Flashcards in FAR 64 - Misc. Trans, Events and Disclosures 2 - Segment Reporting/Software Costs/Subsequent Events Deck (34):
What are the 3 characteristics of an operating segment?
1. The segment is involved in revenue producing and expense incurring activities.
2. The operating results of the segement are reviewed by the company's chief operating decision maker on a regular basis.
3. There is discrete financial info available for the segment.
Which of the following qualifies as a reportable operating segment?
A. Corporate headquarters, which oversees $1 billion in sales for the entire company
B. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer
C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits
D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits
B. Only the North American segment meets at least one of the three quantitative criteria at the 10% level (revenue, income, assets) AND reports to the chief operating decision maker of the firm as a whole. For all three criteria, the segment must account for 10% or more of the combined amount for all operating segments. Reporting to the company-wide chief operating decision maker is also a requirement of an operating segment.
What are the 3 critera used to qualify as a reportable segment?
Only 1 of the 3 critera need to be met to be reportable.
1•segment revenue is 10% or more of total revenue (external and/or intersegment sales) for all reported operating segments,
2•segment profit or loss is 10% or more of total profit for those segments reporting a profit, or 10% of total loss for those segments reporting a loss, whichever is greater in absolute amount, and
3•segment assets are 10% or more of total assets of all operating segments. Thus, each segment meets at least one of the three criteria.
Which of the following types of entities are required to report on business segments?
A. Nonpublic business enterprises
B. Publicly traded enterprises
C. Not-for-profit enterprises
D. Joint ventures
B. FAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments.
What information should a public company present about revenues from foreign operations?
A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas.
B. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between geographical areas.
C. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany sales between geographical areas.
D. No disclosure of revenues from foreign operations needs to be reported.
A. Segment disclosure requires that companies disclose the amount of sales to unaffiliated customers by geographical region. They also require disclosure of intracompany sales between geographical areas. These cannot be aggregated but must be reported separately.
Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?
A. The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
B. The identity of any external customer providing 10% or more of a particular operating segment's revenue
C. The identity of any external customer considered to be "major" by management
D. Information on major customers is not required in segment reporting.
A. This is one of the disclosures required in FAS 131. The identity of the customer does not need to be disclosed, but the segment reporting the revenue must be identified. Such a segment would meet one of the three quantitative thresholds for reporting segment information. The three thresholds are 10% of revenue, income, and assets.
Grum Corp., a publicly owned corporation, is subject to the requirements for segment reporting.
In its income statement for the year ending December 31, 2004, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 2004 were $40,000,000.
In its 2004 financial statements, Grum should disclose major customer data if sales to any single customer amount to at least
Under FAS 131 (1997), if revenues from transactions with a single customer amount to 10% or more of a firm's total revenue, that fact must be disclosed, along with the total revenues from each such customer.
For this firm with revenues of $50,000,000, 10% of total revenues is $5,000,000.
T/F: All reportable segments are operating segments.
T/F: If a segment is the only segment that has an operating loss, then it cannot pass the net income test for reportable segments.
If the loss is more than 10% of total revenue, then it would be a reportable segment
T/F: Operating segments for reporting purposes are based on management's categorization of the firm's subunits.
T/F: Segment earnings is not one of the criteria in the quantitative tests to determine whether an operating segment is a reportable segment.
T/F: The 75% test for reportable segments is based on external revenue.
T/F: The identity of major customers is not a required disclosure for reportable segments.
Only for the entity as a whole.
T/F: For purposes of determining reportable segments, two or more operating segments may be aggregated to form a reportable segment provided that each of the following criteria are met, except for the similarity in nature of regulatory environment.
Segments must be similar in each of the following areas to aggregate.
1. The nature of products and services
2. The nature of production processes
3. Customer type or class
4. Distribution methods for products and services
5. The nature of the regulatory environment.
T/F: A firm's segments all had operating profits. Total firm revenue was $4,000. Total segment profit was $800. Total segment assets were $7,000. If a segment meets any one of the following minimums, it is a reportable segment: $400 revenue, $80 operating profit, and $700 assets.
T/F: An operating segment must pass at least one of three quantitative tests.
Not to be considered an operating segment.
If it the operating segment is reportable, then it would need to pass at least one of three quantitative tests.
Which of the following is an indication that a cloud computing arrangement includes a software license?
I. The customer has contractual right to take possession of the software at any time during the hosting period without significant penalty.
II. The cloud computing arrangement has an indefinite life because the contract is renewable indefinitely.
III. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.
I and III are the criteria for determining if the cloud computing arrangement contain a software license.
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life.
Yellow has a policy of taking a full-year's amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program.
What amount should Yellow report as an expense for the current year?
There are three expenses to be recognized:
(1) software development costs incurred before the application development stage was reached, $4,000,000;
(2) amortization of capitalized software development costs incurred after the application development stage was reached, $8,000,000/4 = $2,000,000;
(3) $50,000 training costs.
The sum of these is $6,050,000.
Training costs are expensed as incurred. The application development stage is the point after which there is sufficient evidence of a product that software development costs are capitalized and amortized. Such costs will benefit future periods.
T/F: The software license that is part of a cloud computing arrangement is capitalized and amortized over the life of the license.
T/F: The smaller amount from two different amortization methods is the amount recognized as amortization of computer software costs each period.
The larger amount
T/F: The cost of duplicating software and manuals is capitalized to inventory.
T/F: Computer software costs incurred before the attainment of technological feasibility are capitalized as R&D expense.
Costs incrred during R&D will be expensed, while the costs incurred subsequently will be capitalized.
T/F: If current software revenues are much smaller than future expected annual software revenues for a product, the straight-line method will result in the larger amortization.
T/F: Capitalized software costs equal $50,000. At the end of the first of a three-year sales life, revenues for that year amounted to $200,000, and future estimated revenues are expected to be $300,000. Amortization of software costs for this first year equals $20,000.
T/F: The end of the current year is the end of the second year of an estimated four-year sales life for a software product. In computing straight-line amortization for computer software costs, the beginning book value for the current year should be divided by 3.
T/F: Computer software costs are capitalized only for those costs preceding the attainment of technological feasibility.
Costs incrred during R&D will be expensed, while the costs incurred after reaching technological feasibility will be capitalized.
In October 20x2, a large U.S. aircraft manufacturer signed a significant contract with the government of France to build 50 jumbo jets, with delivery scheduled for 20x5.
In February 20x3, the firm signed a second contract with the government of Germany to build 35 jumbo jets. The 20x2 financial statements were issued in early March 20x3. The firm did not begin work on either contract before the issuance of the 20x2 statements.
Which contract(s) should be recognized in the accounts for the 20x2 financial statements?
Contract 1 (French)
Contract 2 (German)
No transactions have taken place for either contract. Even though the French contract was signed before the balance sheet date, there is nothing to recognize. Footnotes will describe both contracts.
An entity's current balance sheet is dated December 31, 20x7 and the 20x7 statements are issued Feb. 6, 20x8. Which of the following is a recognized subsequent event for 20x7?
A. Issuance, in January 20x8, of debentures, which double the entity's total liabilities.
B. Issuance, in March 20x8, of common stock, which doubles the entity's contributed capital.
C. $4 million payment on February 2 in settlement of a lawsuit brought by a competitor for patent infringement occurring early January 20x8.
D. Write-off of a customer receivable due to customer bankruptcy caused by conditions beginning in 20x7.
D. The conditions giving rise to the receivable loss were developing in 20x7. As such, the loss is a recognized subsequent event for 20x7. It is recognized in the 20x7 statements.
Adel Inc. uses the allowance method of accounting for bad debts.
During 20x5, the financial condition of Botel Co., one of Adel's major customers, deteriorated rapidly due to accounting and other scandals. In February 20x6 it has become clear that Botel will go out of business, although the firm has not declared or been forced into formal bankruptcy proceedings. Adel's receivable from Botel, 9 months old as of the issuance of Adel's 20x5 financial statements, is 20 times the amount of bad debt expense otherwise reported by Adel.
How should the Botel situation be reflected in Adel's 20x5 financial statements?
A. No recognition other than that implied by the bad debt expense already recorded by Adel is necessary.
B. The footnotes should describe the potential loss, but no separate loss or expense for the Botel receivable should be recognized.
C. A loss in the amount of the Botel receivable should be recognized along with appropriate footnote disclosure.
D. Increase bad debt expense by a percentage of the Botel receivable amount because bankruptcy has not been declared as of the issuance of the financial statements.
C. Although bad debt expense has been recognized, it does not adequately account for the Botel loss, which is probable and estimable.
T/F: Entities can choose whether to evaluate subsequent events through the date of financial statement availability, or through the date of issuance.
Entities that widely distribute their FS use the "issued" date. All other entites use the "available to be issued" date.
T/F: A small local entity that does not widely distribute its financial statements would evaluate subsequent events through the date its financial statements are available to be issued.
T/F: IFRS does not require adjustment for share splits or reverse splits that occur after the reporting date but before the financial statements are issued.
T/F: A subsequent event for a period includes any event occurring after the balance sheet date for that period.
2 categories of subsequent events:
1. The condition leading to the subsequent event EXISTED at the BS date.
2. The condition leading to the subsequent event DID NOT EXIST at the BS date - the condition arose after the BS date.