karoliukas

Allocating an intangible asset’s cost to the income statement over time is known as:

A) depreciation.

B) depletion.

C) amortization.

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Allocating an intangible asset’s cost to the income statement over time is known as amortization. The same process is known as depreciation for tangible assets. For natural resources, allocation of cost to the income statement over time is commonly referred to as depletion.

karoliukas

Intangible assets with finite useful lives are:

A) amortized over their actual lives.

B) not amortized, but are tested for impairment at least annually.

C) amortized over their expected useful lives.

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Intangible assets with finite lives are amortized over their expected useful lives, which is an estimate. Actual lives of intangible assets are often not known in advance. Intangible assets with infinite lives are not amortized, but are tested for impairment at least annually.

karoliukas

Under normal circumstances, intangible assets with indefinite lives are:

A) not amortized but subject to impairment.

B) amortized over a reasonable period but not subject to impairment.

C) amortized over a reasonable period and subject to impairment.

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Intangible assets with indefinite lives are not amortized but are subject to impairment charges. Under such situations, there may be in impairment in the asset value where events and circumstances indicate that the firm may not be able to recover the carrying value through future use. Examples include significant declines in market value of the asset or significant deterioration in the asset’s physical condition.

karoliukas

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) $1,200,000.

C) $400,000.

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Amortization expense for the patent is $2 million / 5 = $400,000. Goodwill is an intangible asset with an indefinite life and is not amortized.

karoliukas

Davis Inc. is a large manufacturing company operating in several European countries. Davis 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 by in independent appraisal to be $690 million. Which of the following entries may Davis record under IFRS?

A) $90 million gain on income statement.

B) $80 million gain on income statement and a $10 million revaluation surplus.

C) $90 million revaluation surplus.

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Under IFRS, firms may choose to report long-lived assets at fair value. Upward revaluations are permitted and will result in a gain recognized on the income statement to the extent it reverses a previously recognized loss. Any excess is reported as a revaluation surplus, a direct adjustment to equity. In this case, the carrying value of the assets is $600 million ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss). The fair value is $690 million. Of the $90 million excess of fair value over carrying value, $80 million is recognized as a gain on the income statement to reverse the $80 million impairment loss that was previously recognized. The remaining $10 million is recorded as a revaluation surplus in shareholders' equity.

karoliukas

A firm revalues its long-lived assets upward. All other things equal, which of the following financial impacts is least likely to occur?

A) Higher profitability in the periods after revaluation.

B) Higher earnings in the revaluation period.

C) Lower leverage ratios.

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Because the asset has now been increased to a higher depreciable base, there will now be higher depreciation expense and therefore, lower profitability in the periods after revaluation. There could be higher earnings in the revaluation period because there may be impairment losses that can be reversed on the income statement. Otherwise, there will be an adjustment to earnings through other comprehensive income. Leverage ratios (i.e. debt to equity) will decrease since the increase in assets will be balanced by an increase in equity. Higher denominators and unchanged numerators will result in lower leverage ratios.

karoliukas

Which of the following statements about accounting treatments under IFRS and U.S. GAAP are most accurate regarding the periodic valuation of identifiable intangible assets and marketable securities classified as available for sale, respectively?

Identifiable intangible assets

Available-for-sale securities

A) U.S. GAAP permits upward revaluation Carried at market value

B) U.S. GAAP permits upward revaluation Carried at amortized cost

C) IFRS permits upward revaluation Carried at market value

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Under IFRS and U.S. GAAP, identifiable intangible assets are reported on the balance sheet at their cost less accumulated amortization. However, a significant difference is that U.S. GAAP does not permit upward revaluations of intangible assets.
The accounting treatment for available-for-sale securities is the same under IFRS and U.S. GAAP. These securities are carried on the balance sheet at their fair market values. Unrealized gains and losses are not recognized on the income statement, but are included in other comprehensive income.

karoliukas

On January 1, 2004, Cayman Corporation bought manufacturing equipment for $30 million. On December 31, 2006, Cayman determined the equipment was impaired and recognized a $5 million impairment loss in its income statement. As of December 31, 2007, the fair value of the equipment exceeded the book value by $7 million. What amount of the recovery in value can Cayman recognize in its 2007 income statement under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and under International Financial Reporting Standards (IFRS)?

U.S. GAAP

IFRS

A) $0 $7 million

B) $0 $5 million

C) $5 million $7 million

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U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the recovery is reported in the income statement to the extent that the previous downward adjustment (loss) was reported in net income. Otherwise, the increase in value is reported as an adjustment to equity. Thus, under IFRS, $5 million will be reported in 2007 net income and $2 million will be directly added to to equity (as an adjustment to equity).

karoliukas

Three years ago, Ranchero Corporation purchased a patent for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the patent was greater than its book value. No impairment losses have been recognized on the patent. 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 patent on the balance sheet at fair value?

A) Only one will increase.

B) Both will decrease.

C) Both will increase.

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Increasing the value of the patent on the balance sheet will increase assets and thus decrease the total asset turnover ratio (higher denominator). Increasing the value of the patent will also increase equity, otherwise, the balance sheet equation would not balance. Increasing equity will result in lower ROE (higher denominator). The increase in the value of the patent is not recognized in the income statement unless it is reversing a previously recognized write-down.

karoliukas

As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate?

A) The write-downs are reported as a component of income from continuing operations.

B) Write-downs taken on asset values can be reversed in later years if market conditions improve.

C) During the year of the write-downs, retained earnings and deferred taxes will decrease.

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Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.