2

Question 1

When a fixed plant asset with a 5-year estimated useful life is sold during the second year, how would the use of an accelerated depreciation method instead of the straight-line method affect the gain or loss on the sale of the fixed plant asset?

Gain
Loss

Answer 1

An accelerated method reduces the carrying amount of the asset more rapidly in the early years of the useful life than does the straight-line method. Hence, the effect of an early sale is to increase the gain or decrease the loss that would have been recognized under the straight-line method.

Question 2

Which one of the following methods of depreciation will result in the lowest reported net income in the early life of a depreciable asset?

Answer 2

Sum-of-the-years’-digits depreciation has the highest depreciation expense in the early years of an asset’s life, resulting in lower net income.

Question 3

In which of the following situations is the units-of-production method of depreciation most appropriate?

Answer 3

The units-of-production depreciation method allocates asset cost based on the level of production. As production varies, so will the credit to accumulated depreciation. Consequently, when an asset’s service potential declines with use, the units-of-production method is the most appropriate method.

Question 4

According to U.S. GAAP, restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?

Held for use

Held for disposal

Answer 4

yes , no
Under U.S. GAAP, a previously recognized impairment loss on a long-lived asset to be held and used must not be reversed. The carrying amount of the long-lived asset adjusted for an impairment loss is its new cost basis. However, if the long-lived asset is held for sale, a gain is recognized for a subsequent increase in fair value minus cost to sell. But the gain is limited to the extent of prior write-downs. Furthermore, if the long-lived asset is held to be disposed of other than by sale, it is classified as held and used until disposal.

Question 5

What amount should Beta Motor report as research and development expense in its income statement for the current year?

Answer 5

Research and development expenses include the salaries of laboratory employees researching how to build the new car (research), and the design, testing, and construction of a prototype (development). The Codification specifically excludes certain items from research and development, such as legal fees for the patent application and engineering follow-up during the early stages of commercial production. The cost of marketing research to promote the new car is a part of advertising expenses. Therefore, this answer is correct because the amount of research and development is $650,000 ($250,000 + $400,000).

Question 6

With respect to subsequent goodwill recognition, private companies may choose to:

Answer 6

Private Company Standards

1. Subsequent Goodwill Measurement—potentially testable due to early adoption.
   a. Entities other than public business entities; not-for-profit entities; and employee benefit plans (Topics 960 and 965) may amortize goodwill on a straight-line basis over a maximum of 10 years.
   b. Goodwill is still to be tested for impairment, although the two-step approach has been eliminated for these entities in favor of a hypothetical application of the acquisition method.
   (1) Under the alternative method, goodwill impairment exists when the carrying amount of the entity/reporting unit (including goodwill) exceeds its fair value.

Question 7

When only a few assets (not a reporting unit) acquired in a business combination accounted for using the acquisition method are being tested for recoverability, all goodwill that arose from that transaction should

Answer 7

This answer is correct. According to ASC Topic 360-35-26, if some but not all of the assets acquired in a business combination accounted for using the acquisition method are being tested for recoverability, the goodwill that arose from that transaction shall not be allocated to the assets unless the asset group includes a reporting unit.

Question 8

Assume a private firm elects to adopt ASU 2014-08: Business Combinations: Accounting for Intangible Assets in a Business Combination. Noncompetition agreements:

Answer 8

This answer is correct. ASU 2014-18 allows (not requires) private firms, in a business combination, to measure noncompetition agreements as part of goodwill.