Chapter 9
1. The amount of goodwill represents the excess of the total purchase price over the fair value of identifiable
tangible and intangible net assets.
2. Long-lived financial assets include investments in securities.
3. U.S. GAAP requires firms to expense research and development (R&D) costs in the period incurred.
4. The laws governing patent protection are both jurisdiction-specific and subject to change, as is the process for
obtaining approval to market a new drug. As a general rule, the longer the drug approval process, the longer is
the useful life of the patent.
5. Firms must expense when incurred the transactions cost of acquiring a firm in a business combination under
both U.S. GAAP and IFRS.
6. Opportunity costs are forgone profits, and U.S. GAAP and IFRS recognize this cost as part of an assets
acquisition cost.
7. Firms sometimes acquire assets by exchanging an asset other than cash or by issuing common stock. In these
cases, acquisition cost is either the fair value of the consideration given or the fair value of the asset received,
depending on which value the firms can more reliably measure.
8. The capitalization of interest in the acquisition cost of assets during construction delays expense recognition
from the time periods of borrowing to the time periods of using the asset.
9. Long-lived assets with extremely long useful lives, such as land and works of art, are treated as having an
indefinite life.
10. Depreciation is the accounting term used to refer to the periodic write-off of intangible assets.
11. Depreciation and amortization is a measure of the decline in economic value of a long-lived asset.
12. The depreciable or amortizable basis of long-lived assets is the acquisition cost less salvage value.
13. For buildings, common depreciation practice assumes a zero salvage value on the assumption that the costs
a firm will incur in tearing down the building will approximate the sales value of the scrap materials recovered.
14. Although the legal life of a drug patent is 20 years, the expected economic life of the drug is often less than
half of that period.
15. U.S. GAAP requires firms to calculate depreciation separately for significant portions of plant and
equipment if those portions have different service lives.
16. The straight-line (use) method is the most common depreciation method for financial reporting.
17. U.S. GAAP and IFRS provide firms considerable flexibility in choosing their depreciation method(s).
18. U.S. GAAP and IFRS require firms to treat expenditures for maintenance and repairs as expenses of the
period as incurred but treat expenditures for improvements as assets (which firms subsequently depreciate or
amortize).
19. U.S. GAAP permits firms to increase the balance sheet carrying values of tangible and intangible long-lived
assets when the fair values of their assets increase.
20. IFRS permits upward asset revaluations, the recognition of unrealized increases in the fair value of
long-lived assets under certain conditions.
21. U.S. GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and
recognizing impairment losses.
22. Both U.S. GAAP and IFRS distinguish the same three categories of long-lived assets for impairment
analysis, and have the same procedures for assessing an asset for impairment and measuring the impairment
loss.
23. U.S. GAAP requires firms to recognize an impairment loss on a nonamortized intangible other than
goodwill whenever the carrying value of the asset exceeds its fair value.
24. Accounting for the impairment of long-lived assets is complex because U.S. GAAP and IFRS requirements
differ for various assets.
25. Tangible long-lived assets typically appear under the title Property, Plant, and Equipment, among the
current assets.
26. Gains and losses on disposals of property, plant, and equipment and intangible assets appear on the income
statement, often in “Other income and expense.”
27. Which of the following is/are intangible assets with a finite useful life?
28. Tangible long-lived assets include
29. Tangible long-lived assets include all of the following except
30. Intangible long-lived assets include:
31. Firms treat expenditures as assets when they:
32. An expenditure qualifies as a(n) _____ if it has the following characteristics:
1. It embodies a probable future benefit.
2. A particular entity can obtain the benefit and control others’ access to it.
3. The transaction or other event giving rise to the entity’s right to, or control of, the benefit has already
occurred.
4. The fair value of the item at the time of initial recognition can be measured with sufficient reliability.
33. An expenditure qualifies as an asset if it has which of the following characteristics?
34. For many technology and pharmaceutical firms:
35. In a corporate acquisition the:
36. Firms generally treat expenditures to develop intangibles internally as
37. Firms treat expenditures to develop intangibles internally as assets under U.S. GAAP when _____ the
point of technological feasibility; and under IFRS when _____ the point of technological feasibility.
38. Firms recognize expenditures to acquire intangibles externally from third parties as _____ if the intangibles
are either separable or arise from contractual or other legal rights.
39. The acquisition cost of equipment is the sum of the invoice price
40. Firms sometimes acquire assets by exchanging an asset other than cash or by issuing common stock. In
these cases, acquisition cost is
41. When a firm constructs its own buildings or equipment,
42. The capitalization of interest in the acquisition cost of assets during construction
43. Assume the following long-term debt structure for Smith Stores:
Construction Loan at 5% on Building Under Construction . . . . . . . ..$2,000,000
Other Borrowings at 6% Average Rate . . . . . . . . . . . . . . . . . . . . . . . . .7,200,000
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,200,000
The account Building Under Construction has an average balance during the year of $6,000,000. Smith Stores
bases the amount of interest capitalized on the new construction-related borrowing, $2,000,000, and enough of
the other borrowing to bring the total to $6,000,000.
How much does Smith Stores capitalize interest on the new construction?
44. Which of the following is not true regarding long-lived assets with a finite life?
45. Which of the following is true regarding long-lived assets with a finite life?
46. The cost of long-lived assets with an indefinite life
47. Long-lived assets with an indefinite life include
48. Depreciation is the accounting term used to refer to
49. Acme Drug Company purchases a patent from its creator. Which of the following is/are true?
50. Which of the following is/are true about goodwill?
51. Which of the following is not true about goodwill?
52. Which of the following is not true about goodwill?
53. The _____ of a long-lived asset is the cost of a series of future services.
54. Which of the following is/are true about holding gains on assets?
55. Which of the following is/are true about holding gains on assets?
56. In accounting, depreciation and amortization involve a systematic process of
57. When calculating the depreciation or amortization of long-lived assets management must
58. The terms salvage value and residual value refer to the estimated proceeds on the disposition of an
59. Which of the following is not true?
60. Some assets, such as a nuclear power plant, are not readily salable at the end of their useful lives, and
retiring them may impose substantial costs. Which of the following is true?
61. Some assets, such as a nuclear power plant, are not readily salable at the end of their useful lives, and
retiring them may impose substantial costs. Which of the following is true?
62. In calculating depreciation and amortization for tangible assets, physical factors that limit service lives
include all of the following except:
63. In calculating depreciation and amortization for tangible assets, functional factors that limit service lives
include:
64. The term _____ value refer to the estimated proceeds on the disposition of an asset less all removal and
selling costs.
65. Estimating _____ presents the most difficult task in the depreciation and amortization calculation. A change
in this estimate will change the depreciation and amortization amounts going forward.
66. The _____ method divides the acquisition cost of an asset (including the cost to dismantle and retire) less its
estimated salvage value by the estimated service life to calculate depreciation or amortization.
67. Alpha Corporation has a machine which costs $10,000, has an estimated salvage value of $400, and has an
expected service life of five years. The straight-line (time) method annual depreciation is
68. Beta Corporation acquired a patent for $60,000 which has an expected service life of five years and zero
salvage value. The annual amortization is
69. The method of depreciation for assets whose utilization is not uniform over time is the _____ method.
70. Charley Company owns a delivery truck that costs $108,000, has an estimated salvage value of $8,000, and
will provide 200,000 miles of use before retirement. If the truck operates 24,000 miles in a given year, the
straight-line (use) depreciation charge is
71. Delta Company has some assets that provide more and better services in the early years of their lives and
require increasing amounts of maintenance as they grow older. The _____ method(s), which recognize larger
depreciation charges in early years and smaller depreciation charges in later years, can be justified.
72. If permitted a choice of depreciation methods for tax reporting, a firm should try to maximize the amount of
the
73. Depreciation and amortization affect both net income reported in the financial statements and taxable
income on tax returns. Which of the following is true?
74. When taxing authorities permit a choice among alternative depreciation methods, a firm should choose the
alternative that allows it to pay the _____ amount of tax, as _____ as possible, within the law.
75. U.S. GAAP authoritative guidance requires that financial statements report depreciation charges based on
_____ estimates; in practice, the _____ method is the most common.
76. Recording periodic depreciation and amortization results in a
77. Depreciation of factory buildings and equipment used in manufacturing operations becomes
78. The amortization of a customer list are
79. The recording of amortization of intangibles generally results in a
80. The entry to record periodic depreciation of $4,500 on office facilities is as follows:
81. The entry to record patent amortization of $4,500 embedded in a product is as follows:
82. The entry to record amortization of a customer list in the amount of $4,500 is as follows:
83. The Work-in-Process Inventory account is _____. Product costs accumulate in the Work-in-Process
Inventory account until the firm completes the goods and transfers them to _____.
84. The original depreciation or amortization schedule for long-lived assets sometimes requires changing.
Which of the following is not true?
85. A firm purchased an office machine for $18,400, estimated that it will use the machine for 15 years, and
estimated a salvage value of $400. On December 31 of the sixth year, before closing the books for the year, the
firm analyzed its estimates of useful life and salvage value. In light of new information, the firm estimated that
the machine will have a total useful life of only 10 years, and the salvage estimate of $400 remains reasonable.
The new estimate of the remaining life is five years (the year just ended plus the next four). The depreciation
entry on December 31 of the sixth year and each year thereafter is:
86. A firm purchased an office machine for $4,600, estimated that it will use the machine for 15 years, and
estimated a salvage value of $100. On December 31 of the sixth year, before closing the books for the year, the
firm analyzed its estimates of useful life and salvage value. In light of new information, the firm estimated that
the machine will have a total useful life of only 10 years, and the salvage estimate of $100 remains reasonable.
The new estimate of the remaining life is five years (the year just ended plus the next four). The depreciation
entry on December 31 of the sixth year and each year thereafter is:
87. Firms often incur costs to maintain, repair, and improve their tangible assets. U.S. GAAP and IFRS require
firms to treat expenditures for _____ as _____ as incurred but _____ treat as _____.
88. Which of the following is/are not true regarding maintenance?
89. Which of the following is/are not true regarding repairs?
90. Which of the following is not true regarding expenditures for improvements?
91. Which of the following is not true regarding expenditures for improvements?
92. Epsilon Company suffers a loss to its building in a fire and spends $100,000 on repairs and improvements. It
judges that $80,000 of the expenditure replaces long-lived assets lost in the fire, and $20,000 represents
improvements to the building. Epsilon Company makes the following single journal entry.
93. Which of the following is/are true regarding the fair value of long-lived assets?
94. Which of the following is/are not true regarding the fair value of long-lived assets?
95. Gamma Corporation replaces a roof damaged in a hurricane. The new roof is purposefully designed to be
stronger than the old one so that it will support the air conditioning equipment the firm plans to install. Which
of the following is/are true?
96. Which of the following is/are true regarding measuring changes in the fair values of long-lived assets?
97. U.S. GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and
recognizing impairment losses. The first category addresses long-lived assets except intangible assets not
subject to amortization and goodwill. This category does not include:
98. U.S. GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and
recognizing impairment losses. The second category addresses intangibles, other than goodwill, not subject to
amortization. This category does not include:
99. U.S. GAAP and IFRS distinguish three categories of long-lived assets for purposes of measuring and
recognizing impairment losses. The second category addresses intangibles, other than goodwill, not subject to
amortization. This category does not include:
100. Under U.S. GAAP and IFRS reporting standards, management assesses the firm’s assets for impairment at
each reporting date by determining if impairment indicators are present. Impairment indicators include
101. Under U.S. GAAP and IFRS reporting standards, management assesses the firm’s assets for impairment at
each reporting date by determining if impairment indicators are present. Impairment indicators do not include