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How are Research and Development costs recorded? Def? Pg. 9-1

They are expensed in the period incurred and are not capitalized

Looking for a new product / new process; "you dont know if the product will work"; development or improvement of a process


Which expenditures are included in the cost of a building? Pg. 8-1

All expenditures to get the building into working condition are ready for use; ie) any type of construction is a building cost and should be depreciated


Which expenditures are included in the cost of land? Pg. 8-1

All expenditures to get the land ready for its intended use:

Title & County Fees

Clearing of Land - Dirt work etc.

Demolition and removal of old buildings (minus any scrap or salvage)

Note: capitalized land costs are not depreciated


In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.


In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.

The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.


How is donated property recorded by the donee?

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value


How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.


How is double-declining balance (DDB) depreciation calculated?

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.


How is Sum of Year's Digits (SYD) depreciation calculated?

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense

For example the depreciation factor for the third year of a 10-year asset would be:

: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%

Remaining useful life : 8 SYD : 55


How is straight line depreciation calculated?

(Cost - Salvage Value) / Useful life : depreciation expense


When is an asset considered to be impaired? How is impairment loss calculated? Pg. 8-12

What is carrying value also known as?

Step 1
When the un-discounted future cash flows are less than the carrying value of the asset.

Step 2
Carrying Value (net of depreciation) - Fair Value : Impairment Loss

Note: impaired assets that recover their value can't be written back up once written down

*Book value; used to WRITE DOWN ASSET


How are legal fees to defend a patent amortized?

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life.

If unsuccessful they are expensed immediately.


What are the two steps for testing goodwill impairment?

What is significant of gains and losses?

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done

If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Losses are recognized, but gain are not


How are costs for developing software recorded? Pg. 9-6

1) Expenses prior to technological feasibility are expensed as R&D; remember to look at how many months!!!

2) After technological feasibility but prior to production costs are capitalized; pick the highest % to amortize; either expected total sales of software or straight line; one year will be used for expense (R&D)

3) Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.


What expenditures are included in the cost of equipment?

All expenditures to get the asset into working condition and ready for use:

Purchase price + liabilities assumed
Legal fees
Construction loan interest

Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.


When do you use the Relative Fair Value Method? Pg. 8-1

For lump sum purchases (when you acquire land and building for a lump sum)

*To allocate cost of building and land because you can only depreciate building


Benefits of capitalizing asset VS expensing asset

Capitalzing an asset is a benefit for book because income would be higher; this would result in the books looking better for investors since income is higher and earnings per share would be higher

Expensing an asset is a benefit for tax because it reduces income; this would result in paying less tax


Cost incurred AFTER acquisition: When would you capitalize it instead of expensing it Pg. 8-5

Cost incurred AFTER acquisition: When would you expense it instead of capitalizing it Pg. 8-5

Journal Entries for Bigger, Better, and Longer

If it makes the asset bigger (additions, new capacity, new functions), better (improving efficiency), or longer (extension of an asset's useful life

If there is repairs and maintenence

Bigger and Better
Asset: debit
Cash: credit

Longer (extension of asset's useful life)
Accumulated Depreciation: debit
Cash: credit


Straight-line method of depreciation equation Pg. 8-6 & Pg. 8-8

*What does this form of depreciation assume?

(Cost - Salvage Value) / Useful life = Depreciation Expense

*It assumes that the benefit of the asset is the same every year (building)


Accerlerated Methods: What does it assume? Pg. 8-6 & Pg. 8-8
a) Sum of the years digits
b) Double Declining Balance
c) Units of production: Activity Method
d) Depletion Pg. 8-11

Used when an asset gives greater benefits in earlier years than in later years (cars, equipment => runs better and get obsolete); Better for matching, minimize obsolence, and even out expenses
a) (Cost - Salvage Value) x (#of years left in asset's life / sum of years in asset's life) => for denominator use
N(N+1) / 2
b) Cost {(1/# years) x 2} = > double straight line
reduce to salvage value (IGNORE SALVAGE VALUE) =>
Roger cake
c) (Cost - SV) x (hours this year / total estimated hours)
d) (Cost - SV) x (units extracted / total expected recoverable units) => "depreciation" of natural resources


What are terms that relate to capitalize or to expense? Pg. 8-35 TBS

Capitalize = Product Cost => get product ready for its intended use

Expense = Period Cost


What is salvage value?

Estimated resale value of an asset at the end of its useful life


How to determine if there is an IMPAIRMENT LOSS for Held for USE? Pg. 8-12
2 Steps

Journal Entry as a result?

*What is something that you cannot do?

1) If carrying value > the expected future net cash flows (recoverability test) => proceed to step 2
2) Find the difference between the Carrying Value and the Fair Value

Loss on Impairment (I/S): debit
Accumulated Depreciation: credit

*You may not recover the impairment for assets Held for Use; also cannot be written up or down


How to determine if there is an IMPAIRMENT LOSS for Held for SALE? Pg. 8-13

*Journal Entry as a result?

*What is significant about this term?

Check if CV > NRV then write down to NRV; if CV is less than NRV leave at CV

*Loss: debit
Other asset: debit (NRV)
Accumulated Depreciation: debit
Equipment: credit

*Restoration are allowed for impairment loss held for sale (can be written up or down), but not for held for use

*NOT to be depreciated


What is a Nonmonetary Exchange? Pg. 8-16
*How is it reported as?
a) Exchanges WITH commercial substance; how do you determine the amount of the new asset?
b) Exchanges LACKING commercial substance; how do you determine the amount of the new asset?

*If boot received is greater than or equal to 25% total consideration received?

*What values do you utilized?
a) New asset
b) Old asset

*What if there is an appraised value?

Trade an asset for an asset
*By its fair value
a) Like you sold your asset and bought a new one; therefore you recognize ALL GAINS AND LOSSES
1) FMW give up + cash paid - cash received (1st choice)
2) FMV of asset received (2nd choice)
3) BV given up + cash paid - cash received (3rd choice)
b) Dealing with a competitor or someone that you usually would not deal with; recognize all LOSSES; defer all gains unless BOOT is RECEIVED (cash received)
Pick lower of:
1) FMW give up + cash paid - cash received
2) FMV of asset received
3) BV given up + cash paid - cash received

*All gain is recognized

*a) New asset: FMV
b) Old asset: BV

*Just find the difference between appraised value and cost to find the gain / loss


When can interest be capitalized? Pg. 8-3

Interest from the money used to build the asset that is constructed for the company's own use


What is an intangible? Pg. 9-1

What are its characteristics? (3)

Lacks physical substance

a) Includes goodwill
b) Internal or External
c) Identifiable or unidentifiable


After Acquisition for Intangibles: Intangible #13

a) Finite useful life intangibles VS b) Indefinite useful life intangibles Pg. 9-2; Intangiblel #13
*How do you amortize?
*How do you test for impairment?

a) Subject to amortization; tests annually for impairment (same approach used in fixed assets held for use)

b) NOT subject to amortization; test at least annually for impairment


What is goodwill? Pg. 9-3

*How is it created?

*How do you test for impairment?

It is an unidentifiable intangible; equals purchase price - FMV (refer to equity method); it is also tested annually for IMPAIRMENT

*It is created through the purchase of a business

*Its a different approached compared to fixed assets and intangibles
1) Compare CV/BV with FV; exists if CV>FV
2) FV net asset > FV reporting unit


Computer Software: How to allocate the costs? Pg. 9-5
a) Costs prior to technological feasibility (working model)
b) Cost incurred after technological feasibility (working model) but before production
c) Cost incurred after production

a) Research and development EXPENSE because you don't know if its going to work, therefore you SHOULD NOT capitalize it; remember to look at how many months!!!
b) They are considered software costs and are amortized by LARGER of straight-line, or ratio to revenue/total revenue; the amortized part will be expensed
c) These are considered PRODUCTION COSTS, which will be part of inventory