karoliukas

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:

A) no change to Marcel’s financial statements.

B) a $90 million gain in other comprehensive income.

C) an $80 million gain on income statement and $10 million gain in other comprehensive income.

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Under U.S. GAAP, long-lived assets are reported on the balance sheet at depreciated cost less any impairment losses ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss, for a net amount of $600 million). Increases are generally prohibited with the exception of assets held for sale. Since these assets are currently in use, this exception does not apply. Therefore, Marcel may not revalue the assets upward.

karoliukas

Under U.S. GAAP, an asset is impaired when:

A) the firm can no longer fully recover the carrying amount of the asset.

B) accumulated depreciation plus salvage value exceeds acquisition costs.

C) the present value of future cash flows exceeds the carrying amount of the asset.

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An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.

karoliukas

An impairment write-down is least likely to decrease a company's:

A) debt-to-equity ratio.

B) assets.

C) future depreciation expense.

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An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.

karoliukas

An analyst determined the following information concerning Franklin, Inc.’s stamping machine:

• Acquired seven years ago for $22 million
• Straight line method used for depreciation
• Useful life estimated to be 12 years
• Salvage value originally estimated to be $4 million

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.

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The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.

karoliukas

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.

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With an abandonment of an asset, the carrying value of the machinery is removed from the balance sheet and a loss of that amount is recognized in the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000).

karoliukas

Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000?

A) Gain of $40,000.

B) Loss of $100,000.

C) Loss of $360,000.

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With a sale of an asset to a third party, the difference between the proceeds and carrying value is reported as a gain or loss on the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000). Therefore, the gain is equal to $40,000 ($400,000 proceeds less $360,000 carrying value).

karoliukas

Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?

A) IFRS.

B) Both IFRS and U.S. GAAP.

C) U.S. GAAP.

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Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.

karoliukas

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?

A) Both of these items are required to be disclosed.

B) Neither of these items is required to be disclosed.

C) Only one of these items is required to be disclosed.

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Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historical cost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite.

karoliukas

A building owned by a firm is most likely to be classified as investment property if:

A) space in the building is rented to other firms.

B) the firm uses the building for its corporate headquarters.

C) the building is a manufacturing plant or distribution center.

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Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capital appreciation, or both.

terpsichorefan

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