11: Fixed Assets
11. On March 31, year 4, Winn Company traded in an old machine having a carrying amount of $16,800, and paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The cash flows from the new machine are expected to be significantly different than the cash flows from the old machine. On March 31, year 4, what amount of loss should Winn recognize on this exchange? a. $0 b. $2,300 c. $3,700 d. $6,000
Correct Answer: B) $2,300 Notes (b) The cash price of the new machine represents its fair market value (FMV). The FMV of the old machine can be determined by subtracting the cash portion of the purchase price ($6,000) from the total cost of the new machine: $20,500 - $6,000 = $14,500. Since the book value of the machine ($16,800) exceeds its FMV on the date of the trade-in ($14,500), the difference of $2,300 must be recognized as a loss.
52. Which of the following statements is(are) correct about the carrying amount of a long-lived asset after an impairment loss has been recognized? Assume the long-lived asset is being held for use in the business and that the asset is depreciable. I. The reduced carrying amount of the asset may be increased in subsequent years if the impairment loss has been recovered. II. The reduced carrying amount of the asset represents the amount that should be depreciated over the asset's remaining useful life. a. I only b. II only c. Both I and II d. Neither I nor II
Correct Answer: B) II only Notes (b) Recoveries of impairment losses shall not be recognized.
4. Clay Company started construction of a new office building on January 1, year 4, and moved into the finished building on July 1, year 5. Of the building's $2,500,000 total cost, $2,000,000 was incurred in year 4 evenly throughout the year. Clay's incremental borrowing rate was 12% throughout year 4, and the total amount of interest incurred by Clay during year 4 was $102,000. What amount should Clay report as capitalized interest at December 31, year 4? a. $102,000 b. $120,000 c. $150,000 d. $240,000
Correct Answer: A) $102,000 Notes (a) The requirement is to calculate the amount of capitalized interest at 12/31/Y4. The requirements for capitalization of interest are met if: (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred. The amount to be capitalized is the lower of avoidable interest or actual interest. Avoidable interest is the average accumulated expenditures multiplied by the appropriate interest rate or rates. Since $2,000,000 was spent on the building evenly throughout the year, the average accumulated expenditures were $1,000,000 ($2,000,000 ÷ 2) and the avoidable interest was $120,000 ($1,000,000 × 12%). Since actual interest ($102,000) is less than avoidable interest, the actual interest cost is capitalized.
27. Rago Company takes a full year's depreciation expense in the year of an asset's acquisition, and no depreciation expense in the year of disposition. Data relating to one of Rago's depreciable assets at December 31, year 4, are as follows: Acquisition Year: Year 2 Cost: $110,000 Residual Value: $20,000 Accumulated Depreciation: $72,000 Estimated useful life: 5 years Using the same depreciation method as used in year 2, year 3, and year 4, how much depreciation expense should Rago record in year 5 for this asset? a. $12,000 b. $18,000 c. $22,000 d. $24,000
Correct Answer: A) $12,000 Notes (a) The requirement is to calculate the amount of depreciation expense to be recorded in year 5. After three years (year 2-year 4), accumulated depreciation is $72,000. Therefore, the method that was used was the sum-of-the-years' digits (SYD) method. Using this method, after three years the balance in accumulated depreciation would be 12/15 of the depreciable base (5/15 + 4/15 + 3/15). The depreciable base is the cost ($110,000) less the residual value ($20,000), or $90,000. Thus, using the SYD method, accumulated depreciation at 12/31/Y4 would be $72,000 ($90,000 × 12/15), which matches the amount given in the problem. Year 5 depreciation expense, using the SYD method is $12,000 ($90,000 × 2/15).
1. Merry Co. purchased a machine costing $125,000 for its manufacturing operations and paid shipping costs of $20,000. Merry spent an additional $10,000 testing and preparing the machine for use. What amount should Merry record as the cost of the machine? a. $155,000 b. $145,000 c. $135,000 d. $125,000
Correct Answer: A) $155,000 Notes (a) The cost of machinery includes all expenditures incurred in acquiring the asset and preparing it for use. Cost includes the purchase price, freight and handling charges, insurance on the machine while in transit, cost of special foundations, and costs of assembling, installation, and testing. All of the costs given in this problem are properly recorded as the cost of the machine. Therefore the cost to be recorded is $155,000 ($125,000 + $20,000 + $10,000).
2. On December 1, year 4, Boyd Co. purchased a $400,000 tract of land for a factory site. Boyd razed an old building on the property and sold the materials it salvaged from the demolition. Boyd incurred additional costs and realized salvage proceeds during December year 4 as follows: Demolition of old building: $50,000 Legal fees for purchase contract & recording ownership: $10,000 Title guarantee insurance: $12,000 Proceeds from sale of salvaged materials: $8,000 In its December 31, year 4 balance sheet, Boyd should report a balance in the land account of a. $464,000 b. $460,000 c. $442,000 d. $422,000
Correct Answer: A) $464,000
46. Linx Corporation acquired equipment on January 1, year 3, for $100,000. The equipment had a ten-year useful life and no salvage value. On December 31, year 4, the following information was obtained regarding the equipment: Expected Value of undiscounted cash flows: $72,000 Fair value estimated with in-use valuation premise: $74,000 Fair value estimated with in-exchange valuation premise: $70,000 What is the amount of impairment loss that Linx should report in its year 4 income statement? a. $6,000 b. $8,000 c. $10,000 d. $0
Correct Answer: A) $6,000 Notes (a) The requirement is to determine the amount of impairment loss. The impairment loss recognized is the difference between the asset's fair value and its carrying value. On December 31, year 4, the carrying value of the equipment is $80,000 after recording depreciation expense for the current year. ($100,000/Y4 years = $10,000 per year × 2 years = $20,000 accumulated depreciation). The fair value is determined by using the principal or most advantageous market assuming the highest and best use of the asset. Since the in-use valuation premise is $74,000, the asset is assumed to be in its highest and best use using an in-use valuation premise. Therefore, the impairment loss recognized in year 4 would be the carrying value of $80,000 less the fair value of $74,000 = $6,000.
50. During December year 4, Bubba Inc. determined that there had been a significant decrease in the market value of its equipment used in its manufacturing process. At December 31, year 4, Bubba compiled the information below. Original cost of the equipment: $500,000 Accumulated depreciation: $300,000 Expected net future cash inflows (undiscounted) related to the continued use and eventual disposal of the equipment: $175,000 Fair value of the equipment: $125,000 What is the amount of impairment loss that should be reported on Bubba's income statement prepared for the year ended December 31, year 4? a. $75,000 b. $25,000 c. $325,000 d. $375,000
Correct Answer: A) $75,000
88. Linden Corporation has investment property that is held to earn rental income. Linden prepares its financial statements in accordance with IFRS. Linden uses the fair value model for reporting the investment property. Which of the following is true? a. Changes in fair value are reported as profit or loss in the current period. b. Changes in fair value are reported as other comprehensive income for the period. c. Changes in fair value are reported as an extraordinary gain on the income statement. d. Changes in fair value are reported as deferred revenue for the period.
Correct Answer: A) Changes in fair value are reported as profit or loss in the current period. Notes (a) The requirement is to identify the true statement regarding use of the fair value model. Answer (a) is correct because the fair value model requires that investment property be measured at fair value, and any changes in fair value are recognized in profit or loss of the period.
67. Sloan Corporation is performing its annual test of the impairment of goodwill for its Financing reporting unit. It has determined that the fair value of the unit exceeds it carrying value. Which of the following is correct concerning this test of impairment? a. Impairment is not indicated and no additional analysis is necessary. b. Goodwill should be written down as impaired. c. The assets and liabilities should be valued to determine if there has been an impairment of goodwill. d. Goodwill should be retested at the entity level.
Correct Answer: A) Impairment is not indicated and no additional analysis is necessary. Notes (a) There are two steps in the test of impairment of goodwill. The first is to compare the carrying value of the reporting unit to its fair value. If the fair value exceeds the carrying value there is no need to perform the second step of valuing the unit's assets and liabilities. Goodwill is never tested at the entity level.
64. Which of the following statements concerning patents is correct? a. Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent's remaining economic life. b. Legal fees and other direct costs incurred in registering a patent should be capitalized and amortized on a straight-line basis over a five-year period. c. Research and development contract services purchased from others and used to develop a patented manufacturing process should be capitalized and amortized over the patent's economic life. d. Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over seventeen years.
Correct Answer: A) Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent's remaining economic life. Notes (a) Costs incurred in connection with securing a patent, as well as attorney's fees and other unrecovered costs of a successful legal suit to protect the patent, can be capitalized as part of patent costs. Therefore, answer (a) is correct because legal fees and other costs incurred to successfully defend a patent should be amortized along with the acquisition cost over the remaining economic life of the patent. Answer (b) is incorrect because legal fees and other direct costs incurred in registering a patent should be capitalized and amortized on a straight-line basis over its economic life, not five years. Answers (c) and (d) are incorrect because research and development costs related to the development of the product, process or idea that is subsequently patented must be expensed as incurred, not capitalized and amortized.
85. For companies that prepare financial statements in accordance with IFRS, plant, property, and equipment should be valued using which models? a. The cost model or the revaluation model. b. The cost model or the fair value model. c. The cost model or the fair value through profit or loss model. d. The revaluation model or the fair value model.
Correct Answer: A) The cost model or the revaluation model. Notes (a) The requirement is to identify the models that may be used to value plant, property, and equipment. Answer (a) is correct because IFRS allows the use of the cost model or the revaluation model for reporting plant, property, and equipment.
97. Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct? a. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued. b. When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset belongs can be revalued. c. Revaluations of property, plant, and equipment must be made at least every three years. d. Increases in an asset's carrying value as a result of the first revaluation must be recognized as a component of profit or loss.
Correct Answer: A) When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued. Notes (a) The requirement is to identify the correct statement regarding the use of the revaluation model. Answer (a) is correct because when an asset is revalued, the entire class must be revalued. Answer (b) is incorrect because the entire class must be revalued. Answer (c) is incorrect because there are no rules regarding the frequency of revaluation. Answer (d) is incorrect because the revaluation surplus is presented in other comprehensive income, not profit or loss.
96. An entity purchases a trademark and incurs the following costs in connection with the trademark: One-time trademark purchase price: $100,000 Nonrefundable VAT taxes: $5,000 Training sales personnel on the use of the new trademark: $7,000 Research expenditures associated with the purchase of the new trademark: $24,000 Legal costs incurred to register the trademark: $10,500 Salaries of the administrative personnel: $12,000 Applying IFRS and assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognize an asset in the amount of a. $100,000 b. $115,500 c. $146,500 d. $158,500
Correct Answer: B) $115,500 Notes (b) The requirement is to determine the amount that should be recognized in the financial statements for the trademark. Answer (b) is correct because the trademark amount should include the purchase price ($100,000) plus the VAT taxes ($5,000) plus the legal cost incurred to register the trademark ($10,500), which is equal to $115,500. The research expenditures, training costs, and salaries should be expensed.
47. Conner Corporation has equipment with a carrying value of $160,000 on December 31, year 4, after recording depreciation expense for year 4. The following information was available on December 31, year 4: Value of similar equipment for sale in market: $140,000 Present value of estimated future cash flows discounted at 10%: $130,000 Estimated undiscounted cash flows of equipment: $135,000 At what amount should the equipment be presented on the December 31, year 4 balance sheet? a. $160,000 b. $140,000 c. $135,000 d. $130,000
Correct Answer: B) $140,000 Notes (b) The requirement is to determine the amount that should be presented for the equipment. An impairment loss is recognized if the carrying value of the asset exceeds the sum of the undiscounted cash flows. Since the carrying value of $160,00 exceeds the sum of the estimated undiscounted cash flows of $135,000, an impairment loss must be measured. The impairment loss is measured by comparing the fair value of the asset to the carrying value. The fair value of the asset is determined by using the lowest level input available. In this situation, a Level 1 input is not available. The value of similar equipment for sale in the market is a Level 2 input because it is a directly or indirectly observable input. The present value of future cash flows is a Level 3 input, and should only be used when Level 1 or Level 2 inputs are not available. Therefore, the asset should be presented at its fair value of $140,000, which uses a Level 2 input to appropriately measure fair value of the equipment.
77. During year 4, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows: -Completion of detailed program design: $13,000 -Costs incurred for coding and testing to establish technological feasibility: $10,000 -Other coding costs after establishment of technological feasibility: $24,000 -Other testing costs after establishment of technological feasibility: $20,000 -Costs of producing product masters for training materials: $15,000 -Duplication of computer software and training materials from product masters (1,000 units): $25,000 -Packaging product (500 units): $9,000 In Pitt's December 31, year 4 balance sheet, what amount should be reported in inventory? a. $25,000 b. $34,000 c. $40,000 d. $49,000
Correct Answer: B) $34,000 Notes (b) Costs incurred in creating a computer software product should be charged to research and development expense when incurred until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detailed program design or working model. In this case, $23,000 would be recorded as expense ($13,000 for completion of detailed program design and $10,000 for coding and testing to establish technological feasibility). Costs incurred from the point of technological feasibility until the time when product costs are incurred are capitalized as software costs. In this situation, $59,000 is capitalized as software cost ($24,000 + $20,000 + $15,000). Product costs that can be easily associated with the inventory items are reported as inventory (in this case, $25,000 for duplication of computer software and training materials and $9,000 of packaging costs, for a total of $34,000).
3. Cole Co. began constructing a building for its own use in January year 4. During year 4, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during year 4 was $40,000. What amount of interest cost should Cole capitalize? a. $20,000 b. $40,000 c. $50,000 d. $70,000
Correct Answer: B) $40,000 Notes (b) The amount of interest cost which should be capitalized during building construction is the lower of avoidable interest or actual interest. Avoidable interest equals the interest computed on the weighted-average amount of accumulated expenditures on the building ($40,000). Since actual interest is $70,000 ($50,000 + $20,000), the amount capitalized should be $40,000.
94. Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if a. The useful life of the intangible asset can be reliably determined. b. An active market exists for the intangible asset. c. The cost of the intangible asset can be measured reliably. d. The intangible asset is a monetary asset.
Correct Answer: B) An active market exists for the intangible asset. Notes (b) The requirement is to identify the circumstances that allow the entity to use the revaluation model. Answer (b) is correct because the revaluation method can only be used if there is an active market for the intangible asset.
100. Under IFRS, intangible assets with indefinite lives are tested for impairment a. Quarterly at the quarterly reporting date. b. Annually at the annual reporting date. c. Biannually at the reporting date. d. There are no guidelines defining when intangible assets are tested for impairment.
Correct Answer: B) Annually at the annual reporting date. Notes (b) The requirement is to identify the rule regarding testing intangible assets with indefinite lives for impairment under IFRS. Answer (b) is correct because intangible assets with indefinite lives must be tested for impairment annually at the annual reporting date.
102. Which of the following is true about biological assets under IFRS? a. Biological assets are only found in Biotech companies. b. Biological assets are living animals or plants and must be disclosed as a separate item on the balance sheet. c. Biological assets must be valued at cost. d. Biological assets do not generally have future economic benefits.
Correct Answer: B) Biological assets are living animals or plants and must be disclosed as a separate item on the balance sheet. Notes (b) The requirement is to identify the true statement about biological assets under IFRS. Answer (b) is correct because biological assets are living animals or plants and must be disclosed as a separate item on the balance sheet.
37. A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the a. Cash proceeds received and original cost of the truck. b. Cash proceeds received. c. Original cost of the truck less the cash proceeds. d. Original cost of the truck.
Correct Answer: B) Cash Proceeds Received
39. At December 31, year 4, Matson Inc. was holding long-lived assets that it intended to sell. The assets do not constitute a separate component of the company. The company appropriately recognized a loss in year 4 related to these assets. On Matson's income statement for the year ended December 31, year 4, this loss should be reported as a(n) a. Extraordinary item. b. Component of income from continuing operations before income taxes. c. Separate component of selling or general and administrative expenses, disclosed net of tax benefit. d. Component of the gain (loss) from sale of discontinued operations, disclosed net of income taxes.
Correct Answer: B) Component of income from continuing operations before income taxes. Notes (b) Losses associated with long-lived assets which are to be disposed of are to be reported as a component of income from continuing operations before income taxes for entities preparing income statements. Losses on long-lived assets to be disposed of are neither unusual nor infrequent occurrences. These losses are not part of selling or general and administrative expenses and they are not disclosed net of tax. Discontinued operations result from disposal of a separate business component.
7. A nonmonetary exchange is recognized at fair value of the assets exchanged unless a. Exchange has commercial substance. b. Fair value is not determinable. c. The assets are similar in nature. d. The assets are dissimilar.
Correct Answer: B) Fair value is not determinable. Notes (b) A nonmonetary exchange is recognized at fair value unless the fair value is not determinable, the exchange transaction is to facilitate sales to customers, or the exchange transactions lacks commercial substance. Answer (a) is incorrect, because the exchange must lack commercial substance. Answers (c) and (d) are incorrect because there is no longer the distinction of similar or dissimilar assets in nonmonetary exchanges.
89. Under IFRS, what valuation methods are used for intangible assets? a. The cost model or the fair value model. b. The cost model or the revaluation model. c. The cost model or the fair value through profit or loss model. d. The revaluation model or the fair value model.
Correct Answer: B) The cost model or the revaluation model. Notes (b) The requirement is to identify the acceptable valuation methods for intangible assets. Answer (b) is correct because under IFRS, intangible assets can be measured using either the cost model or the revaluation model.
9. For purposes of nonmonetary exchanges, the configuration of cash flows includes which of the following? a. The implicit rate, maturity date of loan, and amount of loan. b. The risk, timing, and amount of cash flows of the assets. c. The entity-specific value of the asset which is equal to the fair value of the asset exchanged. d. The estimated present value of the assets exchanged.
Correct Answer: B) The risk, timing, and amount of cash flows of the assets. Notes (b) An entity's cash flows are expected to change significantly if the configuration of the cash flows of the asset received differs significantly from the configuration of the cash flows of the asset transferred. The configuration includes the risk, timing, and amount of the cash flows.
59. On January 2, year 4, Judd Co. bought a trademark from Krug Co. for $500,000. Judd retained an independent consultant, who estimated the trademark's remaining life to be fifty years. Its unamortized cost on Krug's accounting records was $380,000. In Judd's December 31, year 4 balance sheet, what amount should be reported as accumulated amortization? a. $7,600 b. $9,500 c. $10,000 d. $12,500
Correct Answer: C) $10,000 Notes (c) Judd Company would record the trademark at its cost of $500,000. The unamortized cost on the seller's books ($380,000) is irrelevant to the buyer. The trademark has a remaining useful life of fifty years. Therefore, the year 4 amortization expense and 12/31/Y4 accumulated amortization is $10,000 ($500,000 ÷ 50 years).
12. Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $2,500 cash. The cash flows from the new truck are not expected to be significantly different from the cash flows of the old truck. The fair value of the truck received was $17,500. At what amount should Amble record the truck received in the exchange? a. $7,000 b. $9,500 c. $10,500 d. $17,500
Correct Answer: C) $10,500 Notes (c) Because the cash flows of the exchanged assets will not be significantly different, the transaction lacks commercial substances. Therefore, book value is used to record the transition. When the assets are exchanged, boot is received, and a gain results, the exchange is treated as part sale and part exchange. The earnings process is assumed to be complete for the portion relating to the boot received. The gain recognized is computed as follows:
78. During year 4, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows: -Completion of detailed program design: $13,000 -Costs incurred for coding and testing to establish technological feasibility: $10,000 -Other coding costs after establishment of technological feasibility: $24,000 -Other testing costs after establishment of technological feasibility: $20,000 -Costs of producing product masters for training materials: $15,000 -Duplication of computer software and training materials from product masters (1,000 units): $25,000 -Packaging product (500 units): $9,000 In Pitt's December 31, year 4 balance sheet, what amount should be capitalized as software cost, subject to amortization? a. $54,000 b. $57,000 c. $59,000 d. $69,000
Correct Answer: C) $59,000 Notes (c) Costs incurred in creating a computer software product should be charged to research and development expense when incurred until technological feasibility has been established. Technological feasibility is established upon completion of a detailed program design or working model. In this case, $23,000 would be recorded as expense ($13,000 for completion of detailed program design and $10,000 for coding and testing to establish technological feasibility). Costs incurred from the point of technological feasibility until the time when product costs are incurred are capitalized as software costs. In this situation, $59,000 is capitalized as software cost ($24,000 + $20,000 + $15,000). Product costs that can be easily associated with the inventory items are reported as inventory (in this case, $25,000 for duplication of computer software and training materials and $9,000 of packaging costs, for a total of $34,000).
62. On January 2, year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent's useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during year 4, assuming amortization is recorded at the end of each year? a. $9,000 b. $54,000 c. $63,000 d. $72,000
Correct Answer: C) $63,000 Notes (c) Before year 4, Lava would record total amortization of $27,000 [($90,000 × 1/10) × 3 years], resulting in a 12/31/Y3 carrying amount of $63,000 ($90,000 - $27,000). Since the patent became worthless at 12/31/Y4 due to government prohibition of the product, the entire carrying amount ($63,000) should be charged against income in year 4 as an impairment loss.
21. During year 4, King Company made the following expenditures relating to its plant building: Continuing & Frequent repairs: $40,000 Repainted the plant building: $ 10,000 Major improvements to the electrical wiring system: $32,000 Partial replacement of roof tiles: $14,000 How much should be charged to repair and maintenance expense in year 4? a. $96,000 b. $82,000 c. $64,000 d. $54,000
Correct Answer: C) $64,000 Notes (c) The requirement is to calculate the amount to be charged to repair and maintenance expense in year 4. Generally, a cost should be capitalized if it improves the asset and expensed if it merely maintains the asset at its current level. Continuing and frequent repairs ($40,000) should be expensed. Similarly, the cost of repainting the plant building ($10,000) and the cost of partially replacing the roof tiles ($14,000) should be expensed. These are ordinary, regularly occurring expenditures which maintain, rather than improve, the plant building. The work on the electrical wiring system ($32,000) is capitalized instead of expensed since it is a major improvement. Therefore, the total amount expensed is $64,000 ($40,000 + $10,000 + $14,000).
87. When the revaluation model is used for reporting plant, property, and equipment, the gain or loss should be included in a. Income for the period. b. Gain from revaluation on the income statement. c. A revaluation surplus account is other comprehensive income. d. An extraordinary gain or loss on the income statement.
Correct Answer: C) A revaluation surplus account is other comprehensive income. Notes (c) The requirement is to identify where the gain or loss should be presented. Answer (c) is correct because when the revaluation method is used for reporting plant, property, and equipment under IFRS, any gain or loss is recorded in a revaluation surplus account which is classified as other comprehensive income.
103. With respect to subsequent goodwill recognition, private companies may choose to: a. Amortize goodwill over a period not to exceed 20 years. b. Amortize goodwill over a period between 10 and 20 years. c. Amortize goodwill over a period not to exceed 10 years. d. Amortize goodwill over any chosen period.
Correct Answer: C) Amortize goodwill over a period not to exceed 10 years. Notes (c) Private companies may choose to amortize goodwill over a maximum period of 10 years.
49. Under the reporting requirements for impaired assets, impairment losses for assets to be held and used shall be reported a. As an extraordinary item. b. As a component of discontinued operations. c. As a component of income from continuing operations. d. As a change in accounting estimate.
Correct Answer: C) As a component of income from continuing operations. Notes (c) An impairment loss for assets to be held and used shall be reported as a component of income from continuing operations before income taxes for entities presenting an income statement and in the statement of activities of a not-for-profit organization. Although there is no requirement to report a subtotal such as "income from operations," entities that present such a subtotal must include the impairment loss in that subtotal.
10. When determining the commercial substance of the exchange, which of the following items is not considered? a. Cash flow of exchanged asset. b. Cash flow of new asset. c. Cash flow from tax effects on the exchange to avoid taxes. d. Cash flow from potential sale of new equipment at a later date.
Correct Answer: C) Cash flow from tax effects on the exchange to avoid taxes. Notes (c) In determining cash flows from a transaction, the effect of taxes is not considered unless it serves a legitimate business purpose other than tax avoidance. In assessing the commercial substance of an exchange, tax cash flows arising solely to avoid taxes are not considered. Other cash flows from the nonmonetary exchange are considered.
99. Taylor Company uses IFRS for financial reporting purposes. Which of the following is true about accounting for the development costs of the company? a. Development costs must be expensed. b. Development costs are always deferred and expensed against future revenues. c. Development costs may be capitalized as an intangible asset in very restrictive situations. d. Development costs are recorded in other comprehensive income.
Correct Answer: C) Development costs may be capitalized as an intangible asset in very restrictive situations. Notes (c) The requirement is to identify the correct statement regarding accounting for development costs under IFRS. Answer (c) is correct because development costs can be capitalized only if six criteria are met.
53. According to ASC Topic 360, if a long-lived asset is determined to be impaired, how is the loss calculated? a. Future discounted cash flows less asset's carrying (book) value. b. Future undiscounted cash flows less asset's carrying (book) value. c. Fair value less asset's carrying (book) value. d. Cash outflows needed to obtain cash inflows.
Correct Answer: C) Fair value less asset's carrying (book) value. Notes (c) The loss due to impairment of long-lived assets is measured by deducting the asset's fair value from the carrying (book) value.
91. Under IFRS when accounting for plant, property, and equipment, a company a. Must use the cost model for presenting the assets. b. May elect to use the cost model or the revaluation model on any individual asset. c. May elect to use the cost model or the revaluation model on any asset class. d. Must use the cost model for land.
Correct Answer: C) May elect to use the cost model or the revaluation model on any asset class. Notes (c) The requirement is to identify the statement that is true about accounting for plant, property, and equipment under IFRS. Answer (c) is correct because a company may elect to use the cost model or the revaluation model on any asset class.
30. On January 1, year 1, Crater, Inc. purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a ten-year life. The equipment was sold December 31, year 5, for 50% of its original cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Crater use? a. Double-declining balance. b. Sum-of-the-years' digits. c. Straight-line. d. Composite.
Correct Answer: C) Straight-line.
101. Under IFRS, an intangible asset is considered to be impaired if its carrying value is greater than its recoverable amount. The recoverable amount is a. Its historical cost. b. Its net selling price. c. The greater of its net selling price or its value in use. d. Its replacement cost.
Correct Answer: C) The greater of its net selling price or its value in use. Notes (c) The requirement is to identify the definition of recoverable amount under IFRS. Answer (c) is correct because recoverable amount is defined as the greater of net selling price or value in use.
86. Which is true about the revaluation model for valuing plant, property, and equipment? a. Revaluation of assets must be made on the last day of the fiscal year. b. Revaluation of assets must be made on the same date each year. c. There is no rule for the frequency or date of revaluation. d. Revaluation of assets must be made every two years.
Correct Answer: C) There is no rule for the frequency or date of revaluation. Notes (c) The requirement is to identify the true statement about the revaluation model. Answer (c) is correct because IFRS does not provide requirements as to the frequency or date of revaluation of plant, property, and equipment.
90. Pinkerton Corp. uses the cost model for intangible assets. On April 10, year 3, Pinkerton acquired assets for $100,000. On December 31, year 3, it was determined that the recoverable amount for these intangible assets was $80,000. On December 31, year 4, it was determined that the intangible assets had a recoverable amount of $84,000. What is the impairment gain or loss recognized in year 3 and year 4 on the income statement? a. Year 3: $20,000 ; Year 4: $16,000 b. Year 3: $20,000 ; Year 4: $0 c. Year 3: $20,000 ; Year 4: $4,000 d. Year 3: $0 ; Year 4: $0
Correct Answer: C) Year 3: $20,000 ; Year 4: $4,000 Notes (c) The requirement is to determine the impairment gain or loss reported in the financial statements. Answer (c) is correct because if the cost model is used to record intangible assets, the impairment loss is recognized as a loss in the current period. If the cost model is used, a reversal of impairment losses may be recognized in the income statement up to the amount of the impairment loss previously recognized. Therefore, an impairment loss of $20,000 is recognized in year 3, and a gain of $4,000 is recognized in year 4.
98. On January 1, year 1, an entity acquires for $100,000 a new piece of machinery with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Continued operation of the machine requires an inspection every four years after purchase; the inspection cost is $8,000. The company uses the straight-line method of depreciation. Under IFRS, what is the depreciation expense for year 1? a. $10,000 b. $10,800 c. $12,000 d. $13,200
Correct Answer: D) $13,200 Notes (d) The requirement is to calculate depreciation for the asset. Answer (d) is correct because IFRS requires each major component to be depreciated over its respective useful life. The machinery cost $72,000 ($100,000 - $20,000 - $8,000) would be depreciated over 10 years. The drum would be depreciated over 5 years, and the inspection would be depreciated over 4 years. Therefore, depreciation for year 1 would be calculated as $13,200 [($72,000/10) + ($20,000/5) + ($8,000/4)].
22. On June 18, year 4, Dell Printing Co. incurred the following costs for one of its printing presses: Purchase of collating & stapling attachment: $84,000 Installation of attachment: $36,000 Replacement parts for overhaul of press: $26,000 Labor & overhead in connection with overhaul: $14,000 The overhaul resulted in a significant increase in production. Neither the attachment nor the overhaul increased the estimated useful life of the press. What amount of the above costs should be capitalized? a. $0 b. $84,000 c. $120,000 d. $160,000
Correct Answer: D) $160,000 Notes (d) The cost of the attachment ($84,000) should be capitalized because it is an addition. The cost of installing the attachment ($36,000) is also capitalized because this expenditure was required to get the attachment ready for its intended use. The overhaul costs ($26,000 + $14,000 = $40,000) are also capitalized. Even though the overhaul did not increase useful life, it is a capital expenditure because it increased productivity. The total amount capitalized is $160,000 ($84,000 + $36,000 + $40,000).
48. Dahle Corporation has equipment with a carrying value of $450,000 on December 31, year 4. The following information was available on December 31, year 4: Expected net cash flows (undiscounted): $420,000 Expected net cash flows discounted at 7%: $400,000 Fair value, using the assets with other assets: $415,000 Fair value, assuming the assets are sold stand-alone: $428,000 What is the impairment loss that Dahle must report in its year 4 income statement for this equipment? a. $50,000 b. $35,000 c. $30,000 d. $22,000
Correct Answer: D) $22,000 Notes (d) The requirement is to determine the impairment loss on the equipment. An impairment loss is recognized when the carrying value of an asset exceeds the expected undiscounted cash flows of the asset. In this case, the undiscounted expected cash flows are $420,000 and are less than the carrying value. Therefore, an impairment loss is measured as the difference between the fair value of the asset and its carrying value. The fair value of the asset should be measured based on the lowest level priority input, and assuming the highest and best use of the asset. The highest and best use of the asset occurs when the asset is sold as standalone for $428,000. Therefore, the impairment loss recognized for year 4 is $428,000 fair value less $450,000 carrying value, or $22,000.
72. Cody Corp. incurred the following costs during year 4: Design of tools, jigs, molds, and dies involving new technology: $125,000 Modification of the formulation of a process: $160,000 Troubleshooting in connection with breakdowns during commercial production: $100,000 Adaptation of an existing capability to a particular customer's need as part of a continuing commercial activity: $110,000 In its year 4 income statement, Cody should report research and development expense of a. $125,000 b. $160,000 c. $235,000 d. $285,000
Correct Answer: D) $285,000 Notes (d) Among those items listed as being part of R&D costs are design of tools, jigs, molds, and dies involving new technology ($125,000) and modification of the formulation of a process ($160,000), for a total R&D expense of $285,000. Included in the items not being part of R&D costs are troubleshooting breakdowns during production ($100,000), and adaptation of existing capability for a specific customer ($110,000).
104. A private company that chooses to apply private company guidance must measure goodwill impairment using: a. A two-step impairment approach b. No approach—goodwill is not examined for impairment. c. The same approach required for public companies. d. An approach where the private company uses a hypothetical application of the acquisition method.
Correct Answer: D) An approach where the private company uses a hypothetical application of the acquisition method. Notes (d) Although private companies may choose to use the same approach required for public companies (two-step approach), if private company guidance is adopted, the private company will examine goodwill for impairment using an approach where the private company uses a hypothetical application of the acquisition method.
65. Under ASC Topic 350, goodwill should be tested periodically for impairment a. For the entity as a whole. b. At the subsidiary level. c. At the industry segment level. d. At the operating segment level or one level below.
Correct Answer: D) At the operating segment level or one level below. Notes (d) Goodwill is allocated to reporting units which are operating segments of the business or one level below. Goodwill is also tested for impairment at the level of the reporting unit.
82. What is the proper accounting treatment for the following stages of internal-use software costs? I. Preliminary stage costs II. Post-implementation costs a. I. Capitalized as incurred ; II. Capitalized as incurred b. I. Expensed as incurred ; II. Capitalized as incurred c. I. Capitalized as incurred ; II. Expensed as incurred d. I. Expensed as incurred ; II. Expensed as incurred
Correct Answer: D) I. Expensed as incurred ; II. Expensed as incurred Notes (d) Preliminary costs are similar to research and development costs; therefore, they are expensed as incurred. Post-implementation costs such as training are not considered software development costs at all and are expensed as incurred.
5. During year 4, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year 4 income statement? I. Interest incurred for machinery for own use II. Interest incurred for machinery held for sale a. I. All interest incurred ; II. All interest incurred b. I. All interest incurred ; II. Interest incurred after completion c. I. Interest incurred after completion ; II. Interest incurred after completion d. I. Interest incurred after completion ; II. All interest incurred
Correct Answer: D) I. Interest incurred after completion ; II. All interest incurred Notes (d) Certain assets for which interest costs incurred in their production should be capitalized rather than expensed. Assets which "qualify" for interest capitalization are those constructed or otherwise produced for an enterprise's own use and those intended for sale or lease that are constructed or otherwise produced as discrete projects. The capitalization period shall end when the asset is substantially complete and ready for its intended use. Based upon these criteria, the interest costs associated with the machinery for Bay's own use should be capitalized during the construction period and expensed after completion. Additionally, all costs associated with the machinery held for sale should be expensed because the machinery does not meet the "discrete project" criterion.
68. Wilson Corporation is performing the test of impairment of its Technology reporting unit at 9/30/Y4. In the first step of the process, Wilson has valued the unit using a multiple of earnings approach at $2,000,000. The carrying value of the net assets of the Technology unit is $2,100,000. What should Wilson do with this information? a. Record an impairment loss of $100,000. b. Record no impairment loss. c. Value goodwill individually. d. Perform step two of the test of impairment.
Correct Answer: D) Perform step two of the test of impairment. Notes (d) Since the fair value of the reporting unit is less than its carrying amount, the second step in the test should be performed. The assets and liabilities of the unit should be valued and compared to value of the total unit. The implied value of goodwill is the difference. The impairment is equal to the difference between the implied value and the carrying amount of the goodwill.
93. Wilson Company maintains its records under IFRS. During the current year Wilson sold a piece of equipment used in production. The equipment had been accounted for using the revaluation method and details of the accounts and sale are presented below. Sales Price: $100,000 Equipment book value (net): $90,000 Revaluation surplus: $20,000 Which of the following is correct regarding recording the sale? a. The gain that should be recorded in profit and loss is $30,000. b. The gain that should be recorded in other comprehensive income is $10,000. c. The gain that should be recorded in other comprehensive income is $30,000. d. The gain that should be recorded in profit and loss is $10,000; the $20,000 revaluation surplus should be transferred to retained earnings.
Correct Answer: D) The gain that should be recorded in profit and loss is $10,000; the $20,000 revaluation surplus should be transferred to retained earnings. Notes (d) The requirement is to identify the correct statement about recording the sale. Answer (d) is correct because the gain of $10,000 ($100,000 book value - $90,000 book value) should be recorded in profit and loss for the period; the balance in the revaluation surplus account should be transferred to retained earnings.
95. Under IFRS, which of the following is a criterion that must be met in order for an item to be recognized as an intangible asset other than goodwill? a. The item's fair value can be measured reliably. b. The item is part of the entity's activities aimed at gaining new scientific or technical knowledge. c. The item is expected to be used in the production or supply of goods or services. d. The item is identifiable and lacks physical substance.
Correct Answer: D) The item is identifiable and lacks physical substance. Notes (d) The requirement is to identify the criterion that must be met in order for an item to be recognized as an intangible asset other than goodwill. Answer (d) is correct because the asset must be identifiable and lack physical substance.
38. During year 4, the management of West Inc. decided to dispose of some of its older equipment and machinery. By year-end, December 31, year 4, these assets had not been sold, although the company was negotiating their sale to another company. On the December 31, year 4 balance sheet of West Inc., this equipment and machinery should be reported at a. Fair value. b. Carrying amount. c. The lower of carrying amount or fair value. d. The lower of carrying amount or fair value less cost to sell.
Correct Answer: D) The lower of carrying amount or fair value less cost to sell. Notes (d) When management plans to dispose of long-lived assets and limited-lived intangibles, the assets shall be reported at the lower of carrying amount or fair value less cost to sell.
61. Northern Airline purchased airline gate rights at Newark International Airport for $2,000,000 with a legal life of five years. However, Northern has the ability and right to extend the rights every ten years for an indefinite period of time. Over what period of time should Northern amortize the gate rights? a. 5 years. b. 15 years. c. 40 years. d. The rights should not be amortized.
Correct Answer: D) The rights should not be amortized. Notes (d) In determining the useful life of an intangible, consideration should be given to the legal, regulatory or contractual life, including rights to extension. Since Northern has the ability and intent to renew the rights indefinitely, the intangible should not be amortized.
