Chapter 8 Investing Activities

When one company acquires another company it may not be able to estimate the potential losses inherent to the acquired assets or the potential liability of the acquired company, for these reasons the acquirer may establish ________________________________

acquisition reserves

Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________ securities

available-for-sale

A company would need to record an impairment loss for its equipment when: a. the original cost of the equipment exceeds its fair value and is deemed not recoverable b. management determines that the equipment will no longer be used. c. the carrying amount of the equipment exceeds its fair value and is deemed not recoverable. d. the cash flows from the equipment are less than its fair value

c

A key characteristic of asset measurement is best described as: a. average value based on all assets held by the company b. disposal cost less depreciation c. fair value at the acquisition date d. fair value less depreciation

c

All of the following are consistent with the purpose of determining the useful life of a long-lived asset EXCEPT: a. using the information to convey expectations about the future usefulness of the assets to stakeholders. b. using the information to help project a rational basis for depreciation c. using the information to help project a systemic basis for depreciation d. using the information to manage earnings upward.

d

When a foreign entity operates as a direct and integral extension of the U.S. parent, normally, its functional currency is the _______________________________

U.S. Dollar

When an intangible asset has a finite life, it is reported on the balance sheet at original cost with no ________________________ taken

amortization

Held-to-maturity securities are accounted for at ____________________________

amortized acquisition cost

Under U.S. GAAP, when and asset's carrying amount is deemed ____________________________, the asset is considered impaired

not recoverable

Unrealized holding gains and losses from investments classified as available for sale are reported in ____________________________________

other comprehensive income

Firms that capitalize routine maintenance and repair charges will end up with the result of having the current period's income being ___________________________

overstated

The _______________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.

purchase

An analyst can estimate the average total life of depreciable assets by: a. dividing average depreciable assets by depreciation expense for the year b. dividing depreciation expense for the year by average depreciable assets c. dividing average gross depreciable assets by accumulated depreciation. d. subtracting depreciation expense from accumulated depreciation

a

Which of the following is the LEAST effective way for an analyst to understand whether existing long-lived assets must be replaced? a. understand industry conditions and firm strategies for capital expenditure growth b. calculate the average age of depreciable assets c. calculate the percentage of ownership the firm has in another entity d. calculate the proportion of depreciable assets consumed

c

When dividends from an investment are recognized as reduction of the investment account, the investment must have been of which type? a. minority, passive investment b. majority, passive investment c. majority, active investment d. minority, active investment

d

Unrealized holding gains and losses from investments classified as trading are reported in the __________________________

income statement

Securities that are purchased in order to take advantage of short-term changes in market value should be classified as ____________________________ securities.

trading

When a company has a minority passive investment it will recognize changes in the market value of the investment as ______________________ gains and losses.

unrealized

_____________________________________ include trade and brand names, trademarks, patents, copyrights, franchise rights, customer lists and goodwill

Intangible assets

Ownership of 50% or more of the voting stock of another company implies an ability to ______________________ the company and ___________________ should be prepared

control, consolidated financial statements

When a foreign entity operates as a relatively self-contained and integrated unit within a foreign country, normally, its functional currency is the ________________________________________

currency of the foreign country

All of the following are types of intercorporate investments in capital stock EXCEPT: a. minority, passive b. minority, active c. majority, active d. majority, passive

d

Currently, the FASB's Statements of Accounting Concepts (Nos. 5 and 6) define an asset as having all of the following characteristics EXCEPT: a. costs not guided by management's judgement b. probable future benefits c. resulting from past transactions and events d. something that is obtained/controlled by the entity

a

How should Focus Company record expenditures for research and development costs according to U.S. GAAP? a. expense as incurred b. capitalize and depreciate c. amortize them over 60 months d. none of these are correct

a

Under IFRS, when an asset is revalued upwards, subsequent depreciation is based on: a. the asset's fair value. b. the asset's original cost c. the method used for determining depreciation on the company's tax returns. d. the amount of future cas flows the asset is expected to generate

a

Unrealized holding gains or losses that are recognized in the income statement are from securities classified as: a. trading b. available for sale c. held-to-maturity d. equity

a

When a foreign entity has the foreign currency as its function currency it uses which exchange rate to translate revenues and expenses in the income statement? a. the average exchange rate during the period b. the end of the period exchange rate c. the historical exchange rate d. the exchange rate on the date the asset or liability was obtained

a

When dividends from an investment are recognized as income, the investment must have been of which type? a. minority, passive investment b. majority, passive investment c. majority, active investment d. minority, active investment

a

Using the information below, calculate the average total depreciable life of the assets: Information from the Balance Sheet: 2012 2011 Depreciable Assets $2,458,600 $1,985,400 Accumulated depreciation (1,350,700) (1,046,000) Depreciable Assets (net) $1,107,900 $939,400 From the Income Statement: 2012 Depreciation Expense $384,500 a. 5.8 years b. 10 years c. 2.9 years d. 5.3 years

a Ans = ((2,458,600+1,985,300)/2) / 384,500 = 5.8

All of the following are typically costs that fail the future benefits test of long-lived operating assets EXCEPT: a. costs related to research and development b. costs related to marketing c. costs related to brand-building activities d. costs of equipment used in production

d

Expenditures included in the cost of a long-lived asset are: a. intangible b. charged off c. expensed d. capitalized

d

ASHLEY COMPANY Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc's common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, passive and classifies the investment as an available-for-sale investment, then Ashley will recognize what amount of 2010 income from the investment? a. $4,000 b. $10,000 c. $25,000 d. $15,000

b

Managers are typically faced with all of the following primary choices and estimates when allocating acquisition costs of tangible assets and intangible assets to the periods benefited EXCEPT: a choosing an allocation method b. estimating useful life c. estimating salvage value d. establishing a reserve for obsolescence

d

All of the following statements are true regarding accounting for software development costs EXCEPT: a. Firms must expense as incurred all costs incurred internally in developing computer software until such development achieves the technological feasibility of a product. b. Firms must capitalize as incurred all costs incurred internally in developing computer software c. Researchers have found a significant association between costs and future earnings, which support capitalizing and amortizing product development costs permitted by U.S. GAAP and IFRS d. The interpretation of the meaning of technological feasibility has created diversity in the practice of accounting for software development costs

b

Based on the information concerning Record Corp., what amount of goodwill should CD record at the acquisition date? a. ($294,000) b. $614,000 c. $1,200,000 d. $350,000

b

Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed "not recoverable" as specified by GAAP. GAAP defines a carrying amount as "not recoverable" if: a. it is greater than the sum of the cash flows expected from the asset's use and disposal. b. it is greater than the sum of the undiscounted cash flows expected from the asset's use and disposal c. it is less valuable than its current carrying value. d. it is less valuable than its current fair value

b

For U.S. GAAP, software development costs are capitalized as intangible assets: a. after a copyright is obtained b. once the technological feasibility of the product is established c. from the beginning of development. d. once the product is introduced into the marketplace.

b

GAAP stipulates that firms should do what with expenditures that increase the service potential of an asset beyond that originally anticipated? a. Expense the expenditure immediately. b. Capitalize the expenditure and depreciate it over the remaining service life of the asset. c. Capitalize the expenditure, but do NOT depreciate the asset. d. Charge it off to shareholders' equity

b

Goodwill represents: a. the synergies that will be achieved through the acquisition b. the difference between the acquisition cost and the market value of the identifiable assets and liabilities c. the difference between the acquisition cost and the book value of the identifiable assets and liabilities. d. the merger premium

b

Solo Corp. purchased $500,000 of bonds for $515,000 as an investment. If Solo expects to hold the bonds until they mature, the initial investment should be recorded at: a. Investment in Bonds - $500,000 Additional investment expense - $15,000 b. Investment in Bonds - $515,000 c. Investment in Bonds - $500,000 Prepaid interest revenue - $15,000 d. Accumulated other Comprehensive Investment - $515,000

b

The method used to account for oil and gas exploration costs that capitalizes the exploration costs of productive wells is the: a. reserve recognition accounting b. successful efforts approach c. soft asset approach d. full-cost approach

b

When a firm sells a trading security, it recognizes: a. the average of the selling price and the book value as a gain or loss in measuring net income. b. the difference between the selling price and the book value as a gain or loss in measuring net income. c. amortizes any difference between the acquisition cost and maturity value as interest revenue over the life of the debt. d. the difference between the selling price and the acquisition cost of the security as a realized gain or loss on the income statement.

b

When a foreign entity has the U.S. dollar as its functional currency, it uses which exchange rate to translate monetary assets and liabilities? a. The average exchange rate during the period b. the end of the period exchange rate c. the historical exchange rate d. the exchange rate on the date the asset or liability was obtained

b

When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life: a. these asset retirement costs are expensed when asset retirement occurs. b. a liability simultaneously arises c. these estimated future expenditures are added to the carrying value of the asset. d. this fact is only reported in the financial statement footnotes.

b

Which of the following is NOT a classification for a minority, passive investment? a. trading securities b. equity securities c. available-for-sale securities d. held-to-maturity securities

b

ASHLEY COMPANY Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc's common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, then the investment will appear in the December 31, 2010 balance sheet at what amount? a. $60,000 b. $65,000 c. $64,000 d. $75,000

b $60,000 (10,000) dividend +$15,000 share of income $65,000

Using the information below, calculate the average total depreciable life of the assets. Information from Balance Sheet: 2012 2011 Depreciable assets $600,000 $400,000 Accumulated depreciation (175,000) (100,000) Depreciable Assets (Net) $425,000 $300,000 From the Income statement 2012 Depreciation Expense $50,000 a. 6.54 years b. 7.25 years c. 6.91 years d. 9.15 years

b Ans = ((425,000 + 300000)/2) / 50,000

ASHLEY COMPANY Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc's common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority active investment as uses the equity method to account for the investment, then Ashley will recognize what amount of 2010 income from the investment? a. $4,000 b. $10,000 c. $25,000 d. $15,000

d

ASHLEY COMPANY Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc's common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, passive investment and classifies it as an available-for-sale security, then the investment will appear in the Decempber 31, 2010 balance sheet at what amount? a. $60,000 b. $65,000 c. $64,000 d. $75,000

c

All of the following are difficulties encountered in determining fair values EXCEPT: a. the need to make assumptions about the effect of technological and other improvements when using the prices of new assets currently available on the market in the valuation process b. the need to identify comparable assets currently available in the market to value assets in place c. the absence of U.S. GAAP and IFRS standards related to reporting long-lived assets d. the absence of active markets for many used fixed assets, particularly those specific to a particular firm's needs

c

Please view question 34 on the study guide for balance sheet and other information pertaining to question. Based on the information concerning SNOWFLAKE CORP. what is the market value of the company's shareholders' equity at the acquisition date? a. $1,775,000 b. $475,000 c. $2,250,000 d. $0

c

Please view question 48 on the study guide for information on Record Corporation Based on the information concerning Record Corp., what is the market value of the company's shareholders' equity at the acquisition date? a. $0 b. $908,000 c. $1,200,000 d. $1,458,000

c

Under which of the following scenarios would an entity NOT be classified as a variable interest entiry? a. the equity investing firms do not have the obligation to absorb the expected losses of the variable interest entity if they occur. b. The investing firms do no have the right to receive the expected residual returns of the variable interest entity if they occur. c. The total equity investment at risk is sufficient to permit the variable interest entity to finance its activities without additional subordinated financial support from other parties. d. The equity investing firms do not have the direct or indirect ability to make decisions about the variable interest entity's activities through voting rights.

c

Which one of the following is an example of the expected benefit approach for valuing long-lived assets? a. current cost b. historical cost c. discounted present value d. current replacement cost

c

Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. Common stock and exercises significant influence over the company. During 2011, Hobbitt earns $80,000 and pays cash dividends of $30,000. For the year ended December 31, 2011, Olivia should report income related to the investment equal to: a. $0 b. $12,000 c. $32,000 d. $20,000

c 40%*$80,000 = $32,000

U.S. GAAP stipulates that firms should _____________________ expenditures that increase the service potential of an asset beyond that orignially anticipated

capitalize

Olivia Co. owns 5,600 of the 14,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2011, Hobbitt earns $90,000 and pays cash dividends of $25,000. If the beginning balance in the investment account was $190,000, the balance at December 31, 2011 should be: a. $192,000 b. $172,000 c. $180,000 d. $216,000

d

The term used to describe the amount of a company's annual interest cost that should be capitalized is known as: a. tangible interest b. actual interest c. average accumulated expenditures d. avoidable interest

d

When a company records the cost of cutting down timber, this cost is deemed to be: a. exploration cost b. asset retirement obligation c. development cost d. depletion cost

d

Which of the following is a difficulty in determining current market values when determining the value of fixed assets? a. There is an absence of active markets for many fixed assets. b. It is difficult to identify comparable assets currently available in the marketplace to value assets in place. c. It is difficult to make assumptions about the effects of technology and other improvements when using the prices of new assets currently available on the market in the valuation process. d. all of these are correct

d

Which of the following items would be charged to the cost of the building? a. architectural fees b. cost of foundation c. capitalization of interest financing charges d. all of the above

d

Which of the following terms is LEAST consistent with the allocation of costs using a rational and systematic method? a. depreciation b. amortization c. depletion d. upward revaluation

d

Which of the following would NOT be used to determine the cost of an asset? a. cash paid b. sales and excise taxes c. cost incurred to get the asset ready for its intended use d. depreciation method

d

Please view question 34 on the study guide for balance sheet and other information pertaining to question. Based on the information concerning snowflake Corp. by what amount would Penguin increase depreciable assets when it consolidates Snowflake on the acquisition date? a. $1,775,000 b. $475,000 c. $2,250,000 d. $375,000

d (900,000 + 1,250,000) - (900,000 + 875,000) = $375,000

Please view question 34 on the study guide for balance sheet and other information pertaining to question. Based on the information concerning SNOWFLAKE CORP. what is the value of goodwill related to the acquisition? a. $1,775,000 b. $475,000 c. $2,250,000 d. $1,325,000

d 2,250,000 - [(900,000+1,250,000) - (1,100,000 +125,000) = 1,325,000

When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in, it should account for the investment using the __________________________

equity method

Financial reporting requires firms to _______________________ immediately all R&D costs incurred internally

expense

Specifically identifiable intangible assets acquired from others may have either a(n) ___________________________ useful life or a(n) ________________________ useful life.

finite, indefinite

The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency an NOT usually remitted to parent company is the ______________________

foreign currency

When the purchase price of another entity exceeds the book value of the entity's net assets the purchaser allocates the excess to identifiable assets and liabilities in order to revalue them to market value and any additional excess is allocated to ________________________

goodwill

Firms recognize an ____________________________ when the carrying amount of a fixed asset exceeds its fair value and is deemed NOT recoverable

impairment loss

When a long-lived asset loses its ability to generate future benefits, U.S. GAAP requires firms to write down the assets to their fair values and recognize a(n) ____________________________ in oncome from continuing operations

impairment loss

Under the equity method the investor's share of investee income __________________________ the investment account and dividends _________________ the investment account.

increases, decrease

An investing frim consolidates the variable interest entity if it absorbs the majority of the entity's expected __________________________ if the occur, receives a majority of the entity's expected ______________________________ if they occur, or both.

losses, residual returns

When the functional currency is the U.S. dollar, financial reporting requires firms to use the ___________________________________ translation method.

monetary/non-monetary

Most publicly traded firms in the United States use the ___________________________ method of depreciation for _________________________ statement purposes

straight-line, financial