chapter 8

Question 1

Long-lived assets

Answer 1

Assets that are expected to provide economic benefits over a future period of time, typically
greater than one year.
May be tangible (plant, property, and equipment, or PP&E), intangible, or financial assets.

Question 2

Long Lived Asset At acquisition

Answer 2

capitalize
* purchase price and
* expenditures necessary to prepare asset for intended use.

Question 3

Long Lived Asset subsequent expenditure

Answer 3

capitalized if expected to provide benefits beyond one year (extend life or capacity).
expensed otherwise.

Question 4

intangible asset

Answer 4

Assets lacking physical substance.
* Include items that involve exclusive rights, such as patents, copyrights, trademarks, and
franchises.

Question 5

how you can account intangible assets

Answer 5

Accounting for an intangible asset depends on how it is acquired.
We will consider three ways:
* Purchased in situations other than business combinations,
* Developed internally, and
* Acquired in business combinations.

Question 6

Intangible assets
purchased in situations
other than business
combinations.

Answer 6

Recorded at fair value, which is assumed to be
equivalent to the purchase price (same as long-lived
tangible assets).

Question 7

Intangible assets
developed internally.

Answer 7

Generally expensed when incurred, although
capitalized in some situations.

Question 8

Intangible assets acquired
in a business combination.

Answer 8

Identifiable assets are recorded at fair value.
If acquisition price exceeds the sum of amounts
allocable to individual identifiable assets and liabilities,
the excess is recorded as goodwill.

Question 9

Intangible assets
developed internally.
IFRS vs GAAP

Answer 9

FRS
* Expenditures on research are expensed.
* Expenditures on development are capitalized.
* U.S. GAAP
* Generally, both research and development costs are expensed.
* For costs related to software development:
* Products for sale: Both research and development expenditures are expensed until
technology feasibility is established; they are subsequently capitalized.
* Software for internal use: Both research and development expenditures are
expensed until probable completion is demonstrated; they are subsequently
capitalized.

Question 10

what happen when cost are capitalized:
At acquisition
balance sheet
income statment
cash flow

Answer 10

Balance sheet: Increase assets
Cash Flow: Investing cash outflow
Income: nothing

Question 11

what happen when cost are capitalized:
Subsequently
balance sheet
income statment
cash flow

Answer 11

balance shet: nothing
cash flow: nothing
income: expensed via depreciation

Question 12

cost that are expensed when incurred

Answer 12

balance sheet
income statment: immediately reduce net income
cash flow: operating cash flow

Question 13

what happen when capitalizing

Answer 13

higher profitability ratio, in the first year and lower profitability ratios in subsequent years.

Question 14

Accelerated method vs straight line method

Answer 14

Higher depreciation expense in earlier periods, so lower operating profit
margin and operating return on assets (ROA) in the early periods and higher
operating profit margin and operating ROA in the later periods.
* Lower average total assets in earlier periods and thus higher asset turnover
ratio.

Question 15

what is an amortization

Answer 15

Allocation of the cost of an intangible asset over its useful life.
* An intangible asset with an indefinite useful life is not amortized.
* An intangible asset with a finite useful life is amortized using the same methods as depreciation.
Calculating amortization requires
* The original amount at which the intangible asset is recognized,
* The estimated length of its useful life, and
* The estimated residual value at the end of its useful life.

Question 16

Assume a company has elected to use the revaluation model for an item of machinery (the
company’s only long-lived asset). The machine was purchased on the first day of the fiscal
period, and measurement date occurs simultaneously with the company’s fiscal period-end.
* Cost to purchase machine: €10,000.
* At the end of the first fiscal period after acquisition, assume the fair value of the machine is
determined to be €11,000. How will the company’s financial statements reflect the revaluation?

Answer 16

The balance sheet shows
* The asset at a value of €11,000.
* A revaluation surplus (an equity component) of €1,000.
* Other comprehensive income: €1,000 increase in the value of the asset.
* No impact on profit and loss.

Question 17

The cost to purchase a machine was €10,000. Fair value at the end of the
first fiscal period was €11,000.
* At the end of the second fiscal period after acquisition, assume the fair
value of the machine is determined to be €7,500. How will the company’s
financial statements reflect the revaluation (total decrease in the carrying
amount of the asset is €3,500 (€11,000 – €7,500)?

Answer 17

Balance sheet
* Asset at a value of €7,500.
* Revaluation surplus (an equity component) of €0.
* Other comprehensive loss of €1,000, reversing previous increase in the
value of the asset.
* In profit and loss (i.e., income statement), loss of €2,500.

Question 18

Assume a company has elected to use the revaluation model for an item of
machinery (the company’s only long-lived asset). The machine was
purchased on the first day of the fiscal period, and the measurement date
occurs simultaneously with the company’s fiscal period-end.
* Cost to purchase machine: €10,000.
* At the end of the first fiscal period after acquisition, assume the fair value of
the machine is determined to be €7,500. How will the company’s financial
statements reflect the revaluation?

Answer 18

Balance sheet shows the asset at a value of €7,500.
* Profit and loss (i.e., income statement) shows a €2,500 loss.

Question 19

IFRS impairment loss

Answer 19

is measured as the excess of carrying amount of
the asset over its recoverable amount.
* Recoverable amount: “The higher of its fair value less costs to sell and its value in use.”
* Value in use: Discounted expected future cash flows.

Question 20

GAAP

Answer 20

Assess recoverability: If not recoverable (carrying amount exceeds undiscounted
expected future cash flows), then measure impairment loss.
* Impairment loss is measured as the excess of the carrying amount of the asset over its
fair value.

Question 21

derecognition

Answer 21

occurs when the asset is disposed of or is expected to provide no future benefits
from either use or disposal