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Flashcards in MIDTERM II REVIEW Deck (219):
1

What would be the first step for a change in inventory methods? (i.e. LIFO to FIFO)

Step #1: Revise Comparative Financial Statements
(i.e. Make those statements appear as if the newly adopted accounting method, FIFO, had been applied all along)

2

What would be the second step for change in inventory methods?

Step #2: The appropriate accounts are adjusted.

3

What would be the third step for change in inventory methods?

Step #3: A disclosure note provides additional information. (i.e. must provide clear justification that the change is appropriate)

4

The disclosure note also would indicate the effects of the change on:

1. items not reported on the face of the primary statements
2. any per share amounts affected for the current period and all prior periods
3. the cumulative effect of the change on retained earnings or other components of equity as of the beginning of the earliest period presented

5

Accounting records usually are __________ for a company changing to LIFO to report the change retrospectively.

inadequate

6

Changes in inventory methods, other than a change to LIFO, are accounted for __________.

retrospectively (In other words, this means reporting all previous periods' financial statements as if the new method had been used in all prior periods.)

7

Define Property, Plant, and Equipment:

Productive assets that derive their value from long-term use in operations rather than from resale.

8

What are the typical acquisition costs for Property, Plant, and Equipment?

All expenditures necessary to get the asset in condition and location for its intended use.

9

Define Equipment:

Broad term that includes machinery, computers and other office equipment, vehicles, furniture, and fixtures.

10

What are the typical acquisition costs of equipment?

Purchase price (less discounts), taxes, transportation, installation, testing, trial runs, and reconditioning.

11

Define Land:

Real property used in operations (land held for speculative investment or future use is reported as investments or other assets).

12

What are the typically acquisition costs for land?

Purchase price, attorney's fees, title, recording fees, commissions, back taxes, mortgages, liens, clearing, filing, draining, and removing old buildings.

13

Define Land Improvements:

Enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems.

14

What are the typical acquisition costs for land improvements?

Separately identifiable costs

15

Define Buildings:

Structure that include warehouses, plant facilities, and office buildings.

16

What are typical acquisition costs for buildings?

Purchase price, attorney's fees, commissions, and reconditioning.

17

Define Natural Resources:

Productive assets that are physically consumed in operations such as timber, mineral deposits, and oil and gas reserves.

18

Define intangible assets:

Productive assets that lack physical substance and have long-term but typically uncertain benefits.

19

What are the typical acquisition costs for intangible assets?

All expenditures necessary to get the asset in condition and location for its intended use.

20

Define Patents:

Exclusive 2-year right to manufacture a product or use a process.

21

What are the typical acquisition costs for patents?

Purchase price, legal fess, filing fees, not including internal R&D

22

Define Copyrights:

Exclusive right to benefit from a creative work such as a song, film, painting, photograph, or book.

23

What are typical acquisition costs for copyrights?

Purchase price, legal fees, filing fees, not including internal R&D

24

Define Trademarks (tradenames):

Exclusive right to display a word, a slogan, a symbol, or an emblem that distinctly identifies a company, product or a service.

25

What are the typical acquisition costs for trademarks?

Purchase price, legal fees, filing fees, not including internal R&D

26

Define Franchise:

A contractual arrangement under which a franchisor grants the franchisee the exclusive right to use the franchisor's trademark or tradename and certain product rights.

27

What are typical acquisition costs for franchises?

Franchise fee plus any legal fees.

28

Define Goodwill:

The unique value of the company as a whole over and above all identifiable assets.

29

What are the typical acquisition costs of goodwill?

Excess of fair value of the consideration exchanged for the company over the fair value of the net assets acquired.

30

The cost of a major improvement to a delivery truck that extends its useful life generally would be __________. On the other hand, the cost of an engine tune-up for the delivery truck simply allows the truck to continue its productive activity but does not increase future benefits would be __________.

capitalized
expensed

31

The costs of land improvements are __________ and __________.

capitalized
depreciated

32

The cost of a natural resource includes the __________ costs for the use of land, the __________ and __________ costs incurred before production begins, and __________ costs incurred during or at the end of extraction.

acquisition
exploration & development
restoration

33

What are acquisition costs?

The amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.

34

What are exploration costs?

Are expenditures such as drilling a well, or excavating a mine, or any other costs of searching for natural resources.

35

What are development costs?

They are incurred after the resource has been discovered but before production begins. They include a variety of costs such as expenditures for tunnels, wells, and shafts.

36

What are restoration costs?

The are costs to restore land or other property to its original condition after extraction of the natural resource ends.

37

What are asset retirement obligations (ARO)?

Obligations associated with the disposition of an operational asset.

38

How do we measure an asset retirement obligation (ARO)?

It is measured at fair value and is recognized as a liability and corresponding increase in asset valuation.

39

AROs arise only from __________ obligations associated with the retirement of tangible long-lived asset that result from the acquisition, construction, or development and (or) normal operation of a long-lived asset.

legal

40

A retirement obligation might arise at the __________ of an asset's life or during its __________ life.

inception
operating

41

A company recognizes the fair value of an ARO in the period it's __________.

incurred

42

What is the expected cash flow approach?

adjust the cash flows, not the discount rate, for the uncertainty or risk of those cash flows

43

What is depletion?

allocation of the cost of natural resources

44

What is an accretion expense?

the increase in asset retirement obligation (ARO) that accrues as an operating expense

45

__________ costs are one example of asset retirement obligations.

Restoration

46

__________ could result from the acquisition of many different types of tangible assets, not just natural resources.

Asset retirement obligations (ARO)

47

Intangible assets generally represent:

exclusive rights that provide benefits to the owner

48

Intangible assets with finite useful lives are __________; intangible assets with indefinite useful lives are __________.

amortized
not amortized

49

Companies can either __________ or __________ intangible assets.

purchase
develop

50

Purchased intangible assets are valued at their __________ cost.

original

51

Trademarks or tradenames often are considered to have __________ useful lives.

indefinite

52

__________ operations are among the most common ways of doing business.

Franchise

53

When a patent is __________ __________, the research and development costs of doing so are expensed as incurred.

developed internally

54

Most purchased intangibles are __________ __________. That is, cost can be directly associated with the specific intangible right.

specifically identifiable

55

__________ can only be purchased through the acquisition of another company.

Goodwill

56

How do we measure goodwill?

Goodwill is the excess of the fair value of consideration exchanged over the fair value of the net assets acquired.

57

Goodwill, along with other intangible assets with indefinite useful lives, is not __________.

amortized

58

U.S. GAAP makes it mandatory that assets and liabilities acquired in a business combination be valued at their __________ values. Any negative goodwill is reported as a __________ in the year of the combination.

fair
gain

59

In a business combination, an intangible asset must be recognized as a an asset apart from __________ if it arises from contractual or other legal rights or is separable.

goodwill

60

Under the new standard update, sellers are allowed to capitalize, as an intangible asset:

the incremental costs of obtaining and fulfilling a long-term (longer than one year) contract. (e.g. sales commission)

61

In a __________ __________, the total purchase price is allocated in proportion to the relative fair values of the assets acquired.

lump-sum purchase

62

The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets):

the components of the transaction are recorded at their fair values

63

Assets acquired in noncash transactions are valued at the fair value of the assets __________ or the fair value of the assets __________, whichever is more clearly evident.

given
received

64

Some portion of the payment(s) required by a non-interest bearing note in reality is __________.

interest

65

Noncash transactions are recorded at the __________ value of the items exchanged.

fair

66

On January 2, 2013, The Midwestern Steam Gas Corporation purchased an industrial furnace. In payment, Midwestern signed a noninterest-bearing note requiring $50,000 to be paid on December 31, 2014. If Midwestern had borrowed cash to buy the furnace, the bank would have required an interest rate of 10%. What is the journal entry to record this transaction?

Debit: Furnace [PV: ($50,000 * 0.82645)] = $41,323
Debit: Discount on note payable (difference) = $8,677
Credit: Note payable (face amount) = $50,000

67

Assuming that Midwestern's fiscal year-end is December 31 and that adjusting entries are recorded only at the end of each year, the company would record the following entries at the end of 2013 and 2014 to accrue interest and payment of the note:

December 31, 2013
Debit: Interest Expense ($41,323 * 10%) = $4,132
Credit: Discount on note payable = $4,132

December 31, 2014
Debit: Interest Expense ([$41,323 + $4,132] * 10%) = $4,545
Credit: Discount on not payable = $4,545

Debit: Note payable = $50,000
Credit: Cash = $50,000

68

Assets acquired by issuing common stock are valued at the fair value of the __________ or the fair value of the __________, whichever is more clearly evident.

securities
assets

69

__________ __________ are recorded at their fair values.

Donated assets

70

Revenue is __________ for the amount paid by an unrelated party.

credited

71

GAAP requires that donated assets be recorded as __________.

revenue

72

What are government grants?

Grants awarded for the purchase or production of fixed assets (grants related to assets) are generally offset against the acquisition or production costs of the respective assets and reduce future depreciations accordingly.

73

Both U.S. GAAP and IFRS require that companies value donated assets at their __________ values.

fair

74

Unlike U.S. GAAP, donated assets are not recorded as revenue under IFRS. IFRS requires:

government grants to be recognized in income over the periods necessary to match them on a systematic basis with the related costs that are intended to compensate.

75

IAS No. 20 allows two alternatives for grants related to assets:

1. Deduct the amount of the grant in determining the initial cost of the asset.
2. Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the asset's useful life.

76

What is capital budgeting?

The process of evaluating the purchase of operational assets.

77

If the present value is higher than the __________ cost, the asset is acquired.

acquisition

78

The fixed-asset turnover ratio measures:

a company's effectiveness in managing property, plant, and equipment.

Fixed-asset turnover ratio = Net Sales/Average Fixed Assets

79

A gain or loss is recognized for the difference between:

the consideration received and the asset's book value.

80

Property, plant, and equipment and intangible assets to be disposed of by sale are classified as __________ and measured at the __________.

"held for sale"
lower of book value or fair value less cost to sell

81

If the fair value less cost to sell is below book value, we recognize an __________ __________.

impairment loss

82

Assets classified as "held for sale" are not __________ or _________.

depreciated
amortized

83

Occasionally companies dispose of property, plant, and equipment and intangible assets unintentionally. These so-called __________ __________ include destruction by fire, earthquake, flood, or other catastrophe and expropriation by a government body.

involuntary conversions

84

An asset received in exchange of non-monetary assets generally is valued at:

fair value

85

A __________ is recognized when the fair value of an asset given is more than its book value.

gain

86

Gain or loss is the difference between:

fair value and book value of the asset given

87

T/F: The amount of cash given or received has no effect on the amount of gain or loss recognized.

True

88

A __________ is recognized when the fair value of an asset given is less than its book value.

loss

89

If we can't determine the fair value of either asset in the exchange, the asset is valued at the __________ value of the asset given.

book

90

__________ __________ is present when future cash flows change as a result of the exchange.

Commercial substance

91

When the fair value of the asset given is less than its book value, we always use __________ value to record the exchange.

fair

92

The cost of a self-constructed asset includes:

identifiable materials and labor and a portion of the company's manufacturing overhead costs

93

What is the full-cost approach?

All overhead costs are allocated both to production and to self-constructed assets based on the relative amount of chosen cost driver (i.e. labor hours) incurred.

94

In keep with both the __________ __________ principle and the __________ concept, all costs during this period, including interest, should be capitalized and then allocated as depreciation during later periods when the assets are providing benefits.

historical cost
matching

95

Only assets that are constructed as __________ projects qualify for interest capitalization.

discrete

96

Only interest incurred during the __________ period is eligible for capitalization.

construction

97

The interest capitalization period begins when:

construction begins and the first expenditure is made as long as interest costs are actually being incurred.

98

__________ __________ __________ approximate the average debt necessary for construction.

Average accumulated expenditures

99

Average accumulated expenditures is determined by:

Loans * Portion of Year Outstanding
$400,000 * (9/12) = $300,000

100

The amount of interest capitalized is determined by:

Average accumulated expenditures * Annual interest rate
[Loans * Portion of Year Outstanding] * Annual interest rate
[$500,000 * (12/12)] * 8% = $40,000

101

Interest capitalized is limited to interest __________.

incurred

102

What is the specific interest method?

For interest capitalization, rates from specific construction loans to the extent of specific borrowings are used before the average rate of other debt.

103

What is the weighted-average interest method?

For interest capitalization, weighted-average rate on all interest-bearing debt, including all construction loans, is used.

104

If material, the amount of interest capitalized during the period must be __________.

disclosed

105

U.S. GAAP requires all research and development costs to be:

expensed in the periods incurred

106

R&D costs entail a high degree of uncertainty of future __________ and are difficult to match with future __________.

benefits
revenues

107

Define research:

Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about significant improvement to and existing product or process.

108

Define Development:

Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

109

What are some examples of R&D costs?

1. Laboratory research aimed at discovery of new knowledge
2. Searching for applications of new research findings or other knowledge
3. Design, construction, and testing of preproduction prototypes and models
4. Modification of the formulation or design of a product or process

110

What are some examples of Non-R&D costs?

1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production including routine testing of products
3. Routine ongoing efforts to refine, enrich, or otherwise improve on the qualities of an existing product
4. Adaption of an existing capability to a particular requirement or customer's need as a part of a continuing commercial activity

111

R&D expense includes the __________ and __________ of assets used in R&D activities.

depreciation
amortization

112

Costs incurred before the start of commercial production are all expensed as __________.

R&D

113

Costs incurred after commercial production begins would be either be expensed or included in the __________.

cost of inventory (manufacturing overhead)

114

General and administrative costs (should/should not) be included R&D costs.

Should NOT be included unless they are clearly related to the R&D activity.

115

__________ and __________ costs for patents, copyrights, and other developed intangibles are capitalized and amortized in future periods.

Filing
legal

116

U.S. GAAP requires __________ of total R&D expense incurred during the period.

disclosure (either as a line item in the income statement or in a disclosure note)

117

__________ costs are expensed in the period incurred.

Start-up

118

What are development stage enterprises?

A new business that has either not commenced its principal operations or has begun its principal operations but has not generated significant revenues.

119

U.S. GAAP requires the capitalization of software development costs incurred after __________ __________ is established.

technological feasibility

120

What is technological feasibility?

established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements

121

Between the start of R&D activity and technological feasibility, costs are __________.

expensed as R&D

122

Between technological feasibility and date of product release, costs are __________.

capitalized

123

After the date of product release, costs are __________.

not R&D expenditures

124

U.S. GAAP requires all research and development expenditures:

to be expensed in the period incurred

125

IFRS requires research expenditures to be __________ in the period incurred. However, development expenditures that meet specified criteria are __________ as an intangible asset.

expensed
capitalized

126

U.S. GAAP requires that the fair value of in-process research and development is:

capitalized as an indefinite-life intangible asset

127

The percentage we use to amortize computer software development costs under U.S. GAAP is greater of:

1. the ratio of current revenues to current and anticipated revenues
2. the straight-line percentage over the useful life of the software

This approach is allowed under IFRS, but not required.

128

Cost allocation is known as __________ for plant and equipment, __________ for natural resources, and __________ for intangibles.

depreciation
depletion
amortization

129

Depreciation, depletion, and amortization are processes that attempt to satisfy the __________ principle.

matching

130

Depreciation is a process of __________ __________, not __________.

cost allocation
valuation

131

Depreciation, depletion, and amortization for an asset used to manufacture a product are included in the:

cost of inventory

132

When a __________ cost is reported as expense depends on when the product is sold; when a __________ cost is reported as an expense depends on the reporting period in which it is incurred.

product
period

133

What is service life?

The estimated use that the company expects to receive from the asset

134

What is the allocation base?

the value of the usefulness that is expected to be consumed

135

What is the allocation method?

the pattern in which the usefulness is expected to be consumed

136

The service life, or useful life, can be expressed in units of __________ or in units of __________.

time
activity

137

Expected __________ can shorten service life below physical life.

obsolescence

138

How do we measure allocation base?

Difference between asset's acquisition cost and its residual value

139

What is residual (salvage) value?

the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.

140

The allocation method used should be __________ and __________ and correspond to the pattern of asset use.

systematic
rational

141

What are time-based methods?

allocates the cost base according to the passage of time

142

What are activity-based methods?

Allocation of an asset's cost base using a measure of the asset's input or output

143

The Hogan Manufacturing Company purchased a machine for $250,000. The company expects the service life of the machine to be 5 years. During that time the machine will produce 140,000 units. The anticipated residual value is $40,000. Calculate the depreciation per year using the straight-line method:

($250,000 - $40,000)/5 years = $42,000 per year

144

__________ depreciation methods are appropriate when the asset is more useful in its earlier years.

Accelerated

145

For accelerated depreciation methods, the early years incur ___________ depreciation and __________ repairs and maintenance expense, while the later years have __________ depreciation and __________ repairs and maintenance.

higher, lower
lower, higher

146

How do we calculate depreciation using the sum-of-the-years' digits method (SYD)?

Depreciable base * Declining Fraction = Depreciation

($250,000 - $40,000) * (5/15) = $70,000
($250,000 - $40,000) * (4/15) = $56,000
($250,000 - $40,000) * (3/15) = $42,000

147

How do we calculate depreciation using the double-declining-balance method (DDB)?

Book Value @ Beg. of Year * Annual Depr. Rate = Depreciation

$250,000 * 40% = $100,000
$150,000 * 40% = $60,000
$90,000 * 40% = $36,000

148

It is not uncommon for a company to switch from __________ to __________ approximately halfway through an asset's useful life as part of the company's planned depreciation approach.

accelerated
straight-line

149

__________ depreciation methods estimate service life in terms of some measure of productivity.

Activity-based

150

How do we calculate depreciation using the units-of-production method?

Calculate Average depreciation rate per unit = Depreciable base/# of units

($250,000 - $40,000)/140,000 units = $1.50 per unit

Then,

Units Produced * Average depreciation rate per unit = Depreciation

24,000 units produced * $1.50 per unit = $36,000

151

However, __________ methods quite often are either infeasible or too costly to use. That's why most companies use __________ methods.

activity-based
time-based

152

__________ method produces a higher net income than __________ methods in the early years of an asset's life.

Straight-line
accelerated

153

Depreciation is provided over the estimated useful lives of the assets, principally using the __________ method. For tax purposes, __________ methods are used.

straight-line
accelerated

154

T/F: A company does have to use the same depreciation method for both financial reporting and income tax purposes.

False (it does not have to)

155

The IFRS requires that each component of an item of property, plant, and equipment must be:

depreciated separately if its cost is significant in relation to the cost of the item.

156

U.S. GAAP and IFRS determine depreciable base in the same way, by:

Cost - Residual Value

However, IFRS requires a review of residual values at least annually.

157

__________ and __________ depreciation methods aggregate assets to reduce the record-keeping costs of determining periodic depreciation.

Group
Composite

158

What is the group depreciation method?

collection of assets defined as depreciable assets that share similar service lives and other attributes

159

What is the composite depreciation method?

Physically dissimilar assets are aggregated to gain the convenience of group depreciation

160

How do we calculate the group depreciation rate?

Depreciation per year (straight-line)/Total Cost

161

How do we calculate average service life?

Total depreciable base/Depreciation per year (straight-line)

162

No gain or loss is recorded when a group or composite asset is:

retired or sold

163

How does U.S. GAAP and IFRS value property, plant, and equipment?

U.S. GAAP reports PP&E in the balance sheet at (Cost - Accumulated Depreciation) = Book Value (using the cost model)

IFRS can report it at book value (same as above) or at fair value using the revaluation model.

164

Under IFRS, if fair value is higher than book value, the difference is reported as:

Other Comprehensive Income (OCI) which then accumulates in a "revaluation surplus"

165

Under IFRS, if book value is higher than fair value, the difference is reported as:

an expense in the income statement

Unless revaluation surplus account relating to same asset has a balance from previous increase in fair value, that balance is eliminated before debiting revaluation expense

166

Depletion of the cost of natural resources usually is determined using the __________ method.

units-of-production

167

The units-of-production method is often used to determine __________ and __________ on assets used in the extraction of naturals resources.

depreciation
amortization

168

What are biological assets?

Living animals and plants, including trees in a timber tract or in a fruit orchard.

169

Under U.S. GAAP, a timber tract is valued at cost less accumulated __________ and a fruit orchard at cost less accumulated __________.

depletion
depreciation

170

Under IFRS, biological assets are valued at:

their fair value less estimated costs to sell, with changes in fair value included in the calculation of net income

171

The cost of an intangible asset with a finite useful life is __________.

amortized

172

The cost of an intangible asset with an indefinite useful life is __________.

not amortized

173

__________ is an intangible asset whose cost is not expensed through periodic amortization.

Goodwill

174

IFRS allows a company to value an intangible asset subsequent to initial valuation at:

1. cost less accumulated depreciation
2. fair value, if fair value can be determined by reference to an active market

175

Goodwill, however, cannot be __________.

revalued

176

What is the half-year convention?

record 1/2 of a full year's depreciation in the year of acquisition and another half year in the year of disposal

177

A change in estimate should be reflected in the:

financial statements of the current period and future periods

178

Changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in:

accounting estimate

179

What is the proper treatment of material errors occurring in a previous year?

1. Previous years' financial statements are retrospectively restated
2. Account balances are corrected
3. If Retained Earnings requires correction, the correction is reported as a prior period adjustment.
4. A note describes the nature of the error and the impact of the correction on income

180

An asset held for use should be written down if there has been a:

significant impairment of value

181

Property, plant, and equipment and finite-life intangible assets are test for impairment only when:

events or changes in circumstances indicate book value may not be recoverable

182

Measurement of Impairment Loss
STEP 1 - An impairment loss is required only when the undiscounted sum of future cash flows is __________ than book value.
STEP 2 - The impairment loss is the __________ of book value over fair value.

less
excess

183

The present value of future cash flows often is used as a measure of:

fair value

184

When does U.S. GAAP test for impairment of PP&E?

When events or changes in circumstances indicate that book value may not be recoverable.

185

When does the IFRS test for impairment for PP&E?

Assets must be assessed for indicators of impairment at the end of each reporting period. Indicators of impairment are similar to U.S. GAAP.

186

Under U.S. GAAP, an impairment loss is required when:

an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows

187

Under IFRS, an impairment loss is required when:

an asset's book value exceeds the higher of the:
1. asset's present value of estimated future cash flows
2. fair value less costs to sell

188

Under U.S. GAAP, the impairment loss is the difference between:

book value and fair value

189

Under IFRS, the impairment loss is the difference between:

book value and the "recoverable amount" (the higher of the asset's present value of estimated future cash flows and fair value less costs to sell)

190

Under U.S. GAAP, subsequent reversal of loss is:

prohibited

191

Under IFRS, subsequent reversal of loss is:

required if the circumstances that caused the impairment are resolved

192

IFRS requires that intangible assets with indefinite useful lives should be tested for impairment at least __________.

annually

193

Unlike other assets, goodwill cost:

1. can't be directly associated with any specific identifiable right
2. is not separable from the company as a whole

194

Measuring Goodwill
STEP 1 - A goodwill impairment loss is indicated when the fair value of the reporting unit is __________ than its book value.
STEP 2 - A good will impairment loss is measured as the ___________ of the book value of the goodwill over its "implied" fair value.

less
excess

195

A __________ ___________ is an operating segment of a company for which discrete financial information is available and segment management regularly reviews the operating results of that component.

reporting unit

196

The "implied" fair value of goodwill is a residual amount measured by:

subtracting the fair value of all identifiable net assets from the unit's fair value

197

What is the level of testing for U.S. GAAP?

Reporting unit - a segment or a component of an operating segment for which discrete financial information is available

198

What is the level of testing for IFRS?

Cash-generating unit (CGU) - the lowest level at which goodwill is monitored by management. A CGU can't be lower than a segment.

199

Under U.S. GAAP, how do we measure impairment of value for goodwill?

1. Compare the fair value of the reporting unit with its book value. A loss is indicated if fair value is less than book value.
2. The impairment loss is the excess of book value over implied fair value.

200

Under IFRS, how do we measure the impairment of value for goodwill?

1. Compare the recoverable amount of the CGU to book value. If the recoverable amount is less, reduce goodwill first, then other assets. The recoverable is the higher of fair value less costs to sell and present value of estimated future cash flows.

201

IFRS requires goodwill to be tested for impairment at least __________. U.S. GAAP allows a company to avoid annual testing by making __________ __________ of the likelihood of goodwill impairment to determine if step one is necessary.

annually
qualitative evaluations

202

Both U.S. GAAP and IFRS prohibit:

the reversal of goodwill impairment loss

203

For assets held for sale, if book value exceeds fair value less cost to sell, an __________ __________ is recognized for the difference.

impairment loss

204

The FASB and IASB have identified impairment as a topic for longer-term __________.

convergence

205

Expenditures related to assets can increase future benefits in the following ways:

1. An extension of the useful life of the asset
2. An increase in operating efficiency of the asset resulting in either an increase in the quantity of goods or services produced or a decrease in future operating costs.
3. An increase in the quality of goods or services produced by the asset.

206

Many companies do not capitalize any expenditure unless it exceeds a predetermined amount that is considered __________.

material

207

What are repairs and maintenance?

Expenditures to maintain a given level of benefits

208

Expenditures for repairs and maintenance generally are:

expensed when incurred

209

What are additions?

The addition of a new major component to an existing asset.

210

The costs of additions are usually __________.

capitalized

211

What are improvements?

The replacement of a major component

212

The costs of improvements usually are __________.

capitalized

213

Give examples of additions:

1. Adding a refrigeration unit to a delivery truck increases the capability of the truck, thus increasing future benefits.
2. Construction of a new wing on a building
3. Addition of a security system on an existing building

214

What are the three methods used to record the cost of improvements?

1. Substitution
2. Capitalization of new cost
3. Reduction of accumulated depreciation

215

What are rearrangements?

Expenditures to restructure an asset without addition, replacement, or improvement.

216

The cost of material rearrangements should be:

capitalized if they clearly increase future benefits

217

The costs incurred to successfully defend an intangible right should be __________.

capitalized

218

The costs incurred to unsuccessfully defend an intangible right should be __________.

expensed

219

Under U.S. GAAP, litigation costs to successfully defend an intangible right are __________ and __________ over the remaining useful life of the related intangible. Under IFRS, these costs are __________ when an expenditure increases future benefits.

capitalized, amortized
expensed