Becker F2

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empak
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Becker F2
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2011-12-14 18:25:55
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Becker CPA Review F2 Exam FAR
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Becker CPA Review F2
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  1. In general, what are the criteria for revenue recognition under U.S. GAAP?
    • Earned and realized or realizable. The following four criteria must be met before revenue can be recognized:
    • 1. Persuasive evidence of an arrangement exists.
    • 2. Delivery has occurred or services have been rendered.
    • 3. The price is fixed and determinable.
    • 4. Collection is reasonably assured.
  2. What are the four categories of revenue transactions under IFRS and what are the common revenue recognition criteria for those categories?
    • 1. Sales of goods
    • 2. Rendering of services
    • 3. Revenue from interest, royalties, and dividends
    • 4. Construction contracts

    • Common revenue recognition criteria include:
    • - Revenues and costs can be reliably measured.
    • - It is probable that economic benefits will flow to the entity.

    Each category has additional criteria.
  3. When should revenue from the performance of services be recognized under U.S. GAAP and IFRS?
    • U.S. GAAP:
    • In the period in which the services have been rendered and are able to be billed.

    • IFRS:
    • Using the percentage of completion method when the outcome of the transaction can be estimated.
  4. What are the conditions for revenue recognition when the right of return exists?
    • The sales price is substantially fixed at the time of sale
    • The buyer assumes all risks of loss because the goods are considered in the buyer's possession
    • The buyer has paid some form of consideration
    • The product sold is substantially complete
    • The amount of future returns can be reasonably estimated
  5. Name an example of both 1) accelerated and 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred.
    • The percentage-of-completion method of long-term construction accounting is an example of accelerated revenue recognition.
    • The installment method (or cost recovery method) is an example of deferred revenue recognition.
  6. How are purchased intangible assets and internally developed intangible assets recorded under U.S. GAAP and IFRS?
    • Purchased intangible assets:
    • Recorded at cost, including legal and registration fees, under U.S. GAAP and IFRS.

    • Internally developed intangible assets:
    • Legal fees, costs of successful defense, registration fees, consulting fees and design fees can be capitalized under U.S. GAAP and IFRS.
    • Under U.S. GAAP, research and development costs must be expensed. Under IFRS, research costs must be expensed, but development costs may be capitalized if they meet certain criteria.
  7. How are intangible assets reported under U.S. GAAP and IFRS?
    • U.S. GAAP:
    • Reported at cost less amortization (finite life intangibles only) and impairment.

    • IFRS:
    • Reported using the cost model (same as U.S. GAAP) or the revaluation model. Under the revaluation model, reported at fair value on revaluation date less subsequent amortization and impairment.
  8. How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by 1) the franchisor and 2) the franchisee?
    They should be recorded at their present value as unearned revenue by the franchisor until earned and as an intangible asset by the franchisee.
  9. Define start-up costs.
    What is the accounting treatment of start-up costs?
    • Costs incurred for one-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation.
    • Start-up costs are expensed in the period incurred.
  10. Define goodwill.
    • Excess of the fair value of a subsidiary over the fair value of the subsidiary's net assets.
    • Costs of maintaining and/or developing goodwill cannot be capitalized.
  11. What is the maximum period of time over which an indentifiable intangible asset (not goodwill) should be amortized?
    • The shorter of its estimated useful economic life and its legal life (as in copyright, franchise or patent).
    • Goodwill is not amortized, but must be tested at least annually for impairment.
  12. What is the proper treatment of research and development costs under U.S. GAAP and IFRS?
    • U.S. GAAP:
    • Research and development costs should be expensed as incurred unless an expenditure is for capital assets that have alternative future uses, or for research and development undertaken on behalf of others under a contractual arrangement.

    • IFRS:
    • Research costs must be expensed. Development costs may be capitalized if they meet certain criteria.
  13. List some items not considered research and development costs.
    • Routine periodic design changes
    • Marketing research
    • Quality control testing
    • Reformulation of a chemical compound
  14. When should the costs of developing computer software for resale, lease or licensing be capitalized under U.S. GAAP?
    After technological feasibility has been established and before the product is released for sale.
  15. How should the costs of capitalized computer software developed for resale be amortized under U.S. GAAP?
    Annual amortization is the greater of:

    Percent of Revenue Method:

    Total capitalized amount x (Current gross revenue for the period / Total projected gross revenue for product)

    Straight-line:

    Total capitalized amount x (1 / Estimate of economic life)
  16. Outline the treatment of computer software developed internally or obtained for internal use only under U.S. GAAP.
    • Expense costs incurred in the preliminary project state and costs incurred in training and maintenance
    • Capitalize costs incurred after preliminary project state and for upgrades and enhancements
    • Capitalized costs should be amortized on a straight-line basis
  17. What is the test of recoverability for the impairment of long-lived assets other than goodwill under U.S. GAAP?
    • Finite Life:
    • If (1) undiscounted future cash flows expected from use of asset and eventual disposal is less than the carrying value, (2) recognize loss on impairment as the difference between the carrying value of the asset and its fair value (two-step impairment test).

    • Indefinite Life:
    • If fair value is less than carrying value, recognize loss on impairment (one-step impairment test).
  18. How is impairment of long-lived assets other than goodwill analyzed under IFRS?
    • Compare the carrying value of the asset to the asset's recoverable amount (one-step impairment test).
    • The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (PV of future cash flows).
  19. What is the calculation for impairment loss under U.S. GAAP and IFRS?
    • U.S. GAAP:
    • The amount by which the carrying amount exceeds the fair value of the asset.

    • IFRS:
    • The amount by which the carrying amount exceeds the asset's recoverable amount.
    • The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (PV of future cash flows).
  20. How is goodwill impairment analyzed under U.S. GAAP?
    • Goodwill impairment is analyzed at the reporting unit level using a two-step process:
    • 1. Identify potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill.
    • 2. Measure the amount of goodwill impairment by comparing the implied fair value at the reporting unit's goodwill to its carrying amount.
  21. How is goodwill impairment analyzed under IFRS?
    Goodwill impairment testing is done at the cash generating unit (CGU) level using a one-step test that compares the carrying value of the CGU to the CGU's recoverable amount.

    Impairment losses are first allocated to goodwill and then allocated on a pro rata basis to the other CGU assets.
  22. Identify two methods of revenue recognition for long-term construction type contracts under U.S. GAAP and IFRS.
    • U.S. GAAP:
    • - Percentage-of-completion
    • - Completed-contract

    • IFRS:
    • - Percentage-of-completion
    • - Cost recovery
  23. For long-term construction-type contracts, when are losses recognized?
    Immediately when discovered, regardless of the method used for revenue recognition.
  24. State the formula for recognizing the gain/loss on long-term construction-type contracts under the percentage-of-completion method.
    [(Total cost to date / Total estimated cost of contract) x Total est. gross profit] - Gross profit recognized to date
  25. State the formula for calculating the gross profit realized on installment sales.
    Cash received x (Total gross profit / Sales price)
  26. When are profits recognized under the cost recovery method?
    Profits are recognized only after all costs have been recovered.
  27. How are gains/losses on nonmonetary exchanges recognized under U.S. GAAP?
    Exchange has commercial substance - always recognize gains and losses on the exchange equal to the difference between the FV of what is given up and the carrying value of what is given up.

    Exchange does not have commercial substance or the new asset's fair value is not determinable (and the FV of the asset given up is unknown) - NO GAIN on exchange is recognized UNLESS BOOT IS RECEIVED, and losses are recognized in full (if losses exist because an impairment loss was not previously recognized).

    If boot received is greater than 25% of total consideration, gain is recognized just as in a monetary transaction that has commercial substance.
  28. How are gains/losses on nonmonetary exchanges recognized under IFRS?
    • Exchange of similar assets - No gains recognized. Losses recognized in full.
    • Exchange of dissimilar assets - All gains and losses recognized.
  29. When will an asset exchange have commercial substance under U.S. GAAP?
    An asset exchange generally has commercial substance when the entity expects a change in future cash flows as a result of the exchange and that expected change is material relative to the FV of the assets exchanged.

    • [Note that the FASB has not provided specific guidance, nor has it provided examples of transactions that would meet the criteria for commercial substance. Although it is not certain what will occur on the CPA exam, it is suspected that it will be clear in the question whether
    • or not an exchange has or lacks commercial substance.]
  30. In a nonmonetary exchange, what is the basis of the new asset under U.S. GAAP?
    In an exchange that has commercial substance (or an exchange when boot received exceeds 25% of the total consideration), record at fair value of asset given up + cash paid (or - cash received), or the fair value of the asset received if it is more clearly evident.

    In an exchange that lacks commercial substance, record at the net book value of the asset given up + cash paid (or - cash received), unless adjustments are needed for gain recognized (if boot is received).
  31. In creating a new partnership interest with an investment of additional capital, what three methods can be used?
    • Exact method
    • Bonus method
    • Goodwill method
  32. Describe the exact method of creating a new partnership interest with an investment of additional capital.
    • The purchase price equals the book value of the capital account purchased.
    • - No adjustment to the existing partners' capital accounts
    • - No goodwill or bonus
  33. Describe the bonus method of creating a new partnership interest with an investment of addtional capital.
    • Bonus Method:
    • New partner's capital account = (A + B + C) x C's percentage ownership. Excess of new partner's contribution over capital interest received is a bonus to the old partners. Excess of capital interest received over new partner's contribution is a bonus to the new partner.
  34. Describe the goodwill method of creating a new partnership interest with an investment of additional capital.
    • Goodwill is recognized based upon the total value of the partnership implied by the new partner's contribution.
    • Goodwill is shared by the existing partners using the agreed profit/loss ratio.
  35. Describe the bonus method of withdrawal of a partner.
    • The difference between the balance of the withdrawing partner's capital account and the amount that person is paid is the amount of the bonus.
    • The bonus is allocated among the remaining partners' capital accounts in accordance with their remaining profit and loss ratios.
  36. Describe the goodwill method of withdrawal of a partner.
    The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios.

    After allocating goodwill, the balance in the withdrawing partner's capital account should equal the final distribution to the withdrawing partner.
  37. In liquidating a partnership, what is the order of preference?
    • - Creditors
    • - Loans and advances
    • - Capital accounts of partners

    Remember that all losses must be provided for before disposal; that is, maximum potential losses before distribution of cash.
  38. What are monetary items?
    • Assets and liabilities that are fixed in amount by contract or in terms of number of dollars.
    • Examples include cash, accounts and notes receivable, accounts and notes payable.
    • These items are already stated in constant dollars.
  39. What are nonmonetary items?
    • All assets and liabilities that are not monetary.
    • Examples are inventories, property, plant & equipment, and capital stock. These items need to be restated to constant dollars.
  40. Identify the two foreign currency activities.
    • Foreign currency translations
    • Foreign currency transactions
  41. What is an entity's functional currency under U.S. GAAP?
    • The functional currency is the currency of the primary economic environment in which the entity operates. All of the following conditions must be met:
    • - The foreign operations are relatively self-contained and integrated within the country
    • - The day-to-day operations do not depend on the parent's or investor's functional currency
    • - The local economy of the foreign entity is not highly inflationary
  42. When is the translation method used?
    Translation is used to restate financial statements denominated in the functional currency to the reporting currency.
  43. When is the remeasurement method used?
    • Remeasurement is used to restate financial statements from the foreign currency to the entity's functional currency when:
    • - The reporting currency is the functional currency.
    • - The financial statements must be restated in the entity's functional currency prior to translating from the functional currency to the reporting currency.
  44. Identify the exchange rate to be used when translating different components of the balance sheet and income statement.
    • Assets and Liabilities:
    • Current exchange rate

    • Common Stock and APIC:
    • Historical rate

    • Revenue and Expenses:
    • Weighted-average exchange rate for the period
  45. Identify the exchange rate to be used when remeasuring different components of the balance sheet and income statement.
    • Balance Sheet:
    • - Monetary - current exchange rate
    • - Nonmonetary - historical rate

    • Income Statement:
    • - Balance sheet related - historical rate
    • - Non-balance sheet related - weighted-average
  46. Where are the remeasurement gain/loss reported in the financial statements?
    Remeasurement gains or losses are recognized in the income statement.
  47. Where are tranalsation adjustments reported in the financial statements?
    Translation gains or losses are reported in other comprehensive income. They are treated as unrealized gains and losses.
  48. State two types of foreign currency transactions.
    • Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions
    • Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate.
  49. Where are foreign currency transaction gains or losses reported in the financial statements?
    Foreign currency transaction gains or losses are included in determining net income for the period.
  50. For operating transactions in foreign currency, detail the recording process.
    • Record original transaction at exchange or spot rate on date of transaction
    • At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate
    • On payment date, compute gain/loss on the transaction by using the exchange rate on the payment date
  51. What are the general guidelines for OCBOA financial statement presentation?
    • Different titles than accrual basis financial statements.
    • Required financial statements are the equivalent of the accrual basis balance sheet and income statement.
    • Financial statements should explain changes in equity accounts.
    • A statement of cash flows is not required.
    • Disclosures should be similar to GAAP financial statement disclosures.

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