The Parks Corporation, a U.S. business, is a direct competitor of the Rhine Company, a German firm. The two firms not only compete for customers, but also for investment capital. In 2013, each company spent about $35,000 U.S. dollars or the equivalent on research and development. U.S. GAAP requires the entire amount to be expensed, while Germany requires its businesses to record R&D expenditures as an asset and then to expense it over its useful life. Assuming the treatment of R&D is the only difference between the two firms, which of the following is correct?
A)Parks will have higher total assets than Rhine in 2013.
B)Rhine will have a lower net income for 2013.
C)Parks will have a higher debt-to-assets ratio than Rhine in 2013.
D)This difference in accounting principles does not affect the total amount of assets reported by the two companies.

Question

Quizplus · Accepted Answer

Because Rhine capitalizes research and development and expenses it over its useful life, Rhine will report higher assets and lower expenses than Parks. Therefore, Parks, with lower assets, will have a higher debt-to-assets ratio.