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41. Which of the following statement about expenses and intangible assets is least accurate? A. advertising fees are generally expensed as incurred. B. In most countries, research and development costs are capitalized. C. Intangible assets are initially entered on the balance sheet at their purchase prices when they are acquired from an outside entity.

Ans: B. U.S.GAAP requires R&D costs to be expensed. IFRS requires research costs to be expensed, but development costs are capitalized.

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42. In the early years of an asset’s life, a firm that chooses an accelerated depreciation method instead of using straight-line depreciation will tend to have: A. lower net income and lower equity. B. higher return on equity and higher return on assets. C. lower depreciation expense and lower turnover ratios.

Ans: A. These relationships are reversed in the later years of the asset’s life if the firm’s capital expenditures decline.

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42. A manufacturing firm shuts down production at one of its plants and offers the facility for rent. Based on the market for similar properties, the firm determines that the fair value of the plant is €500,000 more than its original cost. If this firm uses the cost model for plant and equipment and the fair value model for investment property, should it recognize a gain on its income statement under IFRS? A. Yes, because the plant will be reclassified as investment property. B. No, because the increase in value does not reverse a previously recognized loss. C. No, because the firm must continue to use the cost model for valuation of this asset.

Ans: B. According to IFRS, property held for the purpose of earning rental income is classified as investment property. However, when a property is transferred from owner-occupied to investment property, a firm using the fair value model must treat any increase in the property’s value as a revaluation. That is, the firm may only recognize a gain on the income statement to the extent that it reverses a previously recognized loss.

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43. Under U.S.GAAP, an asset is considered impaired if its book value is: A. less than its market value. B. greater than the present value of its expected future cash flows. C. greater than the sum of its undiscounted expected cash flows.

Ans: C. Under U.S.GAAP, an asset is considered impaired when its book values is greater than the sum of the estimated undiscounted future cash flows from its use and disposal.

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44. Bao Inc. owns a machine with a carrying value of $3.0 million and a salvage value of $2.0 million. The present value of the machine’s future cash flows is $1.7 million. The asset is permanently impaired. Bao should (under IFRS): A. immediately write down the machine to its salvage value. B. immediately write down the machine to its recoverable amount. C. write down the machine to its recoverable amount as soon as it is depreciated down to salvage value.

Ans: B. Under IFRS, when an asset is permanently impaired, it must be written down to its recoverable amount (greater of value in use or fair value less selling costs) in the period in which the impairment is recognized.

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45. Bao Company has revalued an intangible asset with an indefinite life upward by €25 million. In its financial statements, Bao will most likely: A. disclose how it determined the fair value of the intangible asset. B. report lower net income in subsequent periods because of increased amortization expense on the asset. C. report higher assets, net income, and shareholders’ equity in the most recent period than it would have reported under the cost model.

Ans: A. For firms that revalue assets upward, IFRS requires disclosure of the date the asset was revalued, how management determined its fair value, the asset’s carrying value using the historical cast model, and (for intangible assets) whether the asset’s useful life is finite or indefinite. Although assets and shareholders’ equity will increase as a result of the revaluation, net income will not increase. The increase in the value of the asset is reported as a revaluation surplus in shareholders’ equity. Amortization expense will not increase because indefinite-lived intangible assets are not amortized.

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46. As a result of a recent acquisition, Bao Inc. has placed the following items on their balance sheet as of the beginning of their fiscal year: Goodwill $30 million Patent $10 million Expires in 10 years. Trademark $15 million Expires in 15 years, renewable at minimal cost. If Bao amortizes intangible assets using the straight line method, the amortization expense on these assets for the fiscal year will be: A. $1 million. B. $2 million. C. $3 million.

Ans: A. Goodwill has an indefinite life and is not amortized. A trademark or other intangible asset that has an expiration date but is renewable at minimal cost, is treated as having an indefinite life, and is not amortized. The patent has a finite life and its cost will be amortized at the rate of $1 million each year over ten years under the straight-line method.

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47. Which of the following statements about the role of depreciable lives and salvage values in the computation of depreciation expenses for financial reporting is least accurate? A. Estimates of the useful life of the same depreciable asset can differ between companies. B. Companies are required to disclose data about estimated salvage values in the footnotes to the financial statements. C. Depreciable lives and salvage values are chosen by management and allow for the possibility of income manipulation.

Ans: B. Companies typically do not disclose data about estimated salvage values, except when estimates are changed.

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48. Bao Corp. purchased a new stamping machine for $100,000, paid $100,000 for shipping, and paid $5,000 to have it installed in their plant. Based on an estimated salvage value of $25,000 and an economic life of six years, the difference between straight-line depreciation and double-declining balance depreciation in the second year of the asset’s life is closest to: A. $7,220. B. $10,556. C. $16,666.

Ans: B. Straight line depreciation is: (100,000+10,000+5,000-25,000)/6=15,000each year. Double-declining balance depreciation is the second year is: 115,000(2/3)(1/3)=25,556. The difference is $10,556. Remember that salvage value is not part of the declining balance calculation.

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49. A reconciliation of beginning and ending carrying values for long-lived tangible assets is required for firms reporting under: A. IFRS. B. U.S.GAAP. C. both U.S.GAAP and IFRS.

Ans: A. The required disclosures for long-lived assets under IFRS are more extensive than they are under U.S.GAAP. IFRS requires a reconciliation of beginning and ending carrying values for classes of long-lived tangible assets, while U.S.GAAP does not.