1. Cash and receivable

Transcription

1 1. Cash and receivable The accounting and reporting related to cash is essentially the same under both IFRS and GAAP. In addition, the definition used for cash equivalents is the same. One difference is that, in general, IFRS classifies bank overdrafts as cash. Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS. However, companies may report cash and receivables as the last items in current assets under IFRS. IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts. IFRS sometimes refers to these allowances as provisions. The entry to record the allowance would be: Bad Debt Expense xxxxx Provision for Doubtful Accounts xxxxx Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. The fair value option is similar under GAAP and IFRS but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered. IFRS and GAAP differ in the criteria used to account for transfers of receivables. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of Basic questions 1. Under IFRS, cash and cash equivalents are reported: (a) the same as GAAP. (b) as separate items. (c) similar to GAAP, except for the reporting of bank overdrafts. (d) always as the first items in the current assets section. 2. Under IFRS, receivables are to be reported on the balance sheet at: (a) amortized cost. (b) amortized cost adjusted for estimated loss provisions. (c) historical cost. (d) replacement cost. 3. Which of the following statements is false? (a) Receivables include equity securities purchased by the company. (b) Receivables include credit card receivables. (c) Receivables include amounts owed by employees as result of company loans to employees. (d) Receivables include amounts resulting from transactions with customers. 4. Under IFRS: (a) the entry to record estimated uncollected accounts is the same as GAAP. (b) loans and receivables should only be tested for impairment as a group. (c) it is always acceptable to use the direct write-off method. (d) all financial instruments are recorded at fair value. 페이지 1

2 5. Which of the following statements is true? (a) The fair value option requires that some types of financial instruments be recorded at fair value. (b) The fair value option requires that all noncurrent financial instruments be recorded at amortized cost. (c) The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value. (d) The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future. Additional multiple choices Use the following information to answer Question 1 and 2. Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, On January 3, 2012, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance. 1. Which of the following entries would Harrison make to record the impairment under IFRS? a. Loan Receivable 9,000 Impairment Loss 9,000 b. Loan Recovery Expense 6,000 Loan Receivable 6,000 c. Impairment Loss 9,000 Loan Receivable 9,000 d. Impairment Loss 6,000 Loan Receivable 6, Assume that on January 5, 2013, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As a result, Harrison now estimates that all but $1,500 will be repaid on the loan. Under IFRS, which of the following entries would be made on January 5, 2013? a. Loan Receivable 4,500 Recovery of Impairment Loss 4,500 b. Loan Receivable 1,500 Recovery of Impairment Loss 1,500 c. Bad Debt Expense 1,500 Impairment Loss 1,500 d. No journal entry is allowed under IFRS 3. The IFRS approach for derecognizing a receivable focuses on which of the following? a. Risks b. Rewards c. Loss of control d. All of these 4. Key similarities between U.S. GAAP and IFRS include all of the following except a. the definition used for cash equivalents. b. accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts. c. working toward implementing fair value measurement for all financial instruments. 페이지 2

3 d. the same criteria is used to derecognize a receivable. 5. Genesis Company has seven loans receivable. The loans vary in size and have been extended to companies with different credit ratings. Given a downturn in the economy, it is expected that at least two of these loans will be impaired. Which of the following statements best describes the accounting for these loans under IFRS? a. IFRS implies that the loans should be reported as an aggregated portfolio. b. IFRS uses an incurred loss model rather than an expected loss model, so no impairment on each of the two loans is recognized until an identifiable event occurs and is measurable. c. Under IFRS, when impairment is permitted, the balance on each of the impaired loans becomes the new basis for the loan. d. IFRS uses an expected loss model, so the entire diverse portfolio should be written down based on the anticipated impairment. 6. IFRS requires an impairment loss for a loan receivable be recognized when a. its carrying amount is less than its recoverable amount. b. its recoverable amount is less than its carrying amount. c. its present value of expected future cash flows is greater than its carrying amount. d. its principal amount is less than its interest amount. Use the following information to answer Questions 7and 8. Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, On January 1, 2012, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone estimates that it will collect only 45% of the loan balance. 7. Which of the following entries would Johnstone make to record the impairment under IFRS? a. Loan Receivable 56,250 Impairment Loss 56,250 b. Loan Recovery Expense 68,750 Loan Receivable 68,750 c. Impairment Loss 56,250 Loan Receivable 56,250 d. Impairment Loss 68,750 Loan Receivable 68, Assume that on January 4, 2013, Johnstone learns that Ralph Young Industries has emerged from bankruptcy. As a result, Johnstone now estimates that all but $11,500 will be paid on the loan. Under IFRS, which of the following entries would be made on January 4, 2013? a. Loan Receivable 57,250 Recovery of impairment Loss 57,250 b. Loan Receivable 11,500 Recovery of impairment Loss 11,500 c. Bad Debt Expense 11,500 Impairment Loss 11,500 d. No journal entry is allowed under IFRS. 페이지 3

4 Answers to Multiple Choice 1. D 2. A 3. D 4. D 5. B 6. B 7. D 8. A 2. Inventory The requirements for accounting for and reporting inventories are more principles based under IFRS. That is, GAAP provides more detailed guidelines in inventory accounting. Who owns the goods goods in transit, consigned goods, special sales agreements as well as the costs to include in inventory are essentially accounted for the same under IFRS and GAAP. A major difference between IFRS and GAAP relates to the LIFO cost flow assumption. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average cost are the only two acceptable cost flow assumptions permitted under IFRS. Both sets of standards permit specific c identification where appropriate. In the lower-of-cost-or-market test for inventory valuation, IFRS defines market as net realizable value. GAAP, on the other hand, defines market as replacement cost subject to the constraints of net realizable value (the ceiling) and net realizable value less a normal markup (the floor). IFRS does not use a ceiling or a floor to determine market. Comprehensive example) Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2012, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Using the LCNRV rule, determine the proper unit value for statement of financial position reporting purposes at December 31, 2012, for each of the inventory items above. Item Net Realizable Value Cost LCNRV D $80* $75 $75 E F G H I Under GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be 페이지 4

5 reported on the income statement.. IFRS requires both biological assets and agricultural produce at the point of harvest to be reported to net realizable value. GAAP does not require companies to account for all biological assets in the same way. Furthermore, these assets generally are not reported at net realizable value. Disclosure requirements also differ between the two sets of standards. Comprehensive example) Keyser s Fleece Inc. holds a drove of sheep. Keyser shears the sheep on a semiannual basis and then sells the harvested wool into the specialty knitting market. Keyser has the following information related to the shearing sheep at January 1, 2012, and during the first six months of Shearing Sheep Carrying value (equal to net realizable value), January 1, 2012 $74,000 Change in fair value due to growth and price changes 4,700 Change in fair value due to harvest (575) Wool harvested during the first 6 months (at NRV) 9,000 a. Prepare the journal entry(ies) for Keyser s biological asset (shearing sheep) for the first six months of Biological Assets Shearing Sheep... 4,125* Unrealized Holding Gain or Loss Income... 4,125 *$4,700 $575 = $4,125. b. Prepare the journal entries for (a) the wool harvested in the first six months of 2012, and (b) the wool harvested is sold for $10,500 in July (a) Wool Inventory... 9,000 Unrealized Holding Gain or Loss Income... 9,000 (b) Cash... 10,500 Cost of Goods Sold... 9,000 Basic questions Wool Inventory... 9,000 Sales... 10, All of the following are key similarities between GAAP and IFRS with respect to accounting for inventories except: (a) costs to include in inventories are similar. (b) LIFO cost flow assumption where appropriate is used by both sets of standards. (c) fair value valuation of inventories is prohibited by both sets of standards. (d) guidelines on ownership of goods are similar. 2. All of the following are key differences between GAAP and IFRS with respect to accounting for inventories except the: (a) definition of the lower-of-cost-or-market test for inventory valuation differs between GAAP and IFRS. (b) average cost method is prohibited under IFRS. (c) inventory basis determination for write-downs differs between GAAP and IFRS. (d) guidelines are more principles based under IFRS than they are under GAAP. 페이지 5

6 3. Starfish Company (a company using GAAP and the LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish s financials? (a) During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (b) During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (c) During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (d) During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. 4. Assume that Darcy Industries had the following inventory values. Inventory cost (on December 31, 2012) $1,500 Inventory market (on December 31, 2012) $1,350 Inventory net realizable value (on December 31, 2012) $1,320 Under IFRS, what is the inventory carrying value on December 31, 2012? (a) $1,500. (b) $1,570. (c) $1,560. (d) $1, Under IFRS, agricultural activity results in which of the following types of assets? I. Agricultural produce II. Biological assets (a) I only. (b) II only. (c) I and II. (d) Neither I nor II. Additional multiple choices 1. All of the following are key similarities between U.S. GAAP and IFRS with respect to accounting for inventories except a. guidelines on ownership of goods are similar. b. costs to include in inventories are similar. c. LIFO cost flow assumption where appropriate is used by both sets of standards. d. fair value valuation of inventories is prohibited by both sets of standards. 2. All of the following are key differences between U.S. GAAP and IFRS with respect to accounting for inventories except the a. definition of the lower-of-cost-or-market test for inventory valuation differs between U.S. GAAP and IFRS. b. inventory basis determination for writedowns differs between U.S. GAAP and IFRS. c. guidelines are more principles based under IFRS than they are under U.S. GAAP. d. average costing method is prohibited under IFRS. 3. Which of the following statements is true regarding IFRS and inventories? a. In order to determine market valuation of inventories, IFRS uses a ceiling and a floor. b. IFRS permits the option of valuing inventories at fair value. c. With respect to inventories, IFRS defines market as net realizable value. d. IFRS allows inventory to be written up above its original cost. 4. State Company manufactured a forklift machine at a cost of $60,000. The product is sold for $66,000 at a 5% discount. The delivery costs are estimated to be $6,000. Under IFRS, how much 페이지 6

7 should be the carrying amount of this inventory? a. $60,000 b. $66,000 c. $54,000 d. $56, The following information relates to Moore Company's inventory: Cost of inventory = $860 Selling price of inventory = $1,000 Normal profit margin = 10% of selling price Current replacement cost = $740 Cost of completion and disposal = $100 Under IFRS, which of the following would be the correct measurement value for the inventory? a. $860 b. $740 c. $1,000 d. $ Assume that Darcy Industries had the following inventory values: Inventory cost (on December 31, 2011) = $1,500 Inventory market (on December 31, 2011) = $1,350 Inventory net realizable value (on December 31, 2011) = $1,320 Inventory market (on June 30, 2012) = $1,560 Inventory net realizable value (on June 30, 2012) = $1,570 Under IFRS, what is the inventory carrying value on December 31, 2011? a. $1,500 b. $1,350 c. $1,320 d. $1, Assume that Darcy Industries had the following inventory values: Inventory cost (on December 31, 2011) = $1,500 Inventory market (on December 31, 2011) = $1,350 Inventory net realizable value (on December 31, 2011) = $1,320 Inventory market (on June 30, 2012) = $1,560 Inventory net realizable value (on June 30, 2012) = $1,570 Under IFRS, what is the inventory carrying value on June 30, 2012? a. $1,500 b. $1,560 c. $1,570 d. $1,320 Answers to Multiple Choice 1. c 2.d 3.c 4.d 5.d 6.c 7.a P-1. In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. 페이지 7

8 3. Property, Plant, and Equipment The definition of property, plant, and equipment is essentially the same under GAAP and IFRS. Under both GAAP and IFRS, changes in depreciation method and changes in useful life are treated in the current and future periods. Prior periods are not affected. GAAP recently conformed to IFRS in this area. The accounting for plant asset disposals is the same under GAAP and IFRS. The accounting for the initial costs to acquire natural resources is similar under GAAP and IFRS. Under both GAAP and IFRS, interest costs incurred during construction must be capitalized. Recently, IFRS converged to GAAP. The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in IFRS. GAAP also views depreciation as allocation of cost over an asset s life. GAAP permits the same depreciation methods (straight-line, diminishing-balance, units-of-production) as IFRS. IFRS requires component depreciation. Under GAAP, component depreciation is permitted but is rarely used. Comprehensive example) Ortiz purchased a piece of equipment that cost $202,000 on January 1, The equipment has the following components. Compute the depreciation expense for this equipment at December 31, Component Depreciation Expense A ($70,000 $7,000)/10 = $ 6,300 B ($50,000 $5,000)/ 5 = 9,000 C ($82,000 $4,000)/12 = 6,500 $21,800 Under IFRS, companies can use either the historical cost model or the revaluation model. GAAP does not permit revaluations of property, plant, and equipment or mineral resources. Comprehensive example) Lenovo Group purchases equipment for $500,000 on January 2, The equipment has a useful life of five years, is depreciated using the straight-line method of depreciation, and its residual value is zero. Lenovo s equipment has a carrying amount of $400,000 ($500,000 - $100,000) at the end of the year. Lenovo receives an independent appraisal for the fair value of equipment at December 31, 2012, which is $460,000. The entry to record this revaluation at December 31, 2012, is as follows. 페이지 8

9 December 31, 2012 Accumulated Depreciation Equipment 100,000 Equipment 40,000 Revaluation surplus Equipment 60,000 *The increase in the fair value of $60,000 is reported on the statement of comprehensive income as other comprehensive income. * A revaluation increase generally goes to equity. A revaluation decrease is reported as an expense (as an impairment loss), unless it offsets previously recorded revaluation increases. If the revaluation increase offsets a revaluation decrease that went to expense, then the increase is reported in income. Under no circumstances can the Accumulated Other Comprehensive Income account related to revaluations have a negative balance. In testing for impairments of long-lived assets, GAAP uses a two-step model to test for impairments. As long as future undiscounted cash flows exceed the carrying amount of the asset, no impairment is recorded. The IFRS impairment test is stricter. However, unlike GAAP, reversals of impairment losses are permitted a. To determine whether an asset is impaired, on an annual basis, companies review the asset for indicators of impairments that is, a decline in the asset s cash-generating ability through use or sale. b. If impairment indicators are present, then an impairment test must be conducted. c. Impairment test d. Reversal of impairment loss Example) Tan Company purchases equipment on January 1, 2012, for $300,000, with a useful life of three years, and no residual value. Its depreciation and related carrying amount over the three years is as follows. Year Depreciation Expense Carrying Amount 2012 $100,000 ($300,000/3) $200, $100,000 ($300,000/3) $100, $100,000 ($300,000/3) 0 At December 31, 2012, Tan determines it has an impairment loss of $20,000 and therefore makes the following entry. Loss on Impairment 20,000 Accumulated Depreciation Equipment 20,000 Tan s depreciation expense and related carrying amount after the impairment is as follows 페이지 9

10 Year Depreciation Expense Carrying Amount 2013 $90,000 ($180,000/2) $90, $90,000 ($180,000/2) 0 At the end of 2013, Tan determines that the recoverable amount of the equipment is $96,000, which is greater than its carrying amount of $90,000. Accumulated Depreciation Equipment 6,000 Recovery of Impairment Loss 6,000 * Any recovery above $10,000 is not permitted.(the difference between $100,000 and $90,000) Basic questions 1. Mandall Company constructed a warehouse for $280,000 on January 2, Mandall estimates that the warehouse has a useful life of 20 years and no residual value. Construction records indicate that $40,000 of the cost of the warehouse relates to its heating, ventilation, and air conditioning (HVAC) system, which has an estimated useful life of only 10 years. What is the first year of depreciation expense using straight-line component depreciation under IFRS? (a) $28,000. (b) $14,000. (c) $16,000. (d) $4, Francisco Corporation is constructing a new building at a total initial cost of $10,000,000. The building is expected to have a useful life of 50 years with no residual value. The building s finished surfaces (e.g., roof cover and floor cover) are 5% of this cost and have a useful life of 20 years. Building services systems (e.g., electric, heating, and plumbing) are 20% of the cost and have a useful life of 25 years. The depreciation in the first year using component depreciation, assuming straight-line depreciation with no residual value, is: (a) $200,000. (b) $215,000. (c) $255,000. (d) None of the above. 3. Which of the following statements is correct? (a) Both IFRS and GAAP permit revaluation of property, plant, and equipment. (b) IFRS permits revaluation of property, plant, and equipment but not GAAP. (c) Both IFRS and GAAP do not permit revaluation of property, plant, and equipment. (d) GAAP permits revaluation of property, plant, and equipment but not IFRS. 4. Hilo Company has land that cost $350,000 but now a fair value of $500,000. Hilo Company decides to use the revaluation method specified in IFRS to account for the land. Which of the following statements is correct? (a) Hilo Company must continue to report the land at $350,000. (b) Hilo Company would report a net income increase of $150,000 due to an increase in the value of the land. (c) Hilo Company would debit Revaluation Surplus for $150,000. (d) Hilo Company would credit Revaluation Surplus by $150, Under IFRS, value-in-use is defined as: (a) net realizable value. (b) fair value. (c) future cash flows discounted to present value. (d) total future undiscounted cash flows. Additional multiple choices 1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the first- 페이지 10

11 stage recoverability test under U.S. GAAP comparing the undiscounted cash flow to the carrying amount. As a result, the IFRS test is a. not as strict as U.S. GAAP. b. more strict than U.S. GAAP. c. essentially the same strictness as U.S. GAAP. d. None of the above. 2. Acceptable depreciation methods under IFRS include a. Straight-line. b. Accelerated. c. Units-of-production. d. All of the above. 3. The accounting exchanges of nonmonetary assets has recently converged between IFRS and U.S. GAAP, per SFAS No. 153, now requires a. that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. b. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance. c. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance, and has never been impaired. d. All of the above. 4. In measuring an impairment loss, IFRS uses a. undiscounted cash flows. b. discounted cash flows. c. a fair value test. d. a replacement value test. 5. IFRS permits companies to carry assets at historical cost or use a revaluation model for fixed assets. According to IAS 16, if revaluation is used: 1. it must be applied to all assets in a class of assets. 2. assets must be revalued on an annual basis. 3. assets must be depreciated on the straight-line basis. 4. salvage values must be zero. a. 1 is correct b. 2 is correct c. 1 and 2 are correct d. All are correct Questions 6 through 9 are based on the following information: Simpson Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500, The journal entry to record depreciation for year one will include a a. debit to Accumulated Depreciation for $400,000. b. debit to Depreciation Expense for $100,000. c. credit to Accumulated Depreciation for $100,000. d. debit to Depreciation Expense for $400,000. 페이지 11

12 7. The journal entry to adjust the plant assets to fair value and record revaluation surplus in year one will include a a. debit to Accumulated Depreciation for $100,000. b. credit to Depreciation Expense for $300,000. c. credit to Plant Assets for $300,000. d. credit to Revaluation Surplus for $300, The financial statements for year one will include the following information a. Accumulated depreciation $400,000. b. Depreciation expense $100,000. c. Plant assets $1,500,000. d. Revaluation surplus $100, The entry to record depreciation for this same asset in year two will include a a. debit to Accumulated Depreciation for $400,000. b. debit to Depreciation Expense for $500,000. c. credit to Accumulated Depreciation for $300,000. d. debit to Depreciation Expense for $400,000. Answers to multiple choice: 1. b 2. d 3.a 4.c 5.c 6.d 7.d 8.c 9. B P-1. Presented below is information related to equipment owned by Pujols Company at December 31, Cost (residual value $0) $9,000,000 Accumulated depreciation to date 1,000,000 Value-in-use 5,500,000 Fair value less cost of disposal 4,400,000 Assume that Pujols will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation. Instructions (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, (b) Prepare the journal entry to record depreciation expense for (c) The recoverable amount of the equipment at December 31, 2015, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase. 4. Intangibles Like GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial instruments. In addition, under IFRS an intangible asset is identifiable. To be identifiable, an intangible asset must either be separable from the company (can be sold or transferred) or it arises from a contractual or legal right from which economic benefits will flow to the company. Fair value is used as the measurement basis for intangible assets under IFRS, if it is more clearly evident. As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, however, costs in the development phase are capitalized once technological feasibility (referred to as economic viability) is achieved. 페이지 12

13 IFRS permits revaluation on limited-life intangible assets. Revaluations are not permitted for goodwill and other indefinite-life intangible assets. IFRS permits some capitalization of internally generated intangible assets (e.g., brand value) if it is probable there will be a future benefit and the amount can be reliably measured. GAAP requires expensing of all costs associated with internally generated intangibles. IFRS requires an impairment test at each reporting date for long-lived assets and intangibles and records impairment if the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and its value-in-use. Value-in-use is the future cash flows to be derived from the particular assets, discounted to present value. Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset s fair value. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limited-life intangibles. Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal. Development Costs Impairment of goodwill a. companies must test goodwill at least annually. b. the impairment test is conducted based on the cash-generating unit to which the goodwill is assigned. *Cash generating unit :the smallest identifiable group of assets that generate cash flows independently of the cash flows from other assets. Comprehensive example) Kohlbuy Corporation has three divisions. It purchased one division, Pritt Products, four years ago for $2 million. Unfortunately, Pritt experienced operating losses over the last three quarters. Kohlbuy management is now reviewing the division (the cash-generating unit), for purposes of its annual impairment testing. Illustration below lists the Pritt Division s net assets, including the associated goodwill of $900,000 from the purchase. Assume that the recoverable amount for the Pritt Division is $1,900,000. Recoverable amount of Pritt Division $ 1,900,000 Carrying value of Pritt Division (2,400,000) Loss on impairment $ 500,000 페이지 13

14 Kohlbuy makes the following entry to record the impairment. Loss on Impairment 500,000 Goodwill 500,000 a. Subsequent reversal of loss not allowed for goodwill.may b. Reverse an impairment loss on the Pritt Division assets other than goodwill. IFRS and GAAP are very similar for intangibles acquired in a business combination. That is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired inprocess research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably. Basic questions 1. All of the following are key similarities between GAAP and IFRS with respect to accounting for intangible assets except: (a) for accounting purposes, costs associated with research and development activities are segregated into the two components. (b) the accounting for intangibles acquired in a business combination. (c) recovery of impairments on intangibles other than goodwill. (d) the accounting for impairments of assets held for disposal. 2. Research and development costs are: (a) expensed under GAAP. (b) expensed under IFRS. (c) expensed under both GAAP and IFRS. (d) None of the above. 3. Which of the following statements is correct? (a) Both IFRS and GAAP permit revaluation of property, plant, and equipment and intangible assets (except for goodwill). (b) GAAP permits capitalization of development cost (c) IFRS requires capitalization of research and development costs once economic viability is met. (d) IFRS requires capitalization of development costs once economic viability is met. 4. A loss on impairment of an intangible asset under IFRS is the asset s: (a) carrying amount less the expected future net cash flows. (b) carrying amount less its recoverable amount. (c) recoverable amount less the expected future net cash fl ows. (d) book value less its fair value. 5. Recovery of impairment is recognized for all the following except: (a) patent held for sale. (c) trademark. (b) patent held for use. (d) goodwill. Additional multiple choices 1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into a. two components, the research phase and the production phase. b. two components, the research phase and the development phase. c. three components, the planning phase, the research phase and the production phase. d. three components, the analysis phase, the development phase and the production phase. 페이지 14

15 2. In accounting for internally generated intangible assets, U.S. GAAP requires that a. all costs, no matter how immaterial, be capitalized. b. only material costs be capitalized. c. planned costs be capitalized, while costs in excess of plan be expensed. d. all costs be expensed. 3. IFRS allows reversal of impairment losses when a. the reversal is greater than the amount of the original impairment. b. the reversal falls in a subsequent fiscal year of the company's operations. c. there has been a change in economic conditions or in the expected use of the asset. d. reversal of impairment losses is never allowed. 4. Under U.S. GAAP, impairment losses a. can be reversed but only if the reversal is greater than the amount of the original impairment. b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company's operations. c. cannot be reversed for assets to be held and used. d. none of the above. 5. Under IFRS, costs in the development phase are a. never capitalized, but expensed as they are under U.S. GAAP. b. capitalized if they exceed development phase costs incurred for previously successful ventures. c. capitalized once technological feasibility is achieved. d. capitalized on an interim basis, but then expensed prior to the end of the company's fiscal year. Answers to Multiple Choice: 1. b 2.d 3.c 4.c 5.c P-1. Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2012, the company expends $325,000 on a research project, but by the end of 2012, it is impossible to determine whether any benefit will be derived from it. (a) What account should be charged for the $325,000, and how should it be shown in the financial statements? (b) The project is completed in 2013, and a successful patent is obtained. The R&D costs to complete the project are $130,000 ($36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number in 2013 total $24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in (c) In 2014, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, What is the proper way to account for this cost? Also, record patent amortization (full year) in (d) Additional engineering and consulting costs incurred in 2014 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost. 페이지 15

16 5. Current liabilities Similar to U.S. practice, IFRS requires that companies present current and non-current liabilities on the face of the statement of financial position (balance sheet), with current liabilities generally presented in order of liquidity. However, many companies using IFRS present non-current liabilities before current liabilities on the statement of financial position. IFRS requires that companies classify liabilities as current or non-current on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions). Under IFRS, the measurement of a provision related to a contingency is based on the best estimate of the expenditure required to settle the obligation. If a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the mid-point of the range is used to measure the liability. In GAAP, the minimum amount in a range is used. **Provisions may be recognized in the financial statements: 1. Lawsuits 4. Environmental 2. Warranties 5. Onerous contracts 3. Premiums 6. Restructuring Both IFRS and GAAP prohibit the recognition of liabilities for future losses. However, IFRS permits recognition of a restructuring liability, once a company has committed to a restructuring plan. GAAP has additional criteria (i.e., related to communicating the plan to employees) before a restructuring liability can be established. IFRS and GAAP are similar in the treatment of asset retirement obligations (AROs). However, the recognition criteria for an ARO are more stringent under GAAP: The ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated. Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent if the refinancing is completed by the financial statement date. GAAP uses the date the financial statements are issued. IFRS uses the term provisions to refer to estimated liabilities. Under IFRS, contingencies are not recorded but are often disclosed. The accounting for provisions under IFRS and estimated liabilities under GAAP are very similar. GAAP uses the term contingency in a different way than IFRS. Contingent liabilities are not recognized in the financial statements under IFRS, whereas under GAAP a contingent liability is sometimes recognized. General guidelines for the accounting and reporting of contingent liabilities. General rules related to contingent assets 페이지 16

17 Basic questions 1. The presentation of current and non-current liabilities in the statement of financial position (balance sheet): (a) is shown only on GAAP financial statements. (b) is shown on both a GAAP and an IFRS statement of financial position. (c) is always shown with current liabilities reported first in an IFRS statement of financial position. (d) includes contingent liabilities under IFRS. 2. In accounting for short-term debt expected to be refi nanced to long-term debt: (a) GAAP uses the authorization date to determine classification of short-term debt to be refinanced. (b) IFRS uses the authorization date to determine classification of short-term debt to be refinanced. (c) IFRS uses the financial statement date to determine classification of short-term debt to be refinanced. (d) GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced. 3. Under IFRS, a provision is the same as: (a) a contingent liability. (c) a contingent gain. (b) an estimated liability. (d) None of the above. 4. A typical provision is: (a) bonds payable. (b) cash. (c) a warranty liability. (d) accounts payable. 5. In determining the amount of a provision, a company using IFRS should generally measure: (a) using the midpoint of the range between the lowest possible loss and the highest possible loss. (b) using the minimum amount of the loss in the range. (c) using the best estimate of the amount of the loss expected to occur. (d) using the maximum amount of the loss in the range. 6. Long-term liabilities Under GAAP, companies are permitted to use the straight-line method of amortization for bond discount or premium, provided that the amount recorded is not materially different than that resulting from effective-interest amortization. However, the effective-interest method is preferred and is generally used. Under IFRS, companies must use the effective-interest method. Under IFRS, companies do not use premium or discount accounts but instead show the bond at its net amount. For example, if a $100,000 bond was issued at 97, under IFRS a company would record: Cash 97,000 Bonds Payable 97,000 Under GAAP, bond issue costs are recorded as an asset. Under IFRS, bond issue costs are netted 페이지 17

18 against the carrying amount of the bonds. GAAP uses the term troubled-debt restructurings and has developed specific guidelines related to that category of loans. IFRS generally assumes that all restructurings will be accounted for as extinguishments of debt. Basic questions 1. Under IFRS, bond issuance costs, including the printing costs and legal fees associated with the issuance, should be: (a) expensed in the period when the debt is issued. (b) recorded as a reduction in the carrying value of bonds payable. (c) accumulated in a deferred charge account and amortized over the life of the bonds. (d) reported as an expense in the period the bonds mature or are retired. 2. Which of the following is stated correctly? (a) Current liabilities follow non-current liabilities on the statement of financial position under GAAP but non-current liabilities follow current liabilities under IFRS. (b) IFRS does not treat debt modifications as extinguishments of debt. (c) Bond issuance costs are recorded as a reduction of the carrying value of the debt under GAAP but are recorded as an asset and amortized to expense over the term of the debt under IFRS. (d) Under GAAP, bonds payable is recorded at the face amount and any premium or discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying value so no separate premium or discount accounts are used. 3. All of the following are differences between IFRS and GAAP in accounting for liabilities except: (a) When a bond is issued at a discount, GAAP records the discount in a separate contra-liability account. IFRS records the bond net of the discount. (b) Under IFRS, bond issuance costs reduces the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond. (c) GAAP, but not IFRS, uses the term troubled debt restructurings. (d) GAAP, but not IFRS, uses the term provisions for contingent liabilities which are accrued. 4. On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10% Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of: (a) $4,725,500. (b) $4,714,500. (c) $258,050. (d) $4,745, On January 1, Martinez Inc. issue On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of: (a) $3,185,130. (b) $3,184,500. (c) $3,173,550. (d) $3,165,000. Additional multiple choices 1. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet with current liabilities a. generally presented in order of magnitude. b. presented in alphabetic order. c. presented in order of liquidity. d. presented in the order in which they were incurred. 페이지 18

19 2. Under IFRS, the measurement of a provision related to a contingency is based on a. the best estimate of the expenditure required to settle the obligation. b. the minimum amount from among a number of alternative estimates. c. an average from among a number of alternative estimates. d. whatever management feels that shareholders would be willing to accept because of the impact on current earnings. 3. Both U.S. GAAP and IFRS prohibit a. the recognition of a restructuring liability, once a company has committed to a restructuring plan. b. the recognition of liabilities for future losses. c. communicating information on a restructuring plan to employees, before a liability can be established. d. all of the above. 4. IFRS and U.S. GAAP are a. similar in the treatment of asset retirement obligations (AROs). b. significantly different when it comes to the treatment of asset retirement obligations (AROs). c. continuing to evolve in the area of asset retirement obligations (AROs). d. in conflict with respect to the accounting for and presentation of asset retirement obligations (AROs). 5. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at a. present value discounted at the firm's cost of capital. b. current market values of the obligations, based on changes in the discount rate with unrealized gains and losses reflected in a separate account in stockholders' equity. c. fair value with gains and losses on changes in fair value recorded in income in certain situations. d. historic costs without reflecting changes in valuation as obligations will be retired at their maturity date. 6. IFRS rules for establishing restructuring liabilities could be used as an earnings management tool because IFRS rules are a. more-stringent that U.S. GAAP. b. less-stringent that U.S. GAAP. c. virtually the same as U.S. GAAP. d. totally different than U.S. GAAP. 7. A concern with IFRS is that its less-stringent rules for establishing restructuring liabilities could be used as a. a more appropriate method than that employed under U.S. GAAP. b. an appropriate method, but complex and difficult to explain to shareholders. c. a method readily employed to make the understanding of financial information more comprehensible to shareholders. d. an earinings management tool. 페이지 19

20 Answers to multiple choice: 1.c 2.a 3.b 4.a 5.c 6.b 7.d 7. Pension IFRS and GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar. IFRS and GAAP recognize a pension asset or liability as the funded status of the plan (i.e., defi ned benefi t obligation minus the fair value of plan assets). (Note that defi ned benefi t obligation is referred to as the projected benefi t obligation in GAAP.) IFRS and GAAP compute unrecognized past service cost (PSC) (referred to as prior service cost in GAAP) in the same manner. However, IFRS recognizes past service cost as a component of pension expense in income immediately. GAAP amortizes PSC over the remaining service lives of employees. Under IFRS, companies recognize both liability and asset gains and losses (referred to as remeasurements) in other comprehensive income. These gains and losses are not recycled into income in subsequent periods. GAAP recognizes liability and asset gains and losses in Accumulated other comprehensive income and amortizes these amounts to income over remaining service lives, using the corridor approach. The accounting for pensions and other postretirement benefi t plans is the same under IFRS. GAAP has separate standards for these types of benefi ts, and signifi cant differences exist in the accounting. IFRS pension expense Basic questions 1. At the end of the current period, Oxford Ltd. has a defined benefit obligation of $195,000 and pension plan assets with a fair value of $110,000. The amount of the vested benefits for the plan is $105,000. What amount related to its pension plan will be reported on the company s statement of financial position? (a) $5,000. (b) $90,000. (c) $85,000. (d) $20,000. 페이지 20

21 2. At the end of the current year, Kennedy Co. has a defined benefit obligation of $335,000 and pension plan assets with a fair value of $245,000. The amount of the vested benefits for the plan is $225,000. Kennedy has unrecognized past service costs of $24,000 and an unrecognized actuarial gain of $8,300. What account and amount(s) related to its pension plan will be reported on the company s statement of financial position? (a) Pension Liability and $74,300. (b) Pension Liability and $90,000. (c) Pension Asset and $233,300. (d) Pension Asset and $110, For 2012, Carson Majors Inc. had pension expense of $77 million and contributed $55 million to the pension fund. Which of the following is the journal entry that Carson Majors would make to record pension income and funding? (a) Pension Expense... 77,000,000 Pension Asset/Liability... 22,000,000 Cash... 55,000,000 (b) Pension Expense... 77,000,000 Pension Asset/Liability... 22,000,000 Cash... 99,000,000 (c) Pension Expense... 55,000,000 Pension Asset/Liability... 22,000,000 Cash... 77,000,000 (d) Pension Expense... 22,000,000 Pension Asset/Liability... 55,000,000 Cash... 77,000, At January 1, 2012, Wembley Company had plan assets of $250,000 and a defined benefit obligation of the same amount. During 2012, service cost was $27,500, the discount rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500. Based on this information, what would be the defined benefit obligation for Wembley Company at December 31, 2012? (a) $277,500. (b) $285,000. (c) $27,500. (d) $302, Towson Company has experienced tough competition for its talented workforce, leading it to enhance the pension benefits provided to employees. As a result, Towson amended its pension plan on January 1, 2014, and granted past service costs of $250,000. Current service cost for 2014 is $52,000. Interest expense is $18,000, and interest revenue is $5,000. Actual return on assets in 2014 is $3,000. What is Towson s pension expense for 2014? (a) $65,000. (b) $302,000. (c) $317,000. (d) $315, Leases Both GAAP and IFRS share the same objective of recording leases by lessees and lessors according to their economic substance that is, according to the defi nitions of assets and liabilities. GAAP for leases uses bright-line criteria to determine if a lease arrangement transfers the risks and rewards of ownership; IFRS is more general in its provisions. Much of the terminology for lease accounting in IFRS and GAAP is the same. One difference is that fi nance leases are referred to as capital leases in GAAP. Under IFRS, lessees and lessors use the same general lease capitalization criteria to determine if the risks and rewards of ownership have been transferred in the lease. GAAP has additional lessor criteria that payments are collectible and there are no additional costs associated with a lease. IFRS requires that lessees use the implicit rate to record a lease, unless it is impractical to determine the lessor s implicit rate. GAAP requires use of the incremental rate, unless the implicit rate is known 페이지 21