Deck 10: Long-Lived Assets

Question 1

For tax purposes,taxpayers would prefer not to capitalize interest payments.

Answer 1

True

Question 2

The only long-lived asset measurement method that survives the dual filters of reliability and verifiability is the economic benefit approach.

Answer 2

False

Question 3

Book value reflects the economic worth of an asset.

Answer 3

False

Question 4

A primary concern of auditors and analysts is that numbers on the financial statements be verifiable,which means that the numbers should arise from readily observable facts subject to corroboration.

Question 5

Avoidable interest is the product of cumulative weighted average expenditures times the interest rate.

Question 6

The method of measuring long-lived assets at their estimated value in an input market is the economic sacrifices approach.

Question 7

Salvage value of material from demolishing a building is considered a reduction in the cost of the building.

Question 8

The method of measuring long-lived assets at their estimated value in an output market is the expected benefit approach.

Question 9

U.S.GAAP calls for capitalization of an expenditure on a long-lived asset when the capacity of the asset is decreased.

Question 10

GAAP prohibits adjustment for upward revisions in the replacement cost of the asset,but mandates write-downs when asset values are impaired.

Question 11

Expenditures included in the cost of a long-lived asset are capitalized.

Question 12

Because of interest capitalization,an increase in capital expenditures can temporarily decrease the amount of interest expense shown on the income statement.

Question 13

Long-lived assets are operating assets that are expected to yield their economic benefits over a period longer than one year.

Question 14

One way to value a piece of manufacturing equipment is to just add up the net future operating cash inflows the equipment is expected to generate over its life.

Question 15

All costs necessary to acquire an asset and make it ready for use are included in the asset account.

Question 16

Current cost is an example of the economic sacrifice approach for valuing long-lived assets.

Question 17

An expenditure that increases a long-lived asset's useful life should be capitalized.

Question 18

Because equity funds are not really "free," GAAP allows capitalization of an imputed interest charge when equity is used to finance a construction project.

Question 19

To qualify as avoidable interest,the interest must arise from borrowing that is directly linked to a construction loan.

Question 20

Capitalization of interest for the construction of long-lived assets is limited to the lesser of avoidable interest or interest incurred on actual borrowings from third parties.

Question 21

Generally accepted accounting principles require capitalization of an expenditure when it results in an increase in the economic benefit of an asset.

Question 22

Firms are required to disclose separately total expensed R&D costs;thus,analysts can use these disclosures to reconstruct what asset and amortization amounts would be if GAAP allowed R&D to be capitalized.Required disclosures of marketing and advertising expenditures permit a similar adjustment approach for trademarks and brands.

Question 23

The first stage of impairment testing of a long-lived asset is to take the present value of the future cash flows generated by the asset.

Question 24

When a firm purchases an intangible asset,the acquired intangible is recorded at its purchase price.

Question 25

U.S.GAAP requires that virtually all costs incurred for research and development of an internally generated patent be capitalized.

Question 26

The balance sheet carrying value for internally generated intangibles is often below the value of the property rights.

Question 27

Research indicates that investors treat R&D expenditures as if they are assets.

Question 28

Firms are required to disclose separately total expensed R&D costs;thus,analysts can use these disclosures to reconstruct what asset and amortization amounts would be if GAAP allowed R&D to be capitalized.

Question 29

When asset reinvestment is not continuous,the increasing age of the asset base in conjunction with rising prices introduces distortions in various performance measures that make financial statement analysis difficult.

Question 30

A relatively new asset base makes it difficult for financial analysts to use trend analysis.

Question 31

That a causal relationship between current R&D and future revenue has not been demonstrated was among the FASB's justifications for expensing all R&D.

Question 32

The accounting for an asset whose carrying value exceeds its expected future economic benefits is guided by the concept of verifiability.

Question 33

Under U.S.GAAP,software development costs are expensed as research and development costs up until the time the software is released to customers.

Question 34

Research indicates that investors generally ignore R&D expenditures.

Question 35

For U.S.GAAP,software development costs are capitalized as intangible assets once the technological feasibility of the product is established.

Question 36

Aging assets and inflation tend to complicate financial statement analysis by overstating return on assets.

Question 37

Research findings almost uniformly indicate that existing GAAP for both R&D and software development is conservative.

Question 38

Intangible assets are long-lived assets that do not have physical substance.

Question 39

Market forces lead to commonalities that usually make comparisons across firms within the same industry meaningful.

Question 40

Some intangible assets have indefinite lives and are impairment tested rather than amortized.

Question 41

An impairment loss increases both assets and net income.

Question 42

Depreciation is not intended to track the asset's declining market value.

Question 43

If the book value of an indefinite-lived intangible asset (e.g.,a brand name)exceeds the fair value,then the asset is considered impaired.

Question 44

Firms facing asset retirement obligations must estimate the expected present value of the outflows that will occur when the assets are eventually retired.

Question 45

In the U.S.,accelerated depreciation is almost universally used for tax purposes.

Question 46

For purposes of impairment tests,the fair value of an asset is defined by the FASB as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Question 47

Research suggests that financial statement analysts should be alert to the potential use of impairment write-offs to manage earnings.

Question 48

For firms using the straight-line depreciation method,dividing average net property,plant,and equipment by depreciation expense provides a rough approximation of the estimated useful life of the average asset.

Question 49

Units-of-production depreciation is similar to straight-line depreciation but defines useful life in terms of expected production rather than in years.

Question 50

An impairment loss is the difference between the carrying value of the asset and the future value of the asset.

Question 51

"Accretion expense," classified as an operating item,reflects the current period's growth in an asset retirement obligation.

Question 52

Indefinite-lived intangible assets must be evaluated for impairment at least annually.

Question 53

Under U.S.GAAP,an asset that was written down can later be written back up to its original carrying value if its value recovers to previous levels.

Question 54

The depreciation rate for the double declining balance method is double the straight-line rate.

Question 55

When an asset retirement obligation is established,the offsetting debit goes to a contra-liability account.

Question 56

Impairment losses are reported as a component of income from continuing operations.

Question 57

Firms facing asset retirement obligations must report these obligations only in the notes to their financial statements.

Question 58

When the differences in useful lives of long-lived assets reflect real economic differences,the attempt on the part of financial analysts to undo those differences may impede profit and loss comparisons.

Question 59

When applying the impairment guidelines to groups of assets,the group should consist of the lowest level for which identifiable cash flows are largely independent of the cash flow of other groups of assets and liabilities.

Question 60

Depreciation is the apportionment of the cost of a long-lived tangible asset to the future periods in which it provides benefits.

Question 61

IFRS allows more choice in valuation models for long-term assets than U.S.GAAP.

Question 62

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.

Question 63

Generally,the recorded cost of a nonmonetary asset acquired in exchange for some other nonmonetary asset is the book value of the asset that was given up.

Question 64

To preclude firms from engaging in "sham" exchanges to generate artificial gains,GAAP requires that the transaction must be approved by the SEC.

Question 65

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.

Question 66

Although IFRS allows two different models for accounting for long-lived tangible assets,most firms chose to use the cost method.

Question 67

To preclude firms from engaging in "sham" exchanges to generate artificial gains,GAAP requires that the transaction must possess commercial substance.

Question 68

Accounting for intangible long-lived assets under IFRS is very similar to the accounting under U.S.GAAP.

Question 69

When firms dispose 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.

Question 70

Under IFRS,acquired intangibles are always carried at amortized cost even when an active market is available for the intangible.

Question 71

Although most companies use straight-line depreciation for their financial statements,making valid comparisons across firms is often hindered due to differences in estimated useful lives.

Question 72

When companies following IFRS write-up an asset to its current fair value,an owners' equity account entitled "revaluation surplus" is credited and disclosed as a separate line item.

Question 73

IFRS allows two different models for accounting for long-lived tangible assets: the cost method and appraisal method.

Question 74

To prevent abuses when accounting for nonmonetary asset exchanges,U.S.GAAP requires companies to record certain exchanges of nonmonetary assets at the existing book value of the relinquished assets.

Question 75

Gains and losses from sales of individual operating assets may satisfy the criteria for extraordinary item treatment.

Question 76

Generally,the recorded cost of a nonmonetary asset acquired in exchange for some other nonmonetary asset is the fair value of the asset that was given up.

Question 77

Historically,GAAP did not require firms to record asset retirement obligations.

Question 78

When companies following IFRS write-up an asset to its current fair value,subsequent depreciation of the asset remains based on the original cost of the asset.

Question 79

When a firm that follows IFRS chooses to use the revaluation method for its tangible long-lived assets,it must use that method for all of its tangible long-lived assets.

Question 80

When the fair value of the asset received in a nonmonetary exchange is more clearly evident than the fair value of the asset(s)given up,the fair value of the asset received is used as the new cost base of the asset.