Exam 2 Review

Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.

False

Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.

False

Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent.

False

The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under GAAP.

False

When an ordinary repair occurs, several accounting periods will usually benefit.

False

When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

False

When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.

False - "conservative" approach - losses are recognized immediately REGARDLESS of commercial substance

The first step in the revenue recognition process is to identify the separate performance obligations in the contract.

False - 1st step is to determine if a valid contract exists

Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.

False - FV method, share of dividends = revenue Equity method, share of net income = revenue

Companies may not use the fair value option for investments that follow the equity method of accounting.

False - FV option (not FV method) may be used with any debt or equity security

Companies always treat gains or losses from an involuntary conversion as comprehensive income.

False - Gain/Loss on disposal - "Other Interm" on income statement

Assets classified as PPE can be either acquired for use in operations or acquired for resale.

False - use in operations or INVESTMENTS

If a decline in a security's value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis.

False - write down (impair) only if other than temporary decline in value

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

True

Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently being used.

True

Material, labor, and overhead costs incurred in developing a new product are to be expensed as these are development costs.

True

Revenue from a contract with a customer cannot be recognized until a contract exists.

True

Revenue is recognized in the accounting period when the performance obligation is satisfied.

True

Significant influence over an investee may be indicated by material intercompany transactions and interchange of managerial personnel.

True

The cost of acquiring a customer list from another company is recorded as an intangible asset.

True

The flexibility involved in accounting for intangibles is an example of finite uniformity.

True

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

True

The trade-off made with respect to the valuation of PPE is verifiability over predictive ability.

True

Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

True

Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.

True

When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

True

When a company sells a bundle of goods at a discount, the discount should be allocated to the product that caused the discount and not to the entire bundle.

True

When a sales transaction involves a significant financing component, the fair value is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate.

True

Goodwill is considered a master valuation account because it measures the value of specifically identifiable intangible assets.

True - "balancing" or plug account also known as ASA

When a company makes an unconditional promise to pledge an asset in the future, the company should report the contribution expense and related payable immediately.

True - Example - donate to charity

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

True - Realized gains and losses always flow through the income statement

Companies should always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets.

False - NEVER

If fair value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period.

False - NEVER reversed

Intangible assets derive their value from the right (claim) to receive cash in the future.

False - Value from the rights and privileges granted to the company using them

The Construction in Process account includes only construction costs under the percentage-of- completion method.

False - also included gross profit

GAAP requires start-up costs and initial operating losses during the early years to be capitalized.

False - always expensed

Research and development costs are reported as intangible assets if they will provide economic benefits in future years.

False - always expensed

The new revenue recognition standard adopts a liability approach as the basis for revenue recognition.

False - asset liability

The accounting profession has concluded that an investment of 50 percent or more of the voting stock of an investee should lead to a presumption of only significant influence over an investee.

False - controlling interest

The same recoverability test that is used for impairments of property, plant, and equipment is used for impairments of indefinite-life intangibles.

False - definite life intangible

Internally generated intangible assets are initially recorded at fair value.

False - direct costs such as legal fees can be capitalized

Debt securities include corporate bonds and convertible debt, but not US government securities.

False - does include government securities

If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income.

False - equity (OCI)

Commercial substance exists if one party to the exchange books a gain or loss.

False - exists if future cash flows change as a result of the transaction

Costs in the research phase are expensed under GAAP, but capitalized under IFRS.

False - expensed under both

Changes in the fair value of a company's available-for-sale debt instruments are included as part of earnings in any given period.

False - flows through OCI and earnings indicates "net income"

A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

False - it also must have the ability to hold the debt to maturity

A performance obligation is a written guarantee in a contract to provide a product or service to a customer.

False - it can be an implicit or explicit agreement, it doesn't have to be written

The cost of a purchased patent should be amortized over the remaining legal life of the patent.

False - legal life or useful life whichever is shorter

Contra accounts must be reported for intangible assets in a manner similar to accumulated depreciation and property, plant, and equipment.

False - may directly reduce the intangible account but accumulated amortization must be disclosed in foot notes

When a company sells a product but gives the buyer the right to return it, revenue should not be recognized until the sale is collected.

False - no, book revenue when the performance obligation is satisfied but also book estimated sales returns and allowances (contra revenue)

Periodic alterations to existing products are an example of research and development costs.

False - operating cost

Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

False - other comprehensive income

Under GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.

False - recoverable amount (higher of FV less disposal costs or value in use) (PV of discounted future cash flows)

When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building.

False - removing building is part of the cost of LAND

Amortization of limited-life intangible assets should not be affected by expected residual values.

False - residual value is assumed to be zero unless at the end of the life, the intangible asset has value to another firm

Companies should assign no portion of fixed overhead to self-constructed assets.

False - the debate is over how much fixed overhead to assign

Internally generated goodwill associated with a business may be recorded as an asset when a firm offer to purchase that business unit has been received.

False - the purchase must take place before booking goodwill

The Fair Value Adjustment account has a normal credit balance.

False - there is not normal balance; it can be a debit or credit

If a company develops a trademark, it should expense the costs related to attorney fees, registration fees, and design costs.

False - these are direct costs and can be capitalized

Under the completed-contract method, companies recognize costs only when the contract is completed.

False - they only recognize profit when complete

The rules used to account for impairments of limited-life intangible assets are different from the rules used to account for impairments of plant and equipment.

False - two test approach 1st: future cash flows < CV, impairment exists 2nd: FV-CV: impairment loss amount

The Unrealized Holding Gain/Loss—Income account for equity securities is reported as a part of other comprehensive income.

False - unrealized holding G/L - equity = OCI

A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.

True

After an impairment loss is recorded for a limited-life intangible asset, the carrying amount becomes the basis for the impaired asset and is used to calculate amortization in future periods.

True

All cash dividends received by an investor from the investee decrease the investment's carrying value under the equity method.

True

All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.

True

As in GAAP, under IFRS the costs associated with research and development are segregated into two components.

True

Assets classified as PPE must be both long-term in nature and possess physical substance.

True

Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.

True

Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.

True

Companies report trading securities at fair value with unrealized holding gains and losses reported in net income.

True

Costs in the research phase are always expensed under both IFRS and GAAP.

True

Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future economic benefits.

True

IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under GAAP, impairment losses cannot be reversed for assets to be held and used.

True

IFRS differs from GAAP in the development phase in that IFRS requires that costs are capitalized once technological feasibility is achieved.

True

If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset's book value.

True

If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.

True

If a nonmonetary exchange lacks commercial substance and cash is received, a partial gain or loss is recognized.

True

If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized.

True - a one step test is used that compares FV to BV

Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.

True - all ordinary and necessary costs to acquire the asset and get it ready for its intended use

A contract liability is a company's obligation to transfer goods or services to a customer for which the company has received consideration from the customer.

True - an example of a contract asset = cashed owned to company for services provided but not yet billed

Some intangible assets are not required to be amortized.

True - because there is no foreseeable limit on the time period over which the intangible asset is expected to provide cash flows

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.

True - cost to date to total estimated costs to complete

If the performance obligation is not highly dependent on, or interrelated with, other promises in the contract, then each performance obligation should be accounted for separately.

True - distinct

Companies use the expected value, a probability-weighted amount to estimate variable consideration.

True - it is preferred

Internally generated goodwill should not be capitalized in the accounts.

True - must be expensed - measuring goodwill is too complex. Does not meet the cost/benefit test

A company recognizes revenue from a performance obligation over time by measuring the progress toward completion.

True - percentage of completion method

Warranties that the product meets agreed-upon specifications in the contract at the time the product is sold are referred to as assurance-type warranties.

True - service warranties are extended warranties

IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.

True - technological feasibility

A reclassification adjustment is necessary when a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income.

True - this occurs when AFS securities are reclassified as trading securities, asa result of a change in management intent

Limited-life intangibles are amortized by systematic charges to expense over their useful lives.

True - which may or may not equal the legal life

In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible net assets, with the remainder recorded as goodwill.

True, cost - FV of (assets - liabilities) = goodwill