Unrealized gains and losses on available for sale investments are reported in other comprehensive

income, a component of stockholders equity, unless they are not considered temporary, in which
case they are reported in income. Realized gains and losses are recognized in net income in the
period of sale, in an amount equal to the difference between the selling price and the original cost.
Unrealized gains are recognized with a debit (increase) to the investment and a credit (increase) to
other comprehensive income (OCI). Unrealized losses are recognized with an entry crediting the
investment and debiting OCI. OCI is closed into accumulated other comprehensive income (AOCI),
a stockholders equity account on the balance sheet, which has a balance equal to the cumulative
net unrealized gain or loss on the securities since acquisition. The entity will report the balance in
AOCI, which is the cumulative amount of net gains, and the current periods changes in AOCI, which
is the current periods change in the net value of the investments. These items may be reported in
the statement of stockholders equity, on the face of the financial statements, or in the disclosures.
A gain or loss on the disposal of trading securities is the difference between the sales proceeds and
their carrying value. Since trading securities are reported at their fair values with unrealized gains or
losses recognized in income, the carrying value of the investment would have been its market value.
Foreign currency:
A derivative acquired to hedge a risk associated with a firm commitment is a fair value hedge. It is
reported at fair value with gains or losses recognized in income. At December 12, year 11, Imp
entered into a forward contract to acquire 100,000 LCUs on March 12, year 12, at the rate of $.90
per LCU, which was expected to be the exchange rate on that date. As a result, the derivative would
have had no value at that time. As of December 31, the expected exchange rate at March 12
increased to $.93 indicating that Imp will now pay $.90 for LCUs that are worth $.93, indicating a
gain of $.03 per LCU or (100,000 x $.03) $3,000. Gains or losses on fair value hedges are
recognized in income.
Forward exchange contract receivable
3,000
Forward exchange contract gain
3,000
Generally a company is required to use the current exchange rate for balance sheet accounts
(assets and liabilities) and the same exchange rate on the date that the transaction occurred for
revenue, expense, gain and loss accounts. However, it is generally impractical to use exact
exchange rates for the dates of numerous revenue, expense, gain, and loss transactions so it is
acceptable to use an appropriate average exchange rate to translate those elements. To translate
the income of a subsidiary, a company would normally use an average exchange rate, or 1.55 in this
example.
Since the futures contract was purchased on speculation, it is a derivative that is not a hedge and,
as a result, it is adjusted to fair value on each reporting date with increases or decreases recognized
as gains or losses on the income statement.
A derivative acquired to hedge a risk associated with a firm commitment is a fair value hedge. It is
reported at fair value with gains or losses recognized in income.

When a derivative is accounted for as a cash flow hedge, it is reported at its fair value on the
balance sheet and any increases or decreases are recognized as unrealized gains or losses in other
comprehensive income. The hedged item is accounted for in the same manner as if it were not being
hedged. When changes in the hedged item are reported in income, under its normal accounting
procedures, the corresponding amounts will be reclassified from other comprehensive income and
recognized in income.
The contributed capital accounts of a foreign subsidiary are translated into the currency of the
reporting entity using historical exchange rates, the rates in effect when the capital was contributed
to the entity.
PPE:
When an asset is acquired in exchange for a noninterest bearing note, the equipment is measured at
its fair value, if it can be determined. Otherwise, the present value of the payments called for by the
note is used.
Interest on assets being constructed for an entitys own use may be capitalized. When the asset is
financed in its entirety, the amount of interest to be capitalized will be the weighted average
expenditures multiplied by the interest rate on the loan financing the construction. With a payment of
$1,000,000 on January 2 and another payment of $1,000,000 on December 31, weighted average
expenditures are $1,000,000, the amount outstanding for the entire year. There is a 8% construction
loan financing the entire amount and, as a result, interest of $1,000,000 x 8%, or $80,000, may be
capitalized. Excess interest is expensed.
When a note that does not bear interest is exchanged for a nonmonetary asset, such as a piece of
equipment, the note is recorded at its fair value, its present value, or the fair value of the
nonmonetary asset exchanged, based on the circumstances. Recording a discount of $24,868 on
the $100,000 note payable indicates that its fair value or present value is the difference of $75,132.
As a result, the cost of the asset is that amount plus the $10,000 down payment, or $85,132.
When an asset is being held for appreciation, it is considered investment property and may be
accounted for using the fair value method. Under the fair value model, the asset is adjusted to its
fair value at each balance sheet date and any gain or loss is recognized in profit or loss. In this
case, the asset will be increased in value from $50,000 to $54,000 and a gain of $4,000 will be
recognized in income.
The capitalized cost of the equipment includes both the cash paid to acquire the equipment and
those costs necessary to get it ready for its intended use, as well as the present value of the
scheduled annual payments (ordinary annuity factor).
In general, a nonmonetary transaction is measured on the basis of the fair value of the
consideration. When a transaction lacks commercial substance, however, the transaction is
measured on the basis of reported amounts. A nonmonetary transaction has commercial substance
when, as a result of the transaction, the amounts or timing of future cash flows is affected.

Although gains are not generally recognized in nonmonetary transactions that lack commercial
substance, that is not the case when boot, such as cash, is received as part of the transaction.
When cash is received, any gain is allocated between the nonmonetary portion and the monetary
portion in proportion to the value of the proceeds. Since X received a machine worth $91,000 and
cash of $14,000, or $105,000 in total, for a machine costing $75,000, the total gain is the difference
of $30,000. The gain allocated to the cash portion will be $30,000 x $14,000/$105,000 or $4,000.
Even though this transaction lacks commercial substance, it involved monetary consideration that is
equal to 25% of the total consideration and will, as a result, be treated as a monetary transaction.
Recognize all gains.
When assets are acquired in a lump sum purchase, the total purchase price is allocated among the
assets acquired according to their relative fair values.
The proper accounting method for nonmonetary exchanges that have commercial substance is to
recognize gains and losses immediately.
Interest may be capitalized on assets constructed for a company's own use. The amount to be
capitalized is based on weighted average accumulated expenditures related to the asset. When that
amount exceeds the interest on debt that is directly related to the asset, interest on other debt may
be capitalized as well. When the weighted average is lower than directly related debt, however, only
a portion of the interest on that debt is capitalized.
Lack commercial substance (no change in cash flows) - gain is pro rata of boot received / total
received
Comparing the sum of the undiscounted future cash flows over the remaining life of the asset to its
carrying value reveals that an impairment loss has occurred. The amount of loss is determined by
comparing the assets book value to its fair value.
Since the exchange lacks commercial substance, Campbell should record the asset received at the
lower of three values: (i) the fair value of the asset given up (plus cash paid or minus cash received;
(ii) the fair value of the asset received; or (iii) the book value of the asset given up (plus cash paid or
minus cash received). This rule generally results in the new assets value being based in the book
value of the asset given up.

Intangibles:
Until technological feasibility is achieved, all costs incurred in the development of software are
recognized as expense when incurred. Once technological feasibility has been achieved, until the
commencement of commercial production, costs of producing masters and other costs are

capitalized. Once the software is available for release, costs incurred are either product costs or are
recognized as expense.
Under franchise agreements, revenue should be recognized when the franchisor has substantially
performed all material services and conditions, and collectability from the franchisee is reasonably
assured. Since all services have not yet been performed,no revenue can be recognized, and any
cash received must be reported as unearned franchise fees.
Costs incurred after reaching technological feasibility but before commercial production, such as the
production of product masters, are capitalized and amortized. The amount of amortization will be
the greater amount when calculated under both the straight-line method and the volume of output
approach. Under straight-line, amortization will be 10% of $320,000 or $32,000. Under the volume
of output approach the ratio of current sales, $120,000, to the total of current and estimated future
sales, $120,000 + $680,000 or $800,000, is multiplied by the $320,000 carrying value of the
amortizable costs to determine amortization of , $120,000/$800,000 x $320,000 = $48,000. Since it
is larger, $48,000 will be the amount of amortization in 20X3.
In accordance with the accounting principle of conservatism, research and development costs must
be expensed as incurred. The only exception is purchased equipment with possible future benefits,
which may be capitalized and depreciated.
When an asset is acquired for general research and development activities, it is depreciated over its
useful life with the depreciation recognized as research and development (R & D) expense. When
an asset is acquired for a specific R & D project and has no alternative use to the company, the total
cost is recognized as R & D expense. When an asset is acquired that will be used for R & D, after
which it will have an alternative use to the company, it is depreciated and the depreciation is
recognized as R & D expense while it is being used for that purpose and as a manufacturing
expense when it is converted to that purpose.
In addition, however, the resulting carrying value is compared to the net realizable value that will be
derived from sales of the software.
Under IFRS, in order to capitalize costs incurred in developing an identifiable intangible, a company
is required to be able to demonstrate that completion is technologically feasible, the entity has the
intent and resources available to complete it, the entity has the ability to use or sell the asset, it will
generate probable future economic benefits, and costs can be reliably measured.

Under the revaluation model allowed by IFRS, assets are periodically revalued and adjusted to their
fair values. Revaluation is required to be done relatively frequently, generally at least every three
years, but is not required annually. In between revaluation dates, the asset is amortized and may be
written down due to impairment.
The cost of a patent includes the legal costs associated with obtaining it and, if necessary, the costs
of defending it in court against infringement by third parties. If a legal defense of the patent is

unsuccessful, all costs will be expensed, since no legal benefit will result. A patent that had been
purchased from another party is capitalized at its purchase price.
An intangible asset of finite duration must be amortized over the shorter of its legal or useful life.
In accordance with the accounting principle of conservatism, capitalized software costs are
amortized by the larger of either straight-line or the ratio of actual to total revenue percentages
unless the resulting carrying amount exceeds NRV, in which case the capital software asset will be
reported at NRV. Here, the following data apply:
Useful life:

4 years

Straight-line = 1/4 = 25%

Ratio: 10%
Because the straight-line percentage is higher than the ratio of actual to total revenues, it will be
used to calculate amortization (25% X $600,000 = $150,000). Because the resulting carrying value is
below NRV, it will be reported as the carrying value of the capital software asset.