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My CPA-FARmodule11
Notecards I made from Wiley's 2012 CPA Exam Review
| Question | Answer |
|---|---|
| Define Fixed assets. | Capitalized amount of expenditures made to acquire tangible property to be used for more than one year - Costs are deferred to future periods b/c of matching principle |
| Define Tangible property | land, buildings, equipment, and other property that physically exists |
| What are the capitalized costs of acquiring a fixed asset? Give some examples of these costs. | 1. All costs necessary to get the asset to the work site and prepare it for use 2. cost of negotiation, sales tax, finders fee, razing an old building, shipment, installation, preliminary testing |
| What are some examples of the cost of producing a fixed asset? | direct construction labor, direct materials, variable overhead, and fair share of fixed overhead |
| What if the fixed asset is donated, how is it recorded? | at fair value with a credit to revenue - if fair value can't be determined, use book value |
| What assets qualify to have their interest capitalized as part of their cost? | 1. assets which require a period of time to be prepared for use A. constructed for lease/sale produced as discrete projects (ships, real estate) B. assets constructed for a firms own use, whether constructed by the entity itself or an outsider |
| How is capitalized interest defined? | the amount that could have been avoided if the project had not been undertaken - Includes amortization of any discount, premium, or issue cost. - Cannot exceed actual interest incurred during period |
| How is capitalized interest calculated? | Average accumulated expenditures during period X Interest Rate X Construction period |
| When does the interest capitalization period begin and end? | Begin when following conditions met, end when no longer met 1. expenditures for asset are made 2. activities to get asset ready for use are in progress 3. interest cost is being incurred -interruptions/delays dont stop it. Suspension of activities doe |
| What is the interest rated used when capitalizing interest? | rate on specific borrowing. If not available, use weighted-average of other borrowings |
| In determining average accumulated expenditures, how is capitalized interest compounded? What is excluded in determining the expenditures? | 1. include interest capitalized during previous period 2. non-interest bearing payables (trade payables, accruals) |
| Define average accumulated expenditures | (beg accumulated expenditures+end accumulated expenditures)/2 |
| How is the weighted-average of other borrowings calculated? | (loan 1 actual interest for month+loan 2 actual interest for month)/ (loan 1 amount+loan 2 amount)= % used to multiply remaining avoidable interest (i.e average accumulated expenditures) |
| If interest is accumulated on a loan used to purchase land where an entity is constructing a building, is it capitalized? | Yes, becomes part of the cost of the building. Thus charged to expense as building is depreciated |
| Can interest earned on temporarily invested borrowings be offset against interest to be capitalized? | No, earned interest recognized as a revenue |
| What are the two rationale's for interest capitalization? | 1. reflect asset's acquisition cost 2. match asset's cost with the revenue of periods that benefit from its use |
| In determining the acquisition cost, what is done the proceeds from salvaged material? | netted against the demolition costs |
| How are the value nonmonetary exchanges recorded? | using the fair value of the asset given up - if cash could have been received by one of the parties that value is thought of as the fair value - If fair value of asset given up cant be determined, use fair value of asset received |
| In a nonmonetary exchange, can the transferor maintain involvement in the asset or have any ownership of the risks or rewards? | No |
| What are the reasons for not using the fair value in a nonmonetary exchange? How measured then? | 1. Fair value is not determinable 2. It is an exchange transaction to facilitate sales to customers 3. The transaction lacks commercial substance -ALL BOOK VALUE: 1 no gain/loss recognized 2. loss yes, gain yes portion when boot is received |
| Define commercial substance | cash flows are significantly different as a result of the exchange -include risk, timing, and amount of future cash flows -not include tax effects in determining commercial substance |
| For a nonmonetary exchange how are gains/losses measured? Are losses recognized? gains? | 1. Fair value of asset given (or received if need be)-book value of asset given= gain/loss 2. Always 3. only if exchange measured at fair value. |
| In a nonmonetary exchange that meets one of the criteria of the reasons not to use fair value, what is done if the boot is given? Received? | 1. New asset recorded at book value of given asset plus boot given. 2. If boot received a portion of the gain is recognized and the asset is recorded at Book Value-boot received+recognized gain |
| In a nonmonetary exchange where a boot is received, how do you calculate the amount of the boot to be included in revenue? | [boot received/(boot received+FV of asset received)] X total gain |
| How are costs allocated in a basket purchase? | Cost of all assets acquired X (market value of asset A/ Market Value of All assets acquired)= allocated cost - do for assets b, c, d, etc.. |
| Define Capital expenditures | not normal, recurring expenses. Benefit the operations of more than one period. - Some expensed as revenue expenditures because they are immaterial (e.g. less than $50) |
| Define Revenue expenditures | normal recurring expenditures. |
| What is the objective of depreciation | match asset cost with revenue produced in period |
| Define straight-line depreciation | (Book Value-Salvage Value)/ Estimated life |
| Define double declining balance depreciation | Double the straight line depreciation %- (straight line depreciation amount/ Book Value)- and multiply by the net book value at the beginning of each year. can NOT go below Salvage value |
| Define Sum-of-the-years digits depreciation | 1.Find denominator by [Estimated life(Estimated life+1)]/2 2.Numerator is estimated life left 3.Multiply resulting fraction by Original Book Value-Salvage Value each year |
| What type of expenditures are capitalized directly to an asset? | 1. Additions 2.Repairs- increase the quality/output 3.Replace/Improve- book value of old component is known: new component outlay, credit old component amount. NOT known: increase use value 4. Reinstall- material costs, benefits go beyond current perio |
| What type of expenditures are capitalized to accumulated depreciation? | 1. Repairs- primarily extend useful life 2. Replacements- Book Value known: old component amount. NOT known: extends useful life |
| What type of expenditures are expensed when they occur and not capitalized? | 1. Ordinary Repairs- Only maintain condition, Do not add value, Do not extend life 2. Reinstall- No measurable future benefit |
| What is the rationale behind accelerated depreciation? | 1. increased productivity in a new asset 2. increased maintenance charges with age 3. Risk of obsolescence |
| Define physical use depreciation | based on activity (machine hours) or output (finished widgets) Calculated: Annual Depreciation= (Current activity or output/Total activity or output) X Depreciation Base (i.e Book Value) |
| Define Inventory Depreciation | Used when many low-cost tangible assets (utensils in restaurant) Calculated- Annual Depreciation= Beg Inv+Cost of Acquisitions-End Inv Adv: small assets not practical to maintain depreciation schedule DisAdv: not systematic and rational |
| Define Composite (Group- when similar) Depreciation | average service life of a number of units and depreciate as a single unit Calculate- 1. Use straight line on all assets 2. Add annual depreciation 3. depreciation rate: (Sum of Dep./Total Asset Cost) 4. composite life: (Dep. base/Sum of Dep.) |
| How is a change in depreciation method treated as? | Accounting estimate |
| How is a change in a depreciations useful life or salvage value treated? | Prospectively |
| What is the entry to record the sale of an asset? | Debit:Cash Accumulated Dep Credit: Old Asset Gain |
| If assets are intended to be disposed in a future period rather than held for use, when should a loss be recognized? | As soon as the NRV (fair Value-selling costs) is less than the carrying value |
| Are fixed assets intended for disposal depreciated? Where are they placed? | 1. Depreciation is stopped once they are intended for disposal 2. Classified as other assets on the balance sheet |
| Can losses on fixed assets be recovered if the the NRV changes? | Yes but cannot exceed the carrying amount prior to recognition of impairment (i.e loss already recognized) |
| Define Impairment. When is it recognized? | 1. When the carrying amount of a long-lived asset exceeds its fair value 2. If the carrying amount is not recoverable (exceeds the sum of the expected value of undiscounted cash flows) |
| How is impairment recognized? | As the difference between an asset's fair value and its carrying value |
| In impairment, how is fair value recognized? | As most advantageous 1. In-use valuation assumes the highest value is achieved by using it in business with other assets 2. In-exchange assumes that highest value is the amount received to sell the asset stand-alone |
| Can recoveries of previously recognized impairment losses be recognized in subsequent periods? | No |
| Define depletion. | "depreciation" of natural resources. Depletion base includes all development costs such as exploring, drilling, excavating, and other preparatory costs |
| How do you calculate the depletion? | (units extracted/total expected recoverable units) X Depletion base |
| How is depletion revised? | (original cost+Addt'l costs incurred-Residual Value-Depletion taken in previous years)/ (units withdrawn currently+estimated units recoverable at year end) |
| What happens an insured loss occurs? What's included in the account? Where do payments from the insurance company go? What happens at the end of the period? | 1. An insurance loss account should be set up 2. Loss from decrease in asset value, earned insurance premiums, etc. 3. Credit insurance loss account 4. Close to revenue and expense summary |
| What are some examples of intangible assets? | copyrights, leaseholds, organization costs, trademarks, franchises, patents, and goodwill |
| How should purchased intangibles be recorded? | At cost. Which equals fair value of intangible at time of acquisition |
| How should internally developed intangibles be recorded? Exception? | 1. written off as research and development expense 2. Cost to register a patent |
| When is goodwill recorded? And how? | 1. Only when an entire business is purchased 2. FV-FV of assets - Can be broken up by reporting units (comm, tech, consulting, etc...) |
| How are intangible assets amortized? Qualifications to amortize? | 1. Directly credit the intangible asset, debit amortization expense 2. must have a definite useful life. If company has right to extend legal life of an asset indefinitely, then cannot be amortized, because useful life is considered indefinite |
| What kind of intangible assets should be tested for impairment? How often should it be tested? And how is impairment recorded? | 1. All kinds, even if have indefinite useful life or being amortized 2. Annually or more if facts indicate impairment may have occured 3. Debit Impairment loss, Credit intangible asset- for difference between Carrying Value- Fair Value |
| When should an impairment of goodwill test be conducted? | Annually at any point during the year, but must consistently be done at the same point every year |
| What is the point of a company qualitatively determining impairment of goodwill? How is it done? | 1. If determine odds of impairment having occurred are <50% then can skip goodwill impairment test 2. Examine industry/market conditions, cost factors, overall financial performance, entity-specific events, share price decreases, etc.. |
| How is the impairment of goodwill test conducted? | 1. Compare FV of reporting unit with Carrying Amt 2. If FV>, then find excess of FV of reporting unit by comparing FV to amts assigned to assets/liabilities in unit. Diff is implied goodwill 3. If Implied goodwill<Carrying Amt, then write down goodwill |
| Define start up costs. And when are they expensed? | 1. one-time activities related to opening a new facility, new class of customer, initiating a new process in existing facility, or some other new operation 2. As incurred |
| If Research & Development is done under contract for others, is it expensed? | No, costs incurred would be matched with revenues using completed-contract or percentage-of-completion method |
| When should Research & Development costs be expensed? | As they are incurred. Except for intangible/fixed assets, purchased from others that have alternative future uses |
| What should be done with Research & Development costs associated with intangible/fixed assets purchased from others that have alternative future uses? | Capitalized and amortized over their useful life. -3rd party purchases may be deferred. Internally developed R&D may not |
| Looking at computer software expected to be sold, during the R&D stage, what costs are included? When are costs expensed? And what are they expensed to? | 1. All costs until technological feasibility (detailed program design) is reached 2. Period they occurred 3. R&D Expense |
| Looking at computer software expected to be sold, during capitalization of costs period, what costs are expensed? When are they expensed? And what are they expensed to? HOW? | 1. All that occur between technological (sound design) and market feasibility (ready for sale) 2. After market feasibility 3. Annual amortization 4. Greater of Straight line or (current rev/expected rev)*cost -Ceiling= NRV |
| Looking at computer software expected to be sold, during inventory cost period, What costs are expensed? When are they expensed? And what are they expensed to? | 1. Costs incurred for duplicating software and physical packaging of product 2. As the product is sold 3. cost of goods sold |
| What two criteria must be met for software to be accounted for as internally developed? | 1. Specs must be designed/modified to meet entity's internal needs, include costs to customize purchased software 2. During development, there is no plan/intent to market externally. Can be joint funded by several companies, each must use internally |
| What expectation is needed to justify capitalizing software development? If not there what happens? | 1. that it is probable the project will be completed and software will be used as intended 2. costs are expensed currently as research and development costs |
| Define capitalize | To include an expenditure in an asset's costs |
| Define development stage enterprise. | Entity that devotes substantially all of its efforts to establishing a new business and planned principal operations havent started or have started but there has been no significant revenue -Identified on financial statements |
| If a company were to acquire, develop, or improve a product for use in its selling or administrative activities, would the costs be expensed to research and development? | No, FASB specifically excludes items to be used for selling and administrative purposes as research and development |
| Under IFRS, how are plant, property and equipment defined? | tangible items to be used during more than one period in the production/supply of goods/services, for rental to others, or administrative purposes |
| Under IFRS, how are plant, property, and equipment recorded? What goes into this number? | 1. At cost 2. Purchase price-discounts/rebates, cost to bring the asset to required location/condition, delivery and handling, site preparation, installation, assembly costs, professional fees, and estimated cost for decommissioning/site restoration |
| Under IFRS, define the cost model of valuation | Asset is carried at cost less an accumulated depreciation and accumulated impairment loss |
| Under IFRS, define the revaluation model of valuation | Carrying amount of the asset is fair value at date of revaluation minus subsequent accumulated depreciation&impairment loss - no rule regarding frequency of revaluation - when preformed must do for entire class of assets |
| Under IFRS, in the revaluation model what accounts are used when an asset is written up or down? Where reported? How use accumulated depreciation? | 1. adjustment is recorded to revaluation surplus account 2. in other comprehensive income for period 3. can be adjusted proportionately or can be eliminated and the asset shown net |
| Under IFRS, after initial recognition, what are the two ways property, plant, and equipment may be subsequently measured by? How with long-lived assets (big picture)? | 1. Cost model or revaluation model 2. Divide assets into classes, decide for each class which valuation method is used |
| Under IFRS, define investment property. How does property qualify as investment property? | 1. property held to earn rentals, for capital appreciation, or both 2. my not be used in production/supply of goods/services, nor for administrative purposes, nor can it be held for sale in the ordinary course of business |
| Under IFRS, In the revaluation model, What happens when an asset is disposed of? | gain/loss is recognized and reported on income statement. Balance in the revaluation surplus account is transferred directly to retained earnings |
| Under IFRS, if investment property is measured with the fair value model, How are changes in fair value recognized? Is depreciation recorded? What is the definition of fair value? | 1. in profit or loss in the period of change 2. no 3. price which the property could be exchanged between knowledgeable parties in an arm's-length deal |
| Under IFRS, what does investment property not include? | property used in the business, being constructed or developed for others, under construction that will be future investment property, and property held for sale in normal course of business |
| Under IFRS, if investment property is measured with the fair value model, How are changes in fair value recognized? Is depreciation recorded? What is the definition of fair value? | 1. in profit or loss in the period of change 2. no 3. price which the property could be exchanged between knowledgeable parties in an arm's-length deal |
| Under IFRS, what are the two categories for intangible assets? | 1. identifiable 2. unidentifiable |
| Under IFRS, What are the criteria to define an intangible asset as identifiable?? How many of the criteria must be met? | 1. it is based on contractual or legal rights 2. it can be separated from the entity and sold/transferred/leased.. 3. 1 |
| Under IFRS, how are intangible assets recorded when they are acquired? acquired in a business combination? internally generated? | 1. at cost 2. at fair value separately from goodwill 3. cost of development. not recognized as an asset |
| Under IFRS, what six criteria must be met for development costs to be recognized as an intangible asset? | 1. technological feasibility has been achieved 2. intends to complete the asset 3. has ability to use/sell asset 4. understands how asset will generate future benefits 5. resources are available to complete asset 6. can reliable measure expenditures |
| Under IFRS, what models are used to valuate intangible assets? | 1. Cost Model- same way as p,p,&e 2. Revaluation model- fair value must be determined in an active market |
| Under IFRS, how long can the useful life of intangible assets be? | Finite or indefinite. Finite are amortized over useful life, indefinite are not amortized but annually checked for impairment |
| Under IFRS, when should an entity check for impairment? | At each reporting date check to see if there are conditions to cause an asset to be impaired |
| Under IFRS, when does impairment exist? | When the carrying value of the asset is greater then recoverable (which is greater of net selling price or value its in use) |
| Under IFRS, when are impairments to assets carried at historical cost recognized? How? | 1. The current period 2. May be included with depreciation expense or identified separately on income statement |
| Assuming the historical cost method was used, what is one of the biggest differences between US GAAP and IFRS? How done? | 1. IFRS allows impairment to be reversed 2. Under cost method, reversal is recognized in the income statement up to previous recognized impairments Under revaluation method, recovery recognized in other comprehensive income |
| Under IFRS, what must be disclosed as a separate item on the balance sheet? Give detail on this item. | Biological assets, which are recognized when future economic benefit is probable, entity controls asset as a result of past events, and cost/FV can be measured reliably. Agricultural produce measured at FV-cost to harvest |
Created by:
Bsantoro
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