30. Long lived assets (web, sch, cfa)
Miguel Rodriguez of MARIO S.A., an Uruguayan corporation, is computing the depreciation expense of a piece of manufacturing equipment for the fiscal year ended 31 December 2009. The equipment was acquired on 1 January 2009. Rodriguez gathers the following information (currency in Uruguayan pesos, UYP): Cost of the equipment =UYP 1,200,000 Estimated residual value =UYP 200,000 Expected useful life =8 years Total productive capacity =800,000 units Production in FY 2009 =135,000 units Expected production for the next 7 years =95,000 units each year 1. If MARIO uses the straight-line method, the amount of depreciation expense on MARIO's income statement related to the manufacturing equipment is closest to: A. 125,000. B. 150,000. C. 168,750. 2. If MARIO uses the units-of-production method, the amount of depreciation expense (in UYP) on MARIO's income statement related to the manufacturing equipment is closest to: A. 118,750. B. 168,750. C. 202,500
1. A is correct. Using the straight-line method, depreciation expense amounts to Depreciation expense = (1,200,000 — 200,000)/8 years = 125,000. 2. B is correct Using the units-of-production method, depreciation expense amounts to Depreciation expense = (1,200,000- 200,000) x (135,000/800,000) = 168,750
A firm that capitalizes rather than expensing costs will have: A) lower cash flows from investing. B) lower cash flows from operations. C) lower profitability in the earlier years.
A A firm that capitalizes costs classifies them as an investing cash flow rather than an operating cash flow. Investing cash flows will be lower and cash flow from operations will be higher when costs are capitalized.
Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use: A) accelerated depreciation methods will increase the total amount of depreciation expense over the life of an asset. B) accelerated depreciation methods will decrease the amount of taxes in early years. C) the units-of-production method to depreciate assets will overstate income during periods of low production.
A Accelerated depreciation methods will not change the total amount of depreciation expense over the life of an asset. Accelerated depreciation methods will increase the amount of depreciation expense in the early years of the asset's life, but the depreciation expense will be less in the latter years of the asset's life.
Which of the following items is least likely an example of an intangible asset with an indefinite life? A) Acquired patents. B) Goodwill. C) Trademarks that can be renewed at minimal cost.
A Acquired patents are most likely purchased with the intent to use over a specific period of time and therefore would be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with an indefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with infinite lives.
Allocating an intangible asset's cost to the income statement over time is known as: A) amortization. B) depreciation. C) depletion.
A Allocating an intangible asset's cost to the income statement over time is known as amortization. The same process is known as depreciation for tangible assets. For natural resources, allocation of cost to the income statement over time is commonly referred to as depletion.
A firm revalues its long-lived assets upward. All other things equal, which of the following financial impacts is least likely to occur? A) Higher profitability in the periods after revaluation. B) Higher earnings in the revaluation period. C) Lower leverage ratios.
A Because the asset has now been increased to a higher depreciable base, there will now be higher depreciation expense and therefore, lower profitability in the periods after revaluation. There could be higher earnings in the revaluation period because there may be impairment losses that can be reversed on the income statement. Otherwise, there will be an adjustment to earnings through other comprehensive income. Leverage ratios (i.e. debt to equity) will decrease since the increase in assets will be balanced by an increase in equity. Higher denominators and unchanged numerators will result in lower leverage ratios.
Capitalizing interest costs related to a company's construction of assets for its own use is required by: A) both IFRS and U.S. GAAP. B) IFRS only. C) U.S. GAAP only.
A Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during a the construction of capital assets for their own use.
Dobkin Company decides to expense costs that it would have otherwise capitalized. Compared to capitalizing, expensing these costs will result in: A) lower asset levels and lower equity levels. B) lower asset levels and higher equity levels. C) lower asset levels and lower liability levels.
A Expensing instead of capitalizing results in lower assets. Since the entire expense is recognized in the current period (whereas only a portion of the expenditure is amortized when capitalizing), net income (and therefore equity, via retained earnings) is lower with expensing than with capitalizing. Liabilities are unaffected.
An analyst determined the following information concerning Franklin, Inc.'s stamping machine: Acquired seven years ago for $22 million Straight line method used for depreciation Useful life estimated to be 12 years Salvage value originally estimated to be $4 million The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. Under U.S. GAAP, the stamping machine is: A) impaired because its carrying value exceeds expected future cash flows. B) not impaired. C) impaired because expected salvage value has declined.
A The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.
Which of the following statements regarding capitalizing versus expensing costs is least accurate? A) Total cash flow is higher with capitalization than expensing. B) Capitalization results in higher profitability initially. C) Cash flow from investing is higher with expensing than with capitalization.
A Total cash flow is higher with capitalization than expensing is least accurate because total cash flow would be the same under both methods, not considering tax implications.
Marcel Inc. is a large manufacturing company based in the U.S. but also operating in several European countries. Marcel has long-lived assets currently in use that are valued on the balance sheet at $600 million. This includes previously recognized impairment losses of $80 million. The original cost of the assets was $750 million. The fair value of the assets was determined in a professional appraisal to be $690 million. Assuming that Marcel reports under U.S. GAAP, the new appraisal of the assets' value most likely results in: A) no change to Marcel's financial statements. B) a $90 million gain in other comprehensive income. C) an $80 million gain on income statement and $10 million gain in other comprehensive income.
A Under U.S. GAAP, long-lived assets are reported on the balance sheet at depreciated cost less any impairment losses ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss, for a net amount of $600 million). Increases are generally prohibited with the exception of assets held for sale. Since these assets are currently in use, this exception does not apply. Therefore, Marcel may not revalue the assets upward.
According to U.S. GAAP, an asset is impaired when: A. the firm cannot fully recover the carrying amount of the asset through operations. B. accumulated depreciation plus salvage value exceeds acquisition cost. C. the present value of future cash flows from an asset exceeds its carrying value.
A An asset is impaired when the firm cannot recover the carrying value. Under U.S. GAAP, recoverability is tested based on undiscounted future cash flows.
Which of the following statements regarding the capitalization of an expense is least accurate? A) Capitalizing an expense lowers current period net income. B) Capitalizing an expense creates an asset. C) Capitalized expenses increases equity.
A Capitalizing expenses reduces current period expenses by the amount capitalized. The amount capitalized is added to assets which increases equity by increasing net income and retained earnings in the current period.
East Company purchased a new truck at the beginning of this year for $30,000. The truck has a useful life of eight years or 150,000 miles, and an estimated salvage value of $3,000. If the truck is driven 16,500 miles this year, how much depreciation will East report under the double-declining balance (DDB) method and the units-of-production (UOP) method? DDB UOP A. $7,500 $2,970 B. $7,500 $3,300 C. $6,750 $2,970
A Double-declining balance = $30,000 book value x (2/8) = $7,500. Units-of-production = ($30,000 cost- $3,000 salvage value) / 150,000 miles = $0.18 per mile. 16,500 miles driven x $0.18 per mile = $2,970.
A firm recently recognized a $15,000 loss on the sale of machinery used in its manufacturing operation. The original cost of the machinery was $100,000 and the accumulated depreciation at the date of sale was $60,000. What amount did the firm receive from the sale? A. $25,000. B. $45,000 C. $85,000.
A Gain or loss is equal to the sale proceeds minus the carrying value (cost minus accumulated depreciation) at the time of sale. Given the loss of $15,000 and carrying value of $40,000 ($100,000 - $60,000), we can solve for the proceeds of $25,000 = (-15,000 + 40,000).
Which of the following is least likely considered in determining the useful life an intangible asset? A. Initial cost. B. Legal, regulatory, or contractual provisions. C. Provisions for renewal or extension.
A Initial cost has nothing to do with the useful life of an intangible asset.
At the beginning of this year, Fairweather Corp. incurred $200,000 of research costs and $100,000 of development costs to create a new patent. The patent is expected to have a useful life of 40 years with no salvage value. Calculate the carrying value of the patent at the end of this year, assuming Fairweather follows U.S. GAAP. A. $0. B. $97,500. C. $292,500.
A Under U.S. GAAP, research and development costs are expensed as incurred. Thus, the entire $300,000 of R&D is expensed this year. The result is a zero carrying value.
Which of the following wall cause a company to show a lower amount of amortization of intangible assets in the first year after acquisition? A. A higher residual value. B. A higher amortization rate. C. A shorter useful life.
A is correct. A higher residual value results in a lower total depreciable cost and, therefore, a lower amount of amortization in the first year after acquisition (and every year after that).
BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the construction of its manufacturing plant. The loan has the following conditions: Borrowing date 1 January 2009 Amount borrowed =500 million Brazilian real (BRL) Annual interest rate =14 percent Term of the loan =3 years Payment method =Annual payment of interest only. Principal amortization is due at the end of the loan term. The construction of the plant takes two years, during which time BAURU earned BRL 10 million by temporarily investing the loan proceeds. Which of the following is the amount of interest related to the plant construction (in BRL million) that can be capitalized in BAURU's balance sheet? A. 130. B. 140. C. 210
A is correct. Borrowing costs can be capitalized under IFRS until the tangible asset is ready for use. Also, under IFRS, income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalization. Therefore, Total capitalized interest = (500 million x 14% x 2 years)- 10 million = 130 million.
CROCO S.p.A sells an intangible asset with a historical acquisition cost of €12 million and an accumulated depreciation of €2 million and reports a loss on the sale of€3.2 million. Which of tire following amounts is most likely the sale price of the asset? A. €6.8 million B. €8.8 million C. €13.2 million
A is correct. Gain or loss on the sale = Sale proceeds- Carrying amount. Rearranging this equation, Sale proceeds = Carrying amount +Gain or loss on sale. Thus, Sale price = (12 million- 2 million) + (—3.2 million) = 6.8 million.
According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company's financial statements and footnotes except for. A. fair value. B. impairment loss. C. amortization rate.
A is correct. IFRS do not require fair value of intangible assets to be disclosed
A financial analyst is studying the income statement effect of two alternative depreciation methods for a recently acquired piece of equipment. She gathers the following information about die equipment's expected production life and use: ========Units of production Year 1 ==2,000 Year 2 ==2,000 Year 3 ==2,000 Year 4 ==2,000 Year 5 ==2,500 Total 10,500 Compared with the units-of-production method of depreciation, if the company uses the straight-line method to depreciate the equipment, its net income in Year 1 will most likely be: A, lower. B. higher. C. the same.
A is correct. If the company uses the straight-line method, the depreciation expense will be one-fifth (20 percent) of the depreciable cost in Year 1. If it uses the units-of-production method, the depreciation expense will be 19 percent (2,000/10,500) of the depreciable cost in Year 1. Therefore, if the company uses the straight-line method, its depreciation expense will be higher and its net income will be lower.
Investment property is most likely to: A, earn rent. B. be held for resale. C. be used in the production of goods and services.
A is correct. Investment property earns rent. Inventor,' is held for resale, and property, plant, and equipment are used in the production of goods and services.
Which of the following amortization methods is most likely to evenly distribute the cost of an intangible asset over its useful life? A. Straight-line method. B. Units-of-production method. C. Double-declining balance method.
A is correct. The straight-line method is the method that evenly distributes the cost of an asset over its useful life because amortization is the same amount every year.
Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using the revaluation model. Edgewater needs to determine 1) what Pfaff's carrying value of property, plant and equipment would be under the historical cost model, and 2) which of Pfaff's intangible assets have finite useful lives. Will these items be disclosed in Pfaff's financial statements? A) Neither of these items is required to be disclosed. B) Both of these items are required to be disclosed. C) Only one of these items is required to be disclosed.
B Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historical cost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite.
An impairment write-down is least likely to decrease a company's: A) assets. B) debt-to-equity ratio. C) future depreciation expense.
B An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.
Capitalized interest costs are typically reported in the cash flow statement as an outflow from: A) operating. B) investing. C) financing.
B Capitalized interest costs are reported as CFI on the statement of cash flows, as they are treated as part of the cost of the constructed capital asset.
Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery? A) Historically, economic depreciation was overstated. B) Historically, economic depreciation was understated. C) Lakeside Co. will owe back taxes.
B Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less than expected, accounting methods for depreciation have understated the economic depreciation. In addition, if there is no salvage value when positive salvage value was expected, the understatement problem is compounded.
Component depreciation is required under: A) both IFRS and U.S. GAAP. B) IFRS, but not U.S. GAAP. C) U.S. GAAP, but not IFRS.
B IFRS requires firms to use component depreciation, which refers to depreciating the identifiable components of an asset separately. U.S. GAAP permits component depreciation but does not require it.
As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate? A) The write-downs are reported as a component of income from continuing operations. B) Write-downs taken on asset values can be reversed in later years if market conditions improve. C) During the year of the write-downs, retained earnings and deferred taxes will decrease.
B Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.
Under normal circumstances, intangible assets with indefinite lives are: A) amortized over a reasonable period but not subject to impairment. B) not amortized but subject to impairment. C) amortized over a reasonable period and subject to impairment.
B Intangible assets with indefinite lives are not amortized but are subject to impairment charges. Under such situations, there may be in impairment in the asset value where events and circumstances indicate that the firm may not be able to recover the carrying value through future use. Examples include significant declines in market value of the asset or significant deterioration in the asset's physical condition.
Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets currently in use that are valued on the balance sheet at $600 million. This includes previously recognized impairment losses of $80 million. The original cost of the assets was $750 million. The fair value of the assets was determined by in independent appraisal to be $690 million. Which of the following entries may Davis record under IFRS? A) $90 million gain on income statement. B) $80 million gain on income statement and a $10 million revaluation surplus. C) $90 million revaluation surplus.
B Under IFRS, firms may choose to report long-lived assets at fair value. Upward revaluations are permitted and will result in a gain recognized on the income statement to the extent it reverses a previously recognized loss. Any excess is reported as a revaluation surplus, a direct adjustment to equity. In this case, the carrying value of the assets is $600 million ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss). The fair value is $690 million. Of the $90 million excess of fair value over carrying value, $80 million is recognized as a gain on the income statement to reverse the $80 million impairment loss that was previously recognized. The remaining $10 million is recorded as a revaluation surplus in shareholders' equity.
Schubert, Inc. acquires 100% of another firm. As a result of the acquisition, Schubert reports on its balance sheet 1) a patent with five years remaining and a carrying value of $2 million and 2) goodwill with a carrying value of $4 million. Using the straight-line method, total amortization expense in the first year for these two intangible assets is: A) $800,000. B) $400,000. C) $1,200,000.
B Use calc. Goodwill is an intangible asset with an indefinite life and is not amortized.
Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000? A) Loss of $100,000. B) Gain of $40,000. C) Loss of $360,000.
B With a sale of an asset to a third party, the difference between the proceeds and carrying value is reported as a gain or loss on the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000). Therefore, the gain is equal to $40,000 ($400,000 proceeds less $360,000 carrying value).
Which of the following statements about indefinite-lived intangible assets is most accurate? A. They are amortized on a straight-line basis over a period not to exceed 40 years. B. They are reported on the balance sheet indefinitely. C. They never appear on the balance sheet unless they are internally developed.
B Indefinite-lived intangible assets are not amortized; rather, they are reported on the balance sheet indefinitely unless they are impaired.
Novak, Inc. owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvage value of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is: A) $2,880. B) $2,200. C) $3,000.
B Use Calc
Two years ago, Metcalf Corp. purchased machinery for $800,000. At the end of last year, the machinery had a fair value of $720,000. Assuming Metcalf uses the revaluation model, what amount, if any, is recognized in Metcalf's net income this year if the machinery's fair value is $810,000? A. $0. B. $80,000. C. $90,000.
B Under the revaluation method, Metcalf reports the equipment on the balance sheet at fair value. At the end of last year, an $80,000 loss was recognized (from $800,000 to $720,000) in the income statement. Any recovery is recognized in the income statement to the extent of the loss. Any remainder is recognized in shareholders' equity as revaluation surplus. Thus, at the end of this year, an $80,000 gain is recognized in the income statement, and a $10,000 revaluation surplus is recognized in shareholders' equity.
MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for its property, plant, and equipment. One of MARU's machines was purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31 March 2010, the machine has a fair value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine? A. Yes. B. No, because this revaluation is recorded directly in equity. C. No, because value increases resulting from revaluation can never be recognized as a profit
B is correct In this case, the value increase brought about by the revaluation should be recorded directly in equity. The reason is that under IFRS, an increase in value brought about by a revaluation can only be recognized as a profit to the extent that it reverses a revaluation decrease of the same asset previously recognized in the income statement
An analyst is studying the impairment of the manufacturing equipment of WLP Corp., a UK-based corporation that follows IFRS. He gathers the following information about the equipment: Fair value ==£16,800,000 Costs to sell ==£800,000 Value in use ==£14,500,000 Net carrying amount ==£19,100,000 The amount of the impairment loss on WLP Corp.'s income statement related to its manufacturing equipment is closest to: A. £2,300,000. B. £3,100,000. C. £4,600,000
B is correct The impairment loss equals £3,100,000. Impairment = max(Recoverable amount; Value in use) — Net carrying amount = max(16,800,000- 800,000; 14,500,000)- 19,100,000 =-3,100.000
An analyst in the finance department of BOOLDO S.A., a French corporation, is computing the amortization of a customer list, an intangible asset, for the fiscal year ended 31 December 2009. She gathers the following information about the asset: Acquisition cost: €2,300,000 Acquisition date: 1 January 2008 Expected residual value at time of acquisition: €500,000 The customer list is expected to result in extra sales for three years after acquisition. The present value of these expected extra sales exceeds the cost of the list. If the analyst uses the straight-line method, the amount of accumulated amortization related to the customer list as of 31 December 2009 is closest to: A €600,000. B. €1,200,000. C. €1,533,333.
B is correct Using the straight-line method, accumulated amortization amounts to Accumulated amortization = [(2,300,000- 500,000)/3 years] x 2 years = 1,200,000.
A financial analyst is analyzing the amortization of a product patent acquired by MAKETTI S.p.A, an Italian corporation. He gathers the following information about the patent: Acquisition cost= €5,800,000 Acquisition date= 1 January' 2009 Patent expiration date= 31 December 2015 Total plant capacity of patented product= 40,000 unit per year Production of patented product in fiscal year ended 31 December 2009= 20,000 units Expected production of patented product during life of the patent= 175,000 units If the analyst uses the units-of-production method, the amortization expense on the patent for fiscal year 2009 is closest to: A. €414,286. B. €662,857. C. €828,571
B is correct Using the units-of-production method, depreciation expense amounts to Depreciation expense = 5,800,000 x (20,000/175,000) = 662,857.
After reading the financial statements and footnotes ofa company that follows IFRS, an analyst identified the following intangible assets: • product patent expiring in 40 years; • copyright with no expiration date; and • goodwill acquired 2 years ago in a business combination. Which of these assets is an intangible asset with a finite useful life? Product Patent=====Copyright =====Goodwill A Yes ============Yes ===========No B Yes ============No ===========No C No ============Yes ===========Yes
B is correct. A product patent with a defined expiration date is an intangible asset with a finite useful life. A copyright with no expiration date is an intangible asset with an indefinite useful life. Goodwill is no longer considered an intangible asset under IFRS and is considered to have an indefinite useful life.
According to IFRS, all of the following pieces of information about property, plant, and equipment must be disclosed in a company's financial statements and footnotes except for. A. useful lives. B. acquisition dates. C. amount of disposals.
B is correct. IFRS do not require acquisition dates to be disclosed.
Which of the following characteristics is most likely to differentiate investment property from properly, plant, and equipment? A. It is tangible. B. It earns rent. C. It is long-lived.
B is correct. Investment property earns rent. Investment property and property, plant, and equipment are tangible and long-lived.
JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs: Purchase price $12,980 Freight and insurance $1,200 Installation $700 Testing $100 Maintenance staff training costs $500 The total cost of the machine to be shown on JOOVI's balance sheet is closest to: A. $14,180. B. $14,980. C. $15,480
B is correct. Only costs necessary for the machine to be ready to use can be capitalized. Therefore, Total capitalized costs = 12.980 + 1,200 + 700 + 100 = $14,980.
A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on 31 December 2009. The analyst compiles the following information about the vehicle: Acquisition cost of the vehicle ==ARP 100,000 Acquisition date ==1 January 2007 Estimated residual value at acquisition date ==ARP 10,000 Expected useful life ==9 years Depreciation method ==Straight-line The result of the sale of the vehicle is most likely: A. a loss of ARP 15,000, B. a gain ofARP 15,000. C. a gain of ARP 18,333.
B is correct. The result on the sale of the vehicle equals Gain or loss on the sale = Sale proceeds — Carrying amount = Sale proceeds- (Acquisition cost — Accumulated depreciation) = 85,000- {100,000- [((100,000- 10,000)/9 years) x 3 years]} = 15,000
When comparing capitalizing versus expensing costs which of the following statements is most accurate? A) Expensing costs creates lower cash flows from operations and lower cash flows from investing. B) Capitalizing costs creates lower cash flows from operations and higher cash flows from investing. C) Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.
C Although net cash flows are not affected by the choice of capitalization or expensing, the components of cash flow are affected. Because, a firm that capitalizes classifies the expenditure as investing (not operations), cash flow from operations will be higher for firms that capitalize and investing cash flows will be lower than that of an expensing firm.
Under U.S. GAAP, an asset is impaired when: A) accumulated depreciation plus salvage value exceeds acquisition costs. B) the present value of future cash flows exceeds the carrying amount of the asset. C) the firm can no longer fully recover the carrying amount of the asset.
C An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets? A) IFRS. B) Both IFRS and U.S. GAAP. C) U.S. GAAP.
C Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.
Intangible assets with finite useful lives are: A) amortized over their actual lives. B) not amortized, but are tested for impairment at least annually. C) amortized over their expected useful lives.
C Intangible assets with finite lives are amortized over their expected useful lives, which is an estimate. Actual lives of intangible assets are often not known in advance. Intangible assets with infinite lives are not amortized, but are tested for impairment at least annually.
A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company's: A) total assets on the balance sheet. B) net income/sales ratio. C) fixed asset turnover ratio.
C The use of an accelerated depreciation method will increase depreciation expenses early in the asset's life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed assets) will increase, because the book value of the fixed assets will be lower.
Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The original cost of the machinery was $500,000 and to date has generated accumulated depreciation of $140,000. Which of the following must Spenser record on the income statement if it decides to abandon the asset? A) Gain of $40,000. B) Loss of $100,000. C) Loss of $360,000.
C With an abandonment of an asset, the carrying value of the machinery is removed from the balance sheet and a loss of that amount is recognized in the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000).
In the early years of an asset's life, a firm using the double-declining balance method, as compared to a firm using straight-line depreciation, will report lower: A. depreciation expense. B. operating cash flow. C. retained earnings.
C In the early years, accelerated depreciation will result in higher depreciation expense; thus, lower net income. Lower net income will result in lower retained earnings.
Red Company immediately expenses its development costs while Black Company capitalizes its development costs. All else equal, Red Company will: A. show smoother reported earnings than Black Company. B. report higher operating cash flow than Black Company. C. report higher asset turnover than Black Company.
C As compared to a firm that capitalizes its expenditures, a firm that immediately expenses expenditures will report lower assets. Thus, asset turnover (revenue / average assets) will be higher for the expensing firm (lower denominator).
Which of the following disclosures would least likely be found in the financial statement footnotes of a firm? A. Accumulated depreciation. B. Carrying values by asset class. C. Average age of assets.
C The average age is not a required disclosure. However, it can be calculated given other disclosures.
Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of: A. revaluation. B. impairment C. amortization.
C is correct An intangible asset with a finite useful life is amortized, whereas an intangible asset with an indefinite useful life is not.
A company is most likely to: A. use a fair value model for some investment property and a cost model for other investment property. B. change from the fair value model when transactions on comparable properties become less frequent. C. change from the fair value model when the company transfers investment property to property, plant, and equipment
C is correct. A company will change from the fair value model to either the cost model or revaluation model when the company transfers investment property to property, plant, and equipment.
Juan Martinez, CFO of VIRM1N, S.A., is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production Is expected to be relatively low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If Martinez wants to minimize tax payments in the first year of the machine's life, which of the following depreciation methods is Martinez most likely to use? A. Straight-line method. B. Units-of-production method. C. Double-declining balance method.
C is correct. If Martinez w'ants to minimize tax payments in the first year of the machine's life, he should use an accelerated method, such as the double-declining balance method.
If a company uses the fair value model to value investment property, changes in tire fair value of the asset are least likely to affect: A. net income. B. net operating income. C. other comprehensive income.
C is correct. When a company uses the fair value model to value investment property, changes in the fair value of the property are reported in the income statement—not in other comprehensive income.
