ACCTG 302 Midterm Purple Questions

how does capitalized interest ultimately affect net income if the asset was construct for (1) the company's own use or (2) for sale or lease?

1. depreciation expense will be higher in the future, & NI will be lower 2. COGS will be higher in the future & NI will be lower

what are two likely economic differences between purchased & internally developed intangibles?

1. much more uncertainty with respect to benefits for internally developed intangibles 2. difficult to determine what costs developed a specific intangible

what 3 categories of costs are included in valuing inventory for manufacturers?

1. raw materials 2. direct labor 3. MOH

why does accounting differ for software development costs vs. R&D costs in general?

1. software company's are very important to the company 2. product is very different than other R&D products (like drugs), since it has a point of certainty

companies are required to disclose the amount of R&D expense each period (either in I/S or notes). Why?

Accounting for R&D is a heavy hammer, everything is expensed. Disclosing it provides users information that allows them to recalculate numbers under different assumptions.

why are unrealized gains & losses reported in OCI for AFS?

Bank lobbying. They are very volatile depending on interest rates & would have a big impact on NI. They could make banks look risky when they're just unrealized.

how can these economic difference justify the different accounting treatments described above for purchased & internally developed intangibles?

Look at relevance and faithful representation. It is unknown if internally developed intangibles will have future economic benefits.

what should be the primary determinant of which depreciation method is used for a given asset?

Match the expenses to revenues. Whichever most accurately describes the revenue pattern.

what is an accounting justifications for capitalizing rather than expensing PPE costs?

Matching principal. You use the asset over time, expense it when economic benefit is realized & revenue is generated.

what is the accounting rationale that justifies cost allocation?

Matching! Match expenses to the revenue it generates.

what accounting rationale justifies capitalizing interest for self-constructed assets?

Matching; the expense was incurred to create an asset that wasn't yet producing revenue, it's another MOH.

why can the subsequent recovered CV not exceed the CV before the impairment loss was recorded?

PPE & intangibles are recorded at cost. Going above cost would create an unrealized gain.

Why is the recoverability test not used for intangibles with an indefinite life?

Would be impossible to sum future cash flows, would be never ending because no set # of years, so it would not be good at identifying an impairment.

why might a sale price not be available for an equity security?

a company isn't publicly traded

where are equity securities reported on the investors balance sheet?

asset

where are debt securities reported on the investors balance sheet?

assets

why is the depreciable base rather than the historical cost of an asset allocated over the assets useful life?

at the end of the useful life the asset still has some economic benefit (salvage value)

what is the purpose of AFS investments?

companies have a need for cash in the future & start accumulating it sooner. Instead of just holding cash, they invest it & earn a return.

what enhancing qualitative characteristic suffers due to these different accounting treatments?

comparability

what is a potential problem with permitting but not requiring the FV option?

comparability suffers

how are impairment & costs allocation different conceptually?

cost allocation reduces the value of the asset as future economic benefits are realized. impairment occurs if the estimate of future benefits is less than originally thought.

why is the present value of future CF a reasonable estimate of FV for a debt security?

debt securities specify the amount & dates of all payments in a contract so the CF are certain.

how does investee declaration of dividends affect investee net assets?

decreases net assets

why is the PV of future CF not a reasonable estimate for equity securities?

future CF are uncertain, there is no contract specifying them.

what is an intangible that is always considered indefinite-life?

goodwill

how does investee NI affect investee net assets?

increases net assets

what is the rationale for not capitalizing the actual interest incurred if the avoidable interest is lower?

interest would be capitalized that is not related to the specific project

what is the rationale for not capitalizing the avoidable interest if actual interest incurred is lower?

interested would be capitalized that was never incurred

what does it mean for something to be recognized?

it is recorded on your books

why is land used in operations not depreciated?

land has indefinite useful like & can provide benefit for as long as we can see into the future.

where are debt securities reported on the issuers balance sheet?

liabilities

Why is depletion generally a product cost?

natural resources are something you will sell. depletion occurs to get NR so it a product cost & is capitalized.

why are HTM not reported at FV?

not relevant as it doesn't not predict the CFs.

why can we infer that goodwill is likely impaired if the CV of the reporting unit > FV of reporting unit?

of any other assets were impaired & were tested at the same time, they were already written down, suggesting goodwill is the problem.

what is the conceptual distinction between a period cost & a product cost?

product cost is the cost necessary to product inventory; they are expected to produce future economic benefit. period costs do not have future economic benefit.

how is the accounting treatments different for a period cost & a product cost?

product costs are capitalized & period costs are expensed.

what does it mean to capitalize a cost?

record it in an asset account

what does it mean to expense a cost?

record it in an expense account

what is the purpose of TS investments?

speculating. They think the price will go up & will be able to sell at a profit.

where are equity securities reported on the issuers balance sheet?

stockholders equity

what is the rationale for weighting the expenditures?

the hypothetical loans are outstanding for different periods of time

what c garacteristics distinguish natural resources from other PPE?

the resources disappears as it is consumed & it is created by the Earth.

why are assets classified as held for sale not subject to cost allocation?

they are no longer generating revenues

it is not necessary for the interest being incurred to be related to loans specifically obtained to finance the self constructed asset. Why?

they may still be using the money from the loans. Money is fungible.

what is the purpose of HTM investments?

to make profit off of the interest periodic payments

why are AFS reported at FV on the balance sheet?

today's FV is a better indicator of future CF than historical costs

why are TS reported at FV on the balance sheet?

todays FV is a better predictor of what it could be sold for than what it cost. More relevance & faithful representation is not suffering.

what is an example of an asset that may be considered indefinite-life?

trademarks or customer list

Why are unrealized holding gains & losses reported in NI for TS?

unrealized gains & losses are a good predictor if realized gain or loss

how could investing in equity securities give the investor influence over the investees operating & financial policies?

voting rights - if you have this power you vote on the board members. Board is who decided dividends & hires managers

why is an accumulated depletion account typically not used?

you're actually using up the asset, so makes sense to directly reduce the asset.