Accounting Exam 4

Ch 11, 12, 13

Goodwill at Acquisition Calculation

= Purchase Price (whole business) - FV of Net Assets

Half-Year Convention Depreciation

Assumes all fixed assets are purchased in the middle of the yr, so the company records only half a year of depreciation in the first year and the remaining half in the following year

Always a LOSS when derecognition/disposal of an asset

When cash proceeds from sales are <LESS than the carrying/book value

Asset could be heavily depreciated

Components-Based Depreciation Approach

Depreciating each significant part of an asset differently using individual UL’s (ex. 1 building, 3 depr- roof, structure, hvac VS. just one depr.)

IFRS requires component based, GAAP allows but not required

Compensated Absences EOY JE

Accrued as the days are earned during the year

Debit: Wages Expense

Credit: Compensated Absences Liability

Paying for Sick Days During the Yr JE

Debit: Compensated Absences Liability

Credit: Cash (parts & wages)

Assurance-Type Warr. (Balance Sheet Classification)

Current Liability: Warranty Liability

Repair claims expected within 1 year, short term obligation

Service-Type Warr. (Balance Sheet Classification)

Deferred/Unearned Warr. Revenue

1. Current Liability: Unearned Warr. Revenue

2. Long-Term Liability: Unearned Warr. Revenue

Calculating WAAE

= Monthly expenditure * (x/12)

Do for each month, then add up to find WAAE of project/period for capitalizing interest.

If cost in same month as project finishes then (0/12) no interest

Calculating Amortization Exp.

= Cost / Useful Life

Capitalizing R&D (GAAP vs. IFRS)

GAAP: Expense both R&D

IFRS: Expense research, Capitalized Development as an intangible asset

Contingency

Something that will happen in the future, an existing condition/situation of circumstances

Loss Contingency Accounting & Disclosures

• Probable - liability accrued with footnote

• Reasonably Possible - footnote only

• Remote - nothing required

Gain contingencies not recorded

Capitalizing Costs

Costs “normal and necessary” to acquire the asset and get it ready for use (ex. purchase price, sales tax, freight-in, and installation)

No abnormal costs like repairs

Units-of-Output Depreciation

$ = (Cost - Residual) / # Output

Multiply that answer by yearly output to find depreciation

Subject to Amortization

Yes: Finite-life intangible assets

No: Indefinite-life & Goodwill

Amortization

Spreading of the cost of an intangible asset over its useful life

(patent, copyright, customer list, etc.)

Deferred/Unearned Revenue

Advanced collection of money from customer before good/service is delivered/performed (Gift Card)

Liability = obligation to deliver good/service

Gift Card Breakage Definition

When a card is never redeemed, % of company’s total GC sales

Gift Card Initial JE

Debit: Cash

Credit: Gift Card Liability (Deferred Rev)

Asset Retirement Obligation (ARO) Definition

Long term obligation to dismantle/scrap asset, or restore property used for business purposes

Estimating FV that company would have to pay to retire, anticipating cost, adding to Asset value

Assurance-Type Warranties Definition

Immediate included coverage that comes with a good/service

ex. replace TV in first 90 days

Service-Type Warranties Definition

Selling a separate warranty plan, not included with good

Proportional Breakage Formula

=$Expected Breakage * (Actual Redeemed Sales / Estimated Redeemed using %)

Service-Type Warranties JE at Sale

Debit: Cash/AR

Credit: Unearned Warranty Revenue (Def. Rev)

Assurance-Type Warranties JE at Sale

Debit: Cash/AR

Credit: Sales Rev

Debit: Warranty Exp - Assurance (Exp. taken at sale)

Credit: Contingent Warr. Liability

Assurance-Type Warranties JE upon Repair

Debit: Contingent Warr. Liability

Credit: “Parts Inventory” (Whatever was used in repair)

Service-Type Warranties JE upon Repair

Debit: Unearned Warr. Rev

Credit: Warr. Rev - Service

Debit: Warr. Exp - Service

Credit: “Parts Inventory” (Whatever was used in repair)

Accretion Expense (ARO) Definition

Periodic exp recorded to increase ARO liability as time passes, overtime the PV grows to the full anticipated cost/cash outflow you expected to pay to retire asset

Initial ARO Liability Value

=PV of the anticipated cost/cash outflow to dispose

Added to Asset BV

Gain (JE)

Credit Account

Every term to compare BV to for Impairment

Impaired if…BV > FV, NRV (FV-selling cost), discounted/PV of CF’s

Cash Flows Recoverability

1. Undiscounted CF’s Vs. BV

2. If fail: Must write-down BV to PV of CF’s (which is FV)

Loss (JE)

Debit Account

Preparing Asset Held for Disposal

About to get rid: stop depr, must adjust accounting to show current Carrying/BV (OG Cost - Accum Depr)

EOY’s JE for Asset Held for Disposal

Compare BV vs. Yrly FV

Write-down/up if new FV is more or less than BV

“Gain/Loss on Increase/Decrease in FV of AHFS” - can’t go above og bv

Beginning Asset Held for Disposal on Books JE

Debit: “Asset” HFS (New BV in HFS Account)

Debit: Accum Depr (Getting rid of all depr)

Credit: “Asset” (OG Cost of Asset off books)

Disposal of LT Asset Off Books JE

Debit: Cash (Sold for $)

Debit: Accum Depr. (Make sure to add current month)

Credit: Asset (Take off books)

Debit/Credit: Loss/Gain

Tip for determining Gain/Loss

Build out JE by removing asset from Books, Accum Depr, how much Cash we received, then balance JE with gain/loss

Buying Asset w/ Note JE each year

Debit: Interest Expense (Market % of CV)

Credit: Cash (Coupon % of Face)

Debit/Credit: Discount or Premium

Buying Asset w/ Note JE at Acquisition

Debit: Asset (PV of Note)

Credit: Note Payable (Face Value)

Debit/Credit: Discount/Premium on NP

Double Declining Balance Depr. (DDB) Formula

Depr Exp changes each year, not constant like SL, Residual value acts as floor

= (Cost - Accum Depr.) * (2/Useful Life)

= (“Yearly BV”) * (2/UL)

Recoverable Amount (Impairment)

The maximum value you can reasonably get from an asset

Carrying/BV > Recoverable = Impairment

Calculating Recoverable Amount

(FV − costs to sell) OR “Value in Use”

Finite Life Intangible - Impairment Testing & Recognition

1) Recoverability Test: Carrying value vs. undiscounted FCF’s

2) If Carrying> = IMPAIRED: Carrying value - Fair Value of Asset = impairment

Indefinite Life Intangible - Impairment Testing & Recognition

Asset is never amortized, we are testing impairment annually at the least

If circumstances suggests asset is impaired, then FV test: Carrying Value vs. Fair Value

Impairment Loss JE

Debit: Loss on Impairment

Credit: Finite/Indefinite Asset Name

Carrying Value (BV)

Amount an asset or liability shows on the balance sheet, equal to its original cost - accumulated depreciation, amortization, and any impairments (what the company thinks it is worth)

“Fair Value of Company Division With Goodwill”

Zoomed-Out view: price of the entire business if it were for sale

“Fair (appraisal) Value of Net Assets Excluding Goodwill”

Zoomed-In view: What the specific assets and liabilities are worth today, net identifiable assets

=Shareholders’ Equity

Goodwill

Intangible Asset: Extra amount paid to buy a business above the FV of its identifiable net assets (ex. reputation, customer relationships, expected future CF) Not amortized, only impairment tested

Purchase Price > FV

Impairments

Fixing BV of assets that are overvalued: aren’t worth as much as they make

We don’t want Assets on the books for more than they are worth

Asset’s book value is written down because it’s now worth less than what’s recorded on the balance sheet

6 Criteria (Assets Held for Sale)

1. Mgmt. commits to plan to sell Asset

2. Asset is available for immediate sale in present condition

3. Active program to locate a buyer+complete sale has begun

4. Asset is marketed at a reasonable price

5. Sale is probable and expected to be completed within 1 yr

6. It is unlikely plan will be withdrawn or significantly changed

Assets Held for Sale

Assets that a company has decided to sell soon (rather than keep using) and that meet specific criteria

reported at the lower of carrying amount/fair value - costs to sell and are no longer depreciated.

Recoverability Test

Compares an asset group’s carrying amount to the total undiscounted future CF’s it is expected to generate;

if CF < carrying amount = Impairment Loss, the asset is not recoverable

Avoidable Interest

Portion of total interest that would not have been incurred if the company had not spent money on project. The interest would have been avoidable

Capitalization of Interest

Interest cost during project that is added to the cost of the asset being constructed, instead of being recorded immediately as int. exp. -”getting asset ready for intended use”

Becomes part of assets BV

Expensed Interest

Interest cost that is recognized immediately on the I/S as interest expense - as compared to capitalizing with asset construction

Weighted Avg. Accumulated Expenditures (WAAE)

Average amount of construction spending, weighted by how long each expenditure has been outstanding during the period, (X/12) used to calculate how much interest to capitalize on a self‑constructed asset

Calculating Avoidable Interest

Compare WAAE to specific project/construction loan

$ of WAAE fit into, paid by construction loan = use loan %

Remaining $ = use % weight avg from general debt

150% Declining Depr.

=(Carrying Value) * (1.5/Useful Life)

Same as DDB, just 1.5 instead of 2