Financial Statement Analysis Ch. 11

Riley Corporation reports the following information regarding assets held for sale. Book value of the assets is $450,000, fair value of the assets is $325,000, and expected costs to sell the assets is $25,000. These assets would be shown on the balance sheet at

$300,000. Reason: $325,000 - $25,000

Renaldo Corporation purchased a piece of equipment for $21,000. The asset has a useful life of 5 years and a $1,000 salvage value. The asset will be used to produce a total of 10,000 units. Production for the current year was 3,500 units. Depreciation using the straight-line method for the current year is

$4,000. Reason: $21,000 - $1,000 = $20,000 $20,000/5 years = $4,000

Blue Corporation exchanges a delivery truck with a fair value of $50,000 for a piece of equipment from Red Corporation. The truck's book value is $40,000, which is the original cost of $60,000 minus accumulated depreciation of $20,000. In addition to the truck, Blue pays Red $7,500. The cost of the equipment is

$57,500. Reason: $50,000 + $7,500

Hometown Village Construction Company had the following expenditures during the current year. On May 1, they paid $7,500,000 and on September 15, they paid $4,250,000. Using the number of days, calculate the cumulative weighted average expenditures for the year

$6,280,136 Reason: ($7,500,000 x 245/365) + ($4,250,000 x 107/365)

Hometown Village Construction Company had the following expenditures during the current year. On May 1, they paid $7,500,000 and on September 15, they paid $4,250,000. Using the number of days, calculate the interest for the year assuming a 10% rate.

$628,014 Reason: [($7,500,000 x 245/365) + ($4,250,000 x 107/365)] x 10%

Meyer Corporation has a two-year old truck that originally cost $80,000, has a remaining life of 8 years with no salvage value, and is depreciated using the straight-line method. Current resale of the truck is $65,000. Net realizable value of the truck is

$65,000.

Baxter Company sold equipment for $6,000. The equipment originally cost $10,000, had a salvage value of $2,000 and a useful life of 5 years, and had a book value of $5,200 on the date it was sold. The journal entry to record the sale of the truck would include which of the following?

-A debit to Accumulated depreciation for $4,800. -A credit to Gain on sale of asset for $800. -A credit to Equipment for $10,000.

GAAP limits the amount of interest that can be capitalized to the lower of which of the following two?

-Avoidable interest -Interest actually incurred

Sterling Corporation faced a shortage of cherry bookcases but had an excess of mahogany bookcases. Sterling agrees to exchange cherry bookcases with a fair value of $10,000 and a book value of $9,000 for mahogany bookcases with a fair value of $10,500 from Princess Industries. Which of the following would be included in the journal entry to record this exchange?

-Credit to Inventory-mahogany bookcases for $9,000. -Debit to Inventory-cherry bookcases for $9,000.

Which of the following are true statements?

-Financial reporting is concerned with allocating costs to the asset that generated the costs. -Tax reporting is concerned with minimizing tax payments.

Which of the following are true of impairment evaluation for indefinite-lived intangible assets?

-Firms may first assess qualitative factors to determine whether a quantitative impairment test is necessary. -U.S. GAAP allows a two-step impairment evaluation process.

Which of the following statements are true regarding costs?

-Incremental costs related to the successful negotiation of a contract should be capitalized. -For contracts lasting less than a year, the incremental costs may be expensed immediately. -Expenses that would have been incurred without the contract signing are expensed immediately.

Which of the following conditions would result in the capitalization of expenditures on long-lived assets?

-The useful life of the asset is extended. -The efficiency of the asset is increased.

Intangible assets that have indefinite lives

-are evaluated annually for impairment. -are not amortized.

Examples of intangible assets include

-franchises. -copyrights -patents.

Computing depreciation requires the reporting entity to estimate

-the expected salvage value that will exist at the time the asset is retired. -the depreciation pattern that will reflect the asset's declining service potential. -the expected useful life of the asset.

Click and drag on elements in order: Rank the following stages from first to last in determining an impairment loss.

1. External events raise the possibility that an asset's carrying amount may not be recoverable. 2. Estimate the future undiscounted net cashflows expected from the use and disposal of the asset. 3. Determine that the future undiscounted net cash flows are less than the carrying amount of the asset. 4. Amount of write-down is determined. 5. An impairment loss is recognized.

Bax Industries has an inventory turnover of 60 days and an average receivables collection period of 45 days. What is Bax's operating cycle?

105 days Reason: 60 days + 45 days = 105 days

Interest that could have been averted if expenditures for the assets had not been made is known as ______ interest.

Blank 1: avoidable

An exchange has ______ ______ when the firm's future cash flow are expected to change significantly as a result of the exchange.

Blank 1: commercial Blank 2: substance

When a long-lived asset expenditure doesn't meet the capitalization criteria, it must be treated as a period ______ and be charged to income.

Blank 1: expense

Long-lived assets that do not have physical substance are ______ assets.

Blank 1: intangible

Costs incurred in acquiring more than one asset that are apportioned among the acquiring assets are known as ______ costs.

Blank 1: joint

The ______ ______ for a manufacturer begins with the receipt of raw materials inventory and ends when the cash is received for the completed product that has been sold.

Blank 1: operating Blank 2: cycle

The amount that would be received if the assets were sold in the used asset market is the net ______ ______ .

Blank 1: realizable Blank 2: value

Meyer Corporation has a two-year old truck that originally cost $80,000, has a remaining life of 8 years with no salvage value, and is depreciated using the straight-line method. Current resale of the truck is $65,000. Expected net operating cash inflows are $14,250 and a 10% rate is used. Identify the correct statement.

Discounted present value is $76,023. Reason: $14,250 x 5.33493 (discount factor for ordinary annuity for 8 years at 10%)

True or false: Under GAAP, if an asset is written down, it can later be written back up.

False

Identify the correct statement: 1. For tax purposes, it is better to capitalize interest than to deduct it immediately. 2. U.S. tax rules differ from GAAP rules and do not require avoidable interest to be capitalized for tax purposes. 3. U.S. tax rules don't require cost allocations between land and buildings. 4. For financial reporting purposes, the manner in which costs are allocated is guided by which asset generated the cost.

For financial reporting purposes, the manner in which costs are allocated is guided by which asset generated the cost.

Which of the following represents the difference between the total fair value of an acquired business and the fair value of its identifiable net assets?

Goodwill

Green agrees to exchange a delivery truck with a book value of $60,000 for a different delivery truck owned by White Corporation. The original cost of Green's delivery truck was $80,000 and accumulated depreciation is $20,000 Green also pays $10,000 to complete the transaction. It is not possible to measure the fair value of either truck. Identify the correct statement.

Green Corporation records the new truck at $70,000.

Identify the correct statement regarding indefinite-lived intangible assets.

Indefinite-lived intangible assets must be evaluated for impairment annually or more frequently to determine if they are impaired.

Identify the correct statement regarding the treatment of interest in measuring long-lived assets.

Interest paid to lenders during the construction period is considered to be a cost necessary to prepare the asset for its intended use.

Identify the correct statement regarding long-lived assets.

Measures that use output market numbers are called expected benefit approaches.

Which of the following is NOT a criteria required for costs to be capitalized?

The costs would have been incurred without the contract signing.

Which of the following is not a required estimate needed to compute depreciation?

The historical cost of the asset.

True or false: Capitalization is restricted to interest that arises from actual borrowings from outsiders.

True

Identify the correct statement regarding assets held for sale.

When assets are expected to be sold within one year of the balance sheet date, they should be classified as "held for sale".

Prince Corporation sells a truck for $8,500 after it had been used for 3 years. The truck was purchased for $17,000, had a useful life of 5 years, and had a $2,000 salvage value. The journal entry to record the sale of the truck would include

a credit to gain on sale of asset of $500. Reason: $17,000 - $2,000 = $15,000 $15,000/5 years = $3,000 per year x 3 years = $9,000 Book value = $8,000 Gain on sale $8,500 - $8,000 = $500

Blue Corporation exchanges a delivery truck with a fair value of $50,000 for a piece of equipment from Red Corporation. The truck's book value is $40,000, which is the original cost of $60,000 minus accumulated depreciation of $20,000. In addition to the truck, Blue pays Red $7,500. The journal entry to record the sale would include

a gain on exchange for $10,000. Reason: $50,000 - $40,000

The allocation of costs to periods for intangible assets is referred to as

amortization.

The systematic expensing and write-down of a tangible long-lived assets is known as

depreciation.

Discounted present value and cash inflow that an asset would bring if it were sold instead of being used in operations are examples of an

expected benefit approach.

The dominant GAAP measurement method for measuring long-lived assets is the

historical cost

The two rules that govern the initial balance sheet carrying amount of a long-lived asset include

joint costs. capitalized costs.

To preclude firms from generating artificial gains on exchange transactions being recorded at fair value, U.S. GAAP requires that the transaction

must possess commercial substance.

Once an impairment loss has been recognized on an asset,

that asset cannot later be written back up if the fair value recovers.

In an exchange of nonmonetary assets when the fair value of the exchanged assets cannot be determined,

the asset will be recorded as the sum of the book value of the old asset plus any cash given.

When assets are exchanged to balance inventories,

the exchange does not represent earnings. the received assets are recorded at the book value of the assets relinquished.

The amount of the write-down that must be recognized due to an impairment loss is the difference between

the fair value of the asset and its current carrying amount.

Renaldo Corporation purchased a piece of equipment for $21,000. The asset has a useful life of 5 years and a $1,000 salvage value. The asset will be used to produce a total of 10,000 units. Production for the current year was 3,500 units. Depreciation is $7,000. Depreciation has been determined using the

units-of-production method. Reason: $21,000 - $1,000 = $20,000 $20,000/10,000 = $2 per unit $2 x 3,500 units = $7,000