Reading 23 Long-Lived Assets
Reading 23 Long-Lived Assets
Reading 23 Long-Lived Assets
Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was
$500,000 and to date it has accumulated depreciation of $140,000. Which of the following
will Felker recognize on its income statement if it sells the machinery for $400,000?
A) Loss of $100,000.
B) Gain of $40,000.
C) Loss of $360,000.
Capitalizing interest costs related to a company's construction of assets for its own use is
required by:
La Crosse Partners LLC has a franchise agreement with Arnolds Crispy Fry that expires in
seven years, but is renewable at each expiration date for a nominal fee. If the franchise
agreement is initially valued at $60,000:
Q ti #4 f 76
Question #4 of 76 Question ID: 1457744
Dubois Company bought land for company use five years ago for €2 million and presents its
balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million,
Dubois will:
Under IFRS, if a firm reports investment property using the fair value model, unrealized
gains and losses on investment property are:
Which of the following items is least likely an example of an intangible asset with an
indefinite life?
A) Acquired patents.
B) Goodwill.
C) Trademarks that can be renewed at minimal cost.
Compared with firms that expense costs, firms that capitalize costs can be expected to
report:
A) higher asset levels and higher equity levels in the early years of the asset's life.
B) higher asset levels and lower equity levels in the early years of the asset's life.
C) lower asset levels and higher equity levels in the early years of the asset's life.
In the early years of an asset's life, a firm that chooses an accelerated depreciation method
instead of using straight-line depreciation will tend to have:
Stannum Records obtains two intangible assets in a business acquisition: legal rights to
reproduce songs, valued at $5 million, and a trademark valued at $1 million. The trademark
expires in 10 years and can be renewed at a minimal cost. Stannum estimates a 5-year
useful life for the song rights. Because much of the songs' economic value is realized in their
early years, Stannum uses double-declining balance amortization. Amortization expense in
the first year after the acquisition is closest to:
A) $2.1 million.
B) $2.0 million.
C) $2.2 million.
The most likely result of increasing the estimated useful life of a depreciable asset is that:
Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using
the revaluation model. Edgewater needs to determine 1) what Pfaff's carrying value of
property, plant and equipment would be under the historical cost model, and 2) which of
Pfaff's intangible assets have finite useful lives. Will these items be disclosed in Pfaff's
financial statements?
Vasco Ltd. purchased a unit of heavy equipment one year ago for £500,000 and capitalized it
as a long-lived asset. Because demand for equipment of this type has grown significantly,
Vasco believes the fair value of its equipment has increased to £600,000. If Vasco revalues its
equipment to £600,000, what will be the most likely effect on Vasco's financial results,
compared to not revaluing the equipment?
For a firm to use the revaluation model for balance sheet reporting of long-lived assets:
A firm acquires investment property for €3 million and chooses the fair value model for
financial reporting. In Year 1 the market value of the investment property decreases by
€150,000. In Year 2 the market value of the investment property increases by €200,000. On
its financial statements for Year 2, the firm will recognize a:
The average age of a firm's property, plant, and equipment can be estimated by dividing:
Davis Inc. is a large manufacturing company operating in several European countries. Davis
has long-lived assets that are valued on the balance sheet at $600 million. This includes
previously recognized revaluation losses of $80 million. In the most recent accounting
period, the fair value of these assets in an active market is $690 million. Which of the
following entries will Davis record under the IFRS revaluation model?
A company acquires an intangible asset for $100,000 and expects it to have a value of
$20,000 at the end of its 5-year useful life. If the company amortizes the asset using the
double-declining balance method, amortization expense in year 4 of the asset's useful life is
closest to:
A) $1,600.
B) $6,910.
C) $8,640.
Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end
of its life it will have an estimated salvage value of $15,000. Using the double-declining
balance (DDB) method, depreciation expense in year 2 is closest to:
A) $51,020.
B) $58,750.
C) $71,430.
Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The
original cost of the machinery was $500,000 and to date has generated accumulated
depreciation of $140,000. Which of the following must Spenser record on the income
statement if it decides to abandon the asset?
A) Gain of $40,000.
B) Loss of $100,000.
C) Loss of $360,000.
The most likely effects of taking an impairment charge in the current period on an intangible
asset with a remaining life of five years would be to:
A) increase the debt-to-equity ratio and decrease the long-term asset turnover ratio.
B) reduce net income in the current period and increase it in future periods.
C) reduce pretax income and accumulated amortization in the current period.
U.S. GAAP least likely requires property, plant, and equipment to be tested for impairment:
A) at least annually.
B) when an asset is reclassified as held-for-sale.
C) when events indicate the firm may not recover the asset’s carrying value.
A reconciliation of beginning and ending carrying values for each class of property, plant,
and equipment is required for firms reporting under:
In accounting for PP&E using the cost model, companies are required to disclose both gross
asset value and accumulated depreciation under:
Three years ago, Ranchero Corporation purchased equipment for a process used in
production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the
equipment was greater than its book value. No impairment losses have been recognized on
the equipment. Assuming Ranchero follows International Financial Reporting Standards,
what is the impact on its total asset turnover ratio and return on equity of reporting the
value of the equipment on the balance sheet at fair value?
Under U.S. GAAP, an asset is considered impaired if its book value is:
A) greater than the present value of its expected future cash flows.
B) less than its market value.
C) greater than the sum of its undiscounted expected cash flows.
Mammoth, Inc. reports under U.S. GAAP. Mammoth has begun a long-term project to
develop inventory control software for external sale. On its financial statements, Mammoth
should:
Stone Development Company owns four office buildings and a tract of raw land. Stone
occupies one of the buildings, collects rental income from the other three buildings, and is
holding the land for capital appreciation. Under IFRS, which of these assets should Stone
classify as investment property on its balance sheet?
Accelerated depreciation methods for financial reporting are most likely to have which of the
following effects on a company's financial ratios during the early years of an asset's life?
After acquiring a subsidiary, Lafleur Company adds to its balance sheet a patent that expires
in five years and a trademark that can be renewed every three years. Lafleur
should amortize:
A) the patent over five years and the trademark over three years.
B) the patent over five years, but should not amortize the trademark.
C) neither the patent nor the trademark, but must test them for impairment annually.
The stamping machine is expected to generate $1,500,000 per year for five more years and
will then be sold for $1,000,000. Under U.S. GAAP, the stamping machine is:
A) not impaired.
B) impaired because its carrying value exceeds expected future cash flows.
C) impaired because expected salvage value has declined.
Lakeside Co. recently determined that one of its processing machines has become obsolete
after 7 years of use and, unexpectedly, has no salvage value. The machine was being
depreciated over a useful economic life of 10 years. Which of the following statements is
most consistent with this discovery?
On January 1, 20X4, Cayman Corporation bought manufacturing equipment for $30 million.
On December 31, 20X6, Cayman determined the equipment was impaired and recognized a
$5 million impairment loss in its income statement. As of December 31, 20X7, the fair value
of the equipment exceeded the book value by $7 million. Cayman may recognize a gain in its
20X7 income statement if it reports under:
Meyer Investment Advisory and Smith Brothers Investments are operationally identical
except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is
likely to have:
A firm revalues its long-lived assets upward. All other things equal, which of the following
financial impacts is least likely to occur?
A) $3,000.00.
B) $2,880.00.
C) $2,200.00.
A manufacturing firm shuts down production at one of its plants and offers the facility for
rent. Based on the market for similar properties, the firm determines that the fair value of
the plant is €500,000 more than its carrying value. If this firm uses the cost model for plant
and equipment and the fair value model for investment property, should it recognize a gain
on its income statement?
No, because the firm must continue to use the cost model for valuation of this
A)
asset.
B) Yes, because the plant will be reclassified as investment property.
C) No, because the increase in value does not reverse a previously recognized loss.
A) $1,600.
B) $4,800.
C) $5,200.
Question #50 of 76 Question ID: 1462847
Clampet Ltd. reports under IFRS and reports certain assets on its balance sheet using the
revaluation model. Machinery purchased in 20X1 for £22,000 is revalued to £20,000 at the
end of 20X2. At the end of 20X3, the fair value of the asset is £23,000. The most likely effect
of the change in value to £23,000 is to:
Which of the following statements regarding capitalizing versus expensing costs is least
accurate?
Companies are specifically required to disclose data about estimated salvage values
A)
in the footnotes to the financial statements.
Depreciable lives and salvage values are chosen by management and allow for the
B)
possibility of income manipulation.
The estimated useful life of the same depreciable asset should be the same
C)
regardless of which company owns the asset.
For impaired long-lived assets, a firm reporting under IFRS is least likely required to disclose
the:
On January 1, 2004, JME purchased a truck that cost $24,000. The truck had an estimated
useful life of 5 years and $4,000 salvage value. The amount of depreciation expense
recognized in 2006 assuming that JME uses the double declining balance method is:
A) $3,456.
B) $4,000.
C) $5,760.
Train, Inc.'s cash flow from operations (CFO) in 20X8 was $14 million. Train paid $8 million
cash to acquire a franchise at the beginning of 20X8 and recognized the entire purchase
price as an expense. If Train had instead elected to amortize the cost of the franchise over
its estimated life, 20X8 cash flow from operations (CFO) would have been:
A) $14 million.
B) $6 million.
C) $22 million.
A) $6,000.
B) $12,000.
C) $15,000.
An analyst will most likely use the average age of depreciable assets to estimate the
company's:
A) cash flows.
B) earnings potential.
C) near-term financing requirements.
Compared to firms that expense costs, firms that capitalize expenses will have:
Capitalized interest costs are typically reported in the cash flow statement as an outflow
from:
A) financing.
B) investing.
C) operating.
accelerated depreciation methods for tax purposes will decrease the amount of
A)
taxes paid in early years.
accelerated depreciation methods will have lower asset turnover ratios than if they
B)
used straight line depreciation.
straight-line depreciation methods will have higher book values for the assets on the
C)
balance sheet than companies that use accelerated depreciation.
Blocher Company is evaluating the following methods of accounting for depreciation of long-
lived assets and inventory:
A) DDB; FIFO.
B) Straight-line; FIFO.
C) Straight-line; LIFO.
Schubert, Inc. acquires 100% of another firm. As a result of the acquisition, Schubert reports
on its balance sheet 1) a patent with five years remaining and a carrying value of $2 million
and 2) goodwill with a carrying value of $4 million. Using the straight-line method, total
amortization expense in the first year for these two intangible assets is:
A) $800,000.
B) $400,000.
C) $1,200,000.
For a firm that uses the cost basis for valuing its long-lived assets, fair value is a
consideration when calculating a gain or loss on:
A) abandoning an asset.
B) exchanging an asset.
C) selling an asset.
20X3 20X4
Gross Profit 13 14
Net Income $1 $8
Cash $4 $5
Accounts Receivable 6 5
Inventory 9 7
Accounts Payable $7 $5
Long-term Debt 10 5
Common Stock 8 8
Retained Earnings 6 14
If Salvo had amortized the cost of the franchise acquired in 20X3 over six years instead of
expensing it, Salvo's return on average total equity for 20X4 would have been closest to:
A) 35.6%.
B) 38.9%.
C) 31.1%.
Marcel Inc. is a large manufacturing company based in the U.S. but also operating in several
European countries. Marcel has long-lived assets currently in use that are valued on the
balance sheet at $600 million. This includes previously recognized impairment losses of $80
million. The original cost of the assets was $750 million. The fair value of the assets was
determined in a professional appraisal to be $690 million. Assuming that Marcel reports
under U.S. GAAP, the new appraisal of the assets' value most likely results in:
Which of the following is best estimated by the ratio of net PP&E to annual depreciation
expense?
Rossdale, Inc., buys a small manufacturing plant with an estimated useful life of 12 years.
The building includes two built-in machines that are expected to be replaced after four years
and six years. Under International Financial Reporting Standards, Rossdale:
A) must have separate depreciation schedules for the machines and the building.
B) may have separate depreciation schedules for the machines and the building.
C) must have a single depreciation schedule for the plant.
Czernezyk Company buys a delivery vehicle for €60,000. Czernezyk expects to drive the
vehicle 400,000 kilometers over 4 years, at the end of which the firm expects to be able to
sell the vehicle for €10,000. At the end of Year 2, the vehicle has been driven 250,000
kilometers. If Czernezyk depreciates the vehicle by the units of production method, its
carrying value at the end of Year 2 is:
A) €15,000.
B) €28,750.
C) €31,250.
The amortized cost of a trademark is least likely to appear on a firm's balance sheet if the
trademark was:
A) developed internally.
B) obtained in the acquisition of another firm.
C) purchased from another firm.
What is the depreciation expense for the second year, assuming Slovac uses the double-
declining balance method of depreciation?
A) $1,406.
B) $1,438.
C) $1,875.
During the year of the write-downs, retained earnings and deferred taxes will
A)
decrease.
The write-downs are reported as a component of income from continuing
B)
operations.
Write-downs taken on asset values can be reversed in later years if market
C)
conditions improve.
Granite, Inc., owns a machine with a carrying value of $3.0 million and a salvage value of
$2.0 million. The present value of the machine's future cash flows is $1.7 million. The asset is
permanently impaired. Granite should:
write down the machine to its recoverable amount as soon as it is depreciated down
A)
to salvage value.
B) immediately write down the machine to its salvage value.
C) immediately write down the machine to its recoverable amount.