Fin 320 Chapter 29
JOOVI Inc. has recently purchased and installed a new machine for its manu- facturing 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:
$14,980
If MARIO uses the straight-line method, the amount of depreciation expense on MARIO's income statement related to the manufacturing equipment is clos- est to:
125,000
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: 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
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:
168,750
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:
20.75 years
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 1 January 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. Which of these assets is an intangible asset with a finite useful life? Ending shareholders' equity Tax rate Dividends Net income Company X As of 31 December £10,000,000 25% £0.00 £750,000 Based on the information given, Company Z's return on equity using year-end equity will be closest to
6.1%
Which of the following will cause a company to show a lower amount of amor- tization of intangible assets in the first year after acquisition?
A higher residual value
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?
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?
Double-declining balance method
Which of the following is a required financial statement disclosure for long- lived intangible assets under US GAAP?
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 capitalise these expenditures?
Future profit growth will be higher than if the expenditures had been capitalised.
Which of the following characteristics is most likely to differentiate investment property from property, plant, and equipment?
It earns rent
With respect to Statement 3, what is the most likely effect of the impairment loss?
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 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?
No, because value increases resulting from revaluation can never be recognized as a profit
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
Which costs incurred with the purchase of property and equipment are expensed?
Training required to use the property and equipment
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: Fair value Costs to sell Value in use Net carrying amount £16,800,000 £800,000 £14,500,000 £19,100,000 Acquisition cost of the vehicle Acquisition date Estimated residual value at acquisition date Expected useful life Depreciation method The result of the sale of the vehicle is most likely
a gain of ARP 15,000
Jordan's response about the impact of the different depreciation methods on net profit margin is most likely incorrect with respect to:
accelerated deperciation
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:
acquisition dates
Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from:
assets that are neither tangible nor identifiable intangible assets
The impairment of intangible assets with finite lives affects:
both the balance sheet and the income statement.
When constructing an asset for sale, directly related borrowing costs are most likely:
capitalized as part of inventory
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:
carrying amount
Jordan's response about the impact of Alpha's decision to classify its lease as an operating lease instead of finance lease is most likely incorrect with respect to:
cash flow form operating activities
Jordan's response about the effect of Beta's impairment loss is most likely incor- rect with respect to the impact on its:
cash flow from operating activities
A company is most likely to:
change from the fair value model when the company transfers investment property to property, plant, and equipment.
All else equal, in the fiscal year when long-lived equipment is purchased:
depreciation expense increase
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:
double-declining balance
Investment property is most likely to:
earn rent
Jordan's response about his approach to estimating a company's need to reinvest in its productive capacity is most likely correct regarding:
estimating the total useful life of the asset base
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
Under the revaluation model for property, plant, and equipment and the fair model for investment property:
fair value of the asset must be able to be measured reliably.
Jordan's response about the ratio impact of Alpha's decision to capitalise inter- est costs is most likely correct with respect to the:
fixed asset turnover ratio
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 depreci- ation 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:
greater
Jordan's response about the financial statement impact of Alpha's decision to capitalise the cost of its new computer system is most likely correct with respect to:
higher cash flow from operating activities
With respect to Statement 4 and Exhibit 1, if AMRC had used its old classifi- cation method for its leases instead of its new classification method, the most likely effect on its 2009 ratios would be a:
higher total liabilities-to-assets ratio
Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of:
impairment
Costs incurred for intangible assets are generally expensed when they are:
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 com- pany uses the straight-line method to depreciate the equipment, its net income in Year 1 will most likely be:
lower
With respect to Statement 4, if AMRC had used its old classification method for its leases instead of its new classification method, its 2009 total asset turnover ratio would most likely be:
lower
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:
other comprehensive income
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:
recoverable amount
A potential advantage of leasing through a finance lease, compared with pur- chasing an asset, is most likely:
reduced risk related to asset obsolescence
Jordan's response about the effect of Alpha's revaluation is most likely correct with respect to the impact on its:
return on equity
Under IFRS, what must be disclosed under the cost model of valuation for investment properties?
useful ives
After reading the financial statements and footnotes of a company that follows IFRS, an analyst identified the following intangible assets: Which of these assets is an intangible asset with a finite useful life?
yes no no
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: The amount of the impairment loss on WLP Corp.'s income statement related to its manufacturing equipment is closest to:
£3,100,000.
A company acquires a patent with an expiration date in six years for ¥100 mil- lion. The company assumes that the patent will generate economic benefits that will decline over time and decides to amortize the patent using the double- declining balance method. The annual amortization expense in Year 4 is closest to:
¥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 fis- cal year ended 31 December 2009. She gathers the following information about the asset: Acquisition cost Acquisition date Expected residual value at time of acquisition Jordan's response about the effect of Alpha's revaluation is most likely correct with respect to the impact on its: 1 January 2008 €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 amorti- zation related to the customer list as of 31 December 2009 is closest to:
€1,200,000
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
€6.8 million
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 Acquisition date Patent expiration date Total plant capacity of patented product Production of patented product in fiscal year ended 31 December 2009 Expected production of patented product during life of the patent €5,800,000 1 January 2009 31 December 2015 40,000 units per year 20,000 units 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:
€662,857.
A company is comparing straight-line and double-declining balance amortiza- tion 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:
€81,400.
