Long-lived Assets Flashcards
Which of the below is not a tangible asset?
A. Land investment.
B. Patent.
C. Plant investment.
D. Equipment investment.
B is correct.
Which of the following costs are capitalized?
A. Cost of relocating or reorganizing part or all of entity’s operations
B. Cost of advertising a new product
C. Administrative and other general overhead costs
D. Employee benefits arising from construction of equipment
D is correct.
Anna Lyssette is evaluating the performance of two biotechnology companies: Biotech
Holdings and Advanced Biotech. Both companies released their first new drugs early in the
year, but Lyssette is worried about a possible lack of comparability due to differing strategies.
Biotech Holdings acquired the research and development for its drug from another company
while Advanced Biotech developed its drug internally. In the current accounting period, all else
equal, Biotech Holdings would most likely report.
A. lower total assets.
B. higher net income.
C. similar cash flow from operations.
B is correct. By acquiring its drug, Biotech Holdings will have higher total assets because it
would capitalized intangible asset and higher cash flow from operations because the drug
purchase would appear as an investing cash flow. All else equal, Biotech Holdings would
initially report higher net income because only a portion of the cost would reduce revenues in
the current accounting period. In future periods, Advanced Biotech would report higher net income so that net income over time would be unaffected by whether R&D was expensed or amortized.
When comparing a company that complies with IFRS to a company that
complies with US GAAP, it is most important to remember that under IFRS,
A. research-phase R&D expenditure are capitalized.
B. acquired in-process R&D is expensed immediately.
C. development-phase R&D expenditure may be capitalized.
C is correct. Under IFRS, development-phase R&D may be capitalized, whereas it must be expensed under US GAP (except for software under certain circumstance). Both standards require expensing of research-phase expenditures, and IFS requires acquired-in-process R&D to be capitalized.
Bobcat Company’s balance sheet shows property, plant, and equipment
valued at a historical cost of $22’983 million and accumulated depreciation of $7’879. Depreciation expense in the most recent year was $2459. What is the average remaining useful life of Bobcat’s assets?
A. 3.2 years.
B. 6.1 years.
C. 9.3 years.
B is correct. The average remaining life is calculated as net PPE divided by annual depreciation expense. Net PPE is $15’104 ($22’983-$7’897). Annual depreciation expense is $2’459, giving an average remaining life of 6.14 years ($15’104/$2’459)
With regard to intangible assets, a company’s reported profit margin the year the asset is acquired will be highest if it estimates a
A. six-year useful life and no salvage value.
B. six-year useful life and a positive salvage value.
C. five-year useful life and a positive salvage value.
B is correct. Amortization expense is determined by dividing the difference
between the acquisition and salvage values over the useful life. Higher salvage values and longer lives equate to lower amortization expense and thus higher profit margins.
