F3 - Assets and Related Topics

Question 1

Checkbook balance shows 12K
Bank Balance shows 16K
There was a check drawn on 12/31, payable to a vendor, dated, and recorded as of 12/31, but not mailed until 1/10 Y2. Check was for $1,800
-Question: What amount should be reported as cash on 12/31 balance sheet?

Answer 1

-Check is not disbursed as of 12/31 Y1, it should be added back to the checkbook balance to determine 12/31/1 cash balance. 12K + 1,800

Question 2

Do we include negative checking account balances in “Cash and cash equivalents”?

Answer 2

Yes.
-A legal right of offset requires a company with different bank accounts to offset overdrawn accounts with positive balances in other accounts AT THE SAME BANK to arrive at cash. You CAN use savings accounts to offset checking account negatives.

Question 3

Which of the following count as “cash and cash equivalents” on a 12/31 balance sheet?

• Cash in bond sinking fund.
• Post dated check from customer dated 1/31.
• Non-sufficient funds check from a customer that was returned for lack of sufficient funds, and was to be re-deposited (again) on Jan 3, Y2

Answer 3

• No
• No
• No: Should not be included in year-end balance (deduct from balance per the books).

Question 4

What amount should be classified as cash?
-Big Bank:
Balance: 150K
Deposit in transit: 5K
Book balance: 155K
-Small Bank:
Balance: 1.5K
Outstanding checks -8.5K
Book balance: -7K

Answer 4

-Big Bank:
150K Bank balance + 5K deposit in transit = cash.
(Book Balance also = cash)

-Small Bank:
Cash cannot be lower than 0. -7K balance is a current liability.

Question 5

Bank Statement Reconciliation: 
-Bank statement shows 54,200
Reconciling items:
-Bank Service Charge
-Insufficient Funds Check
-Checks outstanding
-Deposits in Transit
-Check deposited by company for one amount, improperly recorded as another amount

–>What is the net cash balance after reconciling these items with the balance per the bank statement?

Answer 5

-The only reconciling items are:
Deposits in Transit
Outstanding Checks

Any other reconciling items (bank service charges, NSF checks, credit memos (customer collections via wire transfer), interest income, and errors made by the company), are ONLY reconciling items when examining the balance per the books.

Question 6

Which of these items should be included in cash and cash equivalents on the balance sheet?

• Bank draft from a German customer
• six month T bill maturing in 2 months
• one year CD maturing in 1 month

Answer 6

-Only the bank draft (CD and T Bill) have Original Maturities greater than 3 months.

Question 7

Which of these items should be included in cash and cash equivalents?

• Petty Cash
• Checking Account
• Depository Account
• Marketable Equity Security
• Marketable Debt Security

Answer 7

• Petty Cash, Checking Account, Depository Account = Cash and Cash Equivalents
• Marketable Equity and Debt Securities = Investments, included in investments line

Question 8

Different methods of estimating uncollectible accounts:

-Method that emphasizes asset valuation rather than income measurement?

Answer 8

Aging the receivables. Focuses on balance sheet, emphasizes valuation of the assets. Good matching of revenue and expenses.

Question 9

Roy’s method is to use % of gross accounts receivable to calculate uncollectible “allowance for doubtful accounts”.
-BB ADA: 8,000
-EB gross A/R: 1,000,000
-Estimate: 3% of gross A/R
What is the credit balance of ending ADA?

Answer 9

-Take 3% of ending A/R to calculate:
3% * 1,000,000 = 30,000

Key point: IGNORE beginning balance. Add adjustment credit balance to net you up to what the ending balance should be (22K is missing piece to get to 30K…)

Question 10

Which of the following should go in Net Receivables:

• Trade Account Receivables
• Allowance for Uncollectible Accounts
• Claim against shipper for lost goods
• Selling price of goods on consignment
• Security deposit on warehouse used for storing some inventories

Answer 10

• Yes
• Yes
• Yes
• No, inventory
• No, not usually a current asset

Question 11

What is the journal entry to write off an uncollectible account under “allowance method”?

Answer 11

Debit: Allowance for Uncollectible Accounts (reducing this usual credit balance)
Credit: Accounts Receivable (reducing this debit balance)

Question 12

When a company factors its receivables without recourse, the transaction most closely resembles what type of transaction?

Answer 12

A sale of the company’s receivables, where the risk of uncollectible accounts transfers to the buyer.

Question 13

When a company factors its receivables with recourse, the transaction most closely resembles what type of transaction?

Answer 13

A sale of the company’s receivables, where the risk of uncollectible accounts remains with the seller.

Question 14

What is also known as the process of obtaining a loan using your receivables as collateral?

Answer 14

Pledging your receivables.

Question 15

What is also known as the process of obtaining a loan by transferring a “debtor’s right to cash collected on receivables” to a lender?

Answer 15

Assigning your receivables.

Question 16

Under Cash Basis Accounting, direct write-off method will treat the following sales adjustments as an (increase/decrease) to cash collections?

1) Accounts Written-Off
2) Increase in AR Balance

Answer 16

1) This would be a deduction to cash collections from sales revenue
2) This would also be a decrease to cash collections from sales revenue

Question 17

What is the journal entry to write off an uncollectible account under “direct write off method”?

Answer 17

Debit BDE (affects NI, WC)
Credit AR

Question 18

Walk me through the process of an account that is determined to be uncollectible, but is later collected, under the allowance method.

Answer 18

Entries:

1) (Revenue): AR debit, Revenue Credit
1a) (Given): BDE Debit, ADA Credit

2) (Uncollectible): ADA Debit, AR credit.
- Not in AR anymore, but also no longer in “doubt”

3) (Now it’s collected): Cash Debit, ADA Credit
- Get the cash. Reverse that debit to ADA you previously put in

Question 19

A company issues quarterly interim financials. Uses “lower of cost or market” to measure inventory in annuals.

• What method should they use to measure inventory in quarters?
• Should they recognize inventory losses if they are permanent declines? What about if they are temporary?

Answer 19

• They should use the same method they used in their annuals (lower of cost or market).
• Permanent declines in inventory (losses) should be recognized.
• Temporary declines, or reversals from previous temporary declines (gains), should not be recognized.

Question 20

When do you recognize revenue for agricultural products and precious metals?

Answer 20

At the time of production. Not at the time of sale.

Question 21

Under F.O.B. destination, when does the title pass?

Who pays for shipping, packaging, and handling costs?

Answer 21

F.O.B. destination means title passes when the goods are received by the buyer.
It also means shipping costs, packaging costs, and handling costs are costs to the seller.

Question 22

Under F.O.B. shipping point, when does the title pass?

Who pays for shipping, packaging, and handling costs?

Answer 22

F.O.B. shipping point means title passes when the goods are shipped (leave the seller’s location).
It also means shipping costs are a cost to the buyer.

Question 23

If you want to CLOSELY approximate COGS… and you can only use LIFO and FIFO, which one will get you closest for a current period?

Answer 23

LIFO. Will give you an expense that is most realistic based off current cost of goods sold

Question 24

If you want to CLOSELY approximate Ending Inventory… and you can only use LIFO and FIFO, which one will get you closest for a current period?

Answer 24

FIFO. Will give you an ENDING inventory that is only the last-in stuff… aka-the closest to the current prices.

Question 25

When using the moving-average method of inventory, how do we calculate current inventory cost?

Answer 25

A new weighted average cost is computed after each purchase. Issues are priced at the latest weighted average cost.

Question 26

Which U.S. GAAP inventory costing method will lead to the lowest ending inventory when product lines are subject to specific price increases?

Answer 26

Dollar value LIFO.

Lower value items are still in there.

Question 27

Dollar Value LIFO CALCULATIONS:

• Company adopts dollar value LIFO at end of Y1
• End inv had base year, end of year cost both at 300K
• Y2: end inv had 400K base year, 440K end year cost
• What Dollar Value LIFO inventory cost should be reported in Y2 balance sheet?

Answer 27

Dollar value calculation = EOY cost / Base Year cost = index. Multiply index by Annual Incremental Layers.

Year 2: 440K / 400K = 1.1 index. Multiply by 100K annual incremental layer.
Year 1: 300K / 300K = 1 index. Multiply by 300K annual incremental layer.
12/31/Y2 inventory: 110K + 300K = 410K.

Question 28

True or False?

• FIFO Periodic and FIFO Perpetual will always result in the same dollar value of ending inventory.
• LIFO Periodic and LIFO Perpetual will always…
• Weighted Average Periodic and Weighted Average Perpetual will always…

Answer 28

• True
• False
• False

Question 29

Which of the following affect inventory balances, COGS calculations?

• Freight in
• Freight out

Answer 29

Freight in affects, Freight out does not. Freight in gets added to purchases to get you COGAFS. Freight out is a selling expense.

Question 30

Company buys a plot of land for 100K
Razing a building costs 50K
Sale of scrap materials nets 10K
Excavation costs were 30K
New Plant was built for 800K
What amount should be capitalized for land, building?

Answer 30

Land = 100K + razing costs 50K - sales from scrap materials 10K = 140K
Building = 800K + excavation costs 30K

Question 31

Good understanding question:
Machine is purchased for use in a company’s manufacturing operations. Which of these costs should be capitalized?
-Insurance on machine while it is in transit
-Testing and prep of machine for use

Answer 31

• Yes, capitalize cost of insurance while in transit
• Yes, capitalize costs for testing and prep for use

Key Point:
Any cost incurred to acquire, and make ready, a plant asset is capitalized.

Question 32

What amount of interest should a company capitalize when incurring interest on construction debt?

Answer 32

• Total interest to be capitalized equals the AVOIDABLE interest expense, which is the “interest on the weighted average amount of accumulated expenditures for the building during the year”.
• This amount is capped by the total amount of interest incurred, which is the sum of specific construction debt + other borrowings.

Question 33

If a machine is constructed and held for a company’s own use, what interest should be expensed on this machine?

• Interest up until completion
• Interest after completion

Answer 33

• No, don’t expense. Interest up until completion on a machine held for own use should be capitalized as part of the historic cost of acquiring the fixed asset.
• Yes, expense. Interest after construction has been completed is interest expense on the income statement.

Question 34

If a machine is constructed and held for sale, what interest should be expensed on this machine?

• Interest up until completion
• Interest after completion

Answer 34

-Both. All interest

Question 35

If a rearrangement / remodeling of an asset does not increase the life of a fixed asset, but does make it more efficient, do we capitalize it?

Answer 35

Yes.

Question 36

Which of the following costs should be charged to “Land”?

• Title and Recording Fees
• Clearing of trees and grading
• Interest on a loan to purchase land
• Architect’s fees
• Installation of a new sewage system

Answer 36

• Yes, Title and Recording fees are capitalized and charged to Land
• Yes, Clearing of trees and grading are costs that we should capitalize, charge to Land. Usual and necessary cost to clear and grade the land.
• No. Interest should ONLY be capitalized when it is in connection with a “discrete” manufacturing activity. Acquiring land does not count as that.
• No. Archie fees are charged to buildings.
• No. A sewage system is a “Land Improvement”, not “Land”

Question 37

How much interest should be capitalized in the following scenario:

• 250,000 total amount spent on the project, uniformly throughout the year
• To help pay for construction, 200,000 was borrowed at 10%
• Funds not needed for construction were reinvested and earned +3,000
• Other than construction funds borrowed, only other debt outstanding was 150,000 at 7%.

Answer 37

-Interest to capitalize = lesser of avoidable interest and total interest expensed

-Avoidable: 250K / 2 (“uniformly” to “average”), times 10% (specific borrowing interest rate).
= 12,500

• Total interest spent: 200K * 10% + 150K * 7% = 30,500
• Avoidable is lesser, so answer is 12,500.

Question 38

When capitalizing interest expense for construction expenditures,

• what would be a scenario when we would use the specific interest rate paid on borrowings?
• when would we use a computation to calculate the interest rate?

Answer 38

• When the AVERAGE accumulated expenditures for a year are GREATER than the amount of SPECIFIC NEW BORROWING, we need to recalculate that interest rate.
• When the AVERAGE acc exp for a year are less than the amount of new specific borrowings, we can just use the amount of new specific borrowings (no excess to weighted average factor in)

Question 39

Can we capitalize interest expense when a construction contract is short term (less than a year)?

Answer 39

Yes we can. Whenever you are constructing an asset for internal use, you capitalize interest cost on the asset until it is finished.
-If it is short term (less than a year), you need to remember to divide the interest rate by 12 MONTHS. Divide it up by month! 1/12 of the average for this month, 1/12 of the average for this month, etc.

Question 40

In a nonmonetary exchange that lacks commercial substance, X company exchanges land for land. Fair values of each land are greater than their carrying amounts. X company receives cash of less than 10% of total compensation received from Y company. What should X company recognize?

Answer 40

• Recognize a gain
• Gain recognition is in an amount “determined by the ratio of any cash received (boot) over the total consideration”
• Exception to general rule of basing measurement value of an exchange on fair value.

Question 41

What factors would qualify a transaction for commercial substance?

Answer 41

1) The risk, timing, or amount of expected future cash flows from the asset you transfer differ significantly from the risk, timing, or amount of expected future cash flows of the asset you receive.
2) Entity specific value of the asset received differs significantly from the asset transferred.

Question 42

In general, in a transaction between two parties, what should we value the assets received at?
-What are the exceptions to this rule?

Answer 42

-Value the transaction at fair value
-3 exceptions to the rule:
-
-Inventory for inventory transactions are not valued at fair value. They are made solely to facilitate a sale to a third party that is not a party to the exchange.
-Lack of commercial substance

Question 43

Company A exchanges a truck with Company B. Company A’s truck was BV 12,000; FV 20,000. Company B gave up a truck with FV 16,000 and 4,000 cash.

• Does this exchange have commercial substance?
• What should we record for gain on this exchange? What should we record as the value of the new truck?

Answer 43

1) No, this exchange does not have commercial substance. Exact same fair value is exchanged. Very little apparent difference in timing, small effect on risk (some cash was received).
2) New Truck:
-Gain is proportion of boot / total consideration.
Boot = 4,000. Total consideration = 20,000. Gain proportion = 20%. Gain = 8,000 realized * 20% = 1,600.
Journal entries for company A.
Debit: Cash 4000 received
Debit: New Truck (plug).
Credit: Gain allocated 1600
Credit: Old Truck 12000

Question 44

When a nonmonetary transaction has commercial substance, how do we recognize gains and losses and assets acquired?

Answer 44

• Assets acquired are recognized at their FV.
• Gains and losses are recognized based on difference between FV acquired and BV given up. No proportionalizing these gains like we would in a transaction that “lacks” commercial substance.

Question 45

How do we calculate an asset received when there is a loss under a nonmonetary transaction?

Answer 45

When a loss is recorded, an asset received is recorded at:
\+ Book Value of Asset given up
\+ Cash Paid
- Cash received
- Loss recognized.

Question 46

Can you capitalize internal development of goodwill?

Answer 46

No.

Question 47

Which of the following qualify as R&D expenses?

• R&D contracted out to a third party
• Preproduction prototypes and models costs
• Costs for searching for new products or process alternatives
• Equipment purchased for current projects
• Equipment purchased for future projects
• Legal fees to obtain a patent

Answer 47

• Yes, 3rd party expenses are included
• Yes, preproduction is included
• Yes, costs for searching are included
• Yes, equipment for current projects are fully included
• No, equipment for future projects are not included. However, related depreciation on equipment for current and future projects IS an included expense
• No, legal fees are capitalized.

Question 48

When capitalizing a patent, which of the following costs are included?

• R&D costs to develop the patent
• Legal fees to register the patent

Answer 48

• No

- Yes. Capitalize legal fees. Expense research and development costs.

Question 49

Guy purchases a franchise with a useful life of 10 years. Costs him 50,000. Franchise fees of 3% are due each year to the franchisor. Revenues in the current year for the franchise were 400,000. What is the amount to be reported as “intangible asset - franchise” at the end of the year?

Answer 49

• First, amortize the franchise. 50,000 - 5,000 = 45,000 net.
• Balance in franchise account = “intangible asset - franchise”

Question 50

How do we treat start-up costs (including organization costs)?

Answer 50

Expense them as incurred. Do not capitalize.

Question 51

If a trademark is purchased with an indefinite life - aka, Cash flows will be generated indefinitely at the current level - what amount should a company record for amortization expense?

Answer 51

$0.

• Amortization expense is only recorded when we have a useful life to amortize over.
• Another note…Impairment should be reviewed:
  1) “whenever” events or changes in circumstances indicate that the carrying amount may not be recoverable.
  2) if the sum of Undiscounted Expected FCF’s is LESS than carrying amount… record an impairment loss.

Question 52

What are the differences in capitalization of patents under IFRS and GAAP?

Answer 52

Under IFRS, research costs related to an internally developed intangible (such as a patent) must be expensed, like GAAP. However,

• an intangible asset arising from development is recognized if the entity can demonstrate certain factors:
• > technological feasibility
• > intention to complete the intangible asset
• > ability to use or sell the intangible
• > asset being developed will generate future economic benefits
• > adequate resources are available to complete development and sell or use the asset

Question 53

An entity under IFRS incurred the following costs related to a patent purchased during the current year. Which ones should we capitalize to patent asset?

• Patent purchase price
• Nonrefundable VAT taxes
• Research expenditures
• Legal costs to register
• Training staff on the use
• Admin salaries

Answer 53

• Yes, always capitalize
• Yes, always capitalize
• No, do not capitalize. The only caveat would be if you had “development” expenditures related to the creation of an intangible, and if it demonstrated all of the required criteria.
• Yes, always capitalize
• No, do not capitalize
• No, do not capitalize

Question 54

Can you have a subsequent reversal of a previously recognized intangible asset impairment loss under

• US GAAP?
• What about under IFRS?

Answer 54

• Under US GAAP, no. Reversals of intangible asset impairment losses are prohibited, unless the intangible asset is held for sale
• Under IFRS,

Question 55

What is the recoverability test for intangible assets?

Answer 55

The recoverability test compares (part 1) undiscounted future cash flows to the carrying value of the intangible asset (limited life assets only).
-If the carrying value of the intangible is greater than the undiscounted future cash flows…then a (part 2) fair value test would be performed

Question 56

When a permanent impairment occurs, what journal entry do we make?

Answer 56

Debit: Loss on impairment

Credit: Accumulated Depreciation (increases this contra account)

Question 57

Company operates under GAAP.

• Long lived asset has a carrying value of 120K
• Expected future cash flows are 130K
• Present value of expected FCF’s are 100K
• Market Value is 105K
• What is the impairment loss?

Answer 57

-$0. Expected FCF’s > Carrying value, which is the first step in the impairment calculation under GAAP. Therefore, no impairment loss.

Question 58

Company operates under IFRS

• Long lived asset has a carrying value of 120K
• Expected future cash flows are 130K
• Present value of expected FCF’s are 100K
• FV minus costs to sell = 105K
• What is the impairment loss?

Answer 58

• Under IFRS, impairment occurs when:
• > ” the carrying value of a fixed asset exceeds the fixed asset’s recoverable amount “

What is the recoverable amount?
“ the greater of the asset’s fair value less costs to sell, and the asset’s value in use (which is the Present Value of FCF’s) “

• What is the greater of FV-costs to sell and value in use?
• 105K = FV minus costs to sell = > 100K…

Therefore, impairment loss of 15K.

Question 59

WHEN should a long-lived asset be tested for recoverability?

Answer 59

Important:
-When events or changes in circumstances indicate that an asset’s carrying amount may NOT be recoverable…that’s when we test an asset for recoverability.