CFA 30: Long-lived Assets

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 higher residual value. A higher amortization rate. 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? 130. 140. 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 × 14% × 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 the following amounts is most likely the sale price of the asset? €6.8 million €8.8 million €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: fair value. impairment loss. 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 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: lower. higher. 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: earn rent. be held for resale. be used in the production of goods and services.

A is correct. Investment property earns rent. Inventory 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? Straight-line method. Units-of-production method. 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.

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 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: 125,000. 150,000. 168,750.

A is correct. Using the straight-line method, depreciation expense amounts to Depreciation expense = (1,200,000 - 200,000)/8 years = 125,000.

After reading 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 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: useful lives. acquisition dates. amount of disposals.

B is correct. IFRS do not require acquisition dates to be disclosed.

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? Yes. No, because this revaluation is recorded directly in equity. 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.

Which of the following characteristics is most likely to differentiate investment property from property, plant, and equipment? It is tangible. It earns rent. 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: $14,180. $14,980. $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.

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: £2,300,000. £3,100,000. £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.

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 loss of ARP 15,000. a gain of ARP 15,000. 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) × 3 years]} = 15,000.

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: €600,000. €1,200,000. €1,533,333.

B is correct. Using the straight-line method, accumulated amortization amounts to Accumulated amortization = [(2,300,000 - 500,000)/3 years] × 2 years = 1,200,000.

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 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: 118,750. 168,750. 202,500.

B is correct. Using the units-of-production method, depreciation expense amounts to Depreciation expense = (1,200,000 - 200,000) × (135,000/800,000) = 168,750.

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 units 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: €414,286. €662,857. €828,571.

B is correct. Using the units-of-production method, depreciation expense amounts to Depreciation expense = 5,800,000 × (20,000/175,000) = 662,857.

A company is most likely to: use a fair value model for some investment property and a cost model for other investment property. change from the fair value model when transactions on comparable properties become less frequent. 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.

Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of: revaluation. impairment. 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.

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? Straight-line method. Units-of-production method. Double-declining balance method.

C is correct. If Martinez wants 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 the fair value of the asset are least likely to affect: net income. net operating income. 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.