Chapter 4

Question 1

In an Ernst and Young 2005 survey of 130 companies’ Forms 20-F filed with the SEC, what issue required the greatest adjustment?
	A)	goodwill
	B)	leases
	C)	pensions 
	D)	business combinations

Answer 1

C) pensions

Question 2

What types of issues cause differences between International Financial Reporting Standards and U.S. GAAP?
A) measurement
B) alternatives available
C) disclosure
D) All of the above may be different between IFRS and U.S. GAAP.

Answer 2

D) All of the above may be different between IFRS and U.S. GAAP.

Question 3

Which of the following is generally true about the differences between U.S. GAAP and IASB standards?
A) U.S. GAAP is generally more flexible than IASB standards.
B) U.S. GAAP tends to be more rule-based and the IASB standards tend to be principles-based.
C) More professional judgment is required to apply U.S. GAAP than is required for implementing IASB standards.
D) In all cases, U.S. GAAP is more detailed than the IASB standards.

Answer 3

B) U.S. GAAP tends to be more rule-based and the IASB standards tend to be principles-based.

Question 4

Which of the following inventory valuation methods commonly used in the U.S. is NOT allowed under IAS 2 (Inventories)? 
	A)	LIFO 
	B)	FIFO 
	C)	weighted average 
	D)	retail inventory method

Answer 4

A) LIFO

Question 5

The following inventory information above was taken from the records of GlobeKom Ltd.:

Under IAS 2, what should the Balance Sheet report for Inventory? 
	A)	$9,000 
	B)	$8,500 
	C)	$9,500 
	D)	$10,000

Answer 5

C) $9,500

Question 6

The following inventory information above was taken from the records of GlobeKom Ltd.:

Under U.S. GAAP, what should the Balance Sheet report for Inventory? 
	A)	$9,000 
	B)	$8,500 
	C)	$9,500 
	D)	$10,000

Answer 6

A) $9,000

Question 7

The following inventory information was taken from the records of Kleinfeld Inc.:

	Under IAS 2, what should the Balance Sheet report for Inventory? 
	A)	$7,000 
	B)	$8,500 
	C)	$7,600 
	D)	$9,000

Answer 7

B) $8,500

Question 8

The following inventory information was taken from the records of Kleinfeld Inc.:

Assume that subsequent to your adjustment the expected selling price increases to $13,000. (All the rest of the facts are the same.) What adjustment to inventory should be made under IAS 2 after this event?
A) Inventory should be increased (debited) by $3,500.
B) Inventory should be increased (debited) by $4,000.
C) No adjustment should be made to inventory once it is written down.
D) Inventory should be increased (debited) by $1,000.

Answer 8

A) Inventory should be increased (debited) by $3,500.

Question 9

The following inventory information was taken from the records of Kleinfeld Inc.:

Under U.S. GAAP, what should the Balance Sheet report for Inventory? 
	A)	$9,000 
	B)	$8,500 
	C)	$7,600 
	D)	$10,000

Answer 9

C) $7,600

Question 10

The following inventory information was taken form the records of a foreign corporation whose stock is listed on an exchange in the U.S.

	How will income under the U.S. GAAP compare to income the company reported under IFRS after reconciliation? 
A)	Income will not be affected by the reconciliation. 
B)	Income under U.S. GAAP will be lower by $1,700. 
C)	Income under U.S. GAAP will be lower by $2,500. 
D)	Income under U.S. GAAP will be equal to income under IFRS.

Answer 10

B) Income under U.S. GAAP will be lower by $1,700.

Question 11

Under IAS 2, what adjustment needs to be made after an inventory write-down if the selling price subsequently increases?
A) No adjustment is necessary. Once inventory is written down, it cannot be increased under IASB standards.
B) It should be sold at the replacement cost.
C) The inventory write-down should be reversed to bring it in line with the new net realizable value.
D) Recovery of inventory loss should be debited to reflect the increase in inventory value.

Answer 11

C) The inventory write-down should be reversed to bring it in line with the new net realizable value.

Question 12

What is the basis for choosing depreciation methods for fixed assets under IAS 16 (Property, Plant, & Equipment)?
A) Tax minimization
B) Profit maximization
C) Useful life of the fixed asset
D) Pattern of economic benefits to be derived from the asset

Answer 12

D) Pattern of economic benefits to be derived from the asset

Question 13

According to IAS 16 (Property, Plant & Equipment), what is the term used to indicate the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction? 
	A)	replacement cost 
	B)	net realizable value 
	C)	fair market value 
	D)	historical cost

Answer 13

C) fair market value

Question 14

Which of the following items should be included in the cost of property, plant, and equipment under IAS 16?
A) all costs directly attributable to getting the asset to the proper location
B) import duties and taxes
C) estimated costs of removing the asset
D) All of the above should be considered part of the cost of the asset.

Answer 14

D) All of the above should be considered part of the cost of the asset.

Question 15

In what way does IAS 16 (Property, Plant, & Equipment) differ from U.S. GAAP concerning fixed asset measurement subsequent to initial recognition?
A) IAS 16 allows for upward revaluation of the asset based on fair value.
B) IAS 16 does not allow accumulated depreciation to be shown on the balance sheet.
C) IAS 16 requires that fixed assets be carried at fair value less accumulated impairment losses.
D) IAS 16 allows both upward and downward revaluation of fixed assets, whereas U.S. GAAP only allows upward revaluation.

Answer 15

A) IAS 16 allows for upward revaluation of the asset based on fair value.

Question 16

If a company chooses the revaluation model permitted in IAS 16 for fixed asset measurement:
A) annual revaluations must be performed on each class of assets.
B) it must update the valuation so that the balance sheet represents fair value on the balance sheet date.
C) appraisals must be performed by an official of the IASB.
D) the depreciated replacement cost must be used as the fair value of the fixed asset.

Answer 16

B) it must update the valuation so that the balance sheet represents fair value on the balance sheet date.

Question 17

Chien Bleu Ltd. purchased a building in 2004 for €10,000,000 and as of December 31, 2010 had recorded accumulated depreciation on the building of €3,000,000.  December 31, 2010 the company conducted its first revaluation when the fair value was €12,000,000.  According to IAS 16, what account should be credited for €5,000,000? 
	A)	retained earnings 
	B)	gain from revaluation of building 
	C)	revaluation surplus 
	D)	revaluation revenue

Answer 17

C) revaluation surplus

Question 18

According to IAS 16, a decrease in the carrying amount of a fixed asset that is identified on an asset’s first revaluation should be recorded as:
A) an expense on the Income Statement.
B) a prior period adjustment to Retained Earnings.
C) a credit to Revaluation Surplus.
D) a debit to Revaluation Surplus.

Answer 18

A) an expense on the Income Statement.

Question 19

Blanco Chemical Company spent €15,000,000 in development efforts to create a fertilizer for which it was able to obtain a patent; however, the expected distribution costs make it infeasible to market the chemical in the foreseeable future. According to IAS 38 (Intangible Assets), how should Blanco Chemical Company record the €15,000,000?
A) as a “Deferred Development Cost” on the Balance Sheet
B) as “Fertilizer Revenue” on the Income Statement
C) as “Development Expense” on the Income Statement
D) It should only be reported in the notes to the financial statements.

Answer 19

C) as “Development Expense” on the Income Statement

Question 20

As defined by IAS 38, how are intangible assets unlike other assets?
A) They must have arisen from past events.
B) Their value cannot be reasonably measured.
C) They must be controlled by the enterprise.
D) They are non-monetary and lack physical substance.

Answer 20

D) They are non-monetary and lack physical substance.

Question 21

IAS 38 states that an intangible asset is deemed to have an indefinite life when there is no foreseeable end to the expected cash flows the asset is likely to generate. What is the impact of an indefinite life on amortization of the intangible asset’s cost under IAS 38?
A) Management may choose any number of years over which to amortize the cost.
B) No amortization is taken as long as the life is considered indefinite.
C) The cost of the asset should be amortized over 20 years.
D) The cost of the asset should be expensed in the period the intangible asset is acquired.

Answer 21

B) No amortization is taken as long as the life is considered indefinite.

Question 22

When a patent or trademark is acquired in a business combination, what does IAS 38 say about recording these intangibles?
A) If they had not been previously recorded as separate assets by the acquired company, they should always be recorded as “Goodwill” on the balance sheet of the company acquiring them.
B) The cost of the intangibles should be expensed by the acquiring company on the merger date.
C) They should be recorded as separate intangible assets only if their useful life is indefinite.
D) They should be recorded as separate intangible assets if their fair value can be reliably measured.

Answer 22

D) They should be recorded as separate intangible assets if their fair value can be reliably measured.

Question 23

Through 50 years of high quality service, Domo Diagnostics Laboratory has created goodwill with its clients that management estimates is worth at least $20,000,000. Under IAS 38, how should this be recognized?
A) An intangible asset “Goodwill” should be debited for $20,000,000.
B) The $20,000,000 should be expensed over a period of 20 years.
C) The $20,000,000 should be expensed over a period of 50 years.
D) It should not be recognized in Domo’s accounting records at all.

Answer 23

D) It should not be recognized in Domo’s accounting records at all.

Question 24

Under IAS 38, which of the following items is specifically EXCLUDED from being recognized as an internally generated intangible asset? 
	A)	computer software costs 
	B)	copyrights 
	C)	customer lists 
	D)	motion pictures

Answer 24

C) customer lists

Question 25

How does IAS 38 (Intangible Assets) differ from U.S. GAAP with respect to development costs? A) U.S. GAAP does not allow capitalization of development costs, whereas IAS 38 allows capitalization of these costs. B) U.S. GAAP requires capitalization of development costs, whereas IAS 38 makes capitalization of these costs optional. C) U.S. GAAP treats development costs as part of “Goodwill” whereas IAS 38 treats these costs as an intangible asset. D) U.S. GAAP requires expensing of all development costs and IAS 38 requires capitalizing all development costs.

Answer 25

A) U.S. GAAP does not allow capitalization of development costs, whereas IAS 38 allows capitalization of these costs.

Question 26

Agro-World Technologies Inc. incurred $1,000,000 to construct a pilot plant to study the feasibility of building agricultural machinery more inexpensively for emerging economies. How would this cost be classified under IAS 38 (Intangible Assets)? A) research B) development C) neither research nor development D) It could be either research or development, depending on management's wishes.

Answer 26

B) development

Question 27

Rive Rouge Confections Company incurred €5,000,000 to determine if chocolate could be made to resist melting by adding certain inert minerals to the mixture. According to IAS 38, how should Rive Rouge record this cost? A) It should be capitalized as a Deferred Development Cost. B) It should be treated as a cost of products it currently markets. C) It should be expensed currently. D) It should be amortized over 20 years.

Answer 27

C) It should be expensed currently.

Question 28

How does the definition of asset impairment differ between IAS 36 and U.S. GAAP? A) U.S. GAAP does not consider selling price in determining impairment, but IAS 36 does. B) U.S. GAAP considers cash flows in assessing value of continued use, but does not discount them, whereas IAS 36 requires discounting in assessing asset impairment. C) Asset impairment is more likely to occur under IAS 36 than under U.S. GAAP. D) All of the above are differences between IAS 36 and U.S. GAAP.

Answer 28

D) All of the above are differences between IAS 36 and U.S. GAAP.

Question 29

The following information was taken from the fixed asset records of Bosco Ltd as of December 31, 2010: ``` Using IAS 36, what is the amount of Impairment Loss? A) €18,000 B) €37,000 C) €15,000 D) €25,000 ```

Answer 29

A) €18,000

Question 30

The following information was taken from the fixed asset records of Bosco Ltd as of December 31, 2010: ``` What is the amount of Impairment Loss under U.S. GAAP? A) €37,000 B) €18,000 C) €15,000 D) €25,000 ```

Answer 30

D) €25,000

Question 31

The following information was taken from the fixed asset records of Bosco Ltd as of December 31, 2010: ``` Using IAS 36, what is the recoverable amount? A) €85,000 B) €82,000 C) €63,000 D) €75,000 ```

Answer 31

B) €82,000

Question 32

``` Under U.S. GAAP, if the carrying value was $50,000, the undiscounted expected future cash flows was $55,000, the discounted expected future cash flows was $51,000 and the selling price was $53,000, what is the amount of Impairment Loss? A) $5,000 B) $3,000 C) $1,000 D) $0 ```

Answer 32

D) $0

Question 33

A “bottom up” test and “top down” test must be applied under IASB standards to determine what? A) impairment of tangible fixed assets B) impairment of intangible fixed assets C) impairment of goodwill D) allocation of overhead costs

Answer 33

C) impairment of goodwill

Question 34

How should the cost of borrowing funds to acquire or construct property, plant, and equipment be accounted for under IASB rules, as revised in 2007? A) It should be expensed in the period incurred. B) It should be added to the other costs of acquiring fixed assets to determine the amount for the balance sheet. C) Both methods are acceptable. D) Neither method is acceptable under IASB rules.

Answer 34

B) It should be added to the other costs of acquiring fixed assets to determine the amount for the balance sheet.

Question 35

Under U.S. GAAP, interest on loans secured to acquire fixed assets must be: A) expensed in the period they are incurred. B) capitalized as part of the fixed asset cost. C) either expensed currently or capitalized as part of the fixed asset cost. D) charged against revenue in the year the asset is put into service.

Answer 35

B) capitalized as part of the fixed asset cost.

Question 36

``` Camerata Construction borrowed €19,000,000 for 10 years at 6% specifically to modernize its operations with new equipment. The average rate of interest on Camerata's debt after considering the most recent loan was 5.5%. What rate of interest should be used for capitalizing the borrowing costs on the new equipment under IAS 23? A) 5.5% B) 6% C) 5.75% D) some other amount ```

Answer 36

B) 6%

Question 37

In what way does the IASB standard on Leases (IAS 17) differ from U.S. GAAP? A) It is less specific than U.S. GAAP in terms of defining what constitutes a finance lease. B) U.S. GAAP requires more professional judgment in accounting for leases than does IAS 17. C) IAS 17 is more specific than U.S. GAAP in defining an operating lease. D) Operating leases are capitalized under IAS 17 but are not capitalized under U.S. GAAP

Answer 37

A) It is less specific than U.S. GAAP in terms of defining what constitutes a finance lease.

Question 38

In what way should operating leases be accounted for under IAS 17? A) The lease payments should be capitalized and shown on the balance sheet as an asset. B) The lease payments must be expensed as they are incurred. C) IAS 17 is flexible, allowing both capitalization and expensing of operating lease costs. D) The lessee capitalizes the operating lease and the lessor expenses the lease.

Answer 38

B) The lease payments must be expensed as they are incurred.

Question 39

Which of the following is true about the IASB standards on Cash Flow Statements? A) Cash flow statements are not required under the IASB standards. B) Operating cash flows must be determined using the “direct method.” C) Operating cash flows may be combined with financing cash flows. D) IAS 7 requires essentially the same information in the cash flow statement as U.S. GAAP.

Answer 39

D) IAS 7 requires essentially the same information in the cash flow statement as U.S. GAAP.

Question 40

IASB standards address related party transactions. According to these standards, which of the following is considered a “related party?” A) parent companies B) subsidiary companies C) key members of management D) All of the above could be related parties.

Answer 40

D) All of the above could be related parties.

Question 41

What do IASB standards say about related party transactions? A) They are illegal in most countries and must be avoided. B) Related party transactions should be eliminated from the financial statements. C) They must be disclosed in the notes to the financial statements. D) none of the above

Answer 41

C) They must be disclosed in the notes to the financial statements.

Question 42

Under IAS 17, in a sale-leaseback transaction, how must the initial owner treat any gain? A) defer it and amortize it into income over the life of the lease B) recognize it in income immediately C) defer it until the end of the lease term, including extensions D) He/she can choose to either defer it or recognize it in income immediately.

Answer 42

A) defer it and amortize it into income over the life of the lease

Question 43

Under a joint exposure draft issued by the IASB and FASB in August 2010, what is the most significant proposal? A) IFRS and U.S. GAAP would have identical quantifiable criteria for lease classification. B) Leases would no longer be classified as finance or operating. C) Lessors would recognize income immediately at the inception of the lease. D) There would be no lease disclosure required in the notes to the financial statements.

Answer 43

B) Leases would no longer be classified as finance or operating.

Question 44

What is one major difference between IFRS and U.S. GAAP relative to discontinued operations? A) U.S. GAAP requires that the after-tax gain or loss from operations and the after-tax gain or loss on asset disposal be shown as a combined item. B) U.S. GAAP requires the above components to be shown separately. C) IFRS requires that the after-tax gain or loss from operations and the after-tax gain or loss on asset disposal be shown separately. D) IFRS requires no separate disclosure for discontinued operations.

Answer 44

B) U.S. GAAP requires the above components to be shown separately.

Question 45

What is one major difference between IFRS and U.S. GAAP relative to correction of errors? A) U.S. GAAP is silent as to how to treat errors that have been discovered. B) IFRS is silent as to how to treat errors that have been discovered. C) Under U.S. GAAP a prospective approach is taken. D) Under IFRS, if it’s impractical to restate financial statements, then no restatement is necessary.

Answer 45

D) Under IFRS, if it’s impractical to restate financial statements, then no restatement is necessary.

Question 46

According to IFRS 8 (Segment Reporting), which is not one of the three criteria for defining an operating segment? A) An operating segment can’t merely be a lessor. B) An operating segment is a component of a business that generates revenues. C) An operating segment is a component of a business whose operating results are regularly reviewed by the chief operating officer. D) An operating segment has separate financial information available.

Answer 46

A) An operating segment can’t merely be a lessor.

Question 47

Under IAS 40 (Investment Property), gains or losses from revaluation are: A) recognized in revaluation surplus. B) recognized in current income. C) not permitted. D) recognized either in current income or revaluation surplus at the option of management..

Answer 47

B) recognized in current income.

Question 48

Under IAS 16 (Property, Plant, and Equipment), subsequent revaluation decreases are: A) never recognized. B) credited to a revaluation surplus account. C) recognized as an expense on the Income Statement. D) first recognized as a reduction in any related revaluation surplus.

Answer 48

D) first recognized as a reduction in any related revaluation surplus.

Question 49

Under IAS 10 (Events After the Reporting Period), adjusting events that occur after the balance sheet date are: A) similar to U.S. GAAP. B) disclosed in a footnote only. C) treated as a prior period adjustment. D) not disclosed, since they occurred after the fact.

Answer 49

A) similar to U.S. GAAP.

Question 50

How does IAS 34 (Interim Financial Reporting) differ from U.S. GAAP? A) U.S. GAAP has no guidance for interim financial reporting. B) U.S. GAAP takes the position that interim periods are an integral part of the full year. C) U.S. GAAP is the same as IAS 34. D) U.S. GAAP requires that an interim period be projected pro rata for the entire year.

Answer 50

B) U.S. GAAP takes the position that interim periods are an integral part of the full year.