CPA Exam: FAR Inventory, PP&E, and Intangibles Summary

Under FIFO, the first units bought are the first sold, so the units left are the newest ones.

1. Units available: 100 + 200 = 300
2. Units left: 300 − 220 = 80
3. Ending inventory: 80 × $12 = $960

Check: COGS = $1,000 + 120 × $12 = $2,440; $2,440 + $960 = $3,400 = total cost available.

Wrong choices

• $800: This uses the oldest $10 cost, which is LIFO thinking; under FIFO the oldest units are sold first.
• $880: This uses an average-type cost of $11, not FIFO.
• $2,440: This is cost of goods sold, not ending inventory.

Inventory measured with FIFO or average cost is reported at the lower of cost and net realizable value (NRV). NRV is the selling price minus reasonable costs to complete and sell.

1. NRV: $60 − $15 = $45
2. Lower of $50 cost and $45 NRV = $45

Wrong choices

• $50: Inventory must be written down when net realizable value is below cost.
• $60: Inventory is never written up to selling price.
• $35: Only the costs to finish and sell are subtracted; there is no normal profit deduction under the lower of cost and NRV rule.

An asset's cost includes the price plus all normal costs needed to get it in place and ready to use. Costs from mistakes or accidents are expensed.

1. Price: $50,000
2. Sales tax + freight + installation: $3,000 + $1,200 + $800 = $5,000
3. Capitalized cost = $55,000

The $500 repair is an expense.

Wrong choices

• $55,500: Repairing damage the company caused does not make the machine more useful; it is an expense.
• $53,000: Freight and installation are needed to get the machine ready to use and must be capitalized.
• $50,000: Sales tax, freight, and installation are all part of the machine's cost.

Straight-line depreciation spreads cost minus salvage evenly over the useful life. A partial first year gets only the months used.

1. Depreciable base: $60,000 − $6,000 = $54,000
2. Yearly amount: $54,000 ÷ 6 = $9,000
3. Year 1 (6 months): $9,000 × 6/12 = $4,500

Wrong choices

• $9,000: This is a full year of depreciation, but the equipment was used for only half of Year 1.
• $5,000: Salvage value must be subtracted before computing depreciation.
• $10,000: This ignores salvage value and charges a full year.

Double-declining balance uses twice the straight-line rate on the book value at the start of each year. Salvage is ignored in the calculation, but book value cannot go below salvage.

1. Rate: 2 × (1 ÷ 5) = 40%
2. Year 1: $50,000 × 40% = $20,000; book value $30,000
3. Year 2: $30,000 × 40% = $12,000

Check: book value after Year 2 is $18,000, still above $5,000 salvage.

Wrong choices

• $10,800: Double-declining balance applies the rate to book value without first subtracting salvage.
• $20,000: This is Year 1 depreciation.
• $9,000: This is straight-line depreciation: ($50,000 − $5,000) ÷ 5.

For property held and used, there are two steps. First, if the carrying amount is more than undiscounted future cash flows, the asset is not recoverable. Second, the loss is carrying amount minus fair value.

1. Recoverability: $400,000 > $380,000, so impaired
2. Loss: $400,000 − $300,000 = $100,000

Wrong choices

• $20,000: The undiscounted cash flows are only used to decide whether there is an impairment; the loss is measured with fair value.
• $0: The carrying amount is above the undiscounted cash flows, so the asset is not recoverable and a loss is required.
• $80,000: This is the difference between undiscounted cash flows and fair value, which is not how the loss is measured.

Before recording a sale, depreciation is brought up to date. The gain or loss is the proceeds minus the book value.

1. Depreciation Jan 1–June 30: $8,000 × 6/12 = $4,000
2. Accumulated depreciation: $48,000 + $4,000 = $52,000
3. Book value: $80,000 − $52,000 = $28,000
4. Result: $26,000 − $28,000 = −$2,000 (loss)

Wrong choices

• A $6,000 loss: This skips the depreciation for the first half of the year, which must be recorded before the sale.
• A $2,000 gain: The sale price is below the book value, so the result is a loss.
• A $54,000 loss: This compares the sale price with original cost and ignores accumulated depreciation.

Periodic weighted average uses one average cost for all units available in the period.

1. Total cost: $1,000 + $1,800 + $3,500 = $6,300
2. Total units: 200 + 300 + 500 = 1,000
3. Average cost: $6,300 ÷ 1,000 = $6.30
4. COGS: 600 × $6.30 = $3,780

Check: ending inventory 400 × $6.30 = $2,520; $3,780 + $2,520 = $6,300.

Wrong choices

• $3,500: This is FIFO cost of goods sold, using the oldest costs first.
• $4,100: This is LIFO cost of goods sold, using the newest costs first.
• $2,520: This is ending inventory (400 units), not cost of goods sold.

Research and development costs, such as designing, building, and testing prototypes before commercial production, are expensed as they are incurred. Routine production work and the cost of buying intangible assets are not R&D.

Wrong choices

• Routine quality-control testing during normal production: Routine testing in production is a manufacturing cost, not R&D.
• Buying a patent from an outside party for use in current products: A purchased patent with ongoing use is an intangible asset and is capitalized.
• Legal fees to successfully defend an existing patent: Legal costs to defend a patent are capitalized under U.S. GAAP when the defense succeeds, not treated as R&D.

Interest capitalized is the interest that could have been avoided if the asset had not been built. Use the specific loan rate first, then the average rate on other debt, and never capitalize more than actual interest.

1. Specific loan: $600,000 × 8% = $48,000
2. Remaining: ($1,000,000 − $600,000) × 10% = $40,000
3. Avoidable interest: $48,000 + $40,000 = $88,000
4. Compare with actual $200,000: capitalize the lower, $88,000

Wrong choices

• $100,000: The specific construction loan rate (8%) must be used first for the part of expenditures it covers.
• $80,000: Only $600,000 is covered by the 8% loan; the other $400,000 uses the 10% rate.
• $200,000: Only avoidable interest is capitalized, which is less than total interest incurred here.