FAR Module 11
Brill Co. made the following expenditures during year 4: Costs to develop computer software for internal use in Brill's general management information system $100,000 Costs of market research activities 75,000 What amount of these expenditures should Brill report in its year 4 income statement as research and development expenses? $175,000 $100,000 $ 75,000 $0
$0 The FASB excludes from its definitions of research and development expense the acquisition, development, or improvement of a product or process for use in its selling or administrative activities. Both costs given in this problem relate to selling or administrative activities, so the expenditures of $175,000 would not be reported as research and development expense
On July 1, year 4, Balt Co. exchanged a truck for twenty-five shares of Ace Corp.'s common stock. On that date, the truck's carrying amount was $2,500, and its fair value was $3,000. Also, the book value of Ace's stock was $60 per share. On December 31, year 4, Ace had 250 shares of common stock outstanding and its book value per share was $50. What amount should Balt report in its December 31, year 4 balance sheet as investment in Ace? $3,000 $2,500 $1,500 $1,250
$3,000 DR Investment 3,000 FV truck CR Asset 2,500 CR Gain 500 assume FV truck = FV stocks, dont know APIC
On January 1, year 4, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a ten-year period. However, the new product development is expected to take five years, and the equipment can be used only for this project. Jambon's year 4 expense equals The total cost of the equipment. One-fifth of the cost of the equipment. One-tenth of the cost of the equipment. Zero.
(a) Research and development costs are expensed as incurred except for fixed assets, intangible assets, or materials purchased that have alternative future uses. Jambon purchased equipment to be used for research and development, but the equipment can only be used for that project. Therefore, the cost of the equipment must be expensed in year 4 as it has no alternative future uses.
Cody Corp. incurred the following costs during year 4: Design of tools, jigs, molds, and dies involving new technology $125,000 Modification of the formulation of a process 160,000 Troubleshooting in connection with breakdowns during commercial production 100,000 Adaptation of an existing capability to a particular customer's need as part of a continuing commercial activity 110,000 In its year 4 income statement, Cody should report research and development expense of
(d) Among those items listed as being part of R&D costs are design of tools, jigs, molds, and dies involving new technology ($125,000) and modification of the formulation of a process ($160,000), for a total R&D expense of $285,000. Included in the items not being part of R&D costs are troubleshooting breakdowns during production ($100,000), and adaptation of existing capability for a specific customer ($110,000).
On December 31, year 3, Bit Co. had capitalized costs for a new computer software product with an economic life of five years. Sales for year 4 were 30% of expected total sales of the software. At December 31, year 4, the software had a net realizable value equal to 90% of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount on Bit's December 31, year 4 balance sheet? 70% 72% 80% 90%
70% of expected total sales of the software left, 30% off B/S original capitalized cost The annual amortization of capitalized software costs shall be the greater of 1. The ratio of the software's current sales to its expected total sales, or 2. The straight-line method over the economic life of the product. In this case, the ratio of current to expected total sales is 30% (given). The annual straight-line rate is 20% per year (1 ÷ economic life of five years). The 30% amortization should be recorded in year 4, since it is the higher of the two. The unamortized cost on the 12/31/Y4 balance sheet should, therefore, be 70% (100% - 30% amortization). Note that the unamortized cost of capitalized software products must be compared to the net realizable value of those assets at each balance sheet date. Any excess of the amortized cost over the net realizable value must be written off. In this case, the net realizable value (90%) Module 11: Fixed Assets Multiple-Choice Answers 415 was above the unamortized cost (70%), so no additional writeoff was required.
Which of the following statements is(are) correct regarding the treatment of start-up activities related to the opening of a new facility? I. Costs of raising capital should be expensed as incurred. II. Costs of acquiring or constructing long-lived assets and getting them ready for their intended use should be expensed as incurred. III. Cost of research and development should be expensed as incurred.
Only R&D expensed as incurred (b) The costs of raising capital and the costs of acquiring or constructing long-lived assets and getting them ready for their intended use are not expensed as incurred. Such costs should be accounted for in accordance with other existing authoritative accounting literature. Research and development (R&D) costs are expensed as incurred.
Spiro Corp. uses the sum-of-the-years'-digits method to depreciate equipment purchased in January yr 1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, year 3? a. 2,000 b. 1,800 c. 4,500 d. 3,800
d. 3,800 yr 1 4/10 *18k yr 2 3/10 * 18k yr 3 2/10 * 18k total accum dep = 16.2k 20k-16.2k = 3.8k
Wilson Company maintains its records under IFRS. During the current year Wilson sold a piece of equipment used in production. The equipment had been accounted for using the revaluation method and details of the accounts and sale are presented below. Sales price $100,000 Equipment book value (net) 90,000 Revaluation surplus 20,000 Which of the following is correct regarding recording the sale? a. The gain that should be recorded in other comprehensive income is $30,000 b. The gain that should be recorded in profit and loss is $10,000; the $20,000 revaluation surplus should be transferred to retained earnings c. The gain that should be recorded in profit and loss is $30,000 d. The gain that should be recorded in other comprehensive income is $10,000
revaluation model surplus = surplus account in OCI d. The gain that should be recorded in other comprehensive income is $10,000 100k BV sales price bought - 90k BV
In year 4, Ball Labs incurred the following costs: Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit $400,000 Research and development costs not included above were Depreciation $300,000 Salaries 700,000 Indirect costs appropriately allocated 200,000 Materials 180,000 What was Ball's total research and development expense in year 4? $1,080,000 $1,380,000 $1,580,000 $1,780,000
(b) 1.38m All R&D costs must be expensed when incurred. However, R&D costs incurred when performing R&D work under contract for other entities are specifically excluded from the reporting requirements. Generally such costs are deferred and matched with revenue under the completed-contract or percentage- of-completion method. The other costs listed would all be expensed in year 4. Therefore, Ball's year 4 research and development expense is $1,380,000 ($300,000 + $700,000 + $200,000 + $180,000).
Scarbrough Company had purchased equipment for $280,000 on January 1, year 1. The equipment had an eight-year useful life and a salvage value of $40,000. Scarbrough depreciated the equipment using the straight-line method. In August year 4, Scarbrough questioned the recoverability of the carrying amount of this equipment. At August 31, year 4, the expected net future cash inflows (undiscounted) related to the continued use and eventual disposal of the equipment total $175,000. The equipment's fair value on August 31, year 4, is $150,000. After any loss on impairment has been recognized, what is the carrying value of Scarbrough's equipment as of August 31, year 4? $175,000 $170,000 $150,000 $130,000
(b) 170k year 1-3 = 90k dep year 4 3/4 of year = 20k 280k-90k-20k = 170k A long-lived asset is considered impaired if the future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset. If deemed impaired, the asset's carrying value is reduced to fair value and a loss on impairment is recognized for the difference (Carrying value - Fair value). In this case, the asset is not impaired, as the net cash inflows of $175,000 are greater than the 8/31/Y4 carrying amount (book value) of $170,000. Therefore, the carrying amount of the asset ($170,000) remains unchanged.
West, Inc. made the following expenditures relating to Product Y: • Legal costs to file a patent on Product Y—$10,000. Production of the finished product would not have been undertaken without the patent. • Special equipment to be used solely for development of Product Y—$60,000. The equipment has no other use and has an estimated useful life of four years. • Labor and material costs incurred in producing a prototype model—$200,000. • Cost of testing the prototype—$80,000. What is the total amount of costs that will be expensed when incurred? $280,000 $295,000 $340,000 $350,000
(c) 340k All R&D costs are to be charged to expense when incurred. Specifically R&D costs include designing, constructing, and testing preproduction prototypes, and the cost of R&D equipment (unless it has alternative future uses). Therefore, $340,000 ($60,000 + $200,000 + $80,000) is classified as R&D costs and expensed. The legal costs incurred to obtain a patent ($10,000) are capitalized in the patents account.
Clay Company started construction of a new office building on January 1, year 4, and moved into the finished building on July 1, year 5. Of the building's $2,500,000 total cost, $2,000,000 was incurred in year 4 evenly throughout the year. Clay's incremental borrowing rate was 12% throughout year 4, and the total amount of interest incurred by Clay during year 4 was $102,000. What amount should Clay report as capitalized interest at December 31, year 4? $102,000 $120,000 $150,000 $240,000
102k The requirement is to calculate the amount of capitalized interest at 12/31/Y4. The requirements for capitalization of interest are met if: (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred. The amount to be capitalized is the lower of avoidable interest or actual interest. avoid = 120k (1m * 12%) actual = 102k Avoidable interest is the average accumulated expenditures multiplied by the appropriate interest rate or rates. Since $2,000,000 was spent on the building evenly throughout the year, the average accumulated expenditures were $1,000,000 ($2,000,000 ÷ 2) and the avoidable interest was $120,000 ($1,000,000 × 12%). Since actual interest ($102,000) is less than avoidable interest, the actual interest cost is capitalized.
Rago Company takes a full year's depreciation expense in the year of an asset's acquisition, and no depreciation expense in the year of disposition. Data relating to one of Rago's depreciable assets at December 31, year 5, are as follows: Acquisition year Year 2 Cost $110,000 Residual value 20,000 Accumulated depreciation 72,000 Estimated useful life 5 years Using the same depreciation method as used in year 2, year 3, and year 4, how much depreciation expense should Rago record in year 5 for this asset?
12k sum of years = 15 total 3 year depreciation 2/15 * 90k = 12k
Brunson Corp., a major US winery, begins construction of a new facility in Italy. Following are some of the costs incurred in conjunction with the start-up activities of the new facility: Production equipment $815,000 Travel costs of salaried employees 40,000 License fees 14,000 Training of local employees for production and maintenance operations 120,000 Advertising costs 85,200 What portion of the organizational costs will be expensed? $975,000 $160,000 $0 $139,200
160k Start-up activities are defined broadly as those one-time activities related to opening a new facility as well as introducing a new product or service and conducting business in a new territory. Certain costs that may be incurred in conjunction with start-up activities are not subject to these provisions. These costs include the costs of acquiring long-lived assets such as production equipment, costs of advertising, and license fees. Answer (b) which includes the costs of training local employees ($120,000) and travel costs of salaried employees ($40,000) is the correct answer.
During December year 4, Bubba Inc. determined that there had been a significant decrease in the market value of its equipment used in its manufacturing process. At December 31, year 4, Bubba compiled the information below. Original cost of the equipment $500,000 Accumulated depreciation 300,000 Expected net future cash inflows (undiscounted) related to the continued use and eventual disposal of the equipment 175,000 Fair value of the equipment 125,000 What is the amount of impairment loss that should be reported on Bubba's income statement prepared for the year ended December 31, year 4? $ 75,000 $ 25,000 $325,000 $375,000
200k book value 175k CF 125k FV Book value > Cash flow so impaired FV - BV, 125k-200k = 75k impairment loss (a) The undiscounted expected future cash flows ($175,000) are less than the carrying amount of the equipment ($200,000). Therefore, the equipment is deemed impaired. The impairment loss is calculated in the following way: Carrying amount of the equipment on December 31, year 4 $200,000 Fair value of the equipment on December 31, year 4 125,000 Impairment loss reported on year 4 income statement $ 75,000
Cole Co. began constructing a building for its own use in January year 4. During year 4, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during year 4 was $40,000. What amount of interest cost should Cole capitalize? $20,000 $40,000 $50,000 $70,000
40k Capitalize the weighted-avg amt of accumulated expenses since less than actual interest of 70k The amount of interest cost which should be capitalized during building construction is the lower of avoidable interest or actual interest. Avoidable interest equals the interest computed on the weighted-average amount of accumulated expenditures on the building ($40,000). Since actual interest is $70,000 ($50,000 + $20,000), the amount capitalized should be $40,000.
On January 2, year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent's useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during year 4, assuming amortization is recorded at the end of each year? $ 9,000 $54,000 $63,000 $72,000
63k Before year 4, Lava would record total amortization of $27,000 [($90,000 × 1/10) × 3 years], resulting in a 12/31/Y3 carrying amount of $63,000 ($90,000 - $27,000). Since the patent became worthless at 12/31/Y4 due to government prohibition of the product, the entire carrying amount ($63,000) should be charged against income in year 4 as an impairment loss.
Lano Corp.'s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land's carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in Lano's balance sheet? A. The amount is increased by the excess of the replacement forest land's cost over the condemnation award. B. The amount is increased by the excess of the condemnation award over the condemned forest land's carrying amount. C. The amount is increased by the excess of the replacement forest land's cost over the condemned forest land's carrying amount. D. No effect, because the condemned forest land's carrying amount is used as the replacement forest land's carrying amount.
C. The amount is increased by the excess of the replacement forest land's cost over the condemned forest land's carrying amount. Involuntary conversions of nonmonetary assets to monetary assets are monetary transactions for which gain or loss shall be recognized even though an enterprise reinvests or is obligated to reinvest the monetary assets in replacement nonmonetary assets. Accordingly, Lano would record the condemnation and replacement of the forest land as two separate transactions. Lano should recognize a gain on condemnation and subsequently record the placement land at total purchase price. The net effect of these events is to increase the amount of forest land on Lano's balance sheet by the excess of the replacement land's cost over condemned land's carrying amount. Cash 100 land 50 gain 50 new land 170 cash 100 extra cash 70 70 is net effect
During the year, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year-end income statement? A. Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: all interest incurred B. Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: interest incurred after completion C. Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: interest incurred after completion D. Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: all interest incurred
D. Interest incurred for machinery for own use: interest incurred after completion Interest incurred for machinery held for sale: all interest incurred Discrete projects = intended for sale/lease Certain assets for which interest costs incurred in their production should be capitalized rather than expensed. Assets which "qualify" for interest capitalization are those constructed or otherwise produced for an enterprise's own use and those intended for sale or lease that are constructed or otherwise produced as discrete projects. The capitalization period shall end when the asset is substantially complete and ready for intended use. Own use machine = capitalize during construction period and expensed after completion Held for sale machine = expensed b/c doesn't meet discrete project criterion
Pinkerton Corp. uses the cost model for intangible assets. On April 10, year 3, Pinkerton acquired assets for $100,000. On December 31, year 3, it was determined that the recoverable amount for these intangible assets was $80,000. On December 31, year 4, it was determined that the intangible assets had a recoverable amount of $84,000. What is the impairment gain or loss recognized in year 3 and year 4 on the income statement? Year 3 Year 4 a. $20,000 loss $ 4,000 gain b. $20,000 loss $16,000 loss c. $20,000 loss $0 d. $0 $0
a. $20,000 loss $ 4,000 gain If the cost model is used to record intangible assets, the impairment loss is recognized as a loss in the current period. If the cost model is used, a reversal of impairment losses may be recognized in the I/S up to the amount of the impairment loss previously recognized (so up to 20k)
Linden Corporation has investment property that is held to earn rental income. Linden prepares its financial statements in accordance with IFRS. Linden uses the fair value model for reporting the investment property. Which of the following is true? a. Changes in fair value are reported as profit or loss in the current period. b. Changes in fair value are reported as other comprehensive income for the period. c. Changes in fair value are reported as an extraordinary gain on the income statement. d. Changes in fair value are reported as deferred revenue for the period.
a. Changes in fair value are reported as profit or loss in the current period FV model requires that investment property be measured at FV and any changes in FV are recog in profit or loss of the period
During the year, 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 reported in inventory? a. $25,000 b. $34,000 c. $40,000 d. $49,000
b. $34,000 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) 9,000All costs incurred to establish the technological feasibility of a computer software product should be charged to research and development (R&D) expense when incurred (SFAS 86, par. 3). The technological feasibility of a computer software product is established only when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced (par. 4). Thus, the cost of completion of the detail program design ($13,000) and the costs incurred for coding and testing to establish technological feasibility of the product ($10,000) are R&D expense. The costs incurred for duplicating the computer software document and training materials from the product masters and for physically packaging the product for distribution are capitalized as inventory. ($25,000 + $9,000 = $34,000)
During the year, 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 12/31/yr4 B/S what amount should be capitalized as software cost, subject to amortization? a. 54k b. 57k c. 59k d. 60k
c. 59k Completion of detail program design $13,000 Costs incurred for coding and testing to establish technological feasibility 10,000 =23k expense, R&D expense to prove technical feasibility 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 =59k capitalized product costs = 34k Duplication of computer software and training materials from product masters (1,000 units) 25,000 Packaging product (500 units) 9,000
When the revaluation model is used for reporting PPE, the gain or loss should be included in a. income for the period b. gain from revaluation on I/S c. revaluation surplus acct is the OCI d. an extraordinary gain or loss on the I/S
c. revaluation surplus acct is the OCI
Taft Inc. recognized a loss in year 3 related to long-lived assets that it intended to sell. These assets were not sold during year 4, and the company estimated, at December 31, year 4, that the loss recognized in year 3 had been more than recovered. On the December 31, year 4 balance sheet, Taft should report these long-lived assets at their: a. Fair value on December 31, year 3. b. Fair value less cost to sell on December 31, year 3. c. Fair value on December 31, year 4. d. Carrying amount on December 31, year 3.
d. Carrying amount on December 31, year 3. Already wrote down as a loss on books so book value = carry amount. Can't realize gain In year 3, Taft recognized a loss on the long-lived assets that were to be sold and changed the carrying amount of these assets to fair value less cost to sell. In year 4, the assets have still not been sold. The loss recognized has been more than recovered. Subsequent revisions in estimates of fair value less cost to sell shall be reported as adjustments of the carrying amount of an asset to be disposed of. However, the carrying amount may not be increased above the carrying amount prior to impairment. The same amount recognized as a loss in year 3 would be recognized as a recovery (gain) in the year 4 income statement.
Under IFRS, which of the following is a criterion that must be met in order for an item to be recognized as an intangible asset other than goodwill? a. The item's fair value can be measured reliably. b. The item is part of the entity's activities aimed at gaining new scientific or technical knowledge. c. The item is expected to be used in the production or supply of goods or services. d. The item is identifiable and lacks physical substance
d. The item is identifiable and lacks physical substance -patents, trademarks, copyrights
