Expenses?
Reduction of assets or increases in liabilities
Realization
Entity obtains cash or the right to receive cash
Recognition
Recording of transactions or events
Accrual and Examples?
- Earned(Revenue) or Incurred (Expense), but no cash receipt/outlay yet
- Revenue Ex: Sell an item on credit
- Expense Ex: Monthly rent exp for December not paid until January
Deferral and Examples?
- Cash receipt/outlay, but not earned(revenue) or Incurred(Exp)
- Rev Ex: Customer pre-pays for a repair done to their car
- Exp Ex: Company pre-pays insurance prem and is amort
Franchiser - Revenue Recognition
Initial Fee - Rev when substantially performed
Continuing Fees - Rev when earned
How to account for purchased intangible assets
Record at costs
How to account for internally developed assets? and Exceptions?
- Expense
- Exceptions - Legal fees (successful), registration or consulting fees, design costs, direct cost to secure the asset = capitalize
J/E - for the collection and recognizing of earned royalties
DR: Cash
CR: Unearned Royalty
DR: Unearned Royalty
CR: Earned Royalty
How is a patent amortized?
Over the shorter of its estimated life or remaining life via SL amort
Goodwill is not amortized
IFRS - Intangible assets - how are they reported?
Either Cost or revaluation method-
Cost - reported at cost adj for amort & impairment
Revaluation - Cost then revaluated to FV at revaluation date
- Losses = IS (FV < CV before revaluation) - Gains = OCI (FV > CV before revaluation) - Impairment = First reduce revaluation surplus in equity to 0 with further impairment loss reported on IS
Franchisee - Expense
Initial Fee- Intangible asset and amortize
Continuing Fee - Expense as incurred
How to account for goodwill (expense)?
- Acq Method - goodwill is the excess of an acquired entity’s FV over the FV of the entity’s net assets, including indentifiable intangible assets
- Maintain goodwill - expense
How to account for R&D? and what are the exceptions?
- Expense
2. Exceptions - materials, equipment, facilities that have alternate future uses => capitalize
Computer Software Development Cost for External Use?
Expense cost as R& D (planning, design, coding, testing) until technologically feasibility (then capitalize)
-Amortize is the greater of: Percentage of Rev and SL
Computer Software Development Cost for internal use?
- Expense-preliminary costs
- Capitalize- technologically feasible
- SL Basis of Amortization
Where is impairment loss reported?
Income from Continuing Operations
Steps to Impairment test?
Step 1: Determining the impairment = Undiscounted future net CF - Net Carrying Value (Positive result = no impairment, Negative = Impairment loss => move to next step)
Step 2: Asset Held for Use = FV - Net Carrying Value = Impairment loss (Restoration not permitted)
Step 2: Assets held for disposal =
FV =Impairment Loss \+Cost of disposal =Total impairment loss (Restoration permitted)
Percentage of Completion Method Calculation Formulas?
Step 1: Computer GP of Completed Contract:
Contract Price - = GP
Step 2: Compute “% of Completion”
Total Cost to date / Total Est Cost of Contract
Step 3: Compute GP earned (profit to date (PTD))
Step 1 X Step 2 = PTD
Step 4: Compute GP earned for c/y:
PTD at c/y - beg ptd = Current ytd GP
When does a liability exist when using % of completion method?
When progress billings exceed costs and estimated earnings
When are installment sales used?
When there is no reasonable basis for estimating the degree of collectibility
Accounting for Installment Sales => Problem solving Formulas
GP = Sales - COGS
GP% = GP/ Sales Price
Earned GP = Cash Collections X GP %
DGP = Installment Receivable X GP %
Others:
Sales=DGP X GP%
DGP= Sales - (Collections + Write-offs)
What is cost recovery method?
- At Sale -> Expected Profit is recorded as DGP
- Cash collections –> first applied to the recovery of product costs
- After Costs have been recovered –> recognized as profit
- J/E to record installment sale:
- J/E to recognize cash collections:
- : J/E to record profit on collections:
- DR: Installment sale receivable
CR: Inventory
CR: DGP (contra-receivable) - DR: Cash
CR: Installment Sale AR - DR: DGP (off BS)
CR: Realized GP on installment sales (into IS)
