained earnings

Question 20

Inventory Calculation (BASE)

Answer 20

= Opening inventory
Add: Purchases
Total: Goods available for sale
Less: Cost of Goods Sold (COGS)
Balance = Ending inventory

Question 21

Perpetual Inventory System

Answer 21

A perpetual inventory system is a system used to track and record stock levels, in which every purchase and sale of stock is logged automatically and immediately. In this system, every time a transaction takes place, the software records a change in inventory levels in real-time.

Question 22

Periodic Inventory System

Answer 22

A periodic inventory system is a form of inventory valuation where the inventory account is updated at the end of an accounting period rather than after every sale and purchase. The method allows a business to track its beginning inventory and ending inventory within an accounting period.

Question 23

Free on Board (FOB) Destination

Answer 23

In a FOB destination agreement, the seller retains ownership of the goods (and is therefore responsible for replacing damaged or lost goods) up until the point where the goods have reached their final destination.

Question 24

Dollar-value LIFO method

Answer 24

The dollar-value LIFO method adjusts inventory retail prices and ending inventory cost for price-level changes.

Question 25

Write-off an uncollectible account under the allowance method

Answer 25

It has no effect on net income.

The estimating uncollectible accounts is based on aging the receivables.

Question 26

Patent

Answer 26

Development cost of new product idea are direct expense.

Legal fees and successfully defending the patent rights are capitalized as an asset.

A patent is a type of intangible asset that has a limited useful life.

The recoverability test is only performed on intangible assets with 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.

Question 27

Bank Reconciliation

Answer 27

Post dated check payable are excluded from checkbook balance.

Non-sufficient funds (NSF) should be excluded from checkbook balance.

Question 28

Under lower of cost or market the following need to be determined:

Answer 28

Ceiling, net realizable value (Product could be sold - Replacement Cost) (40,000 - 12,000) = 28,000

Replacement Cost = 20,000

Floor, NRV less profit (28,000 - 10% of 40,000) = 24,000

Market (Floor) = 24,000

Cost (LIFO) = 26,000

Lower of cost or market = 24,000

Question 29

Cash equivalents

Answer 29

Included:
Bank draft

Not included:
Treausry bill and Certificate of Deposit (CD) with maturities greater than 90 days.

Question 30

Depletion base

Answer 30

Purchase Price
+Development costs
+Estimated restoration costs
-Expected salvage value

Question 31

Permanent decline in inventory market

Answer 31

Permanent declines in inventory market value should be reflected in interim financial statements in the period incurred.

Temporary declines in market value that are expected to reverse by the end of the annual period are not recognized in the interim statements. Only permanent declines are recognized.

The lower of cost or market method should be applied to interim periods.

Question 32

Refurbishing cost

Answer 32

The component method is used and loss must be recognized for the carrying amount of building.

The refurbishing costs create a new building (the reconstructing building) and must be capitalized.

Accumulated depreciation would be reduced if the refurbishing costs were material subsequent costs to acquisition of the asset and the refurbishment would extend the life of the asset.

A loss in the amount of the carrying value of the damaged portion of the building must be recognized.