CPA Financial Accounting and Reporting (FAR) : Other Long Lived Assets
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Software, R&D Costs
Which of the following costs will be expensed rather than capitalized?
Costs incurred to develop software for internal use, up until the preliminary project state
Costs incurred to customize software purchased off the shelf for internal use
Costs incurred to developed software, which will be sold to customers, after technological feasibility is established
Costs incurred to develop software for internal use, after the project has reached the preliminary project state
Costs incurred to develop software for internal use, up until the preliminary project state
Costs incurred to develop software for internal use will be expensed up until the project has reached the preliminary project state. After this point, costs incurred will be capitalized. Costs incurred to customize purchased software and costs to develop software to sell, after the point of technological feasibility, will be capitalized.
Example Question #2 : Software, R&D Costs
During Year 5, BioTech, Inc incurred $500,000 of research and development costs to develop a product for which a patent was granted on August 1, Year 5. Legal fees and other costs associated with the patent totaled $85,000. BioTech estimates the useful life of the patent to be 15 years. What amount should BioTech capitalize for the patent on August 1, Year 1?
$585,000
$500,000
$0
$85,000
$85,000
Research and development costs that resulted in a patented product will be expensed, but legal fees to establish the patent will be capitalized. Therefore, only the $85K in legal fees will be capitalized.
Example Question #3 : Software, R&D Costs
Coleman Inc produces software for sale and internal use. In the current year, Coleman incurred the following costs: research & development costs outsourced to a third party of $30,000; design and testing of preproduction prototypes of $110,000; testing in search for new products of $15,000; and quality control costs of $18,000. What amount of costs should be expensed as research & development in the current year?
$155,000
$173,000
$188,000
$140,000
$155,000
All of the listed costs will be expensed, however, the $18K in quality control costs will be exposed as quality control costs, not research and development. All other costs will be expensed as research and development costs.
Example Question #4 : Software, R&D Costs
ABC incurred organization costs of $3,000 at the beginning of its first year of operations. How should ABC treat the organization costs in its financial statements?
Amortized over 50 years
Expensed immediately
Never amortized
Amortized over 180 months
Expensed immediately
Organization costs are expensed for US GAAP financial income but deducted later for tax purposes.
Example Question #5 : Software, R&D Costs
ABC company incurred legal fees in defending its patent rights. These legal fees should be capitalize when the outcome of the litigation is:
Unsuccessful
Neither
Successful
Both
Successful
The accounting treatment for legal fees depends on the defense of a legal outcome. If successful the costs are capitalized, the preferable treatment.
Example Question #1 : Software, R&D Costs
Which term signifies that expenses can begin to be capitalized for software development?
When the software reaches technological feasibility
When the software is created
When the software is functioning
When the software is ready
When the software reaches technological feasibility
Technological feasibility is a key term which indicates that software expenses can begin to be capitalized, which is a preferable outcome.
Example Question #1 : Asset Impairment
A company has a tangible manufacturing asset and is trying to determine whether the asset needs to be evaluated for impairment. Which of the following would not indicate a need to perform this test?
The use of the asset changed significantly during the current year
The asset is being depreciated over 12 years but the company now believes the asset will be sold long before that
The cost of constructing the asset was significantly more than anticipated
The company has experienced an operational loss for the past 3 years
The company has experienced an operational loss for the past 3 years
Operational losses do not indicate that the fair value of the asset is less than the asset's carrying value. The other choices indicate that the asset's fair value could be less than it's carrying value.
Example Question #2 : Asset Impairment
Which of the following is correct, under US GAAP, regarding impairment losses?
Both of the above
Losses are reported before tax if the impairment loss relates to discontinued operations
Neither of the above
Losses reduce the carrying value of an asset due to the book value of an asset falling below its fair value
Neither of the above
Impairment losses on discontinued operations are presented after-tax; Impairment losses are recorded when the fair value of an asset falls below its carrying value, not the other way around.
Example Question #3 : Asset Impairment
The Mallory Corp has a fixed asset with a carrying value of $100,000, expected future cash flows of $90,000, present value of expected future cash flows of $70,000, and a market value of $75,000. What amount of impairment loss should Mallory record for this asset?
$10,000
$25,000
$30,000
$0
$25,000
Because expected future cash flows of $90K are lower than the asset's carrying value of $100K, impairment should be recorded. The amount of impairment loss recorded will be equal to the carrying value of $100K - the asset's fair value of $75K.
Example Question #4 : Asset Impairment
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct under US GAAP?
It is encouraged but not required
It is required when the reversal is considered permanent
It must be disclosed in the notes to the financial statements
It is prohibited
It is prohibited
Under US GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
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