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ACCT 1A Lecture Notes - Lecture 8: Asset, Asset Turnover, Net Profit

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rosebuffalo981
16 Jul 2020
School
Irvine Valley College
Department
Accounting
Course
ACCT 1A
Professor
seilo

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Document Summary

Accounting for the impairment of an intangible asset. Some intangibles such as goodwill, licences and some trademarks have indefinite lives and, therefore are not subject to amortization. But all intangibles are subject to a write-down when their recoverable amount is less then the carrying amount. Under ifrs, a company must check its intangible assets for impairment at each reporting date, whereas under aspe, impairment of intangible assets with an indefinite life is tested only when there is an indication of impairment. Both ifrs and aspe require development costs meeting certain criteria to be capitalized and then expensed over the life of the product, while research costs are to be expensed as incurred. Analyze and evaluate a company"s return on assets. Roa, also known as rate of return on assets, measures how profitable management has used the assets that shareholders and creditors have provided the company. The basic formula for the roa ratio is as follows:

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Related Questions

You are the CFO for Jones company (reporting using IFRS) andmust reconcile your financial statements for the years ending 2008,2009, and 2010 to U.S. GAAP (The Income Statement and StatementStockholders’ Equity). You have identified the following 4 areaswhere there are differences between IFRS and U.S. GAAP at variousdates. Be sure to consider the cumulative effects of prior yeartransactions for each year.

Intangible Assets (Impairment)

As part of a business combination in January 2005, the companyacquired a brand for $10,000,000. The brand is classified as anintangible asset with a 10 year useful life. At year-end 2008, thebrand is determined to have a selling price of $5,500,000 with zerocost to sell. Expected future cash flows from continued use of thebrand are $6,200,000 (undiscounted) and the present value of futurecash flows is 5,700,000

Research and Development Costs

The company incurred research and development costs of $500,000in 2008. Of this amount, 70% related to development activitiessubsequent to the point at which criteria had been met that anintangible asset existed. The development costs were completed atthe end of 2008 and will be amortized over 10 years beginning2009.

Property Plant and Equipment

On January 1, 2009 a building that had an original cost of$5,000,000 and (Purchase date January 1 2004) and was beingdepreciated over 25 years was determined to have a fair value of$6,000,000. The company uses the revaluation model for suchassets.

Sale Leaseback

On January 1, 2005 the company realized a gain on a salesleaseback of $1,000,000. The term of the lease (starting the dateof the sale) is 20 years.

Case 4-1 Bessrawl Corporation

Bessrawl Corporation is a U. S.- based company that prepares itsconsolidated financial statements in accordance with U. S. GAAP.The company reported income in 2011 of $1,000,000 and stockholders’equity at December 31, 2014, of $8,000,000. The CFO of Bessrawl haslearned that the U. S. Securities and Exchange Commission isconsidering giving U. S. companies the option of using either U. S.GAAP or IFRS in preparing consolidated financial statements. Thecompany wishes to determine the impact that a switch to IFRS wouldhave on its financial statements and has engaged you to prepare areconciliation of income and stockholders’ equity from U. S. GAAPto IFRS. You have identified the following six areas in whichBessrawl’s accounting principles based on U. S. GAAP differ fromIFRS. 1. Inventory 2. Property, plant and equipment 3. Intangibleassets 4. Research and development costs 5. Sale and leasebacktransaction Bessrawl provides the following information withrespect to each of these accounting differences.

Inventory: at year-end 2014, inventory had a historical cost$250,000, a replacement cost of $180,000, a net realizable value of$190,000, and a normal profit margin of 20%.

Property, plant and equipment: the company acquired a buildingat the beginning of 2013 at a cost of $2,750,000. The building hasan estimated useful life of 25 years, an estimated residual valueof $250,000 and is being depreciated on straight-line basis. At thebeginning of 2014, the building was appraised and determined tohave a fair value of $3,250,000. There is no change in estimateduseful life or residual value. In a switch to IFRS, the companywould use the revaluation model in IAS 16 to determine the carryingvalue of property, plant, and equipment subsequent toacquisition.

Intangible assets: As part of a business combination in 2011,the company acquired a brand with a fair value of $40,000. Thebrand is classified as an intangible asset with an indefinite life.At year-end 2014, the brand is determined to have a selling priceof $35,000 with zero cost sell. Expected future cash flows fromcontinued use of the brand are $42,000 and the present value of theexpected future cash flows is $34,000.

Research and development costs: the company incurred researchand development costs of $200,000 in 2014. Of this amount, 40%related to development activities subsequent to the point at whichcriteria had been met indicating that an intangible asset existed.As of the end of 2014, development of the new product had not beencompleted.

Sale and leaseback transaction: in January 2012, the companyrealized a gain on the sale-and-leaseback of an office building inthe amount of $150,000. The lease is accounted for as an operatinglease, and the term of the lease is five years.

Required: prepare reconciliation schedule to convert2014 income and December 31, 2014 stockholders’ equity from a U.S.GAAP basis to IFRS. Ignore taxes. Prepare a note to explain eachadjustment made in the reconciliation schedule.

Read the 2015 annual report of Air France – KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports ‘Consolidated statement of recognized income and expenses’ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can ‘exercise significant influence on financial and operating policy decisions?’

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an ‘accumulated other comprehensive income’ item among those reported in the ‘reserves and retained earnings’ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLM’s intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-years’-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in ‘income from operating activities’ but not in ‘income from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an ‘other non-current income and expenses’ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities