Matching

Question 1

Classifying as R&D Expenses

Answer 1

Before technological feasibility is established computer software development costs are expensed as research and development.

Question 2

Proper Amortization of Capitalized Software

Answer 2

Amortization of capitalized software costs equals the greater of straight-line amortization or sales revenue from the software for the period ÷ total projected sale

Question 3

Goodwill impairment

Answer 3

Under IFRS, goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount ($45,000 − $32,000 = $13,000). An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss, which is $13,000. This amount is first allocated to goodwill. Any remaining impairment loss would be allocated on a pro rata basis to the other assets of the cash-generating unit.

Question 4

IFRS Goodwill Impairment

Answer 4

Under IFRS, goodwill cannot be looked at separately. Goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount. An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss

Question 5

Comparing Cash to Accrual for AR and Accrued Expenses

Answer 5

A net decrease in A/R means cash collected exceeds revenue recognized on the accrual basis. This would mean higher cash basis income than accrual basis income. This yields a “no” for Accounts Receivable.
A net decrease in Accrued Expenses means cash paid to reduce Accrued Expenses was more than the accrual basis expense recorded. This would mean a higher expense under the cash basis than under the accrual basis. This yields a “yes” for Accrued Expenses.

Question 6

Internal Use of Software development

Answer 6

Under U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. This software is for internal use, unrelated to production and is not considered research and development. Market research is also not research and development because it is not aimed at discovery of new knowledge to develop a new product or service.

Question 7

Initial Fees for Franchising

Answer 7

The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.” Macklin Co. will recognize the entire initial fee in the current year.

Question 8

What is classified as R&D

Answer 8

Research is the planned efforts of a company to discover new information that will help either create or improve a new product, service, process, or technique or one in current use. Items not considered research and development include: Routine periodic design changes to old products or troubleshooting in production stage, marketing research, quality control testing and reformulation of a chemical compound.

Question 9

Recording Revenue

Answer 9

when there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:
The sales price is substantially fixed (it seems like it is in this question).
The buyer assumes all risk of loss (no information).
The buyer has paid some form of consideration (no information).
The amount of returns can be reasonably estimated (which they can in this question).

Question 10

US GAAP Rules of Impairment

Answer 10

Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill.
Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units.
Determine the fair values of the reporting units and of the assets and liabilities of those reporting units.
If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’s goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill).
If the fair value of a reporting unit is more than its carrying amount, there is no goodwill impairment and Step 2 is not necessary.
Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
Allocate the fair value of the reporting unit to all assets and liabilities of the unit. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit.
Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.

Question 11

Treatment of Impairment Losses

Answer 11

Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.

Question 12

Define the Matching Principle

Answer 12

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.

Question 13

costs to develop computer software for ultimate sale

Answer 13

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.

Question 14

IFRS Software Development

Answer 14

Research expenditures must be expensed under IFRS (and U.S. GAAP). Staff training and administrative salaries must also be expensed.

Question 15

IFRS One-Step Test

Answer 15

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).

Question 16

Complete contract method, losses

Answer 16

Under the completed contract method, revenue is recognized when the contract is complete, however expected losses are recognized immediately in their entirety.

Question 17

Which of the following items will the company use to calculate the income recognized in the third year?

Answer 17

When a company uses the “percentage-of-completion” method of accounting for a five-year construction contract, income previously recognized would be used to calculate the income recognized in the second year (but not progress billings to date)

Question 18

Revenue is recognized when recorded progress billings:

Answer 18

When a company uses the U.S. GAAP “completed contract” method to account for a long-term construction contract, revenue is recognized when the job is completed, not when progress billings are collected or when they exceed recorded costs.
When the “percentage of completion” method of recording revenue is used, engineering estimates of completion or “costs incurred to date” vs. “total estimated costs” is the basis for recognizing revenue, not progress billings.

Question 19

Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method?

Answer 19

Under the percentage-of-completion method, annual gross profit equals [total cost incurred/total expected cost] × [total expected gross profit] less total gross profit previously recognized. In the final year of the contract, actual rather than expected amounts are used.

Question 20

It is proper to recognize revenue prior to the sale of merchandise when

Answer 20

Revenue can be recognized prior to the completion of a long-term project but generally not prior to a merchandise sale, especially not one recognized on the installment method.

Question 21

According to the installment method of accounting, gross profit on an installment sale is recognized in income

Answer 21

Under the installment method, total gross profit is deferred until cash payments are received. Realized gross profit equals the gross profit percentage on the sale times the cash received.

Question 22

How much gross profit from this sale should Pacer recognize using the cost recovery method.

Answer 22

Using the cost recovery method, all gross profit on the sale is deferred until the cost of the item sold is collected.

Question 23

what occurs when a transaction is a nonmonetary exchange that lacks commercial substance less than 10% of consideration

Answer 23

This transaction is a nonmonetary exchange that lacks commercial substance under U.S. GAAP. As such, the transaction is an exception to the general rule of basing the measurement value of the exchange on fair value.
In this question, as in many such questions on the CPA exam, cash (boot) is received. Because the cash is less than 10% of the total consideration, a proportional amount of the gain is recognized.