CFA 2018 quest bank r29 long lived assets q bank

A company has purchased a machine for $1 million with an overall useful life of 20 years and has two significant components: Component A costs $ 500,000 and has an expected useful life o

LO.a: Distinguish between costs that are capitalized and costs that are expensed in the period in which they are incurred

1 A company recently purchased a warehouse property and related equipment for €20 million The company incurred the following additional costs:

• €1.0 million for repairs to the building’s roof

• €0.3 million to modify the interior layout to meet their needs (moving walls and doors, inserting and removing partitions, etc.)

• €0.2 million on an orientation and training session for employees to familiarize them with the facility

The cost to be capitalized (in millions) for accounting purposes is closest to:

A €20.0

B €21.3

C €21.5

2 Energy Unlimited, Inc., a vertically integrated power company, borrows capital from a consortium of banks to finance the construction and commissioning of an electricity generation plant The loan has the following terms:

Borrowing date 10 November 2013

Borrowed amount ¥750 million

Annual interest

Term of the loan 5 years

Payment method Annual interest payments only Entire principal is due at the end of the loan

term

The construction and commissioning of the plant take three years, during which time Energy Unlimited earned ¥25 million by temporarily investing the proceeds of the loan The amount of interest related to construction and commissioning (in ¥ million) that can be

capitalized in Energy Unlimited balance sheet under IFRS is closest to:

A 200

B 225

C 350

3 Capital Inc incurred the following costs recently on purchasing a machine for its car

manufacturing plant:

The total cost of the machine that will appear on Capital’s balance sheet is closest to:

Reinforcement of factory floor to accommodate machine $150

A $18,010

B $18,160

C $18,810

4 The information on a company’s financing for construction of a manufacturing facility is given below:

- Borrowed NZD12,000,000 at a rate of 11%

- Issued NZD2,000,000 of preferred shares with a cumulative dividend rate of 8%

- Temporarily invested NZD1,000,000 of the loan proceeds for the first six months of construction and earned 8% on that account

Under IFRS, the amount of financing costs to be capitalized in the first year is closest to:

A NZD1,280,000

B NZD1,440,000

C NZD1,480,000

5 The information on a company’s financing for construction of a manufacturing facility is given below:

- Borrowed USD12,000,000 at a rate of 11%

- Issued USD2,000,000 of preferred shares with a cumulative dividend rate of 8%

- Temporarily invested USD1,000,000 of the loan proceeds for the first six months of construction and earned 8% on that account

Under US GAAP, the amount of financing costs to be capitalized in the first year is closest

to:

A $1,280,000

B $1,320,000

C $1,480,000

LO.b: Compare the financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination

6 Under IFRS, which of the following conditions is a criterion for an asset to be classified as an intangible asset? It must:

A have an indefinite useful life

B be expected to generate future economic benefits

C be obtained through a business combination

7 On the statement of cash flow, an internally developed intangible asset will most likely be classified as a:

A Operating cash flow

B Investing cash flow

C Financing cash flow

8 Under US GAAP, the costs related to the development of a software for sale are most likely:

A Expensed

B Capitalized

C Expensed until feasibility is established and capitalized thereafter

9 Two companies develop, X and Y, develop scanners and software for editing the scanned images X follows IFRS, while Y follows US GAAP Which of the following statements is most accurate regarding the development of scanners and the editing software?

A Company X can capitalize the software development costs if it meets certain criteria

B Company Y can capitalize the development costs related to making scanners if its meets certain criteria

C Both companies must expense all development costs related to these intangible assets

LO.c: Explain and evaluate how capitalising versus expensing costs in the period in which they are incurred affects financial statements and ratios

10 Capitalizing expenditures, rather than expensing them:

A results in lower profitability in the initial years and higher profitability in subsequent

years

B results in higher profitability in the initial years and lower profitability in subsequent

years

C has no impact, both methods give the same profitability

11 Capitalising an expenditure, rather than expensing it:

A results in greater amount reported as cash flow from operations

B results in lower amount reported as cash flow from operations

C has no impact, both methods report the same cash flow from operations

LO.d: Describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense

12 A company has purchased a machine for $1 million with an overall useful life of 20 years and has two significant components:

Component A costs $ 500,000 and has an expected useful life of 20 years

Component B costs $ 500,000 and has an expected useful life of 10 years

Assuming that the company’s objective is to maximize income and it uses the straight line method of depreciation, the depreciation expense for the first year computed under IFRS

compared with under U.S GAAP will most likely be:

A the same

B $25,000 higher

C $25,000 lower

13 A Russian corporation is computing the depreciation expense of a piece of manufacturing equipment for the fiscal year ended December 31, 2013 using the information below The company takes a full year’s depreciation in the year of acquisition

Date of purchase January 1, 2013

Cost of equipment RUB 5,000,000

Estimated residual value RUB 500,000

Expected useful life 15 years

Total productive capacity 15,000,000 units

Production in 2013 1,100,000 units

The depreciation expense (in RUB) will most likely be:

A 300,000 lower using the straight-line method compared with the double-declining balance method

B 66,667 higher using the units-of-production method compared with the straight-line

C 336,667 higher using the double-declining balance method compared with the units-of-production method

14 At the start of the year, a company acquired new equipment at a cost of €80,000, estimated to have a five year life and a residual value of €5,000 If the company depreciates the asset using the double declining balance method, the depreciation expense that the company will

report for the third year is closest to:

A €11,520

B €17,280

C €19,200

15 An analyst has gathered the following information about a company’s capital assets:

Property, plant, and equipment 4750 4750

Accumulated depreciation 575 420

As of the end of 2012, the expected remaining life of the assets, in years, is closest to:

A 24 years

B 27 years

C 31 years

LO.e: Describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, financial statements, and ratios

16 A research analyst is analyzing the effect of two alternative methods of depreciation for a

newly purchased machine on a company’s income statement She has collected the following information about the machine’s expected production life and use:

Year 1 Year 2 Year 3 Year 4 Year 5 Total

Units of production 1,550 1,750 1,750 1,500 1,500 8,050

If the company uses the straight-line method to depreciate the machine instead of the

units-of-production method of depreciation, its net income in Year 2 will most likely be:

A the same

B lower

C higher

17 Jonathan Hollis, CFO of Alexander Oil Company, is selecting the depreciation method to use for new equipment with an expected useful life of four years Production is expected to be relatively slow initially, but will gradually increase over time The method chosen for tax

reporting must be the same as the method used for financial reporting Which of the

following depreciation methods would you most strongly recommend to Hollis, if he wants to

minimize tax payments in the first year of equipment’s life?

A Straight-line method

B Units-of-production method

C Double-declining balance method

The following information relates to Questions 18 - 19

Anna Judd of Blue Chip Limited, an Australian corporation, is computing the depreciation

expense of a manufacturing plant for the fiscal year ended 31 March 2014 The plant was

acquired on 1 April 2013 Judd gathers the following information (currency in Australian dollars, AUD):

Estimated residual value AUD 250,000

Total productive capacity 1,900,000 units

Production in FY 2014 100,000 units

Expected production for the next 9 years 200,000 units each year

18 The amount of depreciation expense (in AUD) reported on Blue Chip’s income statement

related to the manufacturing plant based on straight-line method is closest to:

A 118,421

B 225,000

C 250,000

19 The amount of depreciation expense (in AUD) reported on Blue Chip’s income statement

related to the manufacturing plant based on units-of-production method is closest to:

A 118,421

B 225,000

C 250,000

20 KESC’s objective is to maximize income; it had spent $3,000,000 for equipment with two significant components as mentioned below The machine is expected to have an overall useful life of 16 years and the company uses the straight line method of depreciation

Component Cost Useful Life

The depreciation expense for the first year computed under U.S GAAP relative to IFRS will

most likely be:

A the same

B $37,500 higher

C $37,500 lower

21 A company prepares its statements according to US GAAP It most likely reports long-lived

assets using:

A the revaluation model at fair value

B the cost model at acquisition cost less accumulated depreciation

C the revaluation model at historical cost

22 What is the effect of a higher expected residual value and a longer useful life on depreciation expense?

A Lower

B Higher

C No effect

23 Assume an asset is in its early years and ignore the effect of taxes An accelerated method of depreciation, relative to straight-line depreciation, will most likely result in a decrease of:

A Asset turnover ratio

B Shareholders’ equity

C Cash flow from operations

LO.f: Describe the different amortisation methods for intangible assets with finite lives and calculate amortisation expense

24 The following information is available on a company for the year 2011:

- Purchased a customer list for $200,000, which is expected to provide equal annual benefits for the next 4 years

- Recorded $200,000 of goodwill in the acquisition of a competitor It is estimated that the acquisition would provide substantial benefits for the company for at least the next 10 years

- Spent $300,000 on media placements announcing the company had donated products and services to the community The CEO believes the firm’s reputation was enhanced substantially and the company will likely benefit from it for the next 5 years

Based on those events, the amortization expense that the company should report in 2011 is

closest to:

A $50,000

B $70,000

C $130,000

25 A financial analyst at Mahsud Financial Corporation, a middle-eastern financial firm, is computing the amortization of a bank accountholders list, an intangible asset, for the fiscal year ended 31 March 2014 She has collected the following information about the asset:

Expected residual value at time of acquisition AED 350,000

The accountholder list is expected to result in additional revenues for five years after acquisition The present value of these expected additional revenues exceeds the cost of the list

Based on the straight-line method, the amount of accumulated amortization related to the

accountholder list as of 31 March 2014 is closest to:

A AED 290,000

B AED 870,000

C AED 1,080,000

26 A research analyst is analyzing the amortization of a product patent acquired by A-One

Digital Printing, a Canadian corporation She collects the following information about the

patent:

Total plant capacity of patented product 55,000 units per year

Production of patented product in fiscal year ended 31 March 2014 32,000 units

Expected production of patented product during life of the patent 264,000 units

The amortization expense on the patent for the fiscal year 2014 using the units-of-production

method is closest to:

A CAD 551,742

B CAD 698,182

C CAD 872,727

27 Which of the following statements is least likely correct?

A Acceptable amortization methods are the same as acceptable depreciation methods

B Intangible assets with finite lives are amortized

C Intangible assets in indefinite useful lives are amortized

28 With respect to accounting treatment, intangible assets with finite useful lives mainly differ

from those with infinite useful lives in terms of:

A Impairment

B Amortization

C Revaluation

LO.g: Describe how the choice of amortisation method and assumptions concerning useful life and residual value affect amortisation expense, financial statements, and ratios

29 Which of the following items will cause a company to report a lower amount of amortization expense of intangible assets in the first year after acquisition?

A A higher amortization rate

B A lower residual value

C A longer useful life

30 Which of the following amortization methods is most likely to equally distribute the cost of

an intangible asset over its useful life?

A Units-of-production method

B Straight-line method

C Double-declining balance method

LO.h: Describe the revaluation model

31 SHM enterprise, a hypothetical company, owns several investment properties on which it earns rental income It values the properties using the fair value model based on prevailing rental markets SHM prepares its financial statements according to IFRS After two years of increases the market softened in 2010 and values decreased A summary of the properties’ valuations is as follows:

 Original cost (acquired in 2008) $100.0 million

 Fair value valuation as of December 31, 2008 $102.0 million

 Fair value valuation as of December 31, 2009 $110.0 million

 Fair value valuation as of December 31, 2010 $98.00 million

What will be the impact of the revaluation on the 2010 financial statements?

A $12 million charge to net income

B $10 million charge to revaluation surplus and €2.0 million charge to net income

C $12 million charge to revaluation surplus

32 Mega Retail, a British corporation that follows IFRS, has elected to use the revaluation

model for its property, plant and equipment One of Mega Retail’s lifter was purchased for

£1,200,000 at the beginning of the fiscal year ended 31 December 2012 As of 31 December

2012, the lifter has a fair value of £2,100,000 Should Mega Retail show a profit for the

revaluation of the lifter?

A No, because increase in value resulting from revaluation can never be recognized as a profit

B No, because this value increase is recorded directly in equity

C Yes

33 A company has two types of long-lived assets: land and machinery The company prepares its financial statements as per IFRS, which allows the company to use:

A The cost model for land and revaluation model for machinery

B Only the revaluation model for both land and machinery

C Only the revaluation model for land and the cost model for machinery

34 Assume a revaluation initially decreases the carrying amount of the asset which resulted in a

loss Subsequently, the carrying amount of the asset increases This increase is most likely:

A recognized as a profit or loss on the income statement

B increase equal to reversal is recorded in income statement and any excess of the reversal amount is recorded directly to equity

C recorded as part of equity under the heading of revaluation surplus in the balance sheet

35 Investment property differs from property, plant and equipment as it:

A is long-lived

B earns rent

C is tangible

36 If a company uses the fair value model to value investment property, changes in the fair

value of the asset are least likely to impact:

A net income

B net operating income

C other comprehensive income

37 Investment property is least likely to:

A be held for capital appreciation

B be used in the production of goods and services

C earn rent

38 Under the fair value model, an increase in the value of an asset:

A increases net income

B is shown as part of other comprehensive income and does not impact net income

C is not reflected in the financial statements

39 Assume a revaluation initially increases the carrying amount of the asset This increase most

likely:

A is recognized as a profit or loss on the income statement

B has no effect on the income statement or the balance sheet

C is recorded as part of equity under the heading of revaluation surplus in the balance sheet

LO.i: Explain the impairment of property, plant, and equipment and intangible assets

40 Which of the following assets should most likely be tested for impairment at least annually?

A Land

B A patent with a legal life of 20 years

C A trademark with an expected indefinite life

41 An analyst is analyzing the impairment of the production equipment of Omega Corp., a

German corporation that follows IFRS He collects following information about the

equipment:

The amount of impairment loss on Omega Corp.’s income statement related to production

equipment is closest to:

Fair value €20,100,000

Costs to sell €695,000

Value in use €15,600,000

Net carrying amount €22,300,000

A 2,200,000

B 2,895,000

C 6,700,000

42 An analyst identified the following intangible assets while reviewing the financial statements and footnotes of a listed company that follows IFRS:

 Product patent with no expiration date;

 Copyright expiring in 25 years; and

 Goodwill acquired 5 years ago in an M&A transaction

Which of these assets is an intangible asset with a finite useful life?

43 Boston Inc preparers financial statement using US GAAP and reports the following

information related to a piece of equipment on 31 December 2015:

 Carrying value = $100,000

 Undiscounted expected cash flows = $102,000

 Fair value = $98,000

What is most likely to be the reported value of the equipment after it is assessed for

recoverability?

A $98,000

B $100,000

C $102,000

44 An Australian printing company which prepares its financial statements according to IFRS has experienced a decline in the demand for its products The following information relates

to the company’s printing equipment as of 31 December 2013:

AUD

Carrying value of equipment (net book value) 300,000

Undiscounted expected future cash flows 330,000

The impairment loss (in AUD) is closest to:

A 0

B 50,000

C 60,000

LO.j: Explain the derecognition of property, plant, and equipment and intangible assets

45 A company plans to either exchange or abandon a long-lived asset Until it does so, the asset

will least likely be:

A Classified as held-for-use until disposal

B Depreciated and tested for impairment if the carrying amount is greater than zero