Mock Exam 2 Capital Lease Problem

[gumbiegirl]

Number 64 on Mock Exam 2. Anyone have this handy and can share how to approach? It was so frustrating because I knew kind of how to do it but didn't have enough time to finish it.

This is the answer.
If all development costs had been expensed then net income would be reduced by the amount spent, and increased by the amortization of the previously capitalized amounts: 225 - 25 + 10 = 210 million. ROA = 210 / 1,875 = 11.2%. CFO would be lower by the amount spent on development 290 - 25 = 265 million. Note: The amortization of previous development costs is a non-cash expense so does not affect cash flow.

Thanks in advance.

 

[gdiddy]

Going back to the differences between IFRS and GAAP, GAAP almost ALWAYS requires you to expense R&D. IFRS, on the other hand, will allow you to capitalize development costs so long as there's technical feasibility and marketability.

The question indicated that you capitalized 25m, but amortized 10. So net, you have 15 on the books that need to drop to the bottom line to translate your statement to GAAP.

So reduce NI by 15. At the same time, and I don't know what the original asset amount was, if you expense that 15, you need to reduce the amount of assets. I'm not sure what the original value in assets was, but in principle, if you expensed that item then it must be removed from assets.

Cash flow from operations is a raw cash figure. Amortization is a noncash expense, which, if you'll remember, is added to NI in the indirect method to compute CFO. In this instance, to adjust the statements under the expensing scenario, you would subtract the 25 from CFO (that 25 is added back to CFI as when it was capitalized it was originally recorded as an investment outflow).

Hope that helps.

 

[amrcd1]

they didn't dedecut that 15m from the assets in the answer sheet !!! i guess it is wrong...