F3 - Assets and Related Topics

On January 2 of the current year, Cruises, Inc. borrowed $3 million at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1.3 million are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year? A. $0 B. $300,000 C. $600,000 D. $900,000

*A. $0 * Explanation Choice "A" is correct. Interest incurred during the construction period should be capitalized, based on the weighted average of accumulated expenditures, as part of the cruise ship cost. Interest cost incurred before or after the construction period should be expensed as well as interest cost incurred during intentional delays in construction.

Aln Co. incurred the following expenses during the current period: Routine ongoing efforts to improve an existing product $ 50,000 Troubleshooting in connection with breakdowns during commercial production $ 75,000 Routine testing of products during commercial production for quality-control purposes $100,000 What is the total amount of research and development expense incurred by Aln during the current period? A. $0 B. $75,000 C. $125,000 D. $175,000

*A. $0* Explanation Choice "A" is correct. *Routine efforts* to improve a product that already exists, *troubleshooting*, and routine quality-control testing are *specifically not considered* research and development (R&D) costs. Choice "B" is incorrect. This choice incorrectly includes troubleshooting costs as R&D costs. Choice "C" is incorrect. This choice incorrectly includes both routine efforts to improve an existing product and troubleshooting costs as R&D costs. Choice "D" is incorrect. This choice incorrectly includes troubleshooting costs and routine quality-control testing as R&D costs.

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

*A. $0* 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. Choice "B" is incorrect. This amount represents the value of the acquired trademark amortized over 40 years. There will be no amortization due to the expectation that the trademark will be renewed indefinitely. Choice "C" is incorrect. The 15 year useful life here is equal to the remaining legal life (5 years) and the first 10 year renewal. This is not applicable here due to the expectation of indefinite renewal. Choice "D" is incorrect. This answer assumes amortization over the remaining legal life, which is not applicable because the company expects to renew indefinitely.

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized? A. $200,000 B. $250,000 C. $270,000 D. $320,000

*A. $200,000* Explanation Choice "A" is correct. Any costs incurred *during the preliminary project state*, as well as costs for *training and maintenance*, should be *expensed*. Costs incurred *after* the preliminary project state, once *commitment to the project has been made*, can be capitalized. These costs include costs for materials and services, direct labor costs, and interest costs incurred for the project. In this case, the only expense eligible for capitalization is the $200,000 to write the code. The $50,000 payroll costs were incurred in the preliminary phase, and the $70,000 general and administrative costs cannot be capitalized because they relate to training and maintenance.

Light Co. had the following bank reconciliation at March 31: Balance per bank statement, March 31 $23,250 Add: Deposit in transit 5,150 28,400 Less: Outstanding checks 6,300 Balance per books, March 31 $22,100 Additional information from Light's bank statement for the month of April is as follows: Deposits $29,200 Disbursements 24,800 All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled $3,200. What is the amount of cash disbursements per books in April? A. $21,700 B. $24,800 C. $27,900 D. $28,000

*A. $21,700* *April cash disbursements = April disbursements - March O/S checks + April O/S checks = $24,800 - 6,300 + 3,200 = $21,700* Explanation Choice "A" is correct. According to the bank statement, disbursements in April totaled $24,800. However, the question says that all outstanding checks from the March reconciliation cleared the bank in April. This means that *$6,300 of the $24,800 disbursement amount was recorded in the company's books during the month of March*. As a result, *$18,500 ($24,800 - $6,300)* of the April disbursements per the bank were recorded in the company's books during April and cleared the bank during April. The last component to consider are the outstanding checks in the April reconciliation. These are checks written and recorded in the books that did not clear the bank. Because they are not included in the adjusted disbursement amount of *$18,500, the $3,200 of outstanding checks are added* to determine total April disbursements per the books of *$21,700.*

Core Properties, Inc. holds the following working capital items as of December 31, Year 1: -Bank draft in the amount of $9,000 from a German customer. -$10,000 six month Treasury bill maturing February 15, Year 2. -$20,000 one-year certificate of deposit maturing on January 15, Year 2. Core includes in cash equivalents all possible items. On Core's December 31, Year 1 balance sheet, cash and cash equivalents is: A. $9,000 B. $19,000 C. $30,000 D. $39,000

*A. $9,000* Explanation Choice "A" is correct. The $9,000 bank draft is the only item to be included in cash and cash equivalents. Choices "B", "C", and "D" are incorrect. The treasury bill and CD have *original maturities* greater than 90 days.

Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment? A. A patent. B. Goodwill. C. R&D costs for a patent. D. A trademark with indefinite useful life.

*A. A patent.* Explanation Choice "A" is correct. A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life. The recoverability test compares undiscounted future cash flows to the carrying value of the asset. If the carrying value is greater, then a fair value test would be performed. Choice "B" is incorrect. Goodwill is an intangible asset with an *indefinite life*; therefore, the *recoverability test is not performed*. Choice "C" is incorrect. R&D costs are expensed immediately; therefore, impairment is irrelevant as no intangible asset would exist to test for impairment. Choice "D" is incorrect. This specific trademark is an intangible asset with an *indefinite life*; therefore, the *recoverability test is not performed*.

In which of the following situations is the units-of-production method of depreciation most appropriate? A. An asset's service potential declines with use. B. An asset's service potential declines with the passage of time. C. An asset is subject to rapid obsolescence. D. An asset incurs increasing repairs and maintenance with use.

*A. An asset's service potential declines with use. * Explanation Choice "A" is correct. Units-of-production depreciation method reflects that an asset's service potential declines with use. Choice "B" is incorrect. Straight-line depreciation method reflects that an asset's service potential declines with the passage of time. Choice "C" is incorrect. An accelerated depreciation method would reflect that an asset is subject to rapid obsolescence. Choice "D" is incorrect. An accelerated depreciation method would reflect that an asset incurs increasing repairs and maintenance with use.

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account: A. Decreases both accounts receivable and the allowance for uncollectible accounts. B. Decreases accounts receivable and increases the allowance for uncollectible accounts. C. Increases the allowance for uncollectible accounts and decreases net income. D. Decreases both accounts receivable and net income.

*A. Decreases both accounts receivable and the allowance for uncollectible accounts.* Explanation Choice "A" is correct, when the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account decreases both accounts receivable and the allowance for uncollectible accounts. Debit (Dr) Allowance for uncollectible accounts XXX Credit (Cr) Accounts receivable XXX Choice "B" is incorrect. The allowance for uncollectable accounts decreases. Choice "C" is incorrect. The allowance for uncollectible accounts decreases, but net income is not affected. Choice "D" is incorrect. Net income is not affected.

Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee's cash collections from customers equal sales adjusted for the addition or deduction of the following amounts: Accounts Written-Off/ Increase in Accounts Receivable Balance A. Deduction/ Deduction B. Addition/ Deduction C. Deduction/ Addition D. Addition/ Addition

*A. Deduction Deduction* Explanation Choice "A" is correct. Deduction - Deduction. During an accounting period, cash collections from customers would equal sales adjusted by deducting "accounts receivable written off" and deducting the "increase in the accounts receivable balance."

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company's next step in performing its impairment test is to: A. Perform a recoverability test on the carrying amount of the division's assets. B. Reduce the carrying amount of the division's assets to the amount of expected divisional cash flows. C. Adjust the carrying amount of the division's assets to fair value. D. Adjust the carrying amount of the division's assets to replacement value.

*A. Perform a recoverability test on the carrying amount of the division's assets.* Explanation Choice "A" is correct. Performance of an impairment test on fixed assets held for use and to be disposed of *begins with a recoverability test*, in which the *sum of undiscounted future cash flows is compared with the carrying amount*. If the undiscounted future cash flows are less than the carrying value, then an impairment loss would be calculated. Choice "B" is incorrect. An impairment loss would be recorded after the recoverability test is performed. In addition, using undiscounted cash flows is not how the impairment loss would be calculated. Choice "C" is incorrect. An impairment loss would be recorded after the recoverability test is performed. The loss would be based on the difference between the fair value and the carrying value of the assets. Choice "D" is incorrect. An impairment loss would be recorded after the recoverability test is performed. In addition, using replacement is not how the impairment loss would be calculated.

During the current year, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam's current year accounting records: Beginning inventory $ 122,000 Purchases 540,000 Freight in 10,000 Transportation to consignees 5,000 Freight out 35,000 Ending inventory (held by Kam ) 145,000 Ending inventory (held by consignees) 20,000 In year-end income statement, what amount should Kam report as cost of goods sold? A. $507,000 B. $512,000 C. $527,000 D. $547,000

*B. $512,000* *Rule*: Consignor must include consigned goods (in the hands of the consignee) in his own inventory, at his cost plus warehousing costs of consignor before goods are transferred to consignee plus shipping costs to consignee. *Choice "B" is correct, $512,000* cost of goods sold on the income statement. Beginning inventory $122,000 Add: Purchases 540,000 Freight in 10,000 *Transportation to consignees 5,000* Cost of goods available for sale 677,000 Less: ending inventory Held by Kam (145,000) *Held by consignees (20,000)* Cost of goods sold $ 512,000

Loft Co. reviewed its inventory values for proper pricing at year end. The following summarizes two inventory items examined for the lower of cost or net realizable value: Inventory Item #1/ Inventory Item #2 Original cost $210,000/ $400,000 Net realizable value 240,000/ 390,000 What amount should Loft include in inventory at year end if it uses the total of the inventory to apply the lower of cost or net realizable value? A. $600,000 B. $610,000 C. $630,000 D. $640,000

*B. $610,000* Explanation Choice "B" is correct. If *total inventory is used to apply* the cost or net realizable value rule, then total cost and total net realizable value are calculated as follows: Original cost $610,000 ($210,000 + $400,000) Net realizable value $630,000 ($240,000 + $390,000)

In Year 5, an entity which uses IFRS, revalued an indefinite life intangible to its fair value of $150,000 and recorded a revaluation surplus of $30,000. On December 31, Year 6, the intangible asset had a fair value of $130,000. In its December 31, Year 6 financial statements, the entity will report: A. A $20,000 revaluation loss on the income statement B. A $20,000 revaluation loss in other comprehensive income C. A $10,000 revaluation loss in accumulated other comprehensive income D. A $30,000 revaluation surplus in accumulated other comprehensive income

*B. A $20,000 revaluation loss in other comprehensive income* Explanation Choice "B" is correct. The entity has a revaluation loss of $20,000 ($150,000 revalued amount from Year 5 - $130,000 fair value on 12/31/Y6). The revaluation loss will be recorded in Year 6 other comprehensive income and *will offset the $30,000 revaluation surplus in accumulated other comprehensive income (AOCI)*, for a net revaluation surplus of $10,000 reported in AOCI on December 31, Year 6. Choice "A" is incorrect. The $20,000 revaluation loss will be reported in other comprehensive income because it reverses a portion of the $30,000 revaluation surplus reported in the prior year. Choice "C" is incorrect. The entity will report a net $10,000 revaluation surplus, not loss, in accumulated other comprehensive income on December 31, Year 6: $10,000 net revaluation surplus = $30,000 Year 5 revaluation surplus - $20,000 Year 6 revaluation loss Choice "D" is incorrect. The entity will report a net $10,000 revaluation surplus in accumulated other comprehensive income on December 31, Year 6: $10,000 net revaluation surplus = $30,000 Year 5 revaluation surplus - $20,000 Year 6 revaluation loss

On December 31, a company has the following bank accounts and corresponding cash balances: California Bank Operating—Summit Ridge ($400,000) Operating—Bakersville 300,000 Operating—Smithville 50,000 Savings 500,000 Sedona Bank Checking ($375,000) How should the company report the above bank account balances in the balance sheet at December 31? A. Cash of $75,000 B. Cash of $450,000 and a liability of $375,000 C. Cash of $850,000 and a liability of $775,000 D. Cash of $800,000 and a liability of $725,000

*B. Cash of $450,000 and a liability of $375,000* Explanation Choice "B" is correct. Although the balances in the various accounts within the same bank can be netted, balance totals for different banks must be accounted for separately on the balance sheet when one has a negative position. Here, because the checking account in Sedona Bank is negative, it must be accounted for separately as a liability. All of the accounts of California Bank can be netted to produce a $450,000 cash position. Choice "A" is incorrect. The negative balance for Sedona should be reported separately as a liability. Choice "C" is incorrect. The operating account for Summit Ridge should be netted with the other positions within California Bank. Choice "D" is incorrect. There would be no reason to just net the Smithville amount with the liabilities.

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be: A. Classified as other income. B. Deducted from the cost of the land. C. Netted against the costs to clear the land and expensed as incurred. D. Netted against the costs to clear the land and amortized over the life of the plant.

*B. Deducted from the cost of the land.* Explanation Choice "B" is correct. The proceeds from the sale of the building should be deducted from the cost of the land. *Rule*: Cost of land includes all costs necessary to put the land in place and condition for construction of the plant. Any proceeds from the sale of any existing buildings (or standing timber, or soil) or scrap are deducted from the cost of the land. Choice "A" is incorrect. The proceeds are a part of the cost of the land, not other income. Choices "C" and "D" are incorrect. Costs to clear the land are capitalized, not expensed or amortized.

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books? A. Change the due date of the invoice. B. Factor the receivables outstanding. C. Discount the receivables outstanding. D. Demand payment from customers before the due date.

*B. Factor the receivables outstanding.* Explanation Choice "B" is correct. Factoring receivables is the process by which a company *converts its receivables to cash by assigning them to a factor*, either with or without recourse. Choice "A" is incorrect. The fact that the receivables have been recorded implies that the company has already sent invoices to its customers setting the payment due date. Generally, the due date cannot be changed after the invoice has been sent, nor is changing the due date likely to speed up the overall customer payment rate. Choice "C" is incorrect. *Discounting is the process of converting notes receivable*, not accounts receivable, to cash. Choice "D" is incorrect. Demanding payment from customers before the due date is likely to anger customers, but is not likely to speed up the overall customer payment rate. The invoice sets the payment terms of the receivable.

After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal: A. Maturity value less the discount at 12%. B. Maturity value less the discount at 15%. C. Face value less the discount at 12%. D. Face value less the discount at 15%.

*B. Maturity value less the discount at 15%.* Explanation Choice "B" is correct. Maturity value less the discount at 15%. The discount is always applied on the maturity value. Choice "A" is incorrect. The discount is taken at the discount rate (15%), not the note rate (12%). Choice "C" is incorrect. The maturity value is used, not face value, and the discount rate (15%) is used, not note rate (12%). Choice "D" is incorrect. The maturity value is used, not face value.

When should a long-lived asset be tested for recoverability? A. When external financial statements are being prepared. B. When events or changes in circumstances indicate that its carrying amount may not be recoverable. C. When the asset's carrying amount is less than its fair value. D. When the asset's fair value has decreased, and the decrease is judged to be permanent.

*B. When events or changes in circumstances indicate that its carrying amount may not be recoverable.* Explanation Choice "B" is correct. The carrying amount of fixed assets should be tested for recoverability at least annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Choice "A" is incorrect. This choice leaves out the fact that events or changes in circumstances may dictate the carrying amount may not be recoverable. Choice "C" is incorrect. This is not problematic. Choice "D" is incorrect. Even if the fair value has decreased, it may still be above carrying value.

A company has a long-lived asset with a carrying value of $120,000, undiscounted expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a fair value less costs to sell of $105,000. What amount of impairment loss should be reported under IFRS? A. $0 B. $10,000 C. $15,000 D. $20,000

*C. $15,000* Explanation Choice "C" is correct. Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount. The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (present value of future cash flows). In this problem, the fair value less costs to sell of $105,000 exceeds the value in use of $100,000, so the recoverable amount is $105,000. The carrying value of $120,000 exceeds the recoverable amount of $105,000, so an impairment loss must be recorded: *Impairment loss = Fair value less costs to sell - Carrying value = $105,000 - $120,000 = $15,000* Choice "A" is incorrect. The carrying value of $120,000 exceeds the $105,000 recoverable amount, so an impairment loss must be recorded. Choice "B" is incorrect. The impairment loss is not the difference between the carrying value and the undiscounted expected future cash flows. Choice "D" is incorrect. Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount. The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (present value of future cash flows). In this problem, the fair value less costs to sell of $105,000 exceeds the value in use of $100,000, so the recoverable amount is $105,000, not $100,000, and the impairment loss is $15,000, not $20,000.

***Roth Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8 percent. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10 percent. What amount of cash did Roth receive from the bank? A. $540,000 B. $523,810 C. $513,000 D. $495,238

*C. $513,000* Explanation Choice "C" is correct: $513,000 cash proceeds received from the bank. *Step 1*: Calculate the maturity value = Face + Total interest *Step 2*: Calculate the discount by the bank = Maturity value x bank discount rate x length of time left in note receivable *Step 3*: Proceeds from bank = Maturity value - bank discount Face of note $ 500,000 Interest rate on note (8% × 1 yr) × 8% =40,000 Maturity value of note 540,000 Discount by bank (10% × 1/2 yr) × 5% =(27,000) Proceeds from bank $ 513,000

Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows: Completion of detail program design $13,000 Costs incurred for coding and testing to establish technological feasibility 10,000 Other coding costs after establishment of technological feasibility 24,000 Other testing costs after establishment of technological feasibility 20,000 Costs of producing product masters for training materials 15,000 Duplication of computer software and training materials from product masters (1,000 units) 25,000 Packaging product (500 units) 9,000 In Pitt's December 31 balance sheet, what amount should be capitalized as software cost, subject to amortization under U.S. GAAP? A. $54,000 B. $57,000 C. $59,000 D. $69,000

*C. $59,000* Explanation Choice "C" is correct. $59,000 capitalized software cost, subject to amortization. Completion of detail program design = R&D Coding & testing to establish technological feasibility = R&D *Coding costs after establishment of technological feasibility 24* *Testing costs after establishment of technological feasibility 20* *Costs of producing product masters for training materials 15* Duplication of software & training materials from product masters (1,000) = Inventory Packaging product (500) = Inventory Total capitalized software cost = $24 + 20 + 15 = $59

Sun Co. was constructing fixed assets that qualified for interest capitalization. Sun had the following outstanding debt issuances during the entire year of construction: $6,000,000 face value, 8% interest. $8,000,000 face value, 9% interest. None of the borrowings were specified for the construction of the qualified fixed asset. Average expenditures for the year were $1,000,000. What interest rate should Sun use to calculate capitalized interest on the construction? A. 8.00% B. 8.50% C. 8.57% D. 9.00%

*C. 8.57%* Explanation Choice "C" is correct. If borrowings are not tied specifically to the construction of an asset, the weighted average interest rate for the other borrowings of the company should be used. The weighted average interest rate is calculated as follows: [(6,000,000/14,000,000) * .08] + [(8,000,000/14,000,000) * .09] = .0857, or 8.57%. Note that if there were borrowings tied to the specific construction, the rate on those borrowings would be used. Choice "A" is incorrect. This is just the rate on the first bond listed. Choice "B" is incorrect. This is not a weighted average of the two bonds, as the second bond carries more weighting. Choice "D" is incorrect. This is just the rate on the second bond listed.

A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year? A. Determine the current year's amortizable amount and report the current-year's amortization expense. B. Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement. C. Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement. D. Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement.

*C. Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement.* Explanation Choice "C" is correct. At a reporting unit level, when the fair value is less than the carrying amount, a loss on impairment is booked on the income statement (a debit) and a reduction in goodwill (credit) is booked to the balance sheet. Choice "A" is incorrect. Goodwill is not amortized. Choice "B" is incorrect. Goodwill "gains" are not booked to the income statement or balance sheet. Choice "D" is incorrect. Restoration of previously recognized impairment losses is prohibited under U.S. GAAP, unless the asset is held for disposal. This is not applicable here, as goodwill is not "disposable."

A company acquired an item of property, plant and equipment that consists of individual components with costs that are both significant and insignificant in relation to the total cost of the item. Which of the following statements represents the methodology that should be used to measure and record depreciation expense under IFRS? A. The individual components may be combined and depreciated using a weighted-average useful life computed for the asset as a whole. B. The individual components may be combined and depreciated over the useful life of the asset based on the company's established policy for that asset category. C. Each component with a cost that is significant in relation to the total cost of the item should be depreciated separately; approximation techniques may be used to depreciate the cost of the remaining items that are individually insignificant. D. Each component with a cost that is significant in relation to the total cost of the item should be depreciated separately, and the company may elect to immediately expense the cost of the remaining items that are individually insignificant.

*C. Each component with a cost that is significant in relation to the total cost of the item should be depreciated separately; approximation techniques may be used to depreciate the cost of the remaining items that are individually insignificant. * Explanation Choice "C" is correct. IFRSs require component depreciation. Separate significant components of a fixed asset with different lives should be recorded and depreciated separately. The remaining cost of the assets is depreciated over the average useful life of the asset as a whole. Choice "A" is incorrect. IFRSs requires component depreciation. U.S. GAAP allows composite or group depreciation, which is the type of depreciation methodology indicated in this choice. Choice "B" is incorrect. IFRSs requires component depreciation. U.S. GAAP allows composite or group depreciation, which is the type of depreciation methodology indicated in this choice. Choice "D" is incorrect. IFRSs require component depreciation, which this choice suggests. Separate significant components of a fixed asset with different lives should be recorded and depreciated separately. The remaining cost of the asset is depreciated over the average useful life of the asset as a whole. The remaining cost is not expensed immediately as this choice suggests.

A company is performing an impairment test of one of its long-lived assets. IFRS, but not U.S. GAAP, requires the company to compare the carrying amount of the asset with its: A. Fair value. B. Purchase price. C. Recoverable amount. D. Undiscounted future cash flows.

*C. Recoverable amount.* Explanation Choice "C" is correct. IFRS uses a one-step model for fixed asset impairment testing in which the carrying value of the fixed asset is compared with the fixed asset's recoverable amount. Choice "A" is incorrect. Under U.S. GAAP, impairment of a fixed asset is determined by comparing the carrying value of the fixed asset to the undiscounted future net cash flows expected from the asset. If impairment exists, the carrying value is then compared to the fair value of the asset to determine the impairment amount. However, this question asks for treatment under IFRS. Choice "B" is incorrect. Under U.S. GAAP, impairment of a fixed asset is determined by comparing the carrying value of the fixed asset to the undiscounted future net cash flows expected from the asset. Another term for undiscounted future cash flows is the recoverable amount. However, this question asks for treatment under IFRS. Choice "D" is incorrect. Under U.S. GAAP, impairment of a fixed asset is determined by comparing the carrying value of the fixed asset to the undiscounted future net cash flows expected from the asset. However, this question asks for treatment under IFRS.

Which of the following statements regarding the IFRS revaluation model is incorrect? A. Revaluation gains are reported in other comprehensive income. B. Revaluation losses are reported on the income statement. C. Revaluation can be performed on individual fixed assets only or on classes of assets. D. Further revaluation is necessary when the carrying value of revalued fixed assets differs materially from fair value.

*C. Revaluation can be performed on individual fixed assets only or on classes of assets. * Explanation Choice "C" is correct. This is an incorrect statement. Under IFRS, if an individual fixed asset is revalued, then the entire class of fixed assets to which that asset belongs must be revalued. Individual fixed assets cannot be revalued alone. Choice "A" is incorrect. This statement is correct. Revaluation gains are reported in other comprehensive income as revaluation surplus. Choice "B" is incorrect. This statement is correct. Revaluation losses are reported on the income statement. Choice "D" is incorrect. This statement is correct. IFRS require that revaluations be made with sufficient regularity to ensure that carrying amount does not differ materially from fair value.

When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a (an): A. Account previously written off is collected. B. Account previously written off becomes collectible. C. Specific uncollectible account is written off. D. Provision for uncollectible accounts is recorded.

*C. Specific uncollectible account is written off.* Explanation Choice "C" is correct. When a specific uncollectible account is written off under the allowance method of recognizing bad debt expense, the "allowance for bad debt" account would decrease. Choice "A" is incorrect. The "allowance for bad debt" (credit balance account) would increase, if a previously written-off account is collected (DR-Cash, CR-Allowance). Choice "B" is incorrect. When a previously written-off account "becomes collectible," the "allowance for bad debt" account would increase (DR-Accounts Receivable, CR-Allowance). Choice "D" is incorrect. The recording of a provision for uncollectible accounts increases the "allowance for bad debt" account (DR-Provision for bad debts, CR-Allowance).

A transaction was reported as a nonmonetary exchange of assets. Under which of the following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered? A. When the entity's future cash flows are expected to change as a result of the exchange. B. When the timing of future cash flows of the asset received differs significantly from the configuration of the future cash flows of the asset transferred. C. When the transaction lacks commercial substance. D. When the transaction has commercial substance.

*C. When the transaction lacks commercial substance.* Explanation Choice "C" is correct. When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If the transaction has commercial substance, the fair value approach is used. Choice "A" is incorrect. When the entity's future cash flows are expected to change as a result of the exchange of nonmonetary assets, this exchange is referred to as having commercial substance. In this situation, the fair value method approach is used. Choice "B" is incorrect. The timing of future cash flows of the asset received differing significantly from the configuration of the future cash flows of the asset transferred is evidence of an exchange with commercial substance in which the fair value approach would be used. Choice "D" is incorrect. The fair value of the assets surrendered or received is used for reporting when the exchange has commercial substance.

The following information relates to two projects performed by Miley Co. during the year for laboratory research aimed at discovering new knowledge: Project Costs Likelihood That Effort Will Result in Future Benefits I. $100,000 Probable II. $ 50,000 Reasonably possible What should Miley report as research and development expenses in its income statement for the year? A. $0 B. $50,000 C. $100,000 D. $150,000

*D. $150,000* Explanation Choice "D" is correct. Under U.S. GAAP, unless the tangible assets associated with the research and development (R&D) expenses have alternative future uses or the work is undertaken on behalf of others under a contractual agreement, the costs associated with the R&D expenses are direct charged as an expense on the income statement. Choice "A" is incorrect. Both the $100,000 and the $50,000 must be charged as R&D expense in the period incurred. Choice "B" is incorrect. Both the $100,000 and the $50,000 must be charged as R&D expense in the period incurred. Choice "C" is incorrect. Both the $100,000 and the $50,000 must be charged as R&D expense in the period incurred.

At December 31, Year 1, Gasp Co.'s allowance for uncollectible accounts had a credit balance of $30,000. During Year 2, Gasp wrote off uncollectible accounts of $45,000. At December 31, Year 2, an aging of the accounts receivable indicated that $50,000 of the December 31, Year 2, receivables may be uncollectible. What amount of allowance for uncollectible accounts should Gasp report in its December 31, Year 2, balance sheet? A. $20,000 B. $25,000 C. $35,000 D. $50,000

*D. $50,000* Explanation Choice "D" is correct. The aging of accounts receivable is a method that can be used to estimate uncollectible accounts under the allowance method required by GAAP. *The sum of the uncollectible balances for the aging categories, $50,000 at the end of Year 2, is the desired ending balance in the allowance account*. Choice "A" is incorrect. This answer represents the difference between the estimated uncollectible accounts at the end of Year 2 and the estimated uncollectible accounts at the end of Year 1. The ending balance at the end of Year 2 should be the amount of estimated uncollectible accounts at the end of Year 2. This amount can be estimated using the percentage of sales method, the percentage of accounts receivable at year-end method, or the aging of receivables method. Choice "B" is incorrect. On its December 31, Year 2, balance sheet, Gasp will report $50,000 as its allowance for uncollectible accounts. Choice "C" is incorrect. This answer represents adding the estimated uncollectible accounts at the end of Year 1 to the estimated uncollectible accounts at the end of Year 2 and then subtracting the accounts that have been written off. The allowance for uncollectible accounts is a valuation account, so the beginning balance is not added to the ending balance to get the ending amount.

***Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a four-year useful life. Yellow has a policy of taking a full-year's amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year under U.S. GAAP? A. $1,600,000 B. $2,000,000 C. $6,012,500 D. $6,050,000

*D. $6,050,000* Explanation Choice "D" is correct. The $4,000,000 that was spent before the application development stage (during the preliminary project state) would certainly be expensed. The $50,000 for training employees would certainly be expensed (costs for training and maintenance are expensed). The total so far is $4,050,000. The package was completed during the year and a full year's worth of *amortization is taken* ($8,000,000 / 4 = $2,000,000). The total then is $6,050,000 under U.S. GAAP. Choice "A" is incorrect. This answer appears to be amortization of the $4,000,000 that was spent before the application development stage and nothing else. That would mean that everything else was capitalized. If everything else were capitalized, what about amortization on those capitalized amounts? It is hard to imagine that they would just "stay out there" forever. Choice "B" is incorrect. This answer appears to be amortization of the $8,000,000 ($8,000,000 / 4 = $2,000,000). That would mean that everything else was capitalized. If everything else were capitalized, what about amortization on those capitalized amounts? Choice "C" is incorrect. This answer includes amortization ($50,000 / 4 = $12,500) of the training expenditures. Training should be expensed when incurred. The rest of the answer ($6,000,000) is the same as the correct answer.

A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset's estimated useful life? Straight-line/ Double-declining balance A. Yes/ Yes B. Yes/ No C. No/ Yes D. No/ No

*D. No/ No* Explanation Choice "D" is correct. If accumulated depreciation equals original cost, then the asset has been depreciated to $0. Depreciable assets should not depreciated below salvage value under any depreciation method.

An entity purchased new machinery from a supplier before the entity's year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase? A. The freight and interest costs should be immediately expensed. B. The freight and interest costs should be capitalized as part of property, plant, and equipment. C. The interest cost should be capitalized as part of property, plant, and equipment, and the freight cost should be immediately expensed. D. The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.

*D. The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.* Explanation Choice "D" is correct. Under IFRS, the freight cost should be capitalized as part of the machinery's historical cost. Just like GAAP, the interest incurred to finance the purchase is expensed and not capitalized as part of the historical cost. Choice "A" is incorrect. The freight and interest costs are not both immediately expensed. The freight is capitalized, and the interest is expensed over the life of the loan. Choice "B" is incorrect. The freight and interest costs are not both capitalized. Only the freight costs are capitalized as part of the cost of the machinery under GAAP and IFRS. Choice "C" is incorrect. Under IFRS, the interest costs associated with the loan to purchase the machinery would not be capitalized as part of its historical cost. Interest is capitalized when the machinery is self-constructed and not purchased. This applies to U.S. GAAP as well.

IFRS Revaluation Impairment Loss (IFRS)

*Step 1*: if carrying value exceeds recoverable amount, there is an impairment (*CV > RA*). If so, subtract the CV from the RA to get the impairment loss (*RA-CV = loss amount*) [Ex: 2295 > 2000, so loss = 2000-2295 = -295] *Step 2*: then take the Loss amount and subtract the revaluation gain (so you can reduce that to zero). The remaining amount will be what you record as Impairment Loss [Ex: 295-200 = 95]

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would: A. Increase the allowance for uncollectible accounts. B. Increase net income. C. Decrease the allowance for uncollectible accounts. D. Have no effect on the allowance for uncollectible accounts.

Explanation Choice "A" is correct. A collection of a previously written-off account receivable would increase the "allowance" account, which is a credit balance account. Debit (Dr) Cash $ 1,000 Credit (Cr) Allowance for doubtful accounts $ 1,000 OR To record collectible: DR A/R CR Allowance To record collection: DR Cash CR A/R