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[QUESTION]
54. The FASB has been able to guard against management manipulation of earnings as a result
of asset impairments by
a. fining any managers found guilty of such manipulation.
b. requiring restoration of previously recognized impairment losses.
c. prohibiting restoration of previously recognized impairment losses.
d. relying on State Boards of Public Accountancy to police the transactions.
55. The Simon Company acquired equipment three years ago at a cost of $125,000. Two years
later the equipment sustained impairment in value. At the time of the impairment, the fair value
of the equipment was $25,000 and the carrying value was $50,000. The entry to record the
impairment would be
a.
DR Retained earnings
25,000
CR Accumulated depreciation
25,000
b.
DR Impairment loss
25,000
CR Equipment
25,000
c.
DR Equipment
25,000
CR Impairment loss
25,000
d.
DR Retained earnings
25,000
CR Equipment
25,000
56. Evaluation of indefinite-lived intangible assets for impairment occurs under all of the
following scenarios except:
a. annually.
b. no less than every three (3) years.
c. when there is a deterioration in the business climate.
d. when there is a significant decrease in the asset’s fair value.
57. Evaluation and testing for impairment assessments of indefinite-lived intangible assets
a. follows the same process as required for impairment evaluation and testing for tangible
assets.
b. requires only assessment of qualitative factors.
c. requires a quantitative impairment test if, after a qualitative assessment, it is more likely than
not that the asset is impaired.
d. requires a two-step process to be completed for all impairment assessments .
58. Which of the following is not an accurate statement regarding asset retirement obligations
(AROs)?
a. A liability is recorded at its present value and the liability increases over time.
b. A liability is computed using a credit-adjusted risk-free rate.
c. A liability is recorded with a credit entry in a contra-asset account.
d. An annual expense is recorded as accretion expense.
59. Which of the following does not represent guidance for assets held for sale?
a. They are reported in the discontinued section of the income statement.
b. They are reported at the lower of book value or fair value.
c. They are expected to be sold within one year.
d. They are reported at the lower of book value or fair value less costs to sell.
60. The allocation of the cost of equipment to future periods of benefit is termed as
a. depletion.
b. amortization.
c. depreciation.
d. allocation.
61. The allocation of the cost of a copyright to future periods of benefit is termed as
a. depletion.
b. amortization.
c. depreciation.
d. allocation.
[QUESTION]
62. The allocation of the cost of a wasting asset to future periods of benefit is termed as
a. depletion.
b. amortization.
c. depreciation.
d. allocation.
Use the following to answer questions 63 – 66:
REFERENCE: Ref. 10_03
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected
salvage value of $5,000 at the end of its five-year useful life.
[QUESTION]
REFER TO: Ref. 10_03
63. What depreciation method is used if depreciation expense is $6,000 in 2021?
a. Straight-line.
b. Sum of years’ digits.
c. Double-declining balance.
d. Composite.
64. How much is the depreciation expense in 2019 if double-declining balance depreciation is
used?
a. $6,000
b. $9,000
c. $12,000
d. $15,000
65. How much is the depreciation expense in 2019 if sum-of-years digits depreciation is used?
a. $6,000
b. $9,000
c. $12,000
d. $15,000
66. How much is the depreciation expense in 2022 if double-declining balance depreciation is
used for 2018-2019 and there is a switch to straight-line in year 2020?
a. $4,333.33
b. $3,000
c. $9,000
d. $12,000
[QUESTION]
67. According to the 2012 AICPA survey of 2011 annual reports, the most favored method of
depreciation for financial reporting purposes is
a. declining-balance.
b. sum-of-the-years’ digits.
c. straight-line.
d. units-of-production.
68. The most widely-used depreciation method for U.S. income tax purposes is
a. sum-of-the-years’ digits.
b. MACRS.
c. straight-line.
d. units-of-production.
69. A major problem facing financial analysts who compare long-lived assets on balance sheets of
various companies is that different companies often use different
a. formats of balance sheet.
b. estimated lives.
c. salvage values.
d. tax methods of depreciation.
70. When the differences in useful lives of long-lived assets reflect real economic differences,
the attempt on the part of financial analysts to undo these differences may
a. impede profit and loss comparisons.
b. enhance profit comparisons.
c. enhance profit comparisons, but impede loss comparisons.
d. enhance profit and loss comparisons.
71. Financial analysts can make comparisons between the long-lived assets of two companies,
both of which use straight-line depreciation, by computing the average useful life of assets with
which one of the following formulas?
a. Net depreciable property, plant, and equipment/average useful life.
b. Gross depreciable property, plant, and equipment/average useful life.
c. Gross depreciable property, plant, and equipment/straight-line depreciation expense.
d. Straight-line depreciation expense/net depreciable property, plant, and equipment.
72. When a financial analyst adjusts a company’s reported depreciation expense to improve
comparisons of profitability with another firm that uses the same depreciation method, the
analyst assumes all of the following to be true except that
a. the useful lives differences are “real”.
b. the dollar breakdown within asset categories is similar for both firms (i.e., both have similar
amounts of buildings vs. leasehold improvements, etc.).
c. salvage value proportions are roughly equivalent for both firms.
d. the useful life differences are artificial.
73. When firms dispose of a long-lived asset by selling it before the end of its useful life, the
difference between the net book value of the asset and the disposition proceeds is a/an
a. cost of goods gain or loss.
b. gain or loss from continuing operations.
c. gain or loss from a discontinued item.
d. gain or loss from a prior period.
74. Devine Company sold a machine for $6,000 that originally cost $34,000 and had accumulated
depreciation of $27,000. Devine had a/an
a. gain of $1,000.
b. sales revenue of $6,000.
c. loss of $1,000.
d. cost of goods sold of $1,000.
75. In assessing whether an exchange transaction has commercial substance, the firm’s future
cash flows are expected to change significantly as a result of the exchange. Which item below
does not describe whether a significant change in cash flow is expected?
a. The risk, timing and amount of the future cash flows differs significantly from the future cash
flows of the asset transferred.
b. The entity-specific value of the asset differs from that of the asset transferred
c. The difference between the entity-specific value of the asset(s) received and the entity-
specific value of the asset(s) transferred is significant in relation to the fair values of the
assets.
d. Only the timing and amount of future cash flows is required to be significant – risk and
entity-specific value are optional.
[QUESTION]
76. When two companies exchange products to facilitate sales to customers and the exchange
also includes a cash payment, which of the following is the proper treatment of the transaction by
the recipient of the cash?
a. No gain or loss is recorded.
b. A portion of any gain is recorded .
c. The inventory received is recorded at the same value as the inventory relinquished.
d. All the cash received is recognized as a gain.
77. The Key Company sold a machine. The machine had accumulated depreciation of $50,000
and a salvage value of $6,000. If the machine sold for $16,000 and a gain of $4,000 is
recognized, the original cost of the asset is
a. $54,000
b. $62,000
c. $66,000
d. $70,000
78. When certain kinds of assets are built that require public welfare and safety expenditures at
the end of the asset’s life,
a. these estimated future expenditures are subtracted from the carrying value of the asset.
b. these “asset retirement” costs are expensed when asset retirement occurs.
c. this fact is only reported in the notes to the financial statements.
d. a liability simultaneously arises for those future expenditures.
79. To preclude firms from generating artificial gains on exchange transactions being recorded
at fair value, U.S. GAAP requires that the transaction
a. must possess commercial substance.
b. have future cash flows that remain substantially the same.
c. be reviewed and approved by the SEC.
d. All of these answer choice criteria must be met to book an exchange transaction at the fair
value of the exchanged assets.
80. Presume that an asset exchange transaction does not culminate an earning process and that
the transaction does not involve cash. In such a case:
a. a gain will be recognized only when the fair value of the acquired assets exceeds the book
value of the relinquished assets.
b. a loss will be recognized only when the fair value of the acquired assets exceeds the book
value of the relinquished assets.
c. the assets acquired are recorded at the book value of the assets relinquished.
d. a gain will be recognized only when the fair value of the acquired assets exceeds the fair
value of the relinquished assets.
81. Under IFRS, when an asset is revalued upward, subsequent depreciation is based on
a. the asset’s original cost.
b. the method used for determining depreciation on the company’s tax returns.
c. the asset’s revaluation net book value which is the fair value at the time of revaluation.
d. the amount of future cash flows the asset is expected to generate.
82. Which of the following is not part of the IFRS revaluation rules for tangible long-lived
assets?
a. A company can elect to revalue individual assets.
b. If a company elects to revalue any assets, all assets of a similar class must be revalued.
c. Once assets are revalued, they must be kept up to date through regular reassessments.
d. If an asset is written up, the revaluation surplus account must be reclassified each year to
retained earnings.
83. When an asset’s fair value has increased and a firm elects the revaluation method,
a. the amount of the necessary write-up is credited to a contra-asset account called revaluation
surplus.
b. subsequent depreciation is based on the asset’s original cost.
c. under U.S. GAAP, the accumulated depreciation account is removed and the revalued amount
becomes the new book value.
d. under IFRS, the accumulated depreciation account is removed and the revalued amount
becomes the new book value.
84. Which of the following is not a difference between U.S. GAAP and IFRS treatment of
impaired assets?
a. The use of discounted cash flow.
b. Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered
by IFRS.
c. The right to reverse prior impairment losses when there is a change in the estimates used to
measure the loss.
d. In determining the valuation, costs to sell are deducted from fair value.
85. Under IFRS, research must be expensed but some development expenditures may be
capitalized. To capitalize development expenditures, firms must demonstrate several factors that
include all of the following except
a. technical feasibility.
b. length of time the intangible asset is expected to provide benefits.
c. ability to use or sell the asset.
d. how the intangible asset will generate probable future economic benefits.
Essay and Computational Questions
[QUESTION]
86. On June 30, 2018 Howard Company acquired a 5-acre tract of land. On the tract was a
warehouse that Howard intended to use as a distribution center. At the time of the purchase, the
land had an assessed tax valuation of $2,250,000 and the building had an assessed tax value of
$7,750,000. Howard paid $16,750,000 for the land and building. After the purchase the
company paid $750,000 to have various modifications made to the building.
Required:
a. At what amount should Howard record the land and building?
b. For financial reporting purposes, why might the managers of Howard prefer to assign a larger
portion of the $16,750,000 to the land rather than the building?
