Q1. 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.

Q2. 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)   $90 million gain in other comprehensive income.

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

Q3. 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 earnings in the revaluation period.

B)   Lower leverage ratios.

C)   Higher profitability in the periods after revaluation.

答案和详解如下：

Q1. 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.

Correct answer is A)

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.

Q2. 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)   $90 million gain in other comprehensive income.

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

Correct answer is C)         

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 direct adjustment to equity through other comprehensive income. 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 gain in other comprehensive income.

Q3. 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 earnings in the revaluation period.

B)   Lower leverage ratios.

C)   Higher profitability in the periods after revaluation.

Correct answer is C)         

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.

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