CPA Exam (FAR F3)

Dollar-Value LIFO

Estimate of changes in price levels req'd. Under regular LIFO, inv is measured in units and priced at unit prices. Under dollar-value LIFO method, inv is measured in dollars and adj for changing price levels. When converting from LIFO inv to dollar-value LIFO, price index will be used to adj the inv value. In some probs price index will be internally computed, in others it will be given. When price index is internally computed, it will be EI at CY cost/ EI at base yr cost. Price index = [EI at CY cost/EI at base yr cost]. To calc LIFO layer added in CY at dollar-value LIFO, LIFO layer at base yr cost is multiplied by internally generated price index. Book ex for dollar value LIFO w/ internally computed price index: B adopted dollar-value LIFO on 1/1/1. Single inv pool and internally computed price index used to calc LIFO inv layers. Gives date, base yr cost, CY cost, and at dollar value LIFO columns. Need to calc LIFO layers added and EI for Y1 and Y2. -Step 1: calc Y1 price index (w/ amts at YE at CY and base yr costs). -Step 2: multiply layer added during Y1 at base yr cost by price index to get amt at dollar-value LIFO (LIFO layer added). Add that to prior amt at dollar-valye LIFO to get EI. Do same thing for Y2. Every layer added gets revalued using price index. When price index is supplied in prob (thanks!!), YE price index is multiplied by LIFO layer at base yr cost to calc LIFO layer added at dollar-value LIFO. Book ex for dollar value LIFO when price index supplied: W adopted dollar-value LIFO at 1/1/1 when inv was valued at 500k. Entire inv is a single pool. Price index is 1.1. 12/31/1 inv was 577,500 at CY cost and 525k at base yr cost. -solve for Y1 layer at base yr costs as EB - BB. Do same thing for current yr cost. -multiply base yr cost by given price index to get LIFO layer added. -dollar-value LIFO EI is the BB at dollar-value LIFO + layer added. -can do a check calc JIC: [EB at dollar-value LIFO/EB at base yr cost] = 1.1.

Lives for Intangible Assets

Finite life: -patent: 20 yrs -copyright: creator + 70 yrs -franchise: defined by contract Indefinite life: -trademark (can be renewed in 10 yr pds) -GW (always indefinite life) Amortize finite lived intangibles over the lesser of legal or useful life. All types should be eval'd for impairmt at least annually.

Impairment Summary Pass Key

Under GAAP: Finite life intangibles: -chars: useful life is limited. -amort: over useful economic life. -impairmt test: 2-step test: (a) undiscounted net CFs (b) FV (or PV FCFs) Indefinite life intangibles: -chars: life extends beyond forseeable future or can't be determined. -amort: none. -impairmt test: 1 step test w/ FV (or PV FCFs). Step 2 only. PV here is for DCF.

Involuntary Conversions

"Sell" to ins co, SP= ins proceeds. Whenever a nonmonetary asset is involuntarily converted (fire loss, theft, condemnation) to cash, entire G/L is recog'd for fin accting purposes. Book ex for gain on condemnation: on 12/1/1, S co received a condemnation award of 100k for the forced sale of its factory bldg. Building had a BV of 75k. Compute G/L on condemnation and prep JE to record the event. -[100k proceeds from condemnation - 75k BV of nonmonetary asset (bldg)] = 25k gain on condemnation. -JE to record the trans: dr cash (proceeds), cr bldg (BV), cr gain on involuntary conversion (100%). The rules for involuntary conversions are diff for tax purposes. If a gain is recog'd for fin purposes in 1 pd and tax purposes in another, a temp diff will result. Interperiod tax allocation will be necessary.

Computing Capitalized Cost

-weighted avg amt of accum'd expenditures: capitalized int costs for a particular pd are determined by applying an IR to the avg amt of accum'd expenditures for the qualifying asset during the pd (capitalizable int = avoidable int). -IR on borrowings: IR paid on borrowings (specifically for asset construction- construction loan) during a particular pd S/B used to determine the amt of int cost to be capitalized during the pd. Where a qualifying asset is related to a specific new borrowing, the allocated int cost is equal to the amt of int incurred on the new borrowing. -IR on excess expenditures (weighted avg): if the avg accum'd expenditures outstanding exceed the related specific new borrowing, int cost S/B computed on the excess. The IR that S/B used on the excess is the weighted avg IR for other borrowings of the co (general debt). So if 1M exp and 700k construction loan, 300k gen debt. Multiply 100 of gen debt by its IR and 1/3 (its fraction of the total), and so on. Sum the results to get the weighted avg. -not to exceed actual int costs: total capitalized int costs for any particular pd may not exceed total int costs actually incurred by an entity during that pd (cap). In consol F/S, this limitation S/B applied on a consol basis. -don't reduce capitalizable int: don't reduce it by inc received on the unexpended portion of the loan. For CPA exam, it's important to remember 2 rules abt capitalized int: 1. Only capitalize int on money *actually spent*, not total amt borrowed. 2. The amt of capitalized int is the lower of: -actual int cost incurred (can never exceed this) or -computed capitalized int (avoidable int). Book ex for capitalized int: on 1/1/1, C signed fixed-price contract for new kitchen to be built for 1M. Borrowed 500k to finance it, payable in 5 100k pmts plus 11% int. Planned to finance rest w/ existing debt, which had weighted avg IR of 9%. During Y1, C had avg accum'd expenditures of 600k, and incurred actual int costs on all borrowings of 150k (cap). Calc capitalized int cost. -(500k x 11%) for construction loan + (100k x 9%) for excess/gen debt. Add them up to get total capitalizable int, which is < cap of 150k. Weighted avg amt is capitalized, remainder of actual int is expensed.

Bank Reconciliations

2 gen forms of bank recs. One called simple rec, one called reconciliation of cash receipts and disbursemts. Goal of a simple rec is to calc "true bal." Diffs btw cash bal per bank and per depositor's records are explained w/ prep of bank rec. Factors that bring abt the diff: 1. Deposits in transit: *add to bank*. Funds sent by depositor to bank that haven't been recorded by bank and deposits made after bank's cutoff date won't be incl in bank's stmt, so bal per books will be higher than bank. 2. Outstanding checks: *deduct from bank*. Checks written for pmt by depositor that haven't been presented to the bank will result in a higher bank bal than book bal. *LOC*, *L*ess *O*utstanding *C*hecks. Mostly these top 2 affect the bank, so remember bank; add it *LOC*. All others (except maybe errors) adj books. 3. Service charges: *deduct from books*. These are deducted by bank, and depositor won't deduct this amt from its records until it's made aware of the charge, usually in next mo. Bal per books is ostated until this amt is substracted. 4. Bank collections : *add to books*. Bank may made collections on depositor's behalf, incr depositor's bank bal. If depositor isn't aware collection was cr to its bal, bal per books will be understated. 5. Errors: those made by either bank or depositor can cause diffs. 6. Non-sufficient funds (NSF): *deduct from books*. Bank may have charged depositor's acct for dishonored check and the check may not have been redeposited until next mo. Would ostate book bal as of B/S date. 7. Interest income: *add to books*. Usually depositor doesn't keep track of avg daily cash bals, so will add this amt to its records when made aware of this rev. Bal per books is understated until this amt is added.

Periodic v Perpetual Inventory System

2 types of inv systems used to count inv. 1. Periodic: 1 JE at time of sale. W/ periodic inv system, quantity of inv is determined only by a physical count, usually at least annually. Units of inv and the assoc costs are counted and valued at the end of the accting pd. Actual COGS for the pd is determined after each inv count by squeezing the diff btw BI + purch - EI based on physical count. Plug and back into COGS! Periodic method doesn't keep a running total of inv balances. EI is physically counted/priced. COGS calc: *memorize*! BI +purch =COGAS -EI (physical count) =COGS As EI incr, COGS decr, and GP ostated. Results in inc, EI, COGS, and GP misstated. 2. Perpetual: 2 JEs at time of sale. W/ perpetual inv system, inv record for each item of inv is updated for each purch/sale as they occur. Actual COGS is determined/recorded w/ each sale. Perpetual inv system keeps a running total of inv balances. *No purchases*! 3. Hybrid inv systems: -units of inv on hand: quantities only. Some cos maintain a perpetual record of quantities only. Record of units on hand is maintained on perpetual basis. Often referred to as modified perpetual system. Changes in quantities are recorded after each sale/purch. -perpetual w/ periodic at YE: most cos w/ a perpetual system still perform either complete periodic physical inventories or test count inventories on a random or cyclical basis. Book ex for comparison of periodic/perpetual inv methods (sales): ABC sold 20k units for $7/unit. Inv OG cost $5/unit. -JE to record sale under periodic method (COGS recorded after periodic inv count): 1 JE! dr cash, cr sales for 140k (20k x 7). -JE to record sale under perpetual method: 2 JEs! dr cash, cr sales for 140k. Dr COGS, cr inv for 100k (20k x 5). Book ex for comparison of periodic/perpetual inv methods (purchases): ABC purch'd 50k units of merch for $6/unit to be held as inv. -JE to record purch under period method: dr purchases, cr cash. -JE to record purch under perpetual method: dr inv, cr cash. Periodic dr puch, perpetual dr inv. No purch under perpetual!

Book Examples for Exchanges Lacking Commercial Substance Continued

4. Boot is rec'd (>=25% rule)= all gain recog'd. Same facts as 1 except get 6k cash w/ machine B. FV machine B is 6k [FV given of 12k = FV rec'd of 6k machine + 6k cash]. Calc total gain on exchange and determine how much is recog'd. Prep JE to record the trans. -Step 1: math. [FV old of 12k - BV old of 10k] = 2k total gain. -Step 2: cash rec'd means some/all gain will be recog'd. [6k/12k] = 50%. >=25%, so entire gain is recog'd (by both sides) and the machine acq'd is recog'd at FV. -JE to record the trans: dr machine B (plug), dr cash (rec'd), cr machine A (BV old), cr gain on exchange (100%). 5. Losses recog'd in full: machine A exchanged for B. BV machine A is 10k, FV 8k. FV machine B 8k (FV given = FV rec'd). Calc loss on exchange, show amt recog'd, and prep JE to record the trans. -Step 1: math. [FV old of 8k - BV old of 10k] = 2k loss. Recog. -Step 2: no cash rec'd/paid. Doesn't matter bc loss, rule of conservatism. Losses are recog'd in full in all exchanges lacking commercial substance. -JE to record trans: dr machine B (plug), dr loss on exchange (100%), cr machine A (BV old).

Estimating Uncollectible Accounts Receivable; Direct Write-Off Method

AR S/B presented on the B/S at their NRV (gross - AFDA = NRV). The amt recorded at the initial trans S/B reduced by the amt of any uncollectible receivables. 2 methods of recognizing uncollectible AR exist, direct write-off method and allowance method. Only allowance method is consistent w/ accrual accting (acceptable for GAAP). The direct write-off method is not GAAP. It's tax, no JE until write-off. Under this method, acct is written off and bad debt is recog'd when the acct becomes uncollectible. Not GAAP bc it doesn't properly match BDE w/ rev. Another weakness of the method is that AR are always ostated bc no attempt is made to acct for unknown bad debt incl in the bal on the F/S. Book ex of direct write-off method: R recorded 10k cr sale. In july of next yr, determined it was uncollectible. -JE to record the acct bal of 10k as uncollectible: dr BDE (Y2), cr AR for 10k. No allowance! The rev recorded in Y1 isn't properly matched to the BDE recorded in Y2.

Securitization

AR are transferred to a diff entity, like trust/sub. Entity then sells secs collateralized by the AR. Investors get cash as the AR are paid. Entity sets up trust/sub --> transfers AR to them --> trust/sub given entity $ --> raises cash by selling secs to investors --> investors give $ to sub --> sub makes principal/int pmts to investors.

Computer Software Development Costs; Computer Software Developed to be Sold, Leased, or Licensed

Accting for costs: -expense costs (planning, design, coding, testing) incurred until technological feasibility has been established for the product. -capitalize costs (coding, testing, and producing product masters) incurred after tech feasibility has been est up to the point the product is released for sale. -tech feasibility is established upon completion of a detailed program design or working model. Annual amort (on a product by product basis) is the greater of: 1. % of rev: amort exp = [total capitalized amt x (current gross rev for pd/total projected gross rev for product)]. Sim % of completion. 2. S/L: amort exp = [total capitalized amt x (1/estimated economic life)]. Costs incurred to actually produce the product are product costs charged to inv. Capitalized software costs are reported at LCM, where mkt is equal to NRV. Accting for comp software developmt costs timeline: -idea -program design, planning, coding and testing; expense it -tech feasbility established -producing product masters, incl additional coding/testing; capitalize it -release product for sale; amort exp begins -duplicate packaging; inventory COGS

Computer Software Development Costs; Computer Software Developed Internally or Obtained Only for Internal Use

Accting for costs: -expense costs incurred for the preliminary project state (idea) and costs incurred for the training and maintenance. -capitalize costs incurred after the preliminary project state (technological feasibility) and for upgrades/enhancemts, incl: (a) direct costs of materials and services (b) costs of employees directly assoc w/ the project and (c) int costs incurred for the project Sim to rules used for software to be sold. Capitalized costs S/B amortized on a S/L basis. If software prev developed for internal use is subseq sold to outsiders, proceeds received (ex: from license of comp software, net of incremental costs) S/B applied 1st to the carrying amt of software, then recog'd as rev (after carrying amt of software has reached 0). This is if co changes their plan and decides to sell it. Use the cost recovery system and then recog rev. IFRS doesn't provide sep guidance regarding comp software developmt costs. Under IFRS, comp software developmt costs are internally generated intangibles. Research costs must be expensed and developmt costs may be capitalized if certain criteria are met (per discussion of intangibles on earlier card).

Book Examples for Exchanges Lacking Commercial Substance

All of these lack commercial substance. It would tell you that or say no sig changes to CFs, etc. in the problem. 1. No boot= no gain recog'd. Machine A (old) exchanged for B (new). A BV is 10k, FV is 12k. B FV is 12k (bc FV given = rec'd). Calc total gain on trans, indicate whether it's recog'd, and calc the basis of the acq'd asset. -Step 1: math. [FV old 12k - BV old 10k] = 2k gain. -Step 2: no boot rec'd/paid, so no gain recog'd. -basis of acq'd asset = basis of old asset, which is also equal to [asset's FV - deferred gain]. -JE to record: dr machine B (rec'd. Plug), cr Machine A (BV) 10k. 2. Boot is paid (<25% rule) = no gain recog'd. Same facts as 1, except give 2,500 cash as well and FV new is 14.5k (FV given = FV rec'd, 12k + 2.5k). Calc total gain on exchange, indicate whether it's recog'd, and calc the basis of the new asset. -Step 1: math. [FV old 12k - BV old 10k] = 2k gain. Also could do [14.5K - 12.5K]. -Step 2: no boot rec'd, boot paid. ($ paid/total FV) = (2,500/14k) = 17.24%. This is <25%, so nonmonetary. No gain recog'd! -basis of acq'd asset = [basis of old asset + cash paid]. -JE to record the trans: dr machine B (plug), cr Machine A (BV), cr cash (paid). 3. Boot is rec'd (<25% rule) = proportional gain recog'd. Same facts as 1 except get machine B and 2,500 cash. FV new is 9,500 (FV given of 12k = FV received of 9,500 + 2,500 cash). Calc total gain recog'd on exchange and prep JE to record the trans. -Step 1: math. [FV old of 12k - BV old of 10k] = 2k gain. -Step 2: boot is rec'd, some gain recog'd since <25%. [2500 cash/12k consideration]= 21%. Recog'd gain = [realized gain of 2k x (2,500 boot rec'd/12k FV rec'd)] = $417. -JE to record the trans: dr machine B (plug), dr cash (rec'd), cr machine A (BV old), cr gain on exchange (proportional). -if cash paid/rec'd >=25% of FV, both sides recog ALL G/L, bc then monetary exchange.

Depletion

Allocation of the cost of wasting natural resources like oil/gas/timber/minerals to the production process. Purch cost: incl any expenditures necessary to purch/prep the land for removal of resources, like drilling costs or costs for tunnels/shafts for the oil industry (intangible developmt costs), or to prep the asset for harvest (like in the lumber industry). Residual value (RV): sim SV. Monetary worth of a depleted asset after the resources have been removed. Depletion base (cost - RV): cost to purch the property minus the estimated net RV (NRV) remaining after all resources have been removed from the prop. Methods incl: 1. Cost depletion (GAAP): computed by dividing current est recoverable units into unrecovered cost (less salvage) to arrive at a cost depletion rate, which is multiplied by units produced to allocate costs to production. 2. Percentage depletion (*not GAAP*, tax only): based on a % of sales. Allowed by congress as a tax deduction to encourage exploration in a risky bus. % depletion can (and usually does) exceed cost depletion. It's limited to 50% of NI from the depletion prop computed before the % depletion allowance. Formula for depletion for the pd: Total depletion = [unit depletion rate x no of units extracted]. Unit depletion is the amt of depletion recog'd per unit (ton, barrel, etc.) extracted. Unit depletion rate = [depletion base/estimated recoverable units]. Depletion base is (cost - RV). *Recoverable units only* in denom. Specific calc for depletion base: Cost to purch prop + developmt costs to prep land for extraction + any estimated restoration costs - RV of land after the resources (mineral, oil, ore, etc.) are extracted = depletion base. If all units extracted aren't sold, depletion must be allocated btw COGS and EI. Amt of depletion to be incl in COGS is calc'd by multiplying unit depletion rate by no of units sold. Depletion applicable to units extracted but not sold is allocated to inv as DM. When computing depletion on land, remember it's *REAL* property: *R*esidual value (subtract) *E*xtraction/developmt cost *A*nticipated restoration cost (part of depletion base) *L*and purch price

Declining Balance Depreciation

Asset subj to rapid obsolescence. Most common of these accelerated methods is double-declining-balance (DDB) method, although other alternative (like 1.5 or anything else < double) methods are acceptable. *SV is ignored in the calc of annual depr exp*. Under DDB, each yr's depr rate is double the S/L rate. In final yr, asset is depr'd to SV, if any (plug). Formula: Depr exp = [2 x (1/N) x (cost - A/D)]. (Cost - A/D) is remaining NBV at beginning of pd. (2 x (1/N)) gives constant rate. Can also calc constant rate as (2/UL), where UL is useful life. Salvage value is the floor on NBV. No allowance is made for SV bc the method always leaves a remaining bal, treated as SV. *Asset shouldn't be depr'd below the estimated SV*. Last yr of depr is a plug to get to SV. The only methods that ignore SV in the annual calc of depr are the declining balance methods. SV is used only as the limitation on total depr. Book ex for DDB method: asset costing 10k w/ 2k SV (floor on NBV) has est useful life of 10 yrs. Use DDB method to calc debt exp. -1st, reg S/L % is determined, then doubled and applied each yr to remaining BV. (2 x (1/10)) = 20%. Constant rate. Can also calc as (2/UL) or (2/10). -multiply constant % by NBV remaining to get amt of depr exp. Each yr, NBV remaining goes down by PY depr exp. -final yr depr is a plug to get to SV (floor). NBV can't drop below SV! No depr exp recorded after the plug. -if this had been 1.5x declining bal, rate would have been 15%, not 20%. -if asset had been placed in service halfway through yr, 1st yr's depr would have been 1/2 of what it was. Would have ripple effect on other yrs since remaining NBV larger. *For all depr methods, partial yr depr applies*. When an asset is placed in service during the yr, depr exp is taken only for the portion of the yr the asset is used. So multiple depr exp by (mos used/12 mos).

Capitalization of Interest Period

Begins when 3 conditions are present: -expenditures for the asset have been made. -activities necessary to get the asset ready for its intended use are in progress (bldg decision made, permits filed). -int cost is being incurred. These are all "during" term of construction. This continues as long as the 3 conditions are present (during). Stops during intentional delays in construction (like waiting for mkt to improve), but continues during ord construction delays (inspection). Ends when asset is (or indep parts of the asset are) substantially complete and ready for the intended use (regardless of whether actually used). For capitalization of int costs, disclose in F/S: -total int cost incurred during the pd (cap) -capitalized int cost for the pd, if any -diff btw the two will be on I/S as part of int exp Book ex for construction pd: gives a whole list of events in chronological order. -co purch'd parcel of land for speculation, w/ some down and some borrowed. Calc monthly int pmts. No capitalization/exp yet. -paid int cost for 2 mos. Expensed bc before. -decision made to build condos on the land, attorneys apply for zoning purpose. Construction is started now! No capitalization/exp here. -int pmt for 2 mos is capitalized bc during. -permits are received, no capitalization/exp. -begin grading/developing land/foundation, pay 4 mos int (charge bldg). All capitalized. -incurred exps to date for attorney/architect/land developmt, all paid w/ additional borrowed money at 12% IR. No capitalization/exp here. -paid 4 mos int. All capitalized. Incl additional debt in this. -sum total int exp to get the cap amount, disclose it and the amt capitalized (based on weighted avg of accum'd expenditures to date). -construction stops for unintentional delay, capitalize int. -construction intentionally delayed, exp int. -1st few floors of bldg are completed and ready for sale (subst complete and ready for intended use), so exp int for those (after), but continue to capitalize int for uncompleted floors. -when bldg/project completed, exp all int. 1/2 400k borrowed and used. To capitalize: 1- expended 2- during 3- not before/after

Cash and Cash Equivalents

Cah incl currency and demand deposits w/ banks/fin institutions. Also incl deposits sim to demand deposits (can be added to/withdrawn from at any time w/o penalty). Cash equivalents broaden definition of cash to incl ST, highly liquid investmts both readily convertible to cash and so near their maturity when acq'd by entity (*OG maturity of <= 90 days from date of purch*) that they present insig risk of changes in value. Fixed inc. Exs of cash/cash equivalents: -coin/currency on hand (incl petty cash) -checking accts -savings accts -money mkt (MM) funds -deposits held as compensating bals against borrowing arrangemts w/ a lending institution that are *NOT* legally restricted -negotiable paper, incl (a) bank checks, money orders, traveler's checks, bank drafts, and cashier's checks (b) commercial paper and treasury bills (c) CDs (w/ OG maturities of <= 90 days) Items that aren't cash/cash equivalents: -time certificates of deposit (if OG maturity >90 days) -legally restricted deposits held as compensating bals against borrowing arrangemts w/ a lending institution

Reconciliation of Cash Receipts and Disbursements

Called 4-column rec or proof of cash. Serves as proof of proper recording of cash trans. Additional info is req'd in prepping this. Bank rec info for present and prior mo must be obtained. Object of the 4-column approach is to rec any diffs btw amt depositor has recorded as cash receipts and amt the bank has recorded as deposits. Likewise, this approach determines any diffs btw amts depositor has recorded as cash disbursemts and amts bank has recorded as checks paid. Book ex: Same info as ex on last card. Rec of CR/CD for 12/3. 4 columns- nov bal, dec receipts, dec pmts, dec bal. Bal per depositor's books + note collected by bank - bank service charge - NSF check (in receipts column) + error in recording check = adj bals. Bal per bank records + deposits in transit (if addition in last mo, subtract from receipts column in current mo) - outstanding checks (add back those subtracted in prior mo in the pmts column) - NSF check from receipts column = adj bals. (should tie to above)

Impairment of Property, Plant, and Equipment

Carrying amts of FA held for use and to be disposed of need to be reviewed at least annually or whenever events/changes in circumstances indicate that the CV may not be recoverable (triggering events). When a FA is tested for impairmt, FCFs expected to result from the use of the asset and its eventual disposition need to be est. If the sum of undiscounted expected FCFs is < CV, impairmt loss needs to be recog'd (step 1). Impairmt loss is calc'd as amt by which the CV exceeds the FV of the asset (or DCF. Step 2). Impairmt test for PP&E finite life: Step 1: [undiscounted future net CFs - net CV]. -if positive, no impairmt loss. -if negative, impairmt. Move on to step 2. Step 2 if assets are held for use: [FV or PV future net CFs - net CV] = impairmt loss. -write asset down -depr new cost -restoration not permitted Step 2 if assets are held for disposal: [FV or PV future net CFs - net CV] = impairmt loss + cost of disposal = total impairmt loss. -write asset down -no depr taken -restoration permitted The impairmt loss is reported as a component of inc from continuing ops before inc taxes or in a stmt of activities (related to NFP entities). The impairmt loss is recog'd by reducing the CV of the asset to its lower FV. Restoration of prev recog'd impairmt losses is prohibited under GAAP unless the asset is held for disposal. A fixed asset impairmt loss under IFRS is calc'd using a 1-step model in which the CV of the FA is compared w/ it's recoverable amt (*use step 2 only*!). IFRS define the recoverable amt as the greater of (assets FV - costs to sell) and assets value in use, which is the PV of FCFs expected from the FA. IFRS allow the reversal of impairmt losses. It's important to remember these rules when performing calcs under GAAP: -Step 1: determining the impairmt - use undiscounted future net CFs. -Step 2: if failed step 1. Amount of the impairmt - use FV or discounted (PV) future net CFs.

Restricted or Unrestricted Cash and Cash Equivalents

Cash can be unrestricted or restricted. Restricted cash has been set aside for a specific use/purpose (purch PP&E, etc.). Unrestricted cash is used for all current ops. Nature, amt, and timing of restrictions S/B disclosed in footnotes. -if the restriction is assoc w/ a current A/L, classify as current asset, but sep from unrestricted cash. -if assoc w/ non-current A/L, classify as a non-current asset, but sep from either investmts or other assets section. Exs of restrictions: -if any portion of cash/cash equivalents is contractually restricted b/c of financing arrangemts w/ credit institution (compensating bal), that portion S/B sep reported as "restricted cash" on B/S. -if any portion of cash/cash equivalents is restricted by mgmt, S/B reported as restricted cash and as a current/LT asset (depending on anticipated date of disbursemt). -some industries (like pub utilities) report the amt of cash/cash equivalents as last asset on B/S bc they report assets in an inverse order of liquidity. Book ex of items incl in cash bal: S corp's cash ledger bal on 12/31/7 was 160k (unadjusted bal). Had these items in its safe: -5k check payable, dated 1/2/8, not incl in dec checkbook bal. -3.5k check payable, deposited 12/22 and incl in 12/31 checkbook bal, was returned NSF and redeposited in january. -25k check dated/recorded 12/31 not mailed until 1/15/8. Cash that S/B on 12/31/7 B/S: Unadj bal of 160k + check payable to supplier of 25k - NSF check of 3,500 =adjusted bal of 181,500.

Intangible Assets; Capitalization, Amortization, and Sale

Co should record the cost of intangibles acq'd from other enterprises/indivs in an arms-length trans as assets. Cost is measured by: -amt of cash disbursed or FV of other assets distributed -PV of amts to be paid for liabs incurred and -FV of consideration received for stock issued Cost may be determined either by the FV of the consideration given up or the FV of the prop acq'd, whichever is more clearly evident (assumed get the same as you give up). The cost of unidentifiable intangibles is measured as diff btw cost of the group of assets/enterprise acq'd and the sum of the costs assigned to identifiable assets acq'd, less liabs assumed. Residual $. Cost of unidentifiable intangibles = [cost of asset group/enterprise - (costs assigned to identifiable assets acq'd - liabs assumed)]. Cost of identifiable assets shouldn't incl GW. For amort, must have a finite life. Value of intangibles eventually disappears, so the cost of each type of intangible asset (except GW and indefinite lived assets) S/B amortized by systematic charges to inc over the pd estimated to be benefited. Matching principle. A patent is amortized over the shorter of its estimated life or remaining legal life. S/L method of amort S/B applied, unless co demonstrates another systematic method is more approp. Method and est useful lives of intangibles S/B adequately disclosed in the notes. Expenses that incr the useful life of the intangible req an adjustmt to the calc of annual amort. If the life of an existing intangible asset is reduced/extended, remaining NBV is amort over the new remaining life. Change in est, prospective (recalc). If an intangible is sold, compare its CV at date of sale w/ selling price to calc G/L.

Composite and Component Depreciation

Component depr: sep depr of each part of an item of PP&E sig to the total cost of the FA. More accurate. Permitted but rarely used under GAAP. IFRS req component depr. Sep sig components of a FA w/ diff lives S/B recorded and depr'd sep. The carrying amt of parts/components replaced S/B derecog'd. Book ex for component depr: on 1/1/1, IFRS entity acq'd machine w/ cost of 250k, est useful life of 20 yrs. Cost of the machine incl cost of a cylinder that must be replaced every 5 yrs for 20k and inspection cost of 5k. Must be reinspected every 10 yrs at an additional cost of 5k/inspection. Calc Y1 depr using component depr. -20k for cylinder/5 yrs = annual depr. -5k inspection cost/10 yrs= annual depr. -plug machine amt (250k - 20k - 5k) and divide by 20 = annual depr. -sum each annual depr to get total annual depr. Composite (if dissimilar) or group (if similar) depr: process of avging the econ lives of a no of prop units and depreciating the entire class of assets over a single life (like all at 5 yrs), simplifying record keeping of assets and depr calcs. When a group/composite asset (indiv) is sold/retired (no G/L on I/S), the A/D is treated diff from A/D of a single asset. If the avg service life of the group of assets hasn't been reached when an asset is retired, the G/L that results is absorbed into the A/D acct. The A/D acct is dr/cr for the diff btw the OG cost and cash received. Composite/component depr can be done using any acceptable depr method, incl S/L, sum of yrs digits, and declining balance methods. Book ex for composite/group depr (avg econ life): schedule of machinery for L co given, w/ diff asset classes and cost, est SV, and est useful life given. L uses S/L method of depr. Depr the machinery using composite depr. -do [(total cost - est SV) = depreciable cost/est useful life] for each asset class to get annual depr. Sum annual deprs from all asset classes. -Take [sum of total costs for all asset classes/sum of annual depr for all asset classes] to get avg composite life. Book ex for disposal of a group/composite asset: L sells machine A in 10 yrs for 260k (no G/L). Loss on disposal isn't recog'd, so A/D must be reduced/dr. -JE: dr cash 260k, dr A/D (plug) for 290k, cr asset A (HC) for 550k.

Plant

Cost of excavation (digging foundation) fwd. Cost of plant or bldgs incl: -purch price -all repair charges neglected by previous owner (deferred maintenance). Not ordinary -alterations and improvemts -architect's fees -possible addition of construction-pd int When prepping the land for the construction of a bldg: -land cost: filling a hole or leveling. -bldg cost: digging a hole for the foundation. In a basket purch of land and bldg, allocate the purch price based on the ratio of appraised values of indiv items. B/c bldg depreciable and land not (except for land improvemts).

Exchanges Having Commercial Substance; Calculation of Basis of Acquired Asset

Cost. Initial BV S/B FV. Calc could incl cash paid, FV of assets/stock given up, and PV liab. Book ex for JE for exchange: same facts as ex on above card. Cash given up in exchange is used to calc the bldg's basis on F's books. Calc the basis of the new bldg and prep the JE to record the exchange. - [FV cars given up of 45k + cash paid of 20k] = 65k FV received (bldg). -JE to record the exchange and gain on it: dr bldg 65k (initial BV, cost), dr A/D cars, cr cars (HC), cr cash paid, cr gain on disposal of cars (recog'd). If the FV of the cars in the ex was 38k instead of 45k, would recog loss of 2k (38k FV - 40K BV) and the basis of the bldg W/B 58k (38K FV + 20K cash). -JE to record the exchange and loss on it: dr bldg for 58k (FV given up), dr A/D cars, dr loss, cr cars (HC), cr cash paid. Under IFRS, nonmonetary exchanges are characterized as exchanges of sim assets and dissimilar assets. Exchanges of dissimilar assets are regarded as those that generate rev, and are accted for in same manner as those w/ commercial substance under GAAP (G/L recog'd). Exchanges of sim assets aren't regarded as exchanges that generate rev, so no gains are recog'd (could still have losses).

Start-up costs: Expense

Expense! Expenses incurred in the formation of a corp (ex: legal fees) are considered organizational costs and are an ex of start-up costs. Start-up costs, incl org costs, S/B expensed when incurred. Start-up costs incl costs of the one-time activities assoc w/: -organizing a new entity (ex: legal fees for prepping a charter, pship agreemt, bylaws, OG stock certifications, filing fees, etc.) -opening a new facility -introducing a new product/service -conducting bus in a new territory or w/ a new class of customer -initiating a new process in an existing facility *Tax rule*: 5k deducted, balance is amort over 15 yrs. Start-up costs do not incl those assoc w/: -routine, ongoing efforts to refine, enrich, or improve the quality of existing products, services, processes, or facilities -bus mergers or acqs -ongoing customer acq Remember that organization exps are *not* capitalized as an intangible. Rather, they're expensed immediately.

Notes Receivable

FV= principal, maturity value= principal + int. NR are written promises to pay a debt, and the writing is called a promissory note. Classified same as AR, current/LT asset, depending on when collection will occur. PV FCF. For F/S purposes, unearned int (accrue/earn over time, not when $ received) and finance charges are deducted from the face amt of the related promissory note. This is necessary to state the receivable at its PV. Assuming noncurrent, face amt - unearned int = NRV (PV). If a promissory note is nonint bearing or int rate is below mkt, value of the note S/B determined by imputing the mkt rate of int and determining the value of the promissory note using the effective int method. Int-bearing promissory notes issued in an arms-length trans are presumed to be issued at the mkt IR. Discounted NR (get cash now) arise when holder endorses the note (w/ or w/o recourse) to a 3rd party and gets cash. Amt received by holder is determined by applying a discount rate to the maturity value of the note. Diff btw the amt of cash received by holder and maturity value is the discount. If w/ recourse: holder remains contingently liable for the ultimate pmt of the note when it becomes due. NR discounted w/ recourse are reported on B/S w/ a corresponding contra-acct (notes receivable discounted), indicating they've been discounted to a 3rd party. Dr cash, cr NR discounted (contra-asset). Alternatively, the NR may be removed from the B/S and the contingent liab disclosed in the footnotes. If w/o recourse: holder assumes no further liab. NR discounted w/o recourse have essentially been sold outright and should be removed from B/S. dr cash, dr loss, cr NR. *ROL* (*R*isk *O*f *L*oss) on buyer. Book ex for discounting a note at a bank: J has 40k, 90 day NR dated 9/30.Y3 and bearing 12% int. 30 days after issue, J takes note to bank, which will discount it at 15%. NR paid at maturity 60 days later. Calc amt to be paid by bank for note. Determine amt J should report as net int inc from the note. -Step 1: [40k principal x 12% x (90/360)] = 1,200 int. Mat value= [40k + 1,200] = 41,200. -Step 2: [OG term 90 - 30 days] = 60 days remaining. [41,200 maturity value x 12% x (60/360)] = 1,030 int to bank. -Step 3: 1,200 int split up. 1,030 to bank, diff of 170 (1,200 - 1,030) to seller. -bank pays 40k + 170= 40,170. When a discounted NR is dishonored, the contingent liab S/B removed by a dr to NR discounted and a cr to NR. NR dishonored S/B recorded to the estimated recoverable amt of the note. A loss is recog'd if the estimated recoverable amt is < amt req'd to settle the note and any applicable penalties.

Disposals and Disclosure

For disposals, when depr is taken individually, and not as a group, then G/L recog'd. Types of disposals: 1. Sale of asset during its UL: dr cash received, dr A/D of sold asset (update to date of sale), cr sold asset at cost, cr/dr diff as a G/L. 2. Write-off fully depr'd asset: dr A/D (NBV incr), cr old asset (NBV decr). Both at 100%. Total N/C to assets or NBV. 3. Total and perm impairmt: dr A/D, dr loss due to impairmt (plug for diff. Unusual or infrequent), cr asset at full cost. -A/D is a contra-asset acct. Incr w/ CY depr, decr w/ disposal and WO's. Credit bal. Allowances for depr/depletion S/B deducted from the assets to which they relate. These disclosures of depreciable assets and depr S/B made in the F/S or notes: -depr exp for the pd -balance of major classes of depreciable assets by nature/function -A/D allowances by classes or in total -methods used, by major classes, in computing depr

Goods and Materials to be Included in Inventory Continued

For sales w/ a right of return, issue is can you reasonably estimate returns? GR is if goods are sold but buyer has right to return them, goods S/B incl in seller's inv if the amt of the goods likely to be returned *cannot* be estimated. If the amt of goods likely to be returned *can* be est, the trans will be recorded as a sale w/ an allowance for estimated returns. Rev from a sales trans in which the buyer has the right to return the product shall be recog'd at the time of sale only if these 5 conditions are met (rev recog rule): 1. sales price is substantially fixed at date of sale 2. buyer assumes all ROL bc the goods are in their possession 3. buyer has paid some form of consideration 4. product sold is substantially complete 5. amt of future returns can be reasonably estimated In a consignmt arrangemt, seller/consignor (true owner) delivers goods to agent/consignee (sales agent, commission) to hold/sell on consignor's behalf. Consignor should incl the consigned goods in inv bc title and ROL is retained by consignor even though consignee possesses the goods. If all of the 5 conditions above aren't met, no rev recog from a sale. Rev will be recog'd when the goods are sold to 3rd party. Until the sale, the goods remain in consignor's inv. Title passes directly to 3rd party buyer (not consignee first) at point of sale. Goods stored in pub warehouses and evidenced by a warehouse receipt S/B incl in inv of the co holding the warehouse receipt. The reason is the warehouse receipt evidences title even though the owner doesn't have possession. Occasionally, as part of a financing arrangemt, seller has a rqmt to repurch goods from buyer (mandatory buyback). If so, seller should incl the goods in inv even though title has passed to buyer. If seller sells goods on an installmt basis but retains legal title as security for the loan, goods S/B incl in the seller's inv if the % of uncollectible debts can't be estimated. If it can be est'd, the trans W/B accted for as a sale, and an allowance for uncollectible debts W/B recorded.

Estimating Uncollectible Accounts Receivable; Allowance Method

GAAP. Can be % sales (I/S), % AR (B/S), and aging schedule (B/S). Estimate and accrue. The bal in the AFDA S/B based on past experience. % of each pd's sales or ending AR is est to be uncollectible. Amt determined is charged to BDE and cr to valuation acct like AFDA. When specific known amts are written off, they're dr to allowance acct. 3 gen accepted methods of est uncollectible/doubtful accts under allowance method: 1. % of sales method (I/S approach): emphasizes matching. Under this method, % of each sale is dr to BDE and cr to AFDA. Applicable % is based on co's experience. *Only use cr sales*, cash sales are distractors! Allowance acct incr w/ BB and exp (crs), decr w/ WOs (drs). Step 1 is to est uncollectible amt, step 2 is to adj ending AFDA. Book ex: ABC bases est uncollectible accts on total cr sales. Ests 2% of 200k cr sales won't be collected. Cr bal in AFDA before adj is 1k. -JE to incr AFDA by 2% of 200k (4k): dr BDE, cr AFDA. -AFDA incr, reduces NRV so A decr, Profit/RE/EQ decr. -BB AFDA (1k) + 4k = 5k EB. BB isn't considered in the above calc. 2. % of AR at YE method (B/S approach): Uncollectible accts may be est as a certain % of AR at YE. Under this method, the amt calc'd is the EB that S/B in the AFDA on the B/S. Diff btw the unadj bal and the desired EB is dr/cr to BDE acct. The % is based on the co's experience. Step 1 is to calc EB, step 2 is to use BDE as a plug to get to it. Book ex: DEF uses % for uncollectible AR based on YE AR bal. Ests bal in the AFDA acct must be 2% of 80k YE AR. Bal in acct is 1k cr before adj. -Step 1: calc EB of 80k x 2% (1,600) -Step 2: calc BDE plug. 1K BB + BDE = 1600 EB. So 600. dr BDE, cr AFDA for 600. If BB had been a cr, would have had to add 2,600 to AFDA. Gross 80k - 1600 AFDA = 78,400 NRV. 3. Aging of AR method: emphasizes asset valuation (NRV). Sch is prepped categorizing accts by no of days/mos outstanding. Each category's total $ amt is multiplied by a % repping uncollectibility based on past experience. Sum of the product for each aging category will be the desired EB in the AFDA acct. BDE is plug. Book ex: bal in AFDA acct is 1k cr. Analysis of aging of AR reqs allowance acct to have net bal of 1,600. -calc desired EB: Several rows based on classification by due date. Multiply bal in each category by est uncollectible % for that category. Sum all. -JE same as prior ex.

Valuation of Inventory

GR is GAAP reqs that inv be stated at its cost. Where evidence indicates that cost will be recovered w/ an approximately normal profit on a sale in the ord course of bus, no loss S/B recog'd even though replacemt/reproduction costs are lower. Inventories are gen accted for at cost, defined as price paid/consideration given to acq an asset. Incl freight in. Methods used to determine cost of inv incl FIFO, LIFO, avg cost, and retail inv method. IFRS doesn't allow LIFO. Exceptions incl departures from cost basis: 1. Precious metals and farm products: gold/silver/other precious metals/meat/some agricultural products are valued at NRV (SP - costs of disposal). When inv is stated at a value in excess of cost, this fact S/B fully disclosed in the F/S. Invs reported at NRV incl: -gold/silver, when there's an effective govt-controlled mkt at a fixed monetary value. -inv of agricultural/mineral/other products meeting these criteria: (a) immediate marketability at quoted prices (b) unit interchangability and (c) inability to determine approp costs 2. Lower of cost or mkt (LCM) and lower of cost and NRV (LCNRV): in ord course of bus, when the utility of goods is no longer as great as their cost (loss on sale expected), a departure from the cost basis principle of measuring inv is req'd. Usually accomplished by stating the goods at MV or NRV, as approp. Purpose of reducing inv to an amt below cost is to show the probable loss sustained (conservatism) in the pd the loss occurred (matching principle). 3. Recog loss in current pd: under GAAP, write-down of inv is usually reflected in COGS, unless the amt is mat, in which case the loss S/B ID'd sep in the I/S. IFRS don't spec where an inv write-down S/B reported on the I/S. 4. Reversal of inv write-downs: US= no, IFRS= yes. Under GAAP, these are prohibited. IFRS allows reversal of inv write-downs for subseq recoveries of inv value. Reversal is limited to the amt of the OG write-down and is recorded as a reduction of total inv costs on the I/S (COGS) in the pd of reversal. The LCM and LCNRV rules won't apply when: -subseq sales price of an end product isn't affected by its MV or -co has a firm sales price contract

Goods and Materials to be Included in Inventory

GR is that any goods/materials in which co has legal title S/B incl in inv, and legal title typically follows possession of the goods. Lots of exceptions/special applications of this GR. For goods in transit, consider whether we are the buyer or seller of goods. Title passes from the seller to the buyer in the manner/under the conditions explicitly agreed on by the parties. If no conditions explicitly agreed on ahead of time, title passes from seller to buyer at time/place where seller's performance regarding delivery of goods is complete. FOB= "free on board". Reqs seller to deliver the goods to the location indicated as FOB at the seller's exp. Terminology commonly used in passing title from seller to buyer: -FOB shipping point: title passes to buyer when seller delivers goods to a common carrier. Goods shipped this way S/B incl in the buyer's inv upon shipmt. In truck. Freight in, part of cost of inv for buyer. -FOB destination: title passes to buyer when buyer receives goods from the common carrier. Seller's inv until delivered to buyer. Freight out, part of selling exp. If the seller ships the wrong goods (nonconforming goods), the title reverts to the seller upon rejection by the buyer. The goods shouldn't be incl in buyer's inv, even if buyer has the goods before their return to the seller. Seller's inv!

Sales Returns and Allowances

GR: expected exchanges do *NOT* affect sales, AR, inv, or COGS. No JE until actual return. Estimate and accrue. Sales of goods often result in them being returned for a variety of reasons. Goods returned rep deductions from AR and sales. If past experience shows a mat % of AR are returned, an allowance for sales returns S/B est. Need to be able to reasonably est. Book ex: -JE to record a sales return: dr sales returns/allowances (contra-sales), cr AR. EQ and A decr.

Exchanges Lacking Commercial Substance

If projected CFs after the exchange aren't expected to change significantly, exchange lacks commercial substance. Accting treatmt used follows this (this method may also be used in any exchange where FVs aren't determinable, or if the exchange is made to facilitate sales to customers). Step 1: [FV old - BV old] = "math" G/L. Step 2: follow rules! Rules are listed below. For gains: 1. No boot is received = no gain. If the exchange lacks commercial substance and no boot is rec'd, no gain recog'd. 2. Boot is paid = no gain (<25% rule). If exchange lacks commercial substance and boot paid is <25% or the total consideration, no gain recog'd. 3. Boot is received = recog proportional gain (<25% rule). If exchange lacks commercial substance and boot received is <25% of total consideration received, a proportional amt of the gain is recog'd. Ratio (total boot rec'd/total consideration rec'd) is calc'd, and that portion of total gain realized is recog'd. These top three are the GR! 4. Exception: Boot received is 25%+ of the total consideration (*rec'd or paid*). When the boot received is 25%+ of total consideration, *both* parties acct for the trans as a monetary exchange, and G/Ls are *recog'd in their entirety* by both parties to the exchange. For losses: Rule of conservatism! If the trans lack commercial substance and a loss is indicated, *loss S/B recog'd*.

Calculation of an Impairment Loss

Impairmt loss is calc'd as amt by which the carrying amt exceeds the FV of the asset. Impairmt test: Step 0: qualitative test for impairmt (indefinite life intangibles only). Doesn't apply to finite life intangibles. Step 1: [undiscounted FCFs - net CV]. Applies to finite life intangibles but not indefinite life. -if positive, no impairmt loss -if negative, impairmt, move on to step 2. Step 2: applies to both finite/indefinite life intangibles. For assets held for use: [FV - net CV] = impairmt loss. -write asset down -depr new cost -restoration not permitted For assets held for disposal: [FV - net CV] = impairmt loss + cost of disposal = total impairmt loss. -write asset down -no depr taken -restoration permitted. Can also use DCF in place of FV in step 2. When testing indefinite-life intangibles for impairmt, FV or DCF must be used instead of undiscounted FCFs. [FV - net CV] = positive (no impairmt) or negative (impairmt). Book ex for no impairmt loss: CV 900k, net FCFs 1M. 1M - 900k = 100k, so not impairmt loss. Step 1. Book ex for impairmt loss: asset's net CV is 1.2M, net FCFs are 1M. -Step 1: [1M - 1.2M] = -200k, impaired. -Step 2 is assuming asset held for use and FV/PV FCFs are 700k: [700k - 1.2M] = -500k. Write asset down, depr new cost, restoration not permitted. -Step 2 assuming asset is held for disposal and FV/PV FCFs are 700k, cost of disposal is 100k: [700k - 1.2M] = -500k - 100k = -600k. Write asset down, no depr taken, restoration permitted. When booking impairmt losses, dr loss on impairmt, cr A/D.

Book Example for Total Depletion and COGS Depletion

In Y1, H corp purch'd a mineral mine for 3.4M w/ removable ore est at 4M tons. Prop has est RV of 20k. Co incurred 800k of developmt costs prepping mine for production. 400K tons were removed during Y1, 375k sold, so 25k tons in EI. 1. Calc depletion base for mineral mine. Depletion base = [cost of land + developmt costs + estimated restoration - RV]. Calc unit depletion rate: Unit depletion rate = [depletion base/estimated recoverable units]. 2. Calc of depletion mine should record for Y1. Y1 depletion = [unit depletion rate x units extracted]. 3. Determine amt of depletion to be incl in COGS for Y1. Depletion to be incl in COGS = [unit depletion rate x units sold]. This goes on I/S! Remainder would be incl in EI (B/S) as DM. The term "extracted and sold" indicates none on B/S as EI, all COGS.

Comparison of FIFO, LIFO, and Weighted Average Methods

In a pd of rising prices, FIFO results in highest EI and lowest COGS, LIFO results in lowest EI and highest COGS, and avg method balances fall between the two. Moving avg method results in higher EI and lower COGS than weighted avg method.

Reporting an Impairment Loss

In continuing ops. An impairmt loss is reported as a component of inc from continuing ops before inc taxes, unless it's related to disco ops. The carrying amt of the asset is reduced by the amt of the impairmt loss. Restoration of prev recog'd impairmt losses is prohibited, unless asset is held for disposal. Under IFRS, an impairmt loss for an intangible other than GW is calc'd using a 1-step model in which CV of the intangible is compared w/ its recoverable amt (*only use step 2*!). IFRS defines the recoverable amt as the greater of the asset's (FV - costs to sell) and the asset's value in use. Value in use is the PV of the FCFs expected from an intangible. IFRS allows the reversal of impairmt losses.

Valuation of Fixed Assets Under IFRS

Incl cost (like US) and revaluation. Under IFRS, fixed assets are initially recog'd at cost to acq the asset. Subseq to acq, they can be valued using the cost or revaluation model. Under the cost model (like US), fixed assets are reported at historical cost (HC) adj for A/D and impairmt. Cost model CV (NBV) = HC - A/D - impairmt. Under the revaluation model (IFRS only), a class of fixed assets is revalued to FV and then reported at FV less *subsequent* A/D and impairmt. Revaluations must be made frequently enough to ensure that the carrying amt doesn't differ mat from FV at the end of the reporting pd. When FV differs mat from CV, a further revaluation is req'd. PUFE*R*. Revaluation model CV = FV at revaluation date - subsequent A/D - subsequent impairmt. Revaluation must be applied to all items in a class of fixed assets, not indiv fixed assets. Land/blgds, machinery, furniture/fixtures, and office equip are exs of FA classes. When FA are reported at FV, the HC equivalent (cost - A/D - impairmt) must be disclosed. When FA are revalued, (initial) revaluation losses (FV < CV before revaluation) are reported on I/S, unless they reverse a prev recog'd revaluation gain A revaluation loss that reverses a prev recog'd revaluation gain is recog'd in OCI and reduces the revaluation surplus in AOCI. (initial) Revaluation gains (FV > CV before revaluation) are reported in OCI and accum'd in EQ as revaluation surplus (PUFE*R*), unless the revaluation gain reverses a prev recog'd revaluation loss. Revaluation gains are reported on the I/S to the extent that they reverse a prev recog'd revaluation loss. If revalued FA subseq become impaired, the impairmt is recorded by first reducing any revaluation surplus (AOCI) to 0 w/ further impairmt losses reported on the I/S. Book ex for IFRS revaluation model: on 12/31/1, co chose to revalue all of its assets under IFRS. On that date, the FA had CV and FV amts (given). Calc revaluation G/L to be reported on the 12/31/1 F/S. -calc the G/L for each fixed asset class. -determine how much goes to OCI v I/S. -if subseq G/L on any asset class, would reverse prior G/L on I/S or in AOCI, w/ the remainder going to its usual location.

Equipment

Incl office equipmt, machinery, furniture, fixtures, and factory equipmt. Cost incl all expenditures related directly to acq/construction of the equipmt: -invoice price (+) -*less* cash discounts and other discounts (if any) - add freight-in (and ins while in transit and while in construction) -add installation charges (incl testing and prep for use. Cost to rearrange) -add sales and fed excise taxes -possible addition of construction pd int Proper accting (capitalize v exp) is determined based on the purpose of the expenditure. 1. Additions: incr the quantity of fixed assets and are capitalized. Dr asset, cr cash/AP. 2. Improvemts/replacemts: improvemts (bettermts) improve the quality of FA and are capitalized to the FA acct (tile/steel roof substituted for old asphalt roof). In a replacemt, a new, sim asset is substituted for the old one (an asphalt shingle roof is replaced w/ a roof of sim material). -if the CV of the old asset is known, remove it and recog any G/L. Capitalize the cost of the improvemt/replacemt to asset acct. -if CV of old asset is unknown and the asset's life is extended, dr A/D for the cost of the improvemt/replacemt (this decr A/D, so NBV incr), cr cash/AP. -if CV of old asset is unknown and the usefulness/utility of the asset is incr, capitalize the cost of the improvemt/replacemt to the asset acct. 3. Repairs: *memorize*! -ord repairs S/B expensed as repair and maintenance exp. -extraordinary repairs S/B capitalized. Treat the repair as an addition/improvemt/replacemt, as approp. Extend useful life/improve utility of the asset. Summary chart: -Additions: incr quantity. Capitalize, asset NBV incr. -improvemt/replacemt that incr life: reduce A/D, asset NBV incr. -improvemt/replacemt that incr usefulness: capitalize, asset NBV incr. -ord repair: expense. -extraord repair that incr life: reduce A/D, asset NBV incr. -extraord repair that incr usefulness: capitalize, asset NBV incr.

Franchisee Accounting

Initial franchise fees are capitalized as an intangible and amortized. PV of the amt paid/to be paid by franchisee is recorded as an intangible on the B/S and amortized over expected pd of benefit of the franchise (expected life). Capitalize: -cash -FV asset -PV of note/liab Continuing franchise fees are expensed as incurred. They're received for ongoing services provided by franchisor to franchisee (franchise royalties). The fees are usually calc'd based on a % of franchise revs. Such services might incl mgmt training, promotion, and legal assistance. Fees S/B reported by franchisee as an exp and as rev by franchisor, in pd incurred. Book ex for franchisees intangible assets: P signed agreemt of 7/1/1 w/ D to op as a franchisee in NYC. Initial fee was 75k, paid by 25k down pmt w/ balance payavle in 5 equal pmts of 10k beginning 7/1/2. Expected life of the franchise is 10 yrs. PV of the 5 annual pmts is 37,908. -Amt to be capitalized as intangible is 62,908 (25k + 37,908). -JE to record franchise at 7/1/1: dr franchises 62,908 (cap and amort), discount on NP (contra-liab) for 12,092 (50k - 37,908), cr NP for 50k, cr cash for 25k. -the discount will be recog'd as int exp by franchisee over the pmt pd on an effective int basis. Franchise acct would appear in franchisee's intangible assets section of B/S and would be amortized over expected life of the franchise. -Y1 amort of fanchises acct= [(franchise bal/expected life) x mos] = [(62,908/10) x (6/12)] = 3,145. Exam trick: watch the dates!

Types of Inventories

Inventories of goods must be periodically counted/valued/recorded in the books of acct of a bus. In general, there are 4 types of inventories, which are assets held for resale: -retail inv: inv that is resold in substantially the same form in which it was purchased. -RM inv: inv that is being held for use in the production process. -WIP inv: inv in production but incomplete. -FG inv: production inv that is complete and ready for sale. Bottom 3 are mfg.

Book Examples for LCM and LCNRV

LCM: US. Choose middle. Co uses LIFO and values EI using LCM. Gives item, cost, replacemt cost, selling price, costs of completion, and normal profit in sep columns. -Step 1: determine ceiling (NRV) and floor (NRV - PM) limits for the replacemt cost. -Step 2: compare replacemt cost, mkt ceiling, and mkt floor. Pick middle one, that's the mkt value. -Step 3: compare that to the cost, whichever is lower is the LCM. When mkt is lower than cost, the maximum prevents a loss in future pds by valuing the inv at its est selling price less costs of completion/disposal. The minimum prevents any future pds from realizing any more than a normal profit. JE to record the write-down to a sep acct: dr inv loss due to decline in MV, cr inv. LCNRV: IFRS and US (FIFO). Co uses FIFO and values its EI using LCNRV. Gives item, cost, selling price, and costs of completion in sep columns. -Step 1: determine NRV (SP - costs of completion). -Step 2: compare that to cost. Whichever is lower is the LCNRV.

Primary Inventory Cost Flow Assumptions

LIFO= minimize TI, FIFO= better ratios and profit on I/S. Inv valuation depends on cost flow assumption underlying the calc. Under GAAP, cost flow assumption used by a co isn't req'd to have a rational relationship w/ the physical inv flows. Primary objective is the selection of the method that will most clearly reflect periodic inc. When sim goods are purch'd at diff times, it may not be possible to ID/match the specific costs of the item sold. Often, the identity of goods and their specific related costs are lost btw the time of acq and sale. This has resulted in the developmt/gen acceptance of several assumptions w/ respect to flow of cost factors (LIFO, FIFO, and avg cost) to provide practical bases for measuremt of periodic inc. Under IFRS, accting method used to acct for inv S/B based on order in which products are sold relative to when they were put in inv. Specific ID S/B used whenever possible. LIFO method is *prohibited* under IFRS bc it rarely reflects actual physical inv flows. IFRS reqs the use of the same cost flow assumption for all inventories w/ a sim nature/use to the entity. GAAP doesn't have this restriction. LIFO = GAAP.

Firm Purchase Commitments

Legally enforceable agreemts to purch a spec'd amt of goods at some time in the future. All mat firm purch commitmts must be disclosed in either the F/S or the notes thereto. Forwards/futures (hedges). If contracted price exceeds mkt price and it's expected that losses will occur when the purch is actually made, loss S/B recog'd at the time of the decline in price (rule of conservatism). Descr of losses recog'd on these commitmts must be disclosed in current pd's I/S. Book ex for loss on purch commitmts: J signed timber-cutting contracts in Y1 to be executed at 5m in Y2. Mkt price at 12/31/1 is 4M and it's expected the loss will occur when the contract is effected in Y2. Determine amt that SB reported as a loss on purch commitmts at 12/31/1. -[price of purch commitmt of 5m - mkt price as 12/31/Y1 of 4m] = loss on purch commitmts of 1m. JE to record the loss: dr estimated loss on purch commitmt, cr est liab on purch commitmt for 1m. EQ decr and L incr. Loss is recog'd in the pd in which the price declined. The estimated loss on purch commitmt is reported in the I/S under exps/losses.

Exchanges Having Commercial Substance

Monetary exchanges. FCFs change, G/Ls recog'd. GAAP reqs exchanges of nonmonetary assets be categorized as either having commercial substance or lacking it. An exchange has commercial substance if the future CFs change as a result of the trans. Change can be in risk, timing, or amt of CFs. If the econ position of the 2 parties changes bc of the exchange, it has commercial substance. A FV approach is used, G/L recog'd. The FV of assets given up is assumed to be equal to the FV of assets received, incl any cash given/rec'd in the trans (if arm's length/not related parties). G/Ls are always recog'd in exchanges w/ commercial substance. Calc'd as (FV old - BV old), where old is the asset given up and BV old is (cost - A/D). Book ex for exchange w/ commercial substance: F exchanged used cars (old) for a bldg. FCFs will sig change (G/L recog'd). BV of the cars (old) is 40k (102k cost - 62k A/D). FV of cars (old) is 45k. F must pay 20k cash as part of the exchange. Calc G/L to be recog'd on exchange. -Gain on disposal of cars = [FV cars 45k - BV cars 40k] = 5k. This is recog'd. -cash given up doesn't enter into the calc of gain on exchange.

Intangible Assets

Long-lived legal rights and competitive advantages developed/acq'd by a bus enterprise. Typically acq'd to be used in ops of a bus and provide benefits over several accting pds. Differ considerably in their chars, ULs, and relationship to ops of an enterprise, and are classified accordingly. Most common ones tested on CPA exam are patents, copyrights, franchises, trademarks, and GW. Intangibles may be either specifically identifiable (patents, copyrights, franchise, etc.), or not specifically identifiable (GW). Manner of acq incl: 1. purchased intangibles: capitalize at cost. intangibles acq'd from other enterprises/indivs S/B recorded as an asset at cost. Legal/registration fees incurred to obtain an intangible should also be capitalized. 2. internally developed intangibles: expensed. Under GAAP, cost of intangibles not acq'd from others (developed internally) S/B expensed when incurred bc GAAP prohibits the capitalization of R&D costs. Exs (must be expensed): -trademarks (except for capitalizable costs below) -GW from advertising -cost of developing, maintaining, or restoring GW Exception is that certain costs assoc w/ internally developed intangibles that are specifically identifiable can be capitalized, like: -legal fees/other costs related to a successful defense of the asset (unsuccessful is expensed and test asset for impairmt) -registration or consulting fees -design costs (like of a trademark) -other direct costs to secure the asset Classification of the intangible depends on whether the econ life can be determined or is indeterminable (expected pd of benefit). Classification also depends on whether the asset can be sep from the entity (like a patent) or is substantially inseparable from it (like trade name or GW). This is separability. Under IFRS, research costs related to internally developed intangibles must be expensed, but an intangible asset arising from the developmt (capitalize) is recog'd if the entity can demonstrate all of these things: -technological feasibility has been established. -entity intends to complete the intangible. -entity has ability to use/sell the intangible. -intangible will generate future econ benefits. -adequate resources are available to complete the developmt and sell/use the asset. The entity can reliably measure the expenditure attributable to the developmt of the intangible.

Impairment of Intangible Assets Other than Goodwill

Not GW. Carrying amt of intangibles (incl GW) and FA held for use and to be disposed of needs to be reviewed at least annually or whenever events/changes in circumstances indicate the carrying amt may not be recoverable (triggering events, bad things). Under GAAP, impairmt test applied to an intangible other than GW is determined by the asset's life. Intangible has a finite life when it's possible to est its useful life. If it isn't possible to determine the useful life of an intangible, the asset has an indefinite (not inifite) life. If an intangible has a finite life, it's amortized over that life. If it has an indefinite life, it isn't amortized. An intangible w/ a finite life is tested for impairmt w/ a two-step impairmt test. -Step 1: carrying amt of the asset is compared w/ the sum of the undiscounted CFs expected to result from the use of the asset and its eventual disposition. This is the recoverablity test. -Step 2: If fail step 1 bc carrying amt exceeds total undiscounted FCFs, then the asset is impaired and an impairmt loss equal to the diff btw the carrying amt of the asset and its FV is recorded. Use discounted CFs if no FV. Its' important to note the following when testing PP&E or an intangible w/ a finite life for impairmt: -Step 1: determining the impairmt- use undiscounted future net CFs. -Step 2: if step 1 failed. Amt of impairmt - use FV (or discounted CFs if no FV). When testing an intangible w/ an indefinite life (incl GW) for impairmt, gen not possible to estimate total future CFs expected to result from the use of the asset and its disposition. As a result, an intangible w/ an indefinite life is tested for impairmt by comparing the FV of the intangible to its carrying amt (*use step 2 only*!). If the FV is < the carrying amt, an impairmt loss is recog'd for the diff. This quantitative impairmt test isn't necessary if, after assessing relative qualitative factors (step 0), an entity determines it's not more likely than not that the FV of the indefinite-life intangible is < its carrying amt.

Sum-of-the-Years'-Digits (SOYD) Depreciation

One of the accelerated methods of depr that provides higher depr exp in early yrs and lower charges in later yrs. To calc SOYD, each yr is progressively no'd and then added. SOYD for 5 yr life W/B: 1+2+3+4+5 = 15. Can also use this formula (gives same answer): SOYD = [{N x (N+1)}/2]. N= est useful life. CPA exam rarely tests SOYD depr for asset lives longer than 5 yrs. SOYD becomes the denom in the depr calc formula. Num is the remaining life of the asset at the beginning of the CY. Ex: 1st yr depr for 5 yr life W/B (5/15) of the depreciable base of the asset. Depr exp = [depreciable base x (remaining life of asset/SOYD)]. Depreciable base is (cost - SV). The % in the formula declines over time, since fewer yrs remaining. Book ex for SOYD method: asset cost 11k, 1k SV, est useful life of 4 yrs. Calc depr exp for all 4 yrs. -depreciable base = (11k-1k) = 10k. -SOYD = (1+2+3+4) or [{4(4+1)}/2]. Both give 10. -1st yr depr is 4/10 x 10k, 2nd yr 3/10, etc. Rate declines over time. Sum the amounts and it gives total depr of 10k.

Accounts Receivable

Oral promises to pay debts gen classified as CA. Can either be classified as trade receivables (AR from purchasers of co's goods/services) or nontrade receivables (AR from ppl other than customers, like advances to employees, tax refunds, etc.). The NRV of AR is the bal of the AR acct adj for allowances for receivables that may be uncollectible, sales discounts, and sales returns and allowances. The prep of an acct analysis may incr ability to "squeeze" answers to CPA exam Qs abt AR, AFDA, and other accts. Analysis format: *BASE*. *B*B *A*dd *S*ubtract *E*B Specifically for AR, t-acct shows incr by crs, decr by drs. -incr by: BB, cr sales. -decr by: write-offs, converting to a note, or $ collected Blank analysis format is basically a t-acct that can be used to obtain the right answer to lots of exam Qs. Helps w/ lots of B/S accts.

Property, Plant and Equipment (PP&E)

PP&E, or fixed assets (FA), are assets acq'd for use in ops and not for resale. They possess physical substance, are LT in nature, and are subj to depr (as a GR). These fixed assets must be shown sep on B/S or footnotes at OG cost (historical cost): -land (prop- *no depr*) -bldgs (plant) -equipmt: may show machinery, tools, furniture, and fixtures sep, if these categories are sig. -A/D acct (contra-asset): has a cr bal. May be combined for 2+ asset categories. Cost - A/D = net book value (NBV). Under US GAAP, historical cost is the basis for valuation of purch'd fixed assets. Historical cost is measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location/condition necessary for its intended use. Note payable. Purch price + _____. Donated fixed assets are recorded under GAAP at their FMV along w/ any incidental costs incurred. Result in the recog of a gain on the I/S. Dr FA (FMV), cr gain on nonreciprocal transfer.

PP&E: Depreciation and Disposal

Pay close attention to dates! The basic principle of matching revs/exps is applied to long-lived assets that aren't held for sale in the ord course of bus. The systematic/rational allocation used to achieve matching is usually accomplished by depr/amort/depletion, according to the type of asset involved. Types of depr incl: -physical depr: related to asset's deterioration and wear over a pd of time. -functional depr: arises from obsolescence of inadequacy of the asset to perform efficiently. May result from diminished demand for the product that the depreciable asset produces or from the availability of a new depreciable asset that can perform the same function for substantially less cost. Salvage/residual value is the est of the amt that will be realized at the end of the useful life of a depreciable asset. Frequently, depreciable assets have little/no SV at the end of their est useful life and, if immaterial, the amts may be ignored in calcing depr. Estimated useful life is the pd of time over which an asset's cost will be depr'd. May be revised at any time, but any revision must be accted for prospectively, in current/future pds only (change in est). CPA exam often has an asset placed in service during the yr, so reqs computing depr for part of the yr rather than the full yr. *Always check the date the asset was placed in service*! Under IFRS, the depr method used should reflect the expected pattern of fixed asset consumption (like inv). Not req'd under GAAP!

Inventory System to Maximize Inventory Carrying Amount; Periodic Weighted Average v Perpetual Moving Average

Perpetual applied to total inventory. Perpetual will produce a higher inv carrying amt than periodic weighted avg when prices are incr bc it computes a new weighted-avg cost after each purch while periodic is based on the avg price of all purchases during the pd. Perpetual is affected more by incr in prices, and inv will be more reflective of current costs. LCM will result in a higher inv cost if applied to total inv than indiv items when prices are gen incr while a few indiv items are decr. The aggregation of inv as a whole will cover the impact of indiv items w/ decr prices.

Pledging and Factoring Accounts Receivable

Pledging (assignmt) of AR is the process where co uses existing AR as collateral for a loan. Co retains title to receivables but pledges it will use the proceeds to pay the loan. Reqs only footnote disclosure, AR acct is not adj. Factoring can be w/o recourse (sale, so AR decr) or w/ recourse (sale or pledge). Factoring is process by which a co can convert its AR into cash by assigning them to a factor either w/o or w/ recourse. Customer may/may not be notified. If w/o recourse: true sale so AR decr. If a sale is nonrecourse, means it's final and the assignee (factor) assumes the risk of any losses on collections. If buyer is unable to collect all of the AR, has no recourse against seller! JE to factor AR w/o recourse: -dr cash, dr due from factor, dr/cr G/L from sale of AR, cr AR. Fee= loss. Due from factor reps proceeds retained by factor. Protects factor against returns, discounts, allowances, and customer disputes. If the returns/discounts/allowances are < retained amt, the balance will be returned to the seller. It's a security, may/may not get. Depends what they collect. Would have a definite loss for the amt dr to the loss acct, as a possible loss for the due from factor amt. If w/ recourse: if treated as sale, AR decr. If pledge, AR collateral (footnote only). If a sale is on a recourse basis, means factor can re-sell any uncollectible receivables back to seller. Transfer may be considered either a sale or a borrowing (w/ receivables as mere collateral). To be considered a sale, transfer must meet these conditions: -transferor/seller's obligation for uncollectible accts can be reasonably est ("due from", recourse liab). -transferor surrenders control of the future econ benefits of the AR to buyer. -transferor can't be req'd to repurch the AR, but may be req'd to replace them w/ other sim AR from other customers. Loss= fee + maximum obligation. If any of these conditions aren't met, the transfer is treated as a loan, so footnote only.

Gross Profit Method

Quarterly and periodic. Used for interim F/S as part of a periodic inv system. Inv is valued at retail, and the avg gross profit % is used to determine the inv cost for the interim F/S. Gross profit % is known and used to calc COGS. Book ex: D sells soap at 20% GP percentage. Gives 8 mos (interim) of sales, BI, and purch (periodic). On sep 1, flood destroys D's soap inv. Estimate cost of destroyed inv. -if sales 100% and GP 20%, COGS 80%. -sales x 80% = COGS. -COGS is deducted from total goods available for sale to get EI. Calc: *BASE* *B*B inv *A*dd purch =COGAS *S*ubtract COGS (calc) *E*B inv. This is the estimated cost of inv destroyed. Plug.

Research and Development Costs

Research is the planned efforts of a co to discover new info that will help either create a new product/service/process/technique or sig improve the one in current use. Developmt takes the findings generated by research and formulates a plan to create the desired item or improve significantly the existing one. Under GAAP, only acceptable method of accting for R&D costs is a direct charge to expense. 2 exceptions (do not expense): 1. Materials, equip, or facilities (tangible assets) that have alternative future uses (PP&E). Capitalize and depr these over their useful lives, not the life of the R&D project). 2. R&D costs of any nature undertaken on behalf of others under a contractual agreemt (inv). -purchaser (buying R&D) will expense as R&D the amt paid, and the provider (performing R&D for purchaser) will exp the costs incurred as cost of sales. Conclusion for charging most R&D costs to expense under GAAP is the high degree of uncertainty of any future benefits. Disclosure is req'd in the F/S or notes of the amt of R&D charged to expense for the pd. Items not considered R&D: -routine periodic design changes to old products or troubleshooting in the production stage (these are mfg costs, not R&D exp) -mkting research -QC testing -reformulation of a chemical compound Under IFRS, research costs must be expensed, but developmt costs may be capitalized if certain criteria are met, as stated in discussion of intangibles on previous card. Book ex for R&D: J incurred R&D costs. Calc amt of R&D costs that S/B expensed in CY. -Mat used in R&D, deor on equip used in R&D, personnel costs of people involved in R&D projects, consulting fees paid to outsiders for R&D projects, and indirect costs reasonably allocable to R&D projects all qualify as R&d expenses and would be expensed in CY. -equipmt acq'd that will have alternative future uses in future R&D projects will be capitalized as a tangible asset and depr'd over the useful life of the equip (bc it has diff uses in the future). The depr exp S/B charged to R&D.

Inventory Cost Flow Assumptions; First In, First Out (FIFO) Method

Sell old, unsold newest. First costs inventoried are the first ones transferred to COGS. EI incl most recently incurred costs, so EB approximates replacemt cost. *EI and COGS are the same whether a periodic or perpetual inv system is used*. Periodic is faster, so should do it nomatter what since it gives the same result anyway. In pds of rising prices, FIFO results in highest EI, lowest COGS, and highest NI (current costs not matched w/ current revs). Accentuates ratios! Unsold= new expensive, sold are old cheapest. Exp decr so profit incr and RE incr. Both A and EQ incr. Book ex for FIFO: H corp purch'd inv in 3 batches. 1 for 4k units at 4.25 each, 2 for 2k units at 4.5 each, 3 for 3k units at 4.75 each. 4k units sold in total, 3k after 1st purch and 1k after 2nd. Want to determine EI and COGS under FIFO and periodic/perpetual inv systems -1st consider units: BI 0 + purch 9k - sold 4k = 5k units in EI. -for periodic system: multiply units bought by their cost/unit. Sum all to get COGAS (always same). Less EI [(2k x 4.5) + (3k x 4.75)], which uses newest, unsold units. This gives COGS. Can also calc COGS as (4k x 4.25) and back into EI instead. -for perpetual system: show units bought/sold multiplied by their cost/unit chronologically, w/ amts remaining in inv bal column and amts sold in COGS column. Inv bal and change in inv will sum to EI, COGS column will sum to COGS. Periodic faster w/ same result, so do it instead!

Units of Production (Productive Output) Depreciation

Service potential declines w/ use. Units of production method relates depr to est production capability of an asset. Expressed in a rate per unit or hr. Formula: Step 1: Rate per unit/hr = (depreciable base/est units or hours). Step 2: [Rate per unit/hr x no units produced/hrs worked] = depr exp. This converts depr to a VC! No units produced/hrs worked is usage of asset.

Valuation of Accounts Receivable with Discounts

Speed and Quantity. In gen, AR S/B initially valued at OG trans amt (historical cost). However, that amt may be adj for sales/cash discounts. The offer of a cash discount on pmts made w/in a spec'd pd is widely used by many cos. This encourages prompt pmt and assumes customers will take adv of the discount. Sales/cash discounts relate to speed, and can be gross or net. The discount is gen based on a % of the sales price. Ex: 2/10, n/30 offers 2% discount if pmt is made w/in 10 days. If not taken, entire amt is due in 30 days. The calc of cash discounts typically follows 1 of 2 forms, choice of which one to use in gen based on co's experience w/ its customers taking discounts. 1. Gross method: records sale w/o regard to available discount. If pmt is received w/in discount pd, sales discount (contra-rev) acct is dr to reflect sales discount. Use this when you don't think they'll take the discount. 2. Net method: records sales and AR net of the available discount. Adj isn't needed if pmt is received w/in discount pd. If pmt is received after discount pd, sales discount not taken acct (rev) must be cr. Book ex for sales discounts, gross/net methods: G sells 100k of goods to S. Terms 2/10, n/30. Prep JEs for AR G would record w/ gross and net method. JE at date of sale: -for gross method: dr AR, cr SR for 100k. -for net method: dr AR, cr SR for 98k. JE if pmt received w/in discount pd: -for gross method: dr cash 98k, dr sales discounts taken (contra-rev acct) 2k, and cr AR 100k. -for net method: dr cash, cr AR 98k. JE if pmt not received w/in discount pd: -for gross method: dr cash, cr AR 100k. -for net method: dr cash 100k, cr sales discounts not taken (rev acct) 2k, cr AR 98k. Trade discounts are related to quantity, and are quoted in %s. SR and AR are recorded net of trade discounts (can't do gross). Trade discounts are applied sequentially (don't add, apply 1 at a time). Book ex for application of trade discounts: C sells coats w/ 1k list price. Sold to stores for list price less trade discounts of 40% and 10%. Calc their AR if 100 coats sold on credit. List price 100k - 40% discount of 40k (100k x 40%) =list price after 40% discount of 60k - 10% discount of 6k (60k x 10%) =AR bal and rev of 54k. Wrong answer W/B 50k (adding the 40% and 10%).

Disclosure

Substantial/unusual losses from the subseq measuremt of inv S/B disclosed in the F/S. Small losses from a decline in value are incl in the COGS. Basic principle of consistency must be applied in the valuation of inv and the method S/B disclosed in the F/S. In the event a sig change takes place in the measuremt of inv, adequate disclosure of the nature of the change and, if mat (materiality principle), the effect on inc S/B disclosed in the F/S.

More Related to Accounts Receivable

The amt charged to earnings for the BDE of the pd incl: 1. provision made each pd throughout the yr and 2. an adj made at YE to incr/decr the bal in the AFDA, if needed. When a specific receivable is formally determined to be uncollectible, it is written-off by dr AFDA (decr this so incr A) and cr AR (decr A). Ultimately no change in NRV and no affect on I/S or total assets. If a collection is made on a receivable previously written off, accting proc depends on method of accting used. 1. for the direct write-off method: tax purposes only. dr cash, cr uncollectible accts recovered (rev acct). Incr A and EQ. 2. for the allowance method: -Step 1: restore acct previously written off: dr AR (incr A), cr AFDA (incr this so decr A). N/C to total assets. -Step 2: record the cash collection: dr cash (incr A), cr AR (decr A). N/C to total assets. Book ex for calc of BDE: B changed to aging of AR approach. Prev used % of sales. BB allowance + provision for uncollectible accts under % of sales - WO's = prelim bal Req'd ending bal under aging method - prelim bal = plug adjustmt req'd. -JE to record WO's: dr AFDA, cr AR. -JE to record adj at YE for method change: dr AFDA (since neg adj req'd. decr this so NRV incr), cr BDE (decr this so profit and RE incr). A and EQ incr.

Straight Line Depreciation

Total depr under all methods (SL, DDB, etc.) is ultimately same, diff is timing of depr. Goal of a depr method S/B to provide for a reasonable, consistent matching of rev/exp by systematically allocating the cost of the depreciable asset over its est useful life. Actual accumulation of depr in the books is accomplished using contra-acct like A/D or allowance for depr. S/L depr presumes service potential declines w/ time. Determined by this formula: Annual S/L depr = [(cost - SV)/est useful life]. Can multiply by fraction of the yr to get partial yr depr. (Cost - SV) is called the depreciable base. Est useful life is usually stated in pds of time like yrs/mos. Book ex for S/L depr: asset cost 11k, 1k SV, est useful life of 5 yrs. -[(11k - 1k)/5 yrs] = 2k depr/yr. -if asset was acq'd w/in the yr instead of at BOY, partial depr exp is taken in the 1st yr.

Inventory Cost Flow Assumptions; Last In, First Out (LIFO) Method

US only! LCM. Not permitted under IFRS. Under LIFO, last costs inventoried are 1st ones transferred to COGS. EI incl oldest costs. EB of inv will typically not approx replacemt cost. LIFO does not gen relate to actual flow of goods in a co bc most cos sell/use their oldest goods 1st to prevent holding old/obsolete items. If LIFO is used for tax purposes, must be used in GAAP F/S (LIFO conformity rule). The use of LIFO gen better matches exp against revs bc it matches current costs w/ current revs. Eliminates holding gains and reduces NI during times of inflation. If sales exceed production/purchases for a given pd, LIFO will result in a distortion of NI b/c old inv costs (LIFO layers) will be matched w/ current rev. Like if you stockpile lower-priced inv. LIFO is susceptible to inc manipulation by intentionally reducing purchases to use old layers at lower costs. In pds of rising prices, LIFO gen results in lowest EI, highest COGS, and lowest NI. *LIFO = lowest*. Exp incr (new exp) so profit decr. Lower TI and RE. Assets incl older cheap. A and EQ decr. Unlike FIFO, LIFO periodic *does not* = perpetual. LIFO methods reqs records be maintained as to base yr inv amt and additional layers that may be added yearly. -after OG LIFO amt is created (base yr), it may decr, or more layers may be created in each yr according to amt of EI. An additional LIFO layer is created in any yr where EI is > BI. -an additional LIFO layer is priced at the earliest costs of yr in which it was created, bc LIFO method matches most current costs incurred w/ current revs, leaving the 1st cost incurred to be incl in any inv incr. Purchases (at varying costs) go into layers of EI. Removed w/ COGS. Last layer in is 1st out. Book ex for LIFO method: same facts as FIFO ex. -1st think of units. BI 0 + purch 9k - sold 4k = EI 5K. -for periodic inv system: multiply units bought by their cost/unit to get COGAS (always same). Calc EI as oldest units (remaining in inv) x their cost/unit. Solve for COGS. Could also calc COGS as newest units (those sold) x their cost/unit and back into EI. -for perpetual inv system: multiply goods purch'd/sold by their cost/unit in chronological order, w/ those sold 1st being the newest ones. Can sum all purchases - amts sold to get inv bal, and just amts sold to get COGS. COGAS - COGS = EI. EI/COGS diff under periodic and perpetual inv systems.

Lower of Cost and Net Realizable Value (IFRS and GAAP) and Lower of Cost or Market (GAAP only)

Under GAAP, LCNRV method is used for all inv not costed using LIFO or retail inv method (basically FIFO and weighted avg). This method is req'd to value all inv under IFRS. LCNRV principle may be applied to a single item/category/total inv, provided that the method most clearly reflects periodic inc. NRV is an item's selling price - costs to complete and dispose of the inv. This is the same as the "mkt ceiling" in the LCM method. Under GAAP, LCM method is used when inv is costed using LIFO or retail inv method. LCM principle may be applied to single item/category/total inv, provided the method most clearly reflects periodic inc. Under GAAP, mkt in LCM gen means current replacemt cost (by purch or reproduction), provided the current replacemt cost doesn't exceed NRV (mkt ceiling) or fall below [NRV - normal profit margin] (mkt floor). Definitions for LCM method: -mkt value= middle value. Under GAAP, this is the median of an inv item's replacemt cost, mkt ceiling, and mkt floor. -replacemt cost: cost to purch the item of inv as of the valuation date. -mkt ceiling: NRV. Item's SP - costs to complete/dispose. -mkt floor: [NRV - profit]. Mkt ceiling less normal PM. Of the latter 3, choose the middle for the market value!

Valuation of Intangibles

Under GAAP, finite life intangibles are reported at cost less amort and impairmt. Indefinite life intangibles are reported at cost less impairmt. Under IFRS, intangibles can be reported under either cost model or revaluation model. -Cost model: intangibles reported at cost adj for amort (finite life intangibles only) and impairmt. -Revaluation model: FV. Intangibles are initially recog'd at cost and the revalued to FV at a subseq revaluation date. Revalued intangibles are reported at FV on the revaluation date adj for subseq amort (finite lived intangibles only) and subseq impairmt. Revaluation model CV = [FV on revaluation date - *subsequent* amort - *subsequent* impairmt]. Revaluations must be performed regularly so that at the end of each reporting pd the CV of the intangible doesn't differ materially from the FV. If an intangible is accted for using revaluation model, all other assets in its class must also be revalued unless there's no active mkt for them. Revaluation losses (FV on revaluation date < CV before revaluation) are reported on I/S, unless they reverse a prev recog'd revaluation gain, in which case they're recog'd in OCI and reduce the revaluation surplus in AOCI to the extent they reverse a prev recog'd revaluation gain. Revaluation gains (FV revaluation date > CV) are reported in OCI and accumulated in EQ as revaluation surplus, unless they reverse a prev recog'd revaluation loss, in which case they're reported on the I/S to the extent they reverse a prev recog'd revaluation loss. If revalued intangibles subseq become impaired, the impairmt is recorded 1st by reducing any revaluation surplus to 0, w/ any further impairmt losses reported on I/S. Book ex for IFRS intangible asset revaluation: on 12/31/Y2, entity that had adopted the IFRS revaluation model in Y1 adjusted its patents to FV. On that date, patents had CV of 8.2M and FV of 9.1M. Had 500k revaluation loss in Y1. -total revaluation gain = [9.1 FV - 8.2 BV] = 900k gain. -500k of gain will be on I/S to reverse prev recog'd revaluation loss. Remaining 400k will be in OCI as revaluation surplus.

Inventory Cost Flow Assumptions; Specific Identification Method

Under this method, cost of each item in inv is uniquely ID'd (VIN #) to that item. Cost follows physical flow of the item in/out of inv to COGS. Usually used for physically large (cars) or high-value (diamonds) items and allows for greater opp for manipulation of inc.

Inventory Cost Flow Assumptions; Weighted Average and Moving Average Methods

Weighted avg method is periodic. Under this method, at the end of pd avg cost of each item in inv W/B the weighted avg of the costs of all items in inv. Weighted avg is determined by dividing total costs of inv available by the total no of units of inv available, remembering that BI is incl in both totals. This is suitable for homogeneous products and a periodic inv system. COGAS/units AFS= weighted avg cost/unit. Book ex for weighted avg method: same info as for FIFO ex. Multiply unit costs by units purch'd. Sum totals and divide by total units to get weighted avg cost/unit. -for COGS, multiply units sold by weighted avg cost/unit. -for EI, multiply units in EI by weighted avg cost/unit. Moving avg method is perpetual. Computes the weighted avg cost after each purch by dividing total cost of inv available after each purch (inv + current purch) by total units available after each purch. More current than weighted avg. Perpetual inv system is necessary to use this method. Book ex for moving avg method: same info as FIFO ex. -for 1st purch, multiply units by avg cost (initial cost here), and do the same for units sold after to get totals for purchases and inv bals. -for 2nd purch, acct for purch of asset by multiplying units by cost. Recalc weighted avg cost as (BI + new purch)/total units. Multiply that by new units to get inv bal. -to remove next sale, would use weighted avg amt. -for next purch, acct at actual cost for purch, at new weighted avg (calc again) for inv bal. -can sum sold values for COGS and inv bal for EI. Cumbersome!

Fixed Assets Constructed by a Company

When a fixed asset is constructed by a co, cost of the fixed asset incl (to capitalize): -DM and DL -repairs/maintenance exp that add value to the FA -OH, incl direct items of OH (any idle plant capacity exp) -construction pd int GR is that int is expensed as incurred. Capitalization of int costs is the exception. Construction pd int S/B capitalized based on weighted avg of accum'd expenditures as part of the cost of producing FA, like: -bldgs/machinery/land improvemts constructed/produced for others or to be used internally. -FA intended for sale/lease and constructed as discrete projects, like real estate projects. -land improvemts. If a structure is placed on the land, charge the int cost to the structure, not the land. Not amt borrowed!

Property

When land has been purch'd for purpose of constructing a bldg, all costs incurred up to excavation for the new bldg are considered land costs. These exps are incl: -purch price -brokers' commissions -title and recording fees -legal fees -draining of swamps -clearing of brush and trees -site developmt (filling in/leveling/grading of mountain tops to make a pad) -existing obligations assumed by buyer, incl mortgages and back taxes -costs of razing (tearing down) an old bldg (demolition) -*less* proceeds from sale of existing bldgs, standing timber, etc. No depr on land. Land improvemts are depreciable, and incl: -fences -water systems -sidewalks -paving -landscaping -lighting All have a useful life! Interest costs during the construction pd S/B added to the cost of land improvemts based on the weighted avg of accum expenditures.

Steps in a Simple Bank Reconciliation

While other methods can be used, most common proc is to reconcile both book/bank bals to a common "true" bal. That bal should appear on B/S under "cash and cash equivalents." Procs: 1. Book bal is adj to reflect any corrections reported by bank (ex: NSF checks, notes collected by bank and cr to the acct, monthly service charges, and other bank charges (like check printing)). 2. After these adjs are made, adj book bal = true bal. 3. The bank bal per the bank stmt is reconciled to the true bal. Book ex of simple bank rec: - B co has 12,650 book bal and bank bal of 10,050, 10 bank service charge, and 90 NSF check. Depsits in transit are 3k and outstanding checks are 500. To get Y3 adj cash bal: Book bal - bank service charge - NSF check =adj cash bal, true bal. Check figure! Bank bal + deposits in transit - oustanding checks (*LOC*) =adj cash bal, true bal. Should match above check figure. Do book side of bank rec w/ incoming (+) 1st, then all exps in chronological order.