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36. On January 1, 2009, Bao limited bought a piece of manufacturing equipment for $250,000. At that time they estimated its useful life to be 10 years and its salvage value to be $10,000. During 2011, it became apparent that the equipment was wearing our more quickly than they had originally estimated. It now appeared that its useful life would only be 6 years in total. If Bao Limited uses the straight-line method for depreciation and  has a policy of only taking one-half year’s depreciation in the year of acquisition, the depreciation expense on this piece of equipment for 2011 will be closest to: A. $48,000. B. $51,000. C. $53,125.

Ans: B. Original depreciation (250,000-10,000)/10=24,000 per year. They have taken 1.5year worth (0.5 for 2009 and full year for 2010)=36,000. The new estimate is for 6 years in total and 2 years have passed, so there are 4 years remaining. Revised depreciation (250,000-36,000-10,000)/4=$51,000.

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35. A company that prepares its financial statements in accordance with IFRS standards is in the process of developing a more efficient production process for one of its primary products. The most appropriate accounting treatment for the costs incurred in the project is to: A. expense all cost as incurred. B. capitalize costs directly related to the development. C. expense costs until technical feasibility has been established.

Ans: C. Under IFRS research and development costs are expensed until certain criteria are met, including that technical feasibility has been established and the company intends to use it. (Under U.S.GAAP, both research and development costs are generally expensed as incurred. One exception is software development.)

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34. For which type of long-lived asset is it most appropriate to test for impairment at least annually: A. Property, plant and equipment. B. Intangible assets with finite live. C. Intangible assets with indefinite lives.

Ans: C. Intangible assets with indefinite lives need to be tested for impairment at least annually. A and C are incorrect. PP&E and intangible with finite lives are tested only if there has been a significant change or other indication of impairment.

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33. During 2011, the following events occurred at a company. The company: 1 Purchased a customer list for $100,000, which is expected to provide equal annual benefits for the next 4 years. 2 Recorded $200,000 of goodwill in the acquisition of a competitor. It is estimated that the acquisition would provide substantial benefits for the company for at least the next 10 years. 3 Repeatedly received favorable mention in the media for its response to a local natural disaster, in which it donated $300,000 in products and services to the community. The CEO of the company was heard to say the publicity enhanced the firm’s reputation substantially and would likely be worth at least $100,000 annually over the next 5 years. Based on these events, the amortization expense that the company should report in 2012 is closest to: A. $25,000. B. $45,000. C. $125,000.

Ans: A. The customer list is the only identifiable intangible asset and it should be amortized on a straight-line basis over its expected future life: $100,000/4=$25,000 per year. Goodwill is an generated intangible that is not recorded on the balance sheet and is therefore not amortized.

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32. An analyst has gathered the following information about a company’s capital assets: Year ending 2012 2011 PP&E €2,500 €2,500 Accumulated depreciation 375 250 Net book value 2,215 2,250 As at the end of 2012, the expected remaining life of the assets, in years, is closest to: A. 6. B. 17. C. 20.

Ans: B. The expected remaining useful life of a company’s overall asset base = net PPE ÷ depreciation expense. Depreciation expense equals the change in accumulated depreciation * 375 – 250 = 125 The expected remaining useful life 2,125 ÷ 125 = 17 years *When there are no asset dispositions or acquisitions, as appears to be the case here, because the gross PPE does not change.

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31. A company purchased equipment in 2011 for ￡25,000; the year-end values for accounting purposes and tax purposes are as follows: 2012 2011 Carrying amount for accounting purposes ￡20,000 ￡22,500 Tax base for tax purposes ￡16,000 ￡20,000 Tax rate 25% 30% Which of the following statements best describes the effect of the change in the tax rate on the company’s 2012 financial statements? The deferred tax liability: A. Increased by ￡250. B. Decreased by ￡200. C. Decreased by ￡800.

Ans: B. Deferred tax liability = taxable temporary difference x tax rate. In 2010 if the rates had not changed, the deferred tax liability would be: 0.30x4,000=￡1,200 1,200But with the lower tax rate, the deferred tax liability will be: 0.25 × 4,000 =￡1,000 Effect of the change in rate therefore is a decrease in the liability: 1,200-1,000=200 Alternative calculation = change in rate × taxable difference:–5% × 4,000=￡ (200)

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30. A company, which prepares its financial statements according to IFRS, owns several investment properties on which it earns rental income. It values the properties using the fair value model based on prevailing rental markets. A summary of the properties’ valuations is as follows: Original cost (acquired in 2009) €50million Fair value valuation as at 31 December 2009 €50.5million Fair value valuation as at 31 December 2010 €54.5million Fair value valuation as at 31 December 2011 €48.0million Which of the following best describe the impact of the revaluation on the 2011 financial statements? A. €6.5million charge to net income. B. €6.5million charge to revaluation surplus. C. €4.5million charge to revaluation surplus and €2.0 million charge to net income.

Ans: A. For investment properties, when using the fair value model of revaluing assets, all increases and decreases affect the net income. Here, it is 54.5 – 48.0 = 6.5.

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29. The capitalization of interest (versus expensing) will have which of the following effects on a company’s financial ratios? A. Lower interest coverage ratio. B. Lower debt-to-equity ratio. C. Higher asset turnover ratio.

Ans: B. The capitalization of interest will increase shareholders’ equity, resulting in a lower debt-to-equity ratio. A is incorrect. Since interest expense (denominator) will be lower when interest is capitalized, the interest coverage ratio will be higher, not lower. C is incorrect. The capitalization of interest will result in a larger asset base and a lower asset turnover ratio (sales/ average assets).

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28. Based on recently complied projections, management expects that the book value of Asset X will not be recovered. The following information for Asset X is available: 2010 2011 2012 Net book value $610,500 $520,700 $390,200 Net realizable value 645,171 545,046 342,772 Value in use 615,350 523,220 365,735 In accordance with IFRS, the amount of the write-down is closest to: A. $24,346. B. $24,465. C. $47,428.

Ans: B. Under IFRS, an impairment loss exists when the carrying amount (net book value) of the assets exceeds its recoverable amount. The recoverable amount is defined as the greater of the assets net realizable value (fair value costs to sell) and its value in use: 2010 2011 2012 Net book value $610,500 $520,700 $390,200 Net realizable value 645,171 545,046 342,772 Value in use 615,350 523,220 365,735 Recoverable amount 645,171 545,046 365,735 In 2010 and 2011, there is no impairment because the carrying amount of the asset is less than the recoverable amount. In 2012, the carrying amount exceeds the recoverable amount, so an impairment loss equal to $24,465 ($390,200-365,735) must be recognized.

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27. The following are excerpts from Bao, Inc. financial statements related to its fixed assets activity for the fiscal year ended June 30, 2004 ($million): Capital expenditures $30.0 Depreciation expense $20.0 Gross PP&E $390.0 Net PP&E $275.0 Assuming the firm uses straight line depreciation, the average age and the average depreciable life of Bao’s fixed assets are closest to: A. 7 years for average age and 20 years for average depreciable life. B. 6 years for average age and 14 years for average depreciable life. C. 6 years for average age and 20 years for average depreciable life.

Ans: C. Accumulated depreciation=gross PP&E – net PP&E                                            = $390 – 275                                            = $115 Average age = accumulated depreciation / depreciation expense                      = $115/ 20 =5.8 years Depreciable life = gross PP&E / depreciation expense                            = $390/20 = 19.5 years