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Chap010 Long-Lived Assets and Depreciation
True/False
[QUESTION]
1. The method of measuring long-lived assets at their estimated value in an output market is the
expected benefit approach.
2. Current cost is an example of the economic sacrifice approach for valuing long-lived assets.
3. Because of interest capitalization, an increase in capital expenditures can temporarily
decrease the amount of interest expense shown on the income statement.
4. The balance sheet carrying value for internally generated intangibles is often below the value
of the property rights.
5. Firms are required to disclose total R&D expense recognized in pretax income; thus, analysts
can use these disclosures to reconstruct what asset and amortization amounts would be if GAAP
allowed R&D to be capitalized. Disclosures of marketing and advertising expenditures are also
required and thus permit a similar adjustment approach for trademarks and brands.
6. Accounting for a long-lived asset whose carrying value exceeds its expected future economic
benefits is guided by the concept of verifiability.
7. For purposes of impairment tests, the fair value of an asset is defined by U.S. GAAP as the
price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date.
8. Depreciation is the apportionment of the cost of a long-lived tangible asset to the future
periods in which it provides benefits.
9. MACRS, a method of accelerated depreciation, is almost universally used for tax purposes in
the U.S.
10. “Accretion expense,” classified as an operating item, reflects the current period’s growth in
an asset retirement obligation.
11. When a firm disposes of a long-lived asset before the end of its useful life, the difference
between the net book value of the asset and the sale proceeds is a gain or loss from a
discontinued item.
12. Gains and losses from sales of assets comprising a clearly distinguishable component of an
entity are shown in the discontinued operations section of the income statement.
13. GAAP requires that all exchange transactions be recorded at the fair value of the exchanged
assets. Thus, except in the rare case that the book value and the fair value of exchanged assets are
identical, gains (or losses) on exchanges should be expected to be recognized.
14. When companies following IFRS write up an asset to its current fair value, subsequent
depreciation of the asset should still be based on the original cost of the asset.
15. IFRS requires that research be expensed but does permit capitalization of some development
expenditures.
16. Long-lived assets are
a. non-operating assets expected to yield their economic benefits (or service potential) over a
period longer than one year.
b. operating assets expected to yield their economic benefits (or service potential) over a period
longer than one year.
c. non-operating assets expected to yield their economic benefits (or service potential) over a
period longer than five years.
d. operating assets expected to yield their economic benefits (or service potential) over a period
longer than two years.
17. Which one of the following is an example of the expected benefit approach for valuing long-
lived assets?
a. Historical cost.
b. Current replacement value.
c. Current cost.
d. Discounted present value.
18. The method of measuring long-lived assets at their estimated value in an input market is the
a. expected benefit approach.
b. economic sacrifice approach.
c. discounted present value approach.
d. net realizable value approach.
19. The dominant method under GAAP for measuring long-lived assets is the
a. expected benefit approach.
b. discounted present value approach.
c. historical cost approach.
d. replacement cost approach.
20. Expected benefit approaches for valuing long-lived assets are not used in current U.S.
GAAP because the numbers generated under these methods are inaccurate and
a. fictitious.
b. objective.
c. not verifiable.
d. neutral.
21. Expenditures included in the initial balance sheet carrying amount of a long-lived asset are
a. charge-off costs.
b. expensed costs.
c. intangible costs.
d. capitalized costs.
22. Which one of the following items would be charged to the cost of a building rather than the
cost of land?
a. Architectural fees.
b. Grading of land.
c. Demolition of an existing structure.
d. Cost of hauling material from a demolished structure.
23. Which one of the following items would be charged to the cost of land rather than the cost of
a building?
a. Demolition of an existing structure.
b. Capitalization of interest.
c. Architectural fees.
d. Cost of the foundation.
24. Capitalization of interest for the construction of long-lived assets is limited to interest arising
from actual borrowings from
a. owners.
b. stockholders.
c. outsiders.
d. the board of directors.
25. Which of the following does not present a challenge to analysts using financial statements?
a. The return-on-asset ratio increases if a firm does not modernize and innovate.
b. U.S. GAAP allows upward adjustments to long-lived assets.
c. The use of historical cost makes comparisons of new and old firms in the same industry
difficult.
d. The expected benefit of a long-lived asset may increase over time.
26. In comparing firms in the same industry, which of the following does not present a
challenge for analysts?
a. Differences in estimates of useful lives.
b. The age of the companies being compared.
c. The use of different depreciation methods.
d. Each of these answer choices presents a challenge for analysts.
Use the following to answer questions 27 – 28:
REFERENCE: Ref. 10_01
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the
old building at a cost of $20,000, and sold scrapped material salvaged from the old building for
$5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land
was $1,000. The construction period interest was $8,000, and the contractor received $300,000
for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.
[QUESTION]
REFER TO: Ref. 10_01
27. The cost of the land recorded by Reid Co. is
a. $100,000
b. $115,000
c. $116,000
d. $118,000
28. The cost of the building recorded by Reid Co. is
a. $300,000
b. $326,000
c. $333,000
d. $335,000
29. Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver
the machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee
training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the
capitalized cost of the machine?
a. $260,000
b. $264,600
c. $271,600
d. $284,600
30. An expenditure that increases a long-lived asset’s useful life should be
a. capitalized.
b. expensed.
c. ignored.
d. written off immediately.
31. Kitty Co. broke ground on its new building on March 1, 2018, and completed construction
November 30, 2018. Kitty made the following expenditures in conjunction with this project:
Date
Expenditure
April 1, 2018
$450,000
June 1, 2018
200,000
September 1, 2018
400,000
November 30, 2018
100,000
Kitty’s cumulative weighted average expenditures on this project would be
a. $287,500
b. $500,000
c. $508,333
d. $595,833
Use the following to answer questions 32 – 36:
REFERENCE: Ref. 10_02
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and
completed construction of the ship on October 31, 2019. To finance construction, Doggy took
out an $8,000,000, 2-year, 6% construction loan on February 1, 2018. Interest on the loan was to
be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-
bearing debt. Doggy made the following expenditures in conjunction with this construction
project:
Date
Amount
2/1/2018
$1,050,000
3/31/2018
900,000
6/1/2018
750,000
10/1/2018
1,000,000
12/31/2018
600,000
3/1/2019
900,000
9/1/2019
250,000
[QUESTION]
REFER TO: Ref. 10_02
32. What is the amount of Doggy’s cumulative weighted average expenditures during 2018
related to the cutter project?
a. $2,150,000
b. $2,325,000
c. $2,536,364
d. $4,300,000
33. How much interest should Doggy capitalize in 2018 related to the cutter project?
a. $129,000
b. $139,500
c. $440,000
d. $480,000
34. How much interest should Doggy expense in 2018?
a. $220,000
b. $300,500
c. $340,500
d. $440,000
35. What is the amount of Doggy’s cumulative weighted average expenditures during 2019
related to the cutter project?
a. $2,966,667
b. $4,341,250
c. $4,941,667
d. $5,450,000
36. What amount would appear in Doggy’s construction in progress (CIP) account at December
31, 2018?
a. $2,325,000
b. $4,300,000
c. $4,439,500
d. $4,740,000
37. U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure
causes any of the following conditions except:
a. The useful life of the asset is extended.
b. The capacity of the asset is increased.
c. The efficiency of the asset is increased.
d. There is an increase in the non-economic benefits associated with owning the asset (such as
an increase in the appearance of the company’s offices).
[QUESTION]
38. Which one of the following factors makes it difficult for financial analysts to use trend
analysis?
a. Decreasing costs and prices.
b. Deflation.
c. An aging asset base.
d. A relatively new asset base.
39. U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across
companies unless the firms
a. apply the same depreciation methods and the same useful lives among similar groups of
assets.
b. market their products to the same customers.
c. are of approximately the same size.
d. have similar operating cycles.
40. U.S. GAAP requires that virtually all costs incurred for research and development of an
internally generated patent be
a. capitalized.
b. expensed.
c. amortized over 40 years.
d. ignored.
41. Which of the following statements about research and development costs is not valid?
a. As long as a firm continues to invest in R&D, total assets and total shareholders’ equity will
be understated.
b. Asset utilization ratios of R&D-intensive firms will be higher than those of non-R&D-
intensive firms.
c. Decreases in R&D expenditures can be used to boost current period income.
d. Asset utilization ratios of R&D-intensive firms will be lower than those of non-R&D -
intensive firms.
42. Under U. S. GAAP, software development costs are capitalized as intangible assets
a. from the beginning of development.
b. after a copyright is obtained.
c. once the product is introduced into the marketplace.
d. once the technological feasibility of the product is established.
[QUESTION]
43. Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and
software development is
a. satisfactory as written.
b. objective.
c. conservative.
d. liberal.
44. Amortizable intangible assets include all of the following except
a. goodwill.
b. patents.
c. copyrights.
d. employment contracts.
[QUESTION]
45. Goodwill represents
a. management’s estimate of the value of the firm’s “unidentified” intangible assets.
b. the difference between the total fair value of an acquired business and the fair value of its
identifiable net assets.
c. the difference between the acquisition value of an acquired business and the book value of its
identifiable net assets.
d. the sum of the acquisition value of an acquired business and the fair value of its identifiable
net assets.
46. According to U.S. GAAP, technological feasibility is established when an entity has
completed all of the following activities necessary to establish that a product can be produced,
except:
a. Coding.
b. Designing.
c. Measuring.
d. Planning.
47. Which of the following is not true with regard to the relationship between R&D expenses
and the value of the company’s stock shares, as perceived by investors and analysts?
a. There is no evidence that R&D expenses represent value-relevant information to investors.
b. There is a causal relationship between R&D expenditures and future financial benefits.
c. A $1 increase in R&D expenditures leads to a $5 increase in the market value of the
company’s stock shares.
d. Analysts adjust estimates of unrecorded R&D assets which are then used to adjust reported
earnings and book values.
48. Which of the following is an accurate statement regarding testing for impairments of
tangible assets and amortizable intangible assets?
a. Assets may be tested as a group if they are used in combination with other assets in the
group.
b. Assets are to be tested only as individual assets.
c. Assets may be tested as a group only if they were purchased as a group.
d. Assets need not to be tested for impairment annually.
49. Which of the following is used to measure the amount of the write-down that must be
recognized on an impaired asset such as depreciable equipment?
a. Undiscounted total future cash inflows minus future outflows.
b. Undiscounted total future cash inflows minus the current carrying value of the asset.
c. Fair value of the asset minus the current carrying value of the asset.
d. Discounted total future cash inflows minus future outflows.
50. Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management believes
the growing popularity of streaming video content will reduce the demand for Henry’s DVD
players. The DVD players are manufactured using specialized equipment with a historical cost
of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the
equipment has a remaining useful life of 4 years and will generate the following undiscounted
cash flows:
Year 2
$540,000
Year 3
420,000
Year 4
190,000
Year 5
125,000
Salvage value
50,000
If the equipment were sold today, the sales price would be $1,600,000. Is the equipment
considered impaired? Why, or why not?
a. Yes, the equipment is impaired. The undiscounted cash flows are lower than the carrying
amount of the asset by $155,000.
b. No, the equipment is not impaired. The fair value of the equipment is greater than the
carrying value of the asset by $120,000.
c. Yes, the equipment is impaired. The undiscounted cash flows are less than the fair value of
the equipment by $275,000.
d. Cannot determine impairment without discounted cash flows.
51. If a long-lived amortizable intangible asset’s future undiscounted net cash flows fall below
the asset’s net book value, the asset is considered to be a/an
a. discontinued asset.
b. discontinued operation.
c. valuable asset.
d. impaired asset.
52. An impairment loss is the difference between the carrying value of the asset and the
a. historical cost of the asset.
b. fair value of an asset.
c. future value of the asset.
d. price-level adjusted value of the asset.
53. An impairment loss is reported on the income statement as
a. part of income from continuing operations .
b. an extraordinary item.
c. part of income from discontinued operations.
d. an accounting change.
