FA5e Test Bank CH08. Chapter 8 Reporting and Analyzing Long-Term Operating Assets

Chapter 8 Reporting and Analyzing Long-Term Operating Assets Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essay Questions LO1 Describe and distinguish between tangi ...

Chapter 8 Reporting and Analyzing Long-Term Operating Assets Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essay Questions LO1 Describe and distinguish between tangible and intangible assets. LO2 Determine which costs to capitalize and report as assets and which costs to expense. LO3 Apply different depreciation methods to allocate the cost of assets over time. LO4 Determine the effects of asset sales and impairments on financial statements. LO5 Describe the accounting and reporting for intangible assets. LO6 Analyze the effects of tangible and intangible assets on key performance measures. Chapter 8: Reporting and Analyzing Long-Term Operating Assets True/False Topic: Capitalization of assets LO: 1, 2 1. Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations. Answer: True Rationale: A firm may capitalize any asset that satisfies two conditions: 1) the asset is owned by the company, and 2) the asset provides future expected benefits. Topic: Depreciation assumptions LO: 3 2. Depreciation requires only two estimates—useful life and residual value—both of which are specified by GAAP depending on the asset type. Answer: False Rationale: GAAP does not specify useful life and residual value amounts. Managers must estimate these amounts based upon the time period that the asset is expected to generate resources for the company and a reasonable amount for which the asset can be sold at the end of its estimated life. Topic: Percent depreciated LO: 4, 6 3. We can estimate the percent of a company’s depreciable assets that are “used up,” reflecting the percent of plant assets that are no longer productive, by the following formula: Accumulated depreciation / Cost of depreciable assets Answer: False Rationale: The correct formula is: Percent used up = Accumulated depreciation / Cost of depreciable assets. Only cost of depreciable assets should be used for the denominator. Topic: Changes in accounting estimates LO: 3 4. Changes in accounting estimates affect only the current and future periods’ income statements. Answer: True Rationale: Changes in accounting estimates require no cumulative effect adjustments or restatements of prior periods’ income statements. They are applied prospectively from the date of change. Topic: Asset impairments LO: 4 5. Companies that have property, plant, and equipment that increase in market value should recognize a gain on the income statement in the period the increase in value occurs. Answer: False Rationale: Impairment losses must be recognized as a loss on the income statement, but increases in value are not recognized.©Cambridge Business Publishers, 2017 Test Bank, Chapter 8 8-3 Topic: Gains and losses on sales LO: 4 6. A sale of a plant asset at less than cost requires that a company recognize a loss in the income statement. Answer: False Rationale: Gains and losses are determined based on the selling price compared to the book value, not the cost. Topic: Asset impairment LO: 4 7. Impairment of long-term plant assets is determined by comparing the sum of expected future (undiscounted) cash flows from the asset with the asset’s net book value. Answer: True Rationale: Impairment of long-term plant assets is determined by comparing the sum of expected future (undiscounted) cash flows from the asset with its net book value. If the asset is deemed to be impaired, it is written down to its market value and the write-down is recorded as a loss in the income statement. Topic: Depreciation LO: 2, 3 8. Depreciation is the recognition of the change in market value of a plant asset over time. Answer: False Rationale: Depreciation is the process of allocating the cost of plant assets to the accounting periods in which the assets provide benefits. Depreciation does not parallel market value. Topic: Asset write-downs LO: 4 9. Asset write-downs have two potential challenges. One is making sure the write-down is not insufficient, and the other is to make sure the write-down is not too aggressive. Answer: True. Rationale: Asset write-downs present two potential challenges, 1) Insufficient write-down and 2) aggressive write-down. Neither is condoned under GAAP. Topic: Accelerated depreciation LO: 3 10. One purpose of using accelerated depreciation for tax purposes is it reduces income taxes payable in the early years of life of a plant asset. Answer: True Rationale: Both a reduction of income and the company’s income tax liability are effects of accelerated depreciation in the early years of life. Topic: Goodwill Impairment LO: 5 11. Goodwill is considered to be impaired if the market value of the acquired business is greater than the carrying amount on the balance sheet. Answer: False Rationale: Goodwill is impaired if the market value of the acquired business is less than its carrying amount on the balance sheet.©Cambridge Business Publishers, 2017 8-4 Financial Accounting, 5thEdition Topic: Goodwill LO: 5 12. An analyst should consider any goodwill write-downs as a non-recurring operating expense. Answer: True Rationale: Goodwill impairments are operating and non-recurring. Topic: R&D costs LO: 5 13. R&D expense is treated as an operating expense, not a capital expenditure, unless the assets have an alternative future use. Answer: True Rationale: Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed unless the R&D assets have alternative future uses. Topic: IFRS LO: 5, 6 14. Under IFRS, research and development costs can be capitalized as intangible assets when specific criteria are met. Answer: False Rationale: Under IFRS, only development costs can be capitalized as intangible assets when specific criteria are met. U.S. GAAP requires both research and development costs be expensed when incurred. Topic: Intangible assets and performance measures LO: 5, 6 15. Internally generated intangible assets are not capitalized, which allows the financial statements to be more transparent for users. Answer: False Rationale: Because internally generated intangible assets are not capitalized, an important component of a company’s assets is potentially hidden from users of the financial statements. Topic: Natural resources LO: 3 16. Natural resource assets, such as oil reserves or timberlands, as often referred to as wasting assets. Answer: True Rationale: Natural resource assets are often referred to as wasting assets, because the assets are consumed as they are used. Topic: Franchise rights LO: 5 17. Franchise rights are considered to be an identifiable intangible asset and must be amortized. Answer: True Rationale: Franchise rights are contractual agreements that give a company the right to operate a particular business in an area for a stated time period. Because these rights have a definite life, they are amortized over the expected franchise life.©Cambridge Business Publishers, 2017 Test Bank, Chapter 8 8-5 Topic: IFRS impairment LO: 4 18. U.S. GAAP requires recognition of the impairment of property, plant, and equipment, while IFRS does not. Answer: False Rationale: Accounting for impairment of property, plant, and equipment assets is required under both GAAP and IFRS. However, the process to determine the impairment amount differs under GAAP as compared to IFRS.©Cambridge Business Publishers, 2017 8-6 Financial Accounting, 5thEdition Multiple Choice Topic: Depreciation expense using the double-declining-balance method LO: 3 1. On January 1, 2015, Dunlop Company purchased a copy machine. The machine costs $600,000, its estimated useful life is 8 years, and its expected salvage value is $40,000. What is the depreciation expense for 2016 using double-declining-balance method? A) $ 95,000 B) $150,000 C) $112,500 D) $ 70,000 Answer: C Rationale: Double-declining-balance rate = 1/8 × 2 = 25%. Depreciation expense of year 2015 is $600,000 × 25% = $150,000 Depreciation expense of year 2016 is $450,000 × 25% = $112,500 Topic: Depreciation assumptions LO: 3 2. Which of the following estimates are required when calculating depreciation expense? 1. Depreciation rate 2. Useful life 3. Expected maintenance costs 4. Salvage value A) 1, 2, and 4 B) 1, 2, 3, and 4 C) 2 and 4 D) 2, 3, and 4 Answer: A Rationale: Expected maintenance costs are not capitalized, nor do they impact the amount of depreciation per period. Topic: Straight-line depreciation LO: 3 3. Which statement is true concerning the straight-line method of depreciation? A) Depreciation is recognized evenly over the estimated useful life of the asset. B) Purchase cost is expensed in the year of acquisition. C) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset. D) Annual depreciation expense is highest in the early years and decreases over the life of the asset. Answer: A Rationale: When using the straight-line method of depreciation, depreciation is recognized evenly over the estimated useful life of the asset.©Cambridge Business Publishers, 2017 Test Bank, Chapter 8 8-7 Topic: Capitalization of asset cost LO: 1, 2, 5 4. Which of the following purchased assets would not be capitalized? A) Factory machine used to fabricate part for new product to be introduced B) Building constructed as a warehouse for a company’s inventory C) Machine used to test the durability of high tech chair in development for a technology company. The machine will not be used to test any other products. D) Building constructed to house management and administrative personnel Answer: C Rationale: Items purchased for research and development purposes that have no alternative future uses are not capitalized and are expensed immediately. Topic: Depreciation assumptions LO: 2, 3 5. Which of the following is not necessary in calculating the depreciation expense for the first year for a newly purchased factory forklift? A) Estimated useful life B) Market value of the forklift during its useful life C) Estimated salvage value D) Depreciation rate E) Total cost of the forklift at acquisition Answer: B Rationale: The market value is not factor in calculating annual depreciation. Topic: Depreciation LO: 2, 3 6. An estimate of how an asset will be used up over its useful life is known as what? A) Useful life B) Salvage value C) Depreciation rate D) Impairment value Answer: C Rationale: A depreciation rate is the estimate of how an asset will be used up over its useful life. Some assets are used up more quickly at the beginning and others are used up equally over their useful lives.