Reading 23: long-lived assets Flashcards
If a company purchases an asset with future economic benefits that are highly uncertain, the company should:
expense the purchase.
use straight-line depreciation.
use an accelerated depreciation method.
If the future economic benefits of a purchase are highly uncertain, a company should expense the purchase in the period it is incurred. (LOS 23.a)
The cost of an intangible asset is most likely to be amortized if the asset has:
a finite life and was purchased.
a finite life and was created internally.
an indefinite life and was acquired in a business combination.
The cost of an intangible asset is amortized if the asset has a finite life and was purchased or acquired in a business combination. Development costs for internally generated intangible assets may be capitalized under IFRS, but research costs are expensed as incurred. (LOS 23.b)
Red Company immediately expenses its development costs while Black Company capitalizes its development costs. All else equal, Red Company will:
show smoother reported earnings than Black Company.
report higher operating cash flow than Black Company.
report higher asset turnover than Black Company.
As compared to a firm that capitalizes its expenditures, a firm that immediately expenses expenditures will report lower assets. Thus, asset turnover (revenue / average assets) will be higher for the expensing firm (lower denominator). (LOS 23.c)
East Company purchased a new truck at the beginning of this year for $30,000. The truck has a useful life of eight years or 150,000 miles, and an estimated salvage value of $3,000. If the truck is driven 16,500 miles this year, how much depreciation will East report under the double-declining balance (DDB) method and the units-of-production (UOP) method?
DDB UOP
7500 2970
7500 3300
6750 2970
Double-declining balance = $30,000 book value × (2/8) = $7,500.
Units-of-production = ($30,000 cost – $3,000 salvage value) / 150,000 miles = $0.18 per mile.
16,500 miles driven × $0.18 per mile = $2,970.
(LOS 23.d)
In the early years of an asset’s life, a firm using the double-declining balance method, as compared to a firm using straight-line depreciation, will report lower:
depreciation expense.
operating cash flow.
retained earnings.
In the early years, accelerated depreciation will result in higher depreciation expense; thus, lower net income. Lower net income will result in lower retained earnings. (LOS 23.e)
Which of the following statements about indefinite-lived intangible assets is most accurate?
They are amortized on a straight-line basis over a period not to exceed 40 years.
They are reported on the balance sheet indefinitely.
They never appear on the balance sheet unless they are internally developed.
Indefinite-lived intangible assets are not amortized; rather, they are reported on the balance sheet indefinitely unless they are impaired. (LOS 23.g)
At the beginning of this year, Fairweather Corp. incurred $200,000 of research costs and $100,000 of development costs to create a new patent. The patent is expected to have a useful life of 40 years with no salvage value. Calculate the carrying value of the patent at the end of this year, assuming Fairweather follows U.S. GAAP.
$0.
$97,500.
$292,500.
Under U.S. GAAP, research and development costs are expensed as incurred. Thus, the entire $300,000 of R&D is expensed this year. The result is a zero carrying value. (LOS 23.g)
Which of the following is least likely considered in determining the useful life an intangible asset?
Initial cost.
Legal, regulatory, or contractual provisions.
Provisions for renewal or extension.
Initial cost has nothing to do with the useful life of an intangible asset. (LOS 23.h)
Two years ago, Metcalf Corp. purchased machinery for $800,000. At the end of last year, the machinery had a fair value of $720,000. Assuming Metcalf uses the revaluation model, what amount, if any, is recognized in Metcalf’s net income this year if the machinery’s fair value is $810,000?
$0.
$80,000.
$90,000.
Under the revaluation method, Metcalf reports the equipment on the balance sheet at fair value. At the end of last year, an $80,000 loss was recognized (from $800,000 to $720,000) in the income statement. Any recovery is recognized in the income statement to the extent of the loss. Any remainder is recognized in shareholders’ equity as revaluation surplus. Thus, at the end of this year, an $80,000 gain is recognized in the income statement, and a $10,000 revaluation surplus is recognized in shareholders’ equity. (LOS 23.i)
According to U.S. GAAP, an asset is impaired when:
the firm cannot fully recover the carrying amount of the asset through operations.
accumulated depreciation plus salvage value exceeds acquisition cost.
the present value of future cash flows from an asset exceeds its carrying value.
An asset is impaired when the firm cannot recover the carrying value. Under U.S. GAAP, recoverability is tested based on undiscounted future cash flows. (LOS 23.j)
In the year after an impairment charge on a finite-lived identifiable intangible asset, compared to not taking the charge, net income is most likely to be:
lower.
higher.
unaffected.
Because a finite-lived identifiable intangible asset would be amortized, amortization expense in the year after the reduction from the impairment charge would be lower (the carrying value of the asset would most likely be lower), increasing net income. (LOS 23.j)
A firm recently recognized a $15,000 loss on the sale of machinery used in its manufacturing operation. The original cost of the machinery was $100,000 and the accumulated depreciation at the date of sale was $60,000. What amount did the firm receive from the sale?
$25,000.
$45,000.
$85,000.
Gain or loss is equal to the sale proceeds minus the carrying value (cost minus accumulated depreciation) at the time of sale. Given the loss of $15,000 and carrying value of $40,000 ($100,000 – $60,000), we can solve for the proceeds of $25,000 (–15,000 + 40,000). (LOS 23.k)
Other things equal, which of the following actions related to property, plant, and equipment will most likely decrease a firm’s return on assets in future periods?
Impairment.
Derecognition.
Upward revaluation.
An upward revaluation will increase the book value of assets and increase depreciation expense in future periods (decreasing net income), both of which reduce ROA. Impairment would have the opposite effects, decreasing future depreciation and book values. Derecognizing an asset may increase, decrease, or not affect ROA in future periods. (LOS 23.f)
Which of the following disclosures would least likely be found in the financial statement footnotes of a firm?
Accumulated depreciation.
Carrying values by asset class.
Average age of assets.
The average age is not a required disclosure. However, it can be calculated given other disclosures. (LOS 23.l)
Metallurgy, Inc., reported depreciation expense of $15 million for the most recent year. Beginning-of-year gross PP&E and accumulated depreciation were $287 million and $77 million, respectively. If end-of year gross PP&E and accumulated depreciation were $300 million and $80 million, the estimated remaining useful life of PP&E is closest to:
10 years.
15 years.
20 years.
The remaining useful life can be estimated as ending net PP&E value divided by annual deprecation.
(300 – 80)/15 = 14.66 years
(LOS 23.m)
