Chapter 8: Long-Lived Assets

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: $14,180. $14,980. $15,480.

$14,980.

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? 130. 140. 210.

130.

If MARIO uses the straight-line method, the amount of depreciation expense on MARIO's income statement related to the manufacturing equipment is c losest to: A . 125,000. B . 150,000. C . 168,750.

A . 125,000.

Based on Exhibits 1 and 2, the best estimate of the average remaining useful life of the company's plant and equipment at the end of 2009 is: A . 20.75 years. B . 24.25 years. C . 30.00 years.

A . 20.75 years.

Which of the following will 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 . A higher residual value.

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 . Straight-line method.

Under IFRS, what must be disclosed under the cost model of valuation for investment properties? A . Useful lives. B . The method for determining fair value. C . Reconciliation between beginning and ending carrying amounts of investment property.

A . Useful lives.

Jordan's response about the impact of the different depreciation methods on net profit margin is most likely incorrect with respect to: A . accelerated depreciation. B . straight-line depreciation. C . units-of-production depreciation.

A . accelerated depreciation.

The gain or loss on a sale of a long-lived asset to which the revaluation model has been applied is most likely calculated using sales proceeds less: A . carrying amount. B . carrying amount adjusted for impairment. C . historical cost net of accumulated depreciation.

A . carrying amount.

All else equal, in the fiscal year when long-lived equipment is purchased: A . depreciation expense increases. B . cash from operations decreases. C . net income is reduced by the amount of the purchase.

A . depreciation expense increases.

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 . earn rent.

Under the revaluation model for property, plant, and equipment and the fair model for investment property: A . fair value of the asset must be able to be measured reliably. B . net income is affected by all changes in the fair value of the asset. C . net income is never affected if the asset increases in value from its carrying amount.

A . fair value of the asset must be able to be measured reliably.

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 . fair value.

Costs incurred for intangible assets are generally expensed when they are: A . internally developed. B . individually acquired. C . acquired in a business combination.

A . internally developed.

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 the equipment's expected production life and use: Year 1 Year 2 Year 3 Year 4 Year 5 Total Units of production 2,000 2,000 2,000 2,000 2,500 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 . lower.

Jordan's response about the effect of Alpha's revaluation is most likely correct with respect to the impact on its: A . return on equity. B . return on assets. C . debt to capital ratio.

A . return on equity.

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 the following amounts is most likely the sale price of the asset? A . €6.8 million. B . €8.8 million. C . €13.2 million.

A . €6.8 million.

A company is comparing straight-line and double-declining balance amortization methods for a non-renewable six-year license, acquired for €600,000. The difference between the Year 4 ending net book values using the two methods is closest to : A . €81,400. B . €118,600. C . €200,000.

A . €81,400.

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.

B . 168,750.

Companies X and Z have the same beginning-of-the-year book value of equity and the same tax rate. The companies have identical transactions throughout the year and report all transactions similarly except for one. Both companies acquire a £300,000 printer with a three-year useful life and a salvage value of £0 on January 1 of the new year. Company X capitalizes the printer and depreciates it on a straight-line basis, and Company Z expenses the printer. The following year-end information is gathered for Company X. Company X As of December 31 Ending shareholders' equity £10,000,000 Tax rate 25% Dividends £0.00 Net income £750,000 Based on the information given, Company Z's return on equity using year-end equity will be closest to: A . 5.4%. B . 6.1%. C . 7.5%.

B . 6.1%.

Which of the following characteristics is most likely to differentiate investment property from property, plant, and equipment? A . It is tangible. B . It earns rent. C . It is long-lived.

B . It earns rent.

With respect to Statement 3, what is the most likely effect of the impairment loss? A . Net income in years prior to 2009 was likely understated. B . Net profit margins in years after 2009 will likely exceed the 2009 net profit margin. C . Cash flow from operating activities in 2009 was likely lower due to the impairment loss.

B . Net profit margins in years after 2009 will likely exceed the 2009 net profit margin.

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 March 31, 2010. As of March 31, 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 . No, because this revaluation is recorded directly in equity.

A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on December 31, 2009. The analyst compiles the following information about the vehicle: Acquisition cost of the vehicle ARP 100,000 Acquisition date January 1, 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 of ARP 15,000. C . a gain of ARP 18,333.

B . a gain of ARP 15,000.

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 . acquisition dates

When constructing an asset for sale, directly related borrowing costs are most likely: A . expensed as incurred. B . capitalized as part of inventory. C . capitalized as part of property, plant, and equipment.

B . capitalized as part of inventory.

Jordan's response about his approach to estimating a company's need to reinvest in its productive capacity is most likely correct regarding: A . estimating the average age of the asset base. B . estimating the total useful life of the asset base. C . estimating the average remaining useful life of the asset base.

B . estimating the total useful life of the asset base.

Jordan's response about the ratio impact of Alpha's decision to capitalize interest costs is most likely correct with respect to the: A . interest coverage ratio. B . fixed asset turnover ratio. C . interest coverage and fixed asset turnover ratios.

B . fixed asset turnover ratio.

Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the carrying amount over the asset's: A . fair value. B . recoverable amount. C . undiscounted expected future cash flows.

B . recoverable amount.

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 . £3,100,000.

A company acquires a patent with an expiration date in six years for ¥100 million. Th e company assumes that the patient will generate economic benefits that will decline over time and decides to amortize the patent using the double-declining balance method. Th e annual amortization expense in Year 4 is closest to: A . ¥6.6 million. B . ¥9.9 million. C . ¥19.8 million.

B . ¥9.9 million.

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 December 31, 2009. She gathers the following information about the asset: Acquisition cost €2,300,000 Acquisition date January 1, 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 December 31, 2009 is closest to: A . €600,000. B . €1,200,000. C . €1,533,333.

B . €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 January 1, 2009 Patent expiration date December 31, 2015 Total plant capacity of patented product 40,000 units per year Production of patented product in fiscal year ended December 31, 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 . €662,857.

After analyzing the financial statements and footnotes of a 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 Yes No No

With respect to Statement 2, what would be the most likely effect in 2010 if AMRC were to switch to an accelerated depreciation method for both financial and tax reporting? A . Net profit margin would increase. B . Total asset turnover would decrease. C . Cash flow from operating activities would increase.

C . Cash flow from operating activities would increase.

Juan Martinez, CFO of VIRMIN, 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 . Double-declining balance method.

Which of the following is a required financial statement disclosure for long-lived intangible assets under US GAAP? A . The useful lives of assets. B . The reversal of impairment losses. C . Estimated amortization expense for the next five fiscal years

C . Estimated amortization expense for the next five fiscal years

With respect to Statement 1, which of the following is the most likely effect of management's decision to expense rather than capitalize these expenditures? A . 2009 net profit margin is higher than if the expenditures had been capitalized. B . 2009 total asset turnover is lower than if the expenditures had been capitalized. C . Future profit growth will be higher than if the expenditures had been capitalized.

C . Future profit growth will be higher than if the expenditures had been capitalized.

Which costs incurred with the purchase of property and equipment are expensed? A . Delivery charges. B . Installation and testing. C . Training required to use the property and equipment.

C . Training required to use the property and equipment.

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 . amortization.

Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from: A . contractual or legal rights. B . assets that can be separated from the acquired company. C . assets that are neither tangible nor identifi able intangible assets.

C . assets that are neither tangible nor identifi able intangible assets.

The impairment of intangible assets with finite lives affects: A . the balance sheet but not the income statement. B . the income statement but not the balance sheet. C . both the balance sheet and the income statement.

C . both the balance sheet and the income statement.

Jordan's response about the effect of Beta's impairment loss is most likely incorrect with respect to the impact on its: A . debt to total assets. B . fixed asset turnover. C . cash flow from operating activities.

C . cash flow from operating activities.

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 . change from the fair value model when the company transfers investment property to property, plant, and equipment.

A company purchases a piece of equipment for €1,500. The equipment is expected to have a useful life of five years and no residual value. In the first year of use, the units of production are expected to be 15% of the equipment's lifetime production capacity and the equipment is expected to generate €1,500 of revenue and incur €500 of cash expenses. The depreciation method yielding the lowest operating profit on the equipment in the first year of use is: A . straight line. B . units of production. C . double-declining balance.

C . double-declining balance.

A company purchases equipment for $200,000 with a five-year useful life and salvage value of zero. It uses the double-declining balance method of depreciation for two years, then shifts to straight-line depreciation at the beginning of Year 3. Compared with annual depreciation expense under the double-declining balance method, the resulting annual depreciation expense in Year 4 is: A . smaller. B . the same. C . greater.

C . greater.

Jordan's response about the financial statement impact of Alpha's decision to capitalize the cost of its new computer system is most likely correct with respect to: A . lower net income. B . lower total assets. C . higher cash flow from operating activities.

C . higher cash flow from operating activities.

If a company uses the fair value model to value investment property, changes in the fair value of the asset are least likely to affect: A . net income. B . net operating income. C . other comprehensive income.

C . other comprehensive income.