Question 1

U.S.GAAP and IFRS provide firms considerable flexibility in choosing their depreciation method(s).

Accepted Answer

Both U.S.GAAP and IFRS do provide firms with a range of acceptable depreciation methods, allowing them to select the method that best fits their business practices and financial reporting requirements. This flexibility can impact a company's financial statements, as different methods can result in varying levels of depreciation expense and asset values. However, the choice of method must comply with the principles and guidelines set forth in the respective accounting standards.

Question 2

Expenditures for maintenance or repair of tangible long-lived assets are treated as asset improvements and subsequently depreciated.

Accepted Answer

Expenditures for maintenance or repair of tangible long-lived assets are expensed as incurred and do not increase the useful life or value of the asset. However, improvements or upgrades that extend the useful life or increase the value of the asset should be capitalized and depreciated over their useful life.

Question 3

U.S.GAAP and IFRS require firms to treat expenditures for maintenance and repairs as expenses of the period as incurred but treat expenditures for improvements as assets (which firms subsequently depreciate or amortize).

Accepted Answer

Both U.S.GAAP and IFRS require maintenance and repair expenses to be treated as expenses of the period, while improvements are treated as assets and depreciated or amortized over time.

Question 4

Market-to-book-value ratios tend to be large for firms that make substantial expenditures on internally developed assets, including research and development, advertising, and employee development.

Accepted Answer

Market-to-book-value ratios reflect investors' expectations of future earnings and growth potential. Firms that invest heavily in their own research and development, advertising, and employee development are often seen as having strong growth potential, leading to higher market-to-book-value ratios.

Question 5

Depreciation is the accounting term used to refer to the periodic write-off of intangible assets.

Accepted Answer

Depreciation is the periodic write-off of tangible assets, while the periodic write-off of intangible assets is referred to as amortization.

Question 6

The laws governing patent protection are both jurisdiction-specific and subject to change, as is the process for obtaining approval to market a new drug.As a general rule, the longer the drug approval process, the longer is the useful life of the patent.

Accepted Answer

The useful life of a patent is typically fixed and does not extend based on the length of the drug approval process. Patents are granted for a specific period, usually 20 years from the filing date, regardless of the time it takes for a drug to receive approval.

Question 7

The depreciable or amortizable basis of long-lived assets is the acquisition cost less salvage value.

Accepted Answer

The depreciable or amortizable basis of long-lived assets is indeed the acquisition cost less salvage value. This means that when calculating the depreciation or amortization expense for an asset, the initial cost is reduced by the estimated salvage value (the value the asset is expected to have at the end of its useful life). The resulting amount is then spread out over the asset's useful life, reflecting the gradual loss of value over time.

Question 8

The amount of goodwill represents the excess of the total purchase price over the fair value of identifiable tangible and intangible net assets.

Accepted Answer

Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of identifiable tangible and intangible net assets.

Question 9

Depreciation and amortization is a measure of the decline in economic value of a long-lived asset.

Accepted Answer

The answer of Depreciation and amortization is a measure of...

Question 10

Long-lived assets with extremely long useful lives, such as land and works of art, are treated as having an indefinite life.

Accepted Answer

Long-lived assets with extremely long useful lives, such as land and works of art, are typically treated as having an indefinite life because their useful life cannot be reliably estimated. This means that they are not subject to depreciation and are instead tested for impairment periodically.

Question 11

With the exception of internally developed software costs, U.S.GAAP requires that the firm expense both research and development expenditures as incurred.

Accepted Answer

According to U.S.GAAP, research and development expenses should be expensed as incurred, except for certain internally developed software costs, which may be capitalized under certain conditions.

Question 12

For buildings, common depreciation practice assumes a zero salvage value on the assumption that the costs a firm will incur in tearing down the building will approximate the sales value of the scrap materials recovered.

Accepted Answer

Common depreciation practice assumes a zero salvage value for buildings because the costs of tearing down the building and recovering scrap materials will likely equal the salvage value, if not exceed it. Therefore, assuming zero salvage value simplifies the depreciation calculation.

Question 13

Firms sometimes acquire assets by exchanging an asset other than cash or by issuing common stock.In these cases, acquisition cost is either the fair value of the consideration given or the fair value of the asset received, depending on which value the firms can more reliably measure.

Accepted Answer

This statement is true. Firms can determine the acquisition cost of assets acquired through non-cash exchanges or issuance of common stock by using either the fair value of the asset received or the fair value of the consideration given, depending on which value is more reliably measurable.

Question 14

Although the legal life of a drug patent is 20 years, the expected economic life of the drug is often less than half of that period.

Accepted Answer

The economic life of a drug patent is often limited by factors such as competition from generic drugs, regulatory changes, shifting market demand, and other factors. It is not uncommon for the economic life of a drug to be only 7-12 years, even though the legal patent life is 20 years.

Question 15

Firms must expense when incurred the transactions cost of acquiring a firm in a business combination under both U.S.GAAP and IFRS.

Accepted Answer

Both U.S.GAAP and IFRS require firms to expense the transactions cost of acquiring a firm in a business combination as incurred. These costs, such as legal and accounting fees, are considered part of the cost of the acquisition and are included in the overall purchase price of the acquired business.

Question 16

Long-lived financial assets include investments in securities.

Accepted Answer

Long-lived financial assets refer to investments in securities such as stocks, bonds, mutual funds, and other financial instruments that can be held for an extended period of time.

Question 17

Opportunity costs are forgone profits, and U.S.GAAP and IFRS recognize this cost as part of an assets acquisition cost.

Accepted Answer

Opportunity costs are not recognized as part of an asset acquisition cost by U.S. GAAP or IFRS. Acquisition costs usually include the purchase price, taxes, and any other directly attributable costs.

Question 18

The straight-line (use) method is the most common depreciation method for financial reporting.

Accepted Answer

The answer of The straight-line (use) method is the most...

Question 19

The capitalization of interest in the acquisition cost of assets during construction delays expense recognition from the time periods of borrowing to the time periods of using the asset.

Accepted Answer

Capitalization of interest during construction delays is a requirement under the accounting standards. The interest expenses incurred during the construction period are added to the cost of the asset and capitalized. The capitalized interest is then recognized as an expense over the period when the asset is put to use. This results in a better matching of expenses with revenues, which enables more accurate financial reporting.

Question 20

U.S.GAAP requires firms to expense research and development (R&D) costs in the period incurred.

Accepted Answer

Under U.S.GAAP, firms are required to recognize R&D costs as an expense in the period they are incurred. These costs cannot be capitalized and treated as an asset, unless they meet certain criteria for development costs related to the creation of an intangible asset.

Quiz 10: Long-Lived Tangible and Intangible Assets