FAR Flashcards
(186 cards)
1
Q
O.X
Shares of its own stock held by a corporation should be recorded as treasury stock and shown as a reduction in the stockholders’ equity section of the B/S.
A
O
2
Q
Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a “preference” over common stock dividends until all past preferred stock dividends are paid.
A
O
3
Q
dividends are cumulative.
A
4
Q
The sale of treasury stock at less than cost will result in a net increase in stockholders’ equity.
A
5
Q
Gains and losses on treasury stock transactions are never recorded on the income statement.
A
6
Q
Ending retained earnings = Unadjusted retained earnings − Cash dividends − Property dividends
A
7
Q
Common and preferred stock are recorded at the number of shares issued times stated or par value. Any excess is paid-in capital
A
8
Q
The date of declaration is the date the board of directors formally approves a divided. A liability is created (dividends payable), and retained earnings is reduced (debited).
A
9
Q
liquidating dividend (amount in excess of retained earnings balance)
A
10
Q
A stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock an
A
11
Q
Dividend Income
= No. of shares × dividend per share
A
12
Q
Net income goes into retained earnings (equity)
A
13
Q
Collections received for service contracts should be recorded as an increase in an unearned service revenue account.
A
14
Q
When service contracts are sold, deferred revenue increases, but service revenue does not increase until services are performed.
A
15
Q
When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.
A
16
Q
Deferred revenue is a liability until the service has been performed.
A
17
Q
Cash received in advance of earning the revenue is reported as a liability, specifically unearned revenue. Because the liability will be satisfied within a year from the financial statement date, it will be reported as a current liability. Note that the question is asked from the landlord’s perspective
A
18
Q
Milestones achieved (whether production or distribution related) are an example of an output method used to recognize revenue. Resource consumption, labor hours expended, and costs incurred relative to total expected costs are all examples of input methods.
A
19
Q
If the buyer is benefitting as the seller performs per the terms of the contract, this is an indication that revenue should be recognized over time as opposed to at a point in time. The buyer having legal title to an asset indicates control, which is in line with recognizing revenue at a point in time. When rewards and risks of ownership remain with the seller, revenue would not be recognized.
A
20
Q
If the buyer is benefitting as the seller performs per the terms of the contract, this is an indication that revenue should be recognized over time as opposed to at a point in time. The buyer having legal title to an asset indicates control, which is in line with recognizing revenue at a point in time. When rewards and risks of ownership remain with the seller, revenue would not be recognized.
A
21
Q
Under the revenue recognition rule, revenue cannot be recognized until the performance obligation has been satisfied.
A
22
Q
acklin Co. should report revenue from initial fees when all performance obligations of the sale have been satisfied.” Macklin Co. will recognize the entire initial fee in the current year.
A
23
Q
When a company recognizes revenue over time for a four-year construction contract, income previously recognized would be used to calculate the income recognized in the second year (but not progress billings to date).
A
24
Q
When revenue is recognized at a point in time, revenue is recognized when the contract is complete; however, expected losses are recognized immediately in their entirety
A
25
26
The seller will book the transaction as a financing arrangement when the repurchase price is equal to or greater than the original sale price and the expected market value
27
An entity should recognize a refund liability if it receives or expects to receive consideration from a customer and anticipates having to refund a portion or all of that consideration.
28
The single-step income statement will include Purchase discounts and the recovery of accounts written off in the revenue account?
NO
29
Comprehensive income includes all changes in equity during a period except those resulting from owner investments and distributions to owners.
Dividends paid to stock holders
30
the adjustment for the prior year understatement of amortization expense is a prior period adjustment that will be reflected in beginning retained earnings, not on the income statement. The unrealized gain on the available-for-sale debt security will be reported in other comprehensive income.
31
Net income includes both income from continuing operations and income from discontinued operations, all presented net of tax
32
The earliest period that a component of an entity can be reported in discontinued operations is when the component meets the following "held for sale" criteria:
Management commits to a plan to sell the component.
The component is available for immediate sale in its present condition.
An active program to locate a buyer has been initiated.
The sale of the component is probable and the sale is expected to be completed within one year.
The sale of the component is being actively marketed.
It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.
33
If the U.S. dollar appreciates versus the Japanese yen, this implies that it will take fewer dollars to purchase one yen. As a result, when the transaction is ultimately settled, Jacobs will need fewer dollars to convert into yen to pay Noshima. This will therefore result in a gain.
34
Transaction gains and losses go to the income statement, whereas translation gains and losses go to OCI.
35
Comprehensive income is calculated as net income plus other comprehensive income. An unrealized loss on a trading security will be recorded as a loss on the income statement, which will reduce net income and therefore comprehensive income.
36
Prior service costs recognized in the year of adjustment should be recorded to PBO and other comprehensive income (or loss), which then becomes part of accumulated other comprehensive income (or loss). The unrecognized prior service cost in accumulated other comprehensive income (or loss) is amortized to pension expense over the plan participant's remaining years of service
37
Net income = Sales revenue - Cost of goods sold - Operating expenses
Comprehensive income = Net income + Other comprehensive income
38
Unrealized gains and losses on debt securities classified as available-for-sale are recorded in other comprehensive income.
Unrealized gains and losses on trading securities go onto the income statement, as opposed to going into other comprehensive income.
39
The company has the choice of reporting the components of other comprehensive income on either an individual net of tax basis or each component on a before tax basis with one amount shown after for the aggregate tax effects.
40
Bond X is classified as held-to-maturity, and any sales prior to maturity will not have an impact on other comprehensive income.
Realized gains and losses on trading securities go onto the income statement, as opposed to going into other comprehensive income
41
preferred stock dividends are cumulative, when they are declared or paid is not relevant
42
The possible exercise of common stock options would increase EPS by $0.10, so they are not used because of the antidilution rule. Each potentially dilutive security is considered separately for its dilutive effect.
43
A "cumulative effect" type accounting change is not included in the net income of the period of change; instead, the beginning of the year retained earnings is restated.
44
What amount of these expenses should Tree include in its third quarter interim financial statements for the three months ended September 30?
For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods.
45
For large accelerated and accelerated filers, the 10-Q is due within 40 days of the period end. From March 31, that means 30 days in April + 10 days in May = May 10.
46
Preferred dividends are not subtracted when computing the adjusted net income because we are making the assumption that the preferred shares were converted to common shares at the beginning of the period and, thus, that no preferred dividends were paid
46
Net income
330,000
Less: Preferred dividends paid
(60,000)
Income available for common stock
270,000
Equation
EPS= NI-Preferred dividend/Weighted shares OS
47
F1-M2 pass!!!!
48
A lease should be classified as a finance lease if the leased asset is of a specialized nature that only the lessee can use it without major modifications. This implies that the lessee gains most of the economic benefits from the asset.
49
When payment is received in advance, the entry is to debit Cash and credit Unearned Revenue, reflecting a liability to perform services.
50
If a company's key supplier goes out of business after the balance sheet date, how should this be reported in the financial statements
Disclose the event in the notes to the financial statements.
51
Prepaid Rent is an advance payment for rent, which is an asset that provides future economic benefits. It is classified as a current asset because it is expected to be used up or expire within one year of the balance sheet date.
52
The journal entry for borrowing against pledged receivables involves debiting Cash for the amount received and crediting Notes Payable for the liability incurred
53
Investments held for trading purposes are typically reported at fair value, as they are frequently bought and sold and their fair value can be reliably determined.
54
An intangible asset is defined as an identifiable non-monetary asset without physical substance.
55
Day-to-day operational expenses are typically not considered in the statement of changes in equity; they are part of the income statement.
56
If receivables are sold, the correct term is that the receivables were factored.
57
The carrying amount of a finite-lived intangible asset is calculated as the original cost of the asset minus any accumulated amortization and any impairment losses that have been recognized.
58
Internal Service Funds are used to account for the financing of goods or services provided by one department of a government to other departments of the government on a cost-reimbursement basis.
59
Trading debt securities are reported at fair value, with holding gains and losses included in earnings.
60
The amount of dividend revenue that should be reported in the investor's income statement for this year would be the portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment.
61
The fair value option may be chosen for eligible financial instruments that do not typically get measured at fair value. This option is irrevocable and is applied to individual financial instruments (in their entirety). It is not applied to specific risks.
62
Unrealized gains and losses from marking available-for-sale debt securities to fair value (assuming they are non-impaired) at the balance sheet date are treated as other comprehensive income items and bypass the income statement.
63
Unrealized gains and losses from marking available-for-sale debt securities to fair value (assuming they are non-impaired) at the balance sheet date are treated as other comprehensive income items and bypass the income statement.
64
Unrealized gains and losses (assuming no impairment) on available-for-sale securities are recognized in other comprehensive income (OCI) in the period incurred. The impact of the unrealized gain or loss will show net of tax, either as an individual line item or in aggregate with other components of OCI
65
Trading securities reflect all realized and unrealized gains and losses in earnings. A security that is classified as available for sale would have unrealized gains or losses reflected in other comprehensive income, but once it is transferred into the trading category, those unrealized amounts will need to be recognized in earnings.
66
For held-to-maturity securities, the current expected credit losses (CECL) model requires recording a loss when the amortized cost exceeds the present value of expected future cash flows.
66
For a held-to-maturity debt security, based on the current expected credit losses (CECL) model, a loss is recorded when the amortized cost exceeds the present value of the principal and interest expected to be collected
66
Per the current expected credit loss (CECL) model, the expected credit loss is equal to the difference between amortized cost ($1,000,000) and the present value of expected cash flows ($978,000) = $22,000. However, the loss will not be recorded on the income statement because the fair value ($1,015,000) is higher than amortized cost. Because fair value exceeds amortized cost, the security actually produces a gain of $15,000 (the difference between $1,015,000 and $1,000,000). This gain will be recorded in other comprehensive income (OCI).
66
Concentration of credit risk is required disclosure in the notes to the Financial Statements.
67
The amount to be recognized in the income statement in Year 2 is the difference between the sale price and the fair value as of the end of Year 1.
68
If XYZ debt is appropriately classified as available-for-sale, that alone would not be enough of a reason to reverse a journal entry that debited an unrealized loss to OCI. Available-for-sale debt securities will result in losses in OCI when the fair value is below the present value of expected cash flows and the present value is below amortized cost. The loss recorded in OCI is equal to the difference between the present value and fair value. The credit loss recorded on the income statement is the difference between amortized cost and the present value
69
Although the total difference between amortized cost ($250,000) and fair value ($218,000) is $32,000, the credit loss is equal to the difference between amortized cost and the present value of expected cash flows (interest and principal to be received). If the credit loss is recorded at $23,000, the present value must be equal to $250,000 − $23,000, or $227,000. The additional $9,000 difference between the present value and fair value is recorded as an unrealized loss in other comprehensive income (OCI)
70
the effect of the new estimate of warranty costs (from $100 to $110) is a change in estimate and will be reported in Year 2 income from continuing operations
71
Financial statements of all prior periods presented should be restated when there is a "change in entity" such as resulting from:
Changing companies in consolidated financial statements.
Consolidated financial statements versus previous individual financial statements.
72
hen the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations.
73
If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a change in accounting estimate treated as a change in accounting estimate and is accounted for prospectively.
74
If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders' equity.
75
If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.
76
The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
77
The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance
78
The carrying amounts of the assets and liabilities for these years will be corrected in each year's financial statements and shown as restated in the three year comparative financial statements. As of the beginning of Year 3, the cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.
79
The adjustment to beginning retained earnings must include an adjustment for income taxes
80
Depreciation expense should reflect the appropriate expense amount for the current year and should not be used to fix prior period errors. Accumulated depreciation (and original depreciation expense) are booked at a gross level (prior to accounting for any tax impact), so the correct adjustment will include a credit to accumulated depreciation of $40,000.
81
If Year 2 contracts were signed earlier in the year than before, more warranty work would have been performed by year-end, thus reducing the deferred revenue balance more than in prior years.
82
No interest payable will be recorded for the noninterest bearing note, as the interest is implicit in the face value of the note and will already be accounted for in the carrying value of the note payable on the balance sheet
83
Criteria for determining which investments are treated as cash equivalents is the summary of significant accounting policies.
84
Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7
85
e summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.
86
The summary of significant accounting policies should include "policies." The only policy in the choices listed is the revenue recognition policies.
87
Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements.
88
The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc
89
Financial statements are considered issued on the date when the financial statements are in a form and format that comply with GAAP and by which the financial statements have been widely distributed to financial statement users. There is no requirement for any shareholders to have acknowledged receipt of the financial statements.
90
If there is no principal market, then the price in the most advantageous market is the fair value of the stock. The most advantageous market is the market with the best price after considering transaction costs
91
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date. It is a market-based measure, not an entity-based measure.
92
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date under market conditions.
93
Fair value is a market-based measure, not an entity-based measure. A company may apply fair value to financial instruments on an instrument-by-instrument basis, but once elected, fair value measurement will be used until the asset/liability is disposed.
94
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value does not include transaction costs but may include transportation costs if location is an attribute of the asset or liability.
95
Regarding a building, which is an asset, fair value is the price that would be received to sell the building in an orderly transaction between market participants in the principal market (or most advantageous market in the absence of a principal market) between market participants at the measurement date. In this case the best measurement will be based on the principal market.
96
Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.
A company that purchases real estate zoned for recreational use would be considered a market participant, because it meets the criteria identified above
97
Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.
A company that purchases real estate zoned for recreational use would be considered a market participant, because it meets the criteria identified above
98
Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.
A company that purchases real estate zoned for recreational use would be considered a market participant, because it meets the criteria identified above
99
The highest and best use for the land is for residential development, Fair value.
100
Level 3 inputs are unobservable inputs for the asset or liability, reflecting the entity's judgment about the assumptions that a market participant would use.
101
A Level 2 valuation uses inputs other than quoted market prices that are either observable or unobservable. Applying fair value based on a similar asset's value is a Level 2 valuation.
102
Projected cash flows are an unobservable input based on entity assumptions and would be classified as a Level 3 input.
103
Quoted market prices on a stock exchange for an identical asset are considered to be a Level 1 input, the most reliable of all.
104
Internally generated cash flow projections for a related asset or liability would be better classified as a Level 3 input rather than a Level 2 input because the internally generated cash flow projection is based on "unobservable" inputs reflecting a company's "own assumptions" about the way the related asset or liability would be priced.
105
Level 1 inputs are quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required.
106
Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets.
107
$100,000 [accrual-basis income] – $10,000 [not revenue under the cash basis] – $6,000 [expense under the cash basis] = $84,000 [cash-basis income].
108
OCBOA financial statement titles should differentiate the financial statements from accrual basis financial statements.
109
Special purpose frameworks are non-GAAP presentations and include the cash basis, modified cash basis, and tax basis of accounting, which are the most commonly used special purpose frameworks.
110
Special purpose frameworks are non-GAAP presentations that include other bases of accounting, such as the cash basis and modified cash basis. The statement of cash receipts and disbursements is an example of a cash basis income statement.
111
The conversion from cash basis revenue to accrual basis revenue incorporates the following adjustments starting with cash basis revenue (cash receipts from customers):
Add ending accounts receivable.
Subtract beginning accounts receivable.
Subtract ending unearned (or deferred) revenue.
Add beginning unearned (or deferred) revenue.
112
Accrual-based revenue will count all sales applicable to Year 2, regardless of when they are collected. Year 2 sales include the cash receipts in Year 2 ($200,000) plus the Year 3 cash receipts applicable to Year 2 ($75,000).
113
The decrease in prepaid interest is added when calculating accrual basis interest expense because a decrease in prepaid interest increases interest expense
114
The decrease in interest payable is subtracted when calculating accrual basis interest expense because a decrease in interest payable implies that cash interest payments exceeded accrual basis interest expense.
115
Inventory turn over
Cost of goods sold/average inventory
116
Net profit margin is calculated as net income divided by net sales. If inventory is sold at cost, net income does not change but net sales increases. Therefore, the numerator does not change but the denominator increases, causing net profit margin to decrease.
117
Return on equity is calculated as [net income – preferred dividends] divided by average total equity.
118
Working capital turnover is calculated as sales divided by average working capital.
119
Return on assets is calculated as net income divided by average total assets
120
Not-for-profit corporations are required to produce the following financial statements
Statement of financial position
Statement of activities
Statement of cash flows
Not-for-profit corporations are also required to disclose, display, or separately report the relationship between functional classifications and natural classifications of expenses
121
The quick ratio is calculated by
dividing [cash + cash equivalents + marketable securities + accounts receivable (net)] by current liabilities
122
The current ratio is equal to
current assets divided by current liabilities.
include cash, accounts receivable and inventory,
123
Accounts receivable turnover is
calculated as sales (net) / average accounts receivable (net)
124
Inventory turnover is calculated as
Cost of goods sold/Average inventory
125
Days in inventory, also known as the inventory conversion period, is calculated as:
Days in inventory, also known as the inventory conversion period, is calculated as:
126
Times interest earned is calculated as:
Income before interest expense and taxes/Interest expense
127
Inventory turnover is then calculated as follows
Cost of goods sold/Average Inventory
128
Net profit margin
net income / net sales
129
Net profit margin is calculated as net income divided by net sales. If inventory is sold at cost, net income does not change but net sales increases
Therefore, the numerator does not change but the denominator increases, causing net profit margin to decrease.
130
Return on equity
Net income – Preferred dividends/Average common equity
131
The current ratio is calculated as
current assets divided by current liabilities
132
Cash equivalents must mature in 90 days or less at the date of purchase.
133
Cash is defined as actual unrestricted cash and cash equivalents are defined as short-term, liquid investments that are so near maturity (original maturity date was within three months of the purchase date) that the risk of changes in the value because of interest rate changes is insignificant
Cash in a bond sinking fund is restricted cash.
134
Checking accounts, depository accounts, and petty cash would all qualify as cash and cash equivalents on the balance sheet.
Marketable equity and debt securities are both classified as investments and would be included in the investments line.
135
negative balance (overdraft) in the Small Bank account should be reported on the balance sheet as a current liability.
136
Estimating bad debts on the aging analysis of accounts receivable balances focuses on the balance sheet and emphasizes the valuation of assets. It results in a good matching of revenue and expense.
137
If bad debts are based on accounts receivable, the result of the aging will be the balance in the allowance account.
138
when the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account decreases both accounts receivable and the allowance for uncollectible accounts.
139
When a specific uncollectible account is written off under the allowance method of recognizing bad debt expense, the "allowance for bad debt" account would decrease
140
The uncollectible (bad debts) expense is calculated as follows (B.A.S.E.)
B Beginning balance, allowance for uncollectible accounts
A Uncollectible accounts expense
S Accounts written off
E Ending balance, allowance for uncollectible accounts
141
Factoring receivables is the process by which a company converts its receivables to cash by assigning them to a factor, either with or without recourse
142
The discount is always applied on the maturity value.
143
Revenue is recognized when the goods are sold to a third party. Until the sale, the goods remain in the consigner's inventory. Freight is a cost of inventory and expensed when inventory is sold. Commissions and advertising are expenses.
144
Inventory will be reported at the lower of cost or market, with market as the middle value of the replacement cost, market ceiling, and market floor.
145
Net realizable value is computed as selling price less costs to complete and sell
146
Net realizable value is equal to the selling price less the estimated cost of disposal:
147
The fundamental equation for inventory is: Beginning inventory + Purchases − Cost of goods sold = Ending inventory.
147
Both misstatements are added to the calculated cost of goods sold to achieve the correct cost of goods sold
147
The last in, first out (LIFO) method results in the lowest ending inventory because older inventory costs remain on the balance sheet, with more recent (and higher) inventory costs reflected in the cost of goods sold on the income statement.
When prices are increasing, recording inventory under LIFO results in a higher cost of goods sold, which is reflective of the inflationary prices. A higher cost of goods sold matched against sales revenue results in the lowest net income among the inventory methods, thereby minimizing the impact of taxes and saving cash
147
FIFO will result in a lowest inventory turnover in an inflationary environment assuming constant inventory quantities.
Since the inventory turnover ratio is computed by taking the cost of goods sold for the year and dividing this by the average inventory, then we're looking for an answer that would result in a lower COGS figure and/or a higher average inventory valuation. Keep in mind that we're assuming an inflationary environment or rising prices. Under FIFO, our COGS would be lower, and our ending inventory would be higher, causing our average inventory to be higher as well
147
Under a periodic inventory system, inventory is only counted at the end of the period
147
Inventory = Beg inventory + Purchases - Sales reduced to a cost basis
147
When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.
148
ll inventory was sold during the period, the cost of goods available for sale equals the cost of goods sold
advertising cost, staff salaries, and the bad debt as inventoriable costs. These are period costs and will be reported as selling, general, and administrative expenses in the income statement.
149
Land costs include the costs of getting the land ready for intended use which includes razing old buildings less salvage plus title insurance and legal fees
150
The proceeds from the sale of the building should be deducted from the cost of the land.
Cost of land includes all costs necessary to put the land in place and condition for construction of the plant. Any proceeds from the sale of any existing buildings (or standing timber, or soil) or scrap are deducted from the cost of the land.
151
should be charged to "Land"?
Title and recording fees
Clearing of trees and grading
152
Expense ordinary repairs but capitalize expenditures, which are "additions" or "benefit several periods" or "improve efficiency" as is the case in this question.
153
The installation date is the appropriate date to begin depreciation.
154
Capitalize all costs necessary to put a fixed asset in place, in the required condition, at the proper time for its intended use.
155
Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at the present value of all future payments.
156
the architect's fees o and the new building construction costs o are included as building costs
157
Since the carrying value of the damaged portion of the building is known and is uninsured, the component method is used and a loss in the amount of the carrying value of the damaged portion of the building must be recognized. The refurbishing costs create a new asset (the reconstructed building) and must be capitalized.
158
If borrowings are not tied specifically to the construction of an asset, the weighted average interest rate for the other borrowings of the company should be used
159
Construction period interest is capitalized based on the weighted average of accumulated construction expenditures
160
The double-declining balance percentage is calculated as the straight-line rate times 200%: 1/10 × 200% = 20%
161
The depletion base equals the purchase price plus the development costs plus the estimated restoration costs less the expected salvage value
162
There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under U.S. GAAP (unless the asset is held for disposal).
163
The sum-of-the-years'-digits method is an accelerated method of depreciation where the earlier years reflect more depreciation expense than the later years. To calculate the denominator in the sum-of-the-years'-digits method, the following calculation is necessary
[N × (N+1)]/2, where N is the estimated useful life
164
Units-of-production depreciation method reflects that an asset's service potential declines with use.
165
166
The double-declining method of depreciation will apply a factor of 2/n to the cost total, with n representing the useful life of the asset
The salvage value is not accounted for in the calculation of this method, but must be accounted for manually to ensure that the value of the asset never falls below the salvage value. In addition, if the asset is purchased during the year, depreciation will only be counted for the number of months the asset was available to the company. For this asset, a May 1 purchase implies eight months of depreciation for the year.
167
The double-declining balance method of depreciation doubles the straight-line rate and ignores salvage value in the expense calculation
168
The net gain from the sale of a warehouse and purchase of a new warehouse will fall under continuing operations on the income statement, under "other" revenues and gains.
169
The old building being actively marketed for sale will be valued at the lower of its book value or net realizable value (fair value less the costs to sell
170
net book value is historical cost less accumulated depreciation
170
Estimated restoration costs should be added to the depletable base of the natural resource
171
Performance of an impairment test on fixed assets held for use and to be disposed of begins with a recoverability test, in which the sum of undiscounted future cash flows is compared with the carrying amount.
172
The carrying amount of fixed assets should be tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable
173
A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life.
174
A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life.
174
When legal fees and other costs are incurred to defend a patent and the defense is successful, the appropriate treatment is to capitalize the costs. The costs will be added to the patent account and amortized along with the rest of the patent account over the shorter of the patent's estimated life or remaining legal life.
