FAR PART 2 Flashcards
During the current year, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1. Costs of registering the patent equaled $34,000. The patent’s legal life is 17 years, and its estimated economic life is 10 years. In its December 31, balance sheet, what amount should Jase report as patent, net of accumulated amortization under U.S. GAAP?
a.
$161,500
b.
$33,000
c.
$165,000
d.
$32,300
Choice “d” is correct. Under U.S. GAAP, the research and development costs should be expensed. The patent will be capitalized and amortized over 10 years (the lesser of legal life or economic life). Current year amortization equals $1,700 ($34,000/10 x 6/12). The patent balance at year-end is $32,300 ($34,000 - $1,700).
During Year 1, Lyle Co. incurred $400,000 of research and development costs in its laboratory to develop a product for which a patent was granted on July 1, Year 1. Legal fees and other costs associated with the patent totaled $82,000. The estimated economic life of the patent is 10 years. What amount should Lyle capitalize for the patent on July 1, Year 1 under U.S. GAAP?
a.
$400,000
b.
$482,000
c.
$82,000
d.
$0
Choice “c” is correct. Legal fees and other costs associated with registering a patent are capitalized. Research and development costs are expensed under U.S. GAAP.
On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent’s Year 2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, Year 1, the balance in the escrow account was $3,000. On September 30, Year 2, what amount should Bell show as an escrow liability to Kent?
a.
$4,500
b.
$8,500
c.
$11,500
d.
$1,500
Choice “a” is correct. $4,500 escrow liability at September 30, Year 2.
Escrow
Liability
Begin balance 12/31/ Year 1 $ 3,000 Add deposits ($2,500 x 9 months) 22,500 Sub Total 25,500 Deduct payments ($28,000/4 qtrs x 3 payments) (21,000) Ending balance 9/30/ Year 2 $ 4,500
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, Year 2. Additional information is as follows:
Rents receivable - November 30, Year 2 $ 1,060,000
Rents receivable - November 30, Year 1 800,000
Uncollectible rents written off during the fiscal year 30,000
Under the accrual basis, Marr should report rental revenue of:
a.
$1,920,000
b.
$2,440,000
c.
$2,500,000
d.
$1,980,000
Choice “c” is correct. $2,500,000 rental revenue under the accrual basis.
Rents receivable at begin 11/30/Year 1 $ 800,000
Add: Billings accrued 2,500,000
Sub Total 3,300,000
Less: Cash collections (2,210,000)
Write-offs (30,000)
Rents receivable at end 11/30/Year 2 $ 1,060,000
My calculation: $2210 +290 (1060-800) = $2,500
At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.’s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three equal annual payments of $400,000. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note?
a.
$135,000
b.
$90,000
c.
$45,000
d.
$30,000
Choice “d” is correct. $30,000 accrued interest payable at Dec. 31, Year 2.
Note Payable
Note payable balance at Dec. 31, Year 1 $ 1,200,000
Less: First payment made Oct. 1, Year 2 (400,000)
Note payable balance at Oct. 1, Year 2 800,000
Annual interest rate 15%
Annual interest 120,000
Adjustment factor for 3 mos. From 10-1-Year 2 to 12-31-Year 2 x 3/12
Accrued interest payable at Dec. 31, Year 2 $ 30,000
Stam Co. incurred the following research and development project costs during the current year:
Equipment purchased for current and future projects $ 100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current projects 400,000
Legal fees to obtain patent 50,000
Material and labor costs for prototype product 600,000
The equipment has a five-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end under U.S. GAAP?
a.
$450,000
b.
$1,220,000
c.
$1,350,000
d.
$1,000,000
Choice “b” is correct. Research and development expense is calculated as follows:
Depreciation of equipment for current & future projects $ 20,000
Equipment for current projects only 200,000
R&D salaries 400,000
Material and labor costs for prototype 600,000
Total R&D expense $ 1,220,000
Research and development expense does not include the amount paid for the equipment purchased for current and future projects because the equipment has alternate future uses. This equipment will be capitalized, but the related depreciation expense will be allocated to R&D while the equipment is being used for R&D. The legal fees to obtain the patent are capitalized as an intangible asset.
The matching principle:
a.
Matches expenses against revenues in the same accounting period.
b.
Matches revenues against expenses in the same accounting period.
c.
Matches revenues and gains against expenses and losses in the same accounting period.
d.
Matches expenses and losses against revenues and gains in the same accounting period.
Explanation
Choice “a” is correct. Expenses are necessarily incurred to generate revenues. All expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded.
Choice “d” is incorrect. Losses are never “matched” against gains.
Choice “b” is incorrect. Revenues are not matched to expenses; expenses are matched to the revenues they generate.
Choice “c” is incorrect. Gains and losses are not “matched.”
For accounting (GAAP) purposes, costs to develop computer software for ultimate sale:
a.
Should be expensed if they are relevant design costs incurred before technological feasibility is established.
b.
Should all be expensed as incurred.
c.
Should be capitalized.
d.
Should be capitalized if they are relevant design costs incurred before technological feasibility is established.
Choice “a” is correct. All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in “Inventory” (normal product costs) and charged to “Cost of Goods Sold” when sold.
On December 31, an entity tested its goodwill for impairment and determined the following for one of its cash-generating units:
Carrying value $ 1,015,000
Fair value less costs to sell 955,000
The entity also determined that the present value of the future cash flows expected from the cash generating unit is $940,000. The cash generating unit reports goodwill of $130,000. What is the goodwill impairment loss that will be reported on the December 31 income statement under IFRS?
a.
$75,000
b.
$0
c.
$70,000
d.
$60,000
Explanation
Choice “d” is correct. Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the fair value less costs to sell of $955,000 is the recoverable amount because it exceeds the value in use of $940,000. The impairment loss is:
Impairment loss = Recoverable amount - Carrying value
Impairment loss = $955,000 - $1,015,000 = $(60,000)
Under IFRS, the CGU impairment loss is applied first to the goodwill of the CGU.
On December 31, an entity had a reporting unit that had a book value of $3,450,000, including goodwill of $225,000. As part of its annual review of goodwill impairment, the entity determined that the fair value of the reporting unit was $3,310,000. Star assigned $3,170,000 of the reporting units fair value to its assets and liabilities other than goodwill. What is the goodwill impairment loss to be reported on December 31 under U.S. GAAP?
a.
$85,000
b.
$140,000
c.
$0
d.
$225,000
Explanation
Choice “a” is correct. Under U.S. GAAP, goodwill impairment exists because the $3,310,000 fair value of the reporting unit is less than its $3,450,000 carrying value of the reporting unit. After allocating $3,170,000 of the fair value of the reporting unit to its assets and liabilities other than goodwill, the $140,000 ($3,310,000 - $3,170,000) unallocated fair value is the implied fair value of the goodwill and the goodwill impairment loss is:
Impairment loss = Goodwill implied fair value - Goodwill book value
Impairment loss = $140,000 - $225,000 = $85,000
Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
a.
$135,000
b.
$125,000
c.
$175,000
d.
$165,000
Explanation
Choice “d” is correct. During the year, prepaid expenses increased $5,000 from $10,000 to $15,000. Prepaid expenses represent assets where no benefit has been received yet. In accrual accounting, they are not officially expenses until there is associated benefit. Therefore, the $5,000 needs to be subtracted from $150,000. Also during the year, accrued liabilities increased from $5,000 to $25,000. This represents benefit received but no cash paid out yet. The expense of $20,000 (representing the increase) should be booked now (which creates the liability), and when cash payment is made, the liability will be removed. Given the starting point of $150,000, subtracting $5,000 and adding $20,000 will bring accrued expenses to $165,000.
Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?
a.
$0
b.
$15,000
c.
$40,000
d.
$120,000
Explanation
Choice “a” is correct. Because the trademark is expected to be renewed indefinitely, there will be no amortization expense on the books. Amortization is only recorded for intangible assets with a definite life.
On December 31, Year 1, Classic Company revalued a patent under IFRS. On that date, the patent had a carrying value of $250,000, a fair value of $200,000, and a remaining useful life of 5 years. On December 31, Year 2, the patent’s fair value was $175,000. In its December 31, Year 2 financial statements, Classic will report a current period revaluation:
a.
Gain of $15,000.
b.
Loss of $25,000.
c.
Gain of $40,000.
d.
Loss of $75,000
Choice “a” is correct. During Year 2, Classic will record amortization on the patent of $40,000 ($200,000 revalued patent / 5 years). The carrying value of the patent on December 31, Year 2 will be $160,000 ($200,000 fair value on revaluation date - $40,000 amortization) and a revaluation gain of $15,000 will be recorded in Year 2 income to adjust the patent to its December 31, Year 2 fair value of $175,000. This represents a revaluation gain that partially offsets a previously recorded revaluation loss, so this is an income statement item.
On December 31, an entity tested its goodwill for impairment and determined the following for one of its cash-generating units:
Carrying value $ 2,425,000
Fair value 2,600,000
The entity estimated that if it were to sell the cash generating unit, it would incur costs of $250,000. The entity also determined that the present value of the future cash flows expected from the cash generating unit is $2,400,000. The cash generating unit reports goodwill of $65,000. What is the goodwill impairment loss that will be reported on the December 31 income statement under IFRS?
a.
$65,000
b.
$25,000
c.
$75,000
d.
$0
Explanation
Choice “b” is correct. Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit (CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the value in use of $2,400,000 is the recoverable amount because it exceeds the fair value less costs to sell of $2,350,000 ($2,600,000 fair value - $250,000 costs to sell) and the impairment loss is:
Impairment loss = Recoverable amount - Carrying value
Impairment loss = $2,400,000 - $2,425,000 = $(25,000)
Under IFRS, the CGU impairment loss is applied first to the goodwill of the CGU.
On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1?
a.
$5,000
b.
$20,000
c.
$16,000
d.
$13,500
Choice “d” is correct. The software maintenance costs are expensed, and the software modification costs are capitalized and amortized using the straight line method over five years. Thus, the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1, will be an expense related to the software maintenance cost in the amount of $12,500 ($15,000 ÷ 12 = $1,250 per month × 10 months) plus amortization expense of $1,000 ($5,000 ÷ 5 years = $1,000 per year).
