Chapter 8—Investing Activities
MULTIPLE CHOICE
1. An analyst can estimate the average total life of depreciable assets by
a.
dividing average depreciable assets by depreciation expense for the year.
b.
dividing depreciation expense for the year by average depreciable assets.
c.
dividing average gross depreciable assets by accumulated depreciation.
d.
Subtracting depreciation expense from accumulated depreciation.
2. A company would need to record an impairment loss for its equipment when
a.
the original cost of the equipment exceeds its fair value and is deemed not recoverable.
b.
management determines that the equipment will no longer be used.
c.
the carrying amount of the equipment exceeds its fair value and is deemed not recoverable.
d.
the cash flows from the equipment are less than its fair value.
3. Using the information below calculate the average total depreciable life of the assets:
Information from the Balance Sheet:
2012
2011
Depreciable Assets
$600,000
$400,000
Accumulated Depreciation
(175,000)
(100,000)
Depreciable Assets (Net)
$425,000
$300,000
From the Income Statement
2012
Depreciation Expense
$50,000
a.
6.54 years
b.
7.25 years
c.
6.91 years
d.
9.15 years
4. Which of the following is(are) a difficulty in determining current market values when determining the
value of fixed assets?
a.
There is an absence of active markets for many fixed assets.
b.
It is difficult to identify comparable assets currently available in the marketplace to value
assets in place
c.
It is difficult to make assumptions about the effects of technology and other improvements
when using the prices of new assets currently available on the market in the valuation
process.
d.
All of the above.
7-2
5. GAAP stipulates that firms should do what with expenditures that increase the service potential of an
asset beyond that originally anticipated?
a.
Expense the expenditure immediately.
b.
Capitalize the expenditure and depreciate it over the remaining service life of the asset.
c.
Capitalize the expenditure, but do not depreciate the asset.
d.
Charge it off to shareholders’ equity.
6. How should Focus company record expenditures for research and development costs according to US.
GAAP?
a.
expense as incurred
b.
capitalize and depreciate
c.
amortize them over 60 months
d.
none of the above
7. Using the information below calculate the average total depreciable life of the assets:
Information from the Balance Sheet:
2012
2011
Depreciable Assets
$2,458,600
$1,985,400
Accumulated Depreciation
(1,350,700)
(1,046,000)
Depreciable Assets (Net)
$1,107,900
$939,400
From the Income Statement
2012
Depreciation Expense
$384,500
a.
5.8 years
b.
10 years
c.
2.9 years
d.
5.3 years
8. Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed “not
recoverable” as specified by GAAP. GAAP defines a carrying amount as “not recoverable” if
a.
it is greater than the sum of the cash flows expected from the asset’s use and disposal.
b.
it is greater than the sum of the undiscounted cash flows expected from the asset’s use and
disposal.
c.
it is less valuable than its current carrying value.
d.
it is less valuable than its current fair value.
9. All of the following statements are true regarding accounting for software development costs except:
a.
Firms must expense as incurred all costs incurred internally in developing computer
software until such development achieves the technological feasibility of a product.
b.
Firms must capitalize as incurred all costs incurred internally in developing computer
software.
c.
Researchers have found a significant association between costs and future earnings which
support capitalizing and amortizing product development costs permitted by U.S. GAAP
and IFRS.
d.
The interpretation of the meaning of technological feasibility has created diversity in the
practice of accounting for software development costs.
10. The term used to describe the amount of a company’s annual interest cost that should be capitalized is
known as:
a.
tangible interest
b.
actual interest
c.
average accumulated expenditures
d.
avoidable interest
11. Which of the following would not be used to determine the cost of an asset?
a.
cash paid
b.
sales and excise taxes
c.
cost incurred to get the asset ready for its intended use
d.
depreciation method
12. Currently, the FASB’s Statements of Accounting Concepts (Nos. 5 and 6) define an asset
as having all of the following characteristics except:
a.
costs not guided by management’s judgment
b.
probable future benefits
c.
resulting from past transactions and events
d.
something that is obtained/controlled by the entity
13. A key characteristic of asset measurement is best described as:
a.
average value based on all assets held by the company
b.
disposal cost less depreciation
c.
fair value at the acquisition date
d.
fair value less depreciation
14. All of the following are typically costs that fail the future benefits test of long-lived operating assets
except:
a.
costs related to research and development
b.
costs related to marketing
c.
costs related to brand-building activities
d.
costs of equipment used in production
7-4
15. Managers are typically faced with all of the following primary choices and estimates when allocating
acquisition costs of tangible assets and intangible assets to the periods benefited except:
a.
choosing an allocation method
b.
estimating useful life
c.
estimating salvage value
d.
establishing a reserve for obsolescence
16. All of the following are consistent with the purpose of determining the useful life of a long-lived asset
except:
a.
using the information to convey expectations about the future usefulness of the assets to
stakeholders.
b.
using the information to help project a rational basis for depreciation
c.
using the information to help project a systematic basis for depreciation
d.
using the information to manage earnings upward.
17. Which of the following terms is least consistent with the allocation of costs using a rational and
systematic method?
a.
depreciation
b.
amortization
c.
depletion
d.
upward revaluation
18. All of the following are difficulties encountered in determining fair values except:
a.
the need to make assumptions about the effect of technological and other improvements
when using the prices of new assets currently available on the market in the valuation
process
b.
the need to identify comparable assets currently available in the market to value assets in
place
c.
the absence of U.S. GAAP and IFRS standards related to reporting long-lived assets
d.
the absence of active markets for many used fixed assets, particularly those specific to a
particular firm’s needs
19. Which of the following is the least effective way for an analyst to understand whether existing long-
lived assets must be replaced?
a.
understand industry conditions and firm strategies for capital expenditure growth
b.
calculate the average age of depreciable assets
c.
calculate the percentage of ownership the firm has in another entity
d.
calculate the proportion of depreciable assets consumed
20. All of the following are types of intercorporate investments in capital stock except:
a.
minority, passive
b.
minority, active
c.
majority, active
d.
majority, passive
21. When a firm sells a trading security, it recognizes
a.
the average of the selling price and the book value as a gain or loss in measuring net
income.
b.
the difference between the selling price and the book value as a gain or loss in measuring
net income.
c.
amortizes any difference between the acquisition cost and maturity value as interest
revenue over the life of the debt.
d.
the difference between the selling price and the acquisition cost of the security as a
realized gain or loss on the income statement.
22. When a company records the cost of cutting down timber for example this cost is deemed to be :
a.
exploration cost.
b.
asset retirement obligation.
c.
development cost.
d.
depletion cost.
23. Which one of the following is an example of the expected benefit approach for valuing long-lived
assets?
a.
Current cost.
b.
Historical cost.
c.
Discounted present value.
d.
Current replacement value.
24. Expenditures included in the cost of a long-lived asset are
a.
intangible.
b.
charged off.
c.
expensed.
d.
capitalized.
25. Which of the following items would be charged to the cost of of the building:
a.
Architectural fees.
b.
Cost of foundation.
c.
Capitalization of interest financing charges.
d.
All of the above
26. For U.S. GAAP, software development costs are capitalized as intangible assets
a.
after a copyright is obtained.
b.
once the technological feasibility of the product is established.
c.
from the beginning of development.
d.
once the product is introduced into the marketplace.
7-6
27. The method used to account for oil and gas exploration costs that capitalizes the exploration costs of
productive wells is the
a.
reserve recognition accounting.
b.
successful efforts approach.
c.
soft asset approach.
d.
full-cost approach.
28. When certain kinds of assets are built that require public welfare and safety expenditures at the end of
the asset’s life,
a.
these asset retirement costs are expensed when asset retirement occurs.
b.
a liability simultaneously arises.
c.
these estimated future expenditures are added to the carrying value of the asset.
d.
this fact is only reported in the financial statement footnotes.
29. Under IFRS, when an asset is revalued upwards, subsequent depreciation is based on
a.
the asset’s fair value.
b.
the asset’s original cost.
c.
the method used for determining depreciation on the company’s tax returns.
d.
the amount of future cash flows the asset is expected to generate.
30. Which of the following is not a classification for a minority, passive investment?
a.
trading securities
b.
equity securities
c.
available-for-sale securities
d.
held-to-maturity securities
31. When dividends from an investment are recognized as income, the investment must have been of
which type?
a.
Minority, Passive Investment
b.
Majority, Passive Investment
c.
Majority, Active Investment
d.
Minority, Active Investment
32. When dividends from an investment are recognized as a reduction of the investment account, the
investment must have been of which type?
a.
Minority, Passive Investment
b.
Majority, Passive Investment
c.
Majority, Active Investment
d.
Minority, Active Investment
33. Solo Corp. purchased $500,000 of bonds for $515,000 as an investment. If Solo expects to hold the
bonds until they mature the initial investment should be recorded at
a.
Investment in Bonds – $500,000
Additional Investment Expense – $15,000
b.
Investment in Bonds – $515,000
c.
Investment in Bonds – $500,000
Prepaid Interest Revenue – $15,000
d.
Accumulated Other Comprehensive Investment – $500,000
34. Based on the information concerning Snowflake Corp. what is the market value of the company’s
shareholders’ equity at the acquisition date?
a.
$1,775,000
b.
$475,000
c.
$2,250,000
d.
$0
35. Based on the information concerning Snowflake Corp. what is the value of the goodwill related to the
acquisition?
a.
$1,775,000
b.
$475,000
c.
$2,250,000
d.
$1,325,000
36. Based on the information concerning Snowflake Corp. by what amount would Penguin increase
depreciable assets when it consolidates Snowflake on the acquisition date?
a.
$1,775,000
b.
$475,000
c.
$2,250,000
d.
$375,000
37. Goodwill represents
a.
the synergies that will be achieved through the acquisition.
b.
the difference between the acquisition cost and the market value of the identifiable assets
and liabilities.
c.
the difference between the acquisition cost and the book value of the identifiable assets
and liabilities.
d.
the merger premium.
38. If Ashley Company accounts for the investment as a minority, passive investment and classifies it as a
available-for-sale security the investment will appear in the December 31, 2010 balance sheet at what
amount?
a.
$60,000
b.
$65,000
c.
$64,000
d.
$75,000
39. If Ashley Company accounts for the investment as a minority, active investment and uses the equity
method to account for the investment, the investment will appear in the December 31, 2010 balance
sheet at what amount?
a.
$60,000
b.
$65,000
c.
$64,000
d.
$75,000
7-9
40. If Ashley Company accounts for the investment as a minority, active investment and uses the equity
method to account for the investment, Ashley will recognize what amount of 2010 income from the
investment?
a.
$4,000
b.
$10,000
c.
$25,000
d.
$15,000
41. If Ashley Company accounts for the investment as a minority, passive and classifies the investment as
an available-for-sale investment, Ashley will recognize what amount of 2010 income from the
investment?
a.
$4,000
b.
$10,000
c.
$25,000
d.
$15,000
42. When a foreign entity has the U.S. dollar as its functional currency, it uses which exchange rate to
translate monetary assets and liabilities?
a.
the average exchange rate during the period
b.
the end of the period exchange rate
c.
the historical exchange rate
d.
the exchange rate on the date the asset or liability was obtained
43. When a foreign entity has the foreign currency as its functional currency, it uses which exchange rate
to translate revenues and expenses in the income statement?
a.
the average exchange rate during the period
b.
the end of the period exchange rate
c.
the historical exchange rate
d.
the exchange rate on the date the asset or liability was obtained
44. Unrealized holding gains or losses which are recognized in the income statement are from securities
classified as
a.
trading
b.
available for sale
c.
held-to-maturity
d.
equity
45. Olivia Co. owns 5,600 of the 14,000 outstanding shares of Hobbitt Corp. common stock and exercises
significant influence over the company. During 2011, Hobbitt earns $$90,000 and pays cash dividends
of $25,000 If the beginning balance in the investment account was $190,000, the balance at December
31, 2011 should be:
a.
$192,000
b.
$172,000
c.
$180,000
d.
$216,000
46. Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises
significant influence over the company. During 2011, Hobbitt earns $80,000 and pays cash dividends
of $30,000. For the year ended December 31, 2011 Olivia should report income related to the
investment equal to
a.
$0
b.
$12,000
c.
$32,000
d.
$20,000
47. Under which of the following scenarios would an entity not be classified as a variable interest entity?
a.
The equity investing firms do not have the obligation to absorb the expected losses of the
variable interest entity if they occur.
b.
The investing firms do not have the right to receive the expected residual returns of the
variable interest entity if they occur.
c.
The total equity investment at risk is sufficient to permit the variable interest entity to
finance its activities without additional subordinated financial support from other parties.
d.
The equity investing firms do not have the direct or indirect ability to make decisions
about the variable interest entity’s activities through voting rights or similar rights.
48. Based on the information concerning Record Corp. what is the market value of the company’s
shareholders’ equity at the acquisition date?
a.
$0
b.
$908,000
c.
$1,200,000
d.
$1,458,000
49. Based on the information concerning Record Corp. what amount of goodwill should CD record at the
acquisition date?
a.
($294,000)
b.
$614,000
c.
$1,200,000
d.
$350,000
COMPLETION
1. Firms recognize an ______________________________ when the carrying amount of a fixed asset
exceeds its fair value and is deemed not recoverable.
2. Financial reporting requires firms to ____________________ immediately all R&D costs incurred
internally.
3. U.S. GAAP stipulates that firms should ____________________ expenditures that increase the service
potential of an asset beyond that originally anticipated
7-12
4. Firms that capitalize routine maintenance and repair charges will end up with the result of having the
current period’s income being ____________________.
5. Under US GAAP when an assets carrying amount is deemed _______________the asset is considered
impaired
6. ___________________________________ include trade and brand names, trademarks, patents,
7. Most publicly traded firms in the United States use the _________________________ method of
depreciation for ______________ statement purposes.
8. Specifically identifiable intangible assets acquired from others may have either a
____________________ useful life or an ____________________ useful life.
9. When an intangible asset has a finite life it is reported on the balance sheet at original cost with no
____________ taken.
10. When a long-lived asset loses its ability to generate future benefits U.S. GAAP requires firms to write
down the assets to their fair values and recognize an ______________________________ in income
from continuing operations.
11. The ____________________ method views a corporate acquisition as conceptually identical to the
purchase of any single asset.
7-13
12. When the purchase price of another entity exceeds the book value of the entity’s net assets the
purchaser allocates the excess to identifiable assets and liabilities in order to revalue them to market
value and any additional excess is allocated to ____________________.
13. When one company acquires another company it may not be able to estimate the potential losses
inherent in the acquired assets or the potential liability of the acquired company, for these reasons the
acquirer may establish ________________________________________.
14. When a company has a minority passive investment it will recognize changes in the market value of
the investment as ____________________ gains and losses.
15. Securities that are purchased in order to take advantage of short-term changes in market value should
be classified as ____________________ securities.
16. Unrealized gains and losses that appear in accumulated other comprehensive income are from
securities classified as ___________________________________ securities.
17. Held-to-maturity securities are accounted for at
__________________________________________________.
18. When a firm can exercise control or significantly influence the operations of a company it has only a
minority interest in, it should account for the investment using the
______________________________.
7-14
19. Under the equity method the investor’s share of investee income ____________________ the
investment account and dividends ____________________ the investment account.
20. When a foreign entity operates as a relatively self-contained and integrated unit within a foreign
country, normally, its functional currency is the
____________________________________________________________.
21. When a foreign entity operates as a direct and integral extension of the U.S. parent, normally, its
functional currency is the _________________________.
22. An investing firm consolidates the variable interest entity if it absorbs the majority of the entity’s
expected ____________________ if they occur, receives a majority of the entity’s expected
______________________________ if they occur, or both.
23. The functional currency of a foreign unit whose receivables and payables are denominated in foreign
currency and not usually remitted to parent company is the ______________________________.
24. Ownership of 50% or more of the voting stock of another company implies an ability to
____________________ the company and _________________ should be prepared
25. Unrealized holding gains and losses from investments classified as trading are reported in the
___________________________________.
7-15
26. Unrealized holding gains and losses from investments classified as available for sale are reported in
_____________________________________________.
27. When the functional currency is the U.S. dollar, financial reporting requires firms to use the
___________________________________ translation method.
SHORT ANSWER
1. Orman Company is a large international canning company. Orman uses straight-line depreciation for
financial reporting purposes and accelerated depreciation for tax reporting. The company’s tax rate is
35%. Selected financial information about Orman appears below.
Orman Company
Selected Financial data
December 31,
2010
2009
2008
Property, Plant & Equipment (net)
$178,454
$162,369
$155,388
Total Assets
515,685
424,545
410,256
Deferred Tax Liability relating to
Temporary Depreciation Differences
25,138
18,245
19,689
Common Shareholders’ Equity
302,754
298,564
289,455
Sales
$986,258
$888,965
Cost of Goods Sold
693,857
588,920
Depreciation Expense
48,265
39,640
Interest Expense
84,253
75,689
Net Income
124,581
91,025
Required:
a.
Compute the amount of depreciation expense that Orman recognized for income tax
purposes for year 2010 and 2009. The amount reported as the deferred tax liability
relating to temporary depreciation differences represents the cumulative income tax
delayed as of each balance sheet date because Orman uses accelerated depreciation for tax
purposes and straight-line depreciation for financial statement reporting.
b.
Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts
reported for financial statement purposes.
c.
Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts
reported for tax purposes.
7-16
2. Discuss how firms should account for intangible assets under U.S. GAAP. Your answer should include
discussion of the following areas:
a.
internally generated intangible assets versus specifically identifiable intangible assets
acquired from others.
b.
amortization and impairment testing