Pierce Corporation, a U.S. business, is a direct competitor of Zeiss Company, a German firm. The two firms not only compete for customers, but also for investment capital. In Year 1, each company spent about $35,000 U.S. dollars or the equivalent on research and development. U.S. generally accepted accounting principles (GAAP)requires the entire amount to be expensed, while Germany requires its businesses to record research and development expenditures as an asset and then to expense it over its useful life. Assuming the treatment of research and development is the only difference between the two firms, which of the following is correct?
A)Pierce will have higher total assets than Zeiss in Year 1.
B)Pierce will have a higher debt-to-assets ratio than Zeiss in Year 1.
C)Zeiss will have a lower net income for Year 1.
D)This difference in accounting principles does not affect the total amount of assets reported by the two companies.

Question

Quizplus · Accepted Answer

Pierce will have a higher debt-to-assets ratio than Zeiss in Year 1 because expensing R&D reduces assets, increasing the ratio.