F3 OLD

Question 1

Define cash & equivalents.

Answer 1

*Cash includes both currency and demand deposits with banks and/or other financial institutions.
*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 the date of purchase) that they represent insignificant risk of changes in value.

Question 2

Name two methods of accounting for the write-off of uncollectivle 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, this is no GAAP

ALLOWANCE METHOD:
Dr Allowance for uncollectible accoutns
Cr Accounts receivable

*strengths: matches bad debts with credit sales, accounts receivable is fairly stated. Required by GAAP.

Question 3

Name two methods of estimating for 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

TO PROVIDE FOR:
Dr: Bad debt expense
Cr: Allowance for uncollectible accounts

TO 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 substracting 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 the 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 the 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 rising 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

Carrying = Historical cost - Accumulated depreciation - Impairment

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 EQUIP:
purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed*

ACQUISITION OF BUILDING:
purchase price, deferred maintenance, alterations, improvements, architect’s fees*

*if equipment or 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 & maintenance. They do no 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:
  • actual interest cost incurred; or
  • 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:
1) Expenditures for the asset have been made.
2) Activities that are necessary to get the asset ready for its intended use are in progress.
3) 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

Straight-Line
(Cost - Salvage) / Useful Life

Sum-of-the-Years’ Digits
Sum of years = n(n+1)/2
(Cost - Salvage) x (Years remaining) / (Sum of years)

Double-Declining Balance
2 x Straight-line rate x Net book value of the asset*

*no deduction for salvage to determine the depreciable base. Depreciate down to salvage value.

Unit of Production
(Cost - Salvage) / Estimated hours x Actual hours for period

Question 24

State the rules for computing depletion on natural resources.

[remember it is real property]

Answer 24

Residual value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price

[(cost of land + extraction dev cost + anticipated restoration cost - residual value) / estimated recoverable costs] x units extracted = depletion

Question 25

When will an asset exchange have commercial substance under U.S. GAAP?

Answer 25

An asset exchange generally has commercial substance when the entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.

Question 26

How are gains/losses on nonmonetary exchanges recognized under U.S. GAAP?

Answer 26

Exchange has commercial substance – always recognize gains and losses on the echange equal to the difference between the FV of what is given up and the carrying value of what is given up.

Exchange does not have commercial substance or the new asset’s FV is not determinable (and the FV of the asset given up is unknown) – no gain on exchange is recognized unless boot is received, and losses are recognized in full (if losses exist because an impairment loss was not previously recognized).

If boot received is greater than 25% of total consideration, all gains and losses by both parties to the exchange just as in a monetary transaction that has commercial substance.

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, includiing legal and registration fees.

Internally developed intangible assets:
* Legal fees, costs of successful defence, 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 cost less amortization (finite life intangibles only) and impairment.

Question 30

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

Answer 30

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

Question 31

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

Answer 31

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

Question 32

What is the proper treatment of research and development costs under U.S. GAAP?

Answer 32

Research and development costs should be expensed as incurred unless an expenditure is for captial assets that have alternative future uses, or for research and development undertaken on behalf of others under a contractual agreement.

Question 33

List some items not considered R&D costs.

Answer 33

• Routine periodic design changes
• Marketing research
• Quality control testing
• Refomulation of a chemical compound

Question 34

When should the costs of developing computer software for resale, lease, or licensing be capitalized under U.S. GAAP?

Answer 34

After technological feasibility has been established and before the product is released for sale.

Question 35

How should the costs of capitalized computer software developed for resale be amortized under U.S. GAAP?

Answer 35

Annual amortization is the greater of:

PERCENT OF REVENUE METHOD
Total capitalized amount x (Current gross revenue for the period / Total projected gross revenue for the product )

STRAIGHT-LINE
Total capitalized amount x ( 1/Estimate of economic life)

Question 36

Outline the treatment of computer software developed internally or obtained for internal use under U.S. GAAP.

Answer 36

• Expense costs incurred iin the preliminary project state and costs incurred in training and maintenance.
• Capitalize costs incurred after preliminary project state and for upgrades and enhancements.
• Capitalized costs should be amorized on a straight-line basis.

Question 37

What is the test of recoverability for the impairment of intangible assets other than goodwill under U.S. GAAP?

Answer 37

FINITE LIFE
if undiscounted future cash flows expected from use of asset and eventual disposal is less than the carrying value, recognize loss on impairment

INDEFINITE LIFE
if FV is less than carrying value, recognize loss on impairment

Question 38

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

Answer 38

The amount by which the CV exceeds the FV of the asset.

Question 39

What assets are subject to the impairment test?

Answer 39

• Intangibles (including goodwill) and fixed assets to be held and used.
• Intangibles (including goodwill) and fixed assets slated for disposal.

note: the test must be done at least annually

Question 40

Describe the impairment test under U.S. GAAP.

Answer 40

If the sum of the undiscounted future cash flows is less than the carrying amount, an impairment loss needs to be recognized.

Question 41

How is the impairment loss reported in the financial statements?

Answer 41

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

The carrying amount of the asset is reduced.

Question 42

Is restoration of impairment losses permiited underU.S. GAAP?

Answer 42

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

Restoration is prohibited for assets held for use.

Question 43

Name the two rules for perfomring impairment calculations under U.S. GAAP.

Answer 43

DETERMINING IMPAIRMENT
Use the undiscounted future net cash flows. An impairment loss exists if total undiscounted cash flows are less than the carrying value.

AMOUNT OF IMPAIRMENT
Use the FV of the asset:
Impairment loss = Fair value - Carrying value