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1
Q

Valuation of plant assets on books:

A
  1. Cash purchase price
  2. Credit purchase=PV of future cash payments using market rate of interest
  3. Issuance of securities=FV of security OR asset, whichever more readily available
  4. Donated assets=FV with gain recorded
2
Q

County assessment for sewer lines would be a cost of what?

A

Land

3
Q

The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?

A

$95,000

The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost.

4
Q

Immediately after a note payable was signed, its present value was $30,000. This note and $20,000 cash were used to acquire a used plant asset at the beginning of the current year. The interest rate implied in the note is 6%. Total interest payments due on the note over its term amount to $4,000. The term exceeds one year. No payments on the note are due during the current year. What amount of interest expense is recognized for the first year (current year) on this note, and what amount is capitalized to the plant asset account?

A

The interest expense recognized for the first year is .06($30,000) = $1,800. Although no interest is paid, interest is accrued, increasing the carrying value of the note. The asset is capitalized at $50,000, the sum of cash down payment and present value of the note. The interest over the note term is not capitalized because it does not assist in the process of placing the asset into its intended condition and location.

5
Q

Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.

A

If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.

The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.

6
Q

Interest capitalization increases:

A

Plant assets and income (if all interest first recorded as interest expense, capitalizing it decreases expenses)

DR: Plant Asset under construction
CR: Interest expense
Capitalizes interest

7
Q

Capitalization of interest exemplifies:

A

Matching principle since benefit of constructed asset will be over its useful life so expenses not recognized until asset can provide revenues.

8
Q

3 criteria for interest to be capitalized:

A
  1. Qualifying expenditures made
  2. Construction is in progress
  3. Interest costs are being incurred, limited to actual interest incurred during period of construction
9
Q

When does interest capitalization conclude?

A

Capitalization concludes when asset is substantially completed and ready for intended use.

10
Q

Specific method vs. weighted average

(1) average accumulated expenditures exceed total interest bearing debt (principal) and
(2) the interest rates on all interest bearing debt instruments are the same.

Which situation yields the same results for the two approaches?

A

BOTH

When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results.

11
Q

Debt is frequently incurred when plant assets are acquired. For example, debt may be incurred on the purchase of plant assets. Debt may also be incurred during the construction of plant assets. How is the interest in these two cases treated for financial reporting?

A

Debt for purchase- EXPENSE

Debt during construction-capitalize

12
Q

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa’s consolidated statements prepared immediately after the transaction?

A

Land- 60K
Building-50K

Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be “eliminated” so that the consolidated statements would show land at $60,000 and buildings at $50,000.

13
Q

During Year 1, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete.

How much of the interest incurred should be reported as interest expense in the Year 1 Income Statement?

A

Machine for own use- interest after completion
Asset held for sale- all interest incurred

Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments. The equipment constructed for sale does not appear to be a discrete item in that sense and, thus, none of the interest is capitalized. It is all expensed.

14
Q

Interest costs, when material, can be capitalized for the following:

A
  1. Assets constructed for firm’s own use

2. Assets intended for lease or sale produced as discrete projects (ships, land being developed)

15
Q

A firm is constructing a warehouse for its own use and purchased the land for the site immediately before beginning construction. Interest is capitalized on which of the following:

A

Warehouse- YES
Land- NO

Interest only capitalized for land if land being developed for sale. Cost of land included in AAE but interest is capitalized to the warehouse, not land.

16
Q

Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.

A

Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.

17
Q

Post-acquisition cost can be capitalized when:

A
  1. Asset is more productive (greater utility)

2. Asset has longer useful life

18
Q

A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable.

To account for these events, the owner should:

A

Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.

19
Q

Zahn Corp.’s comprehensive Balance Sheet at December 31, 20X5 and 20X4 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 20X5.

Depreciation charged to operations in 20X5 was:

A

The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts.

Thus, the $10,000 amount is a decrease in accumulated depreciation.

20
Q

What factor must be present to use the units of production (activity) method of depreciation?

A

Total units to be produced can be estimated.

(Cost-salvage value)/(Total estimated production).

21
Q

On January 1, 20X5, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for five years.

Brecon’s 20X5 multi-step Income Statement should include:

A

One-fifth of the cabinet costs in selling, general, and administrative expenses.

The cabinets are not involved in the manufacturing of the goods. Rather, they are used to help sell the merchandise.

Thus, the depreciation is not included in cost of goods sold; rather, it is included in selling, general, and administrative expenses.

22
Q

In which of the following situations is the units of production method of depreciation most appropriate?

A

An asset’s service potential declines with use.

This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.

23
Q

A fixed asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life.

How would using the sum-of-the-years’-digits method of depreciation, instead of the double declining balance method of depreciation, affect a gain or loss on the sale of the fixed asset?

A

Decrease gain, increase loss

The asset has a larger book value under SYD after two years. For a given amount of proceeds on disposal, the larger book value under SYD causes any gain on disposal to be smaller than under DDB and any loss greater than under DDB.

24
Q

Choose the best association of terms in the natural resources accounting area with the conceptual framework.

A

Successful efforts method-definition of asset.

The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

25
Q

During January 20X5, before the 20X4 financial statements were issued, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion?

A

The sum of the carrying value ($520,000) and removal/cleanup cost ($10,000) is the amount to compare to the insurance proceeds when computing the loss. The fire caused the latter costs to be incurred; therefore, the cleanup costs should be included in the loss.

26
Q

What amount should Rudd report as gain (loss) on disposal of the van in its 20X4 income statement?

A

The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 − $2,500 − $700.

27
Q

Which of the following conditions must exist in order for an impairment loss to be recognized?

A

The carrying amount of the long-lived asset is not recoverable.

28
Q

A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. Under IFRS what amount of impairment loss should be reported?

A

$15,000

This response is the difference between carrying value and recoverable amount. According to IFRS the recoverable amount is the greater of fair value less cost to sell ($105,000) or value in use ($100,000). Value in use is the discounted cash flows.

29
Q

Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?

A

The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.

30
Q

Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized?

A

Insurance on machine while in transit.

Testing and preparation of machine for use.

31
Q

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.

The proceeds from the sale of the building should be:

A

Deducted from the cost of the land.

32
Q

Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?

A

When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.

When remeasurement to fair value is used, it must be applied to the entire class or components of PPE.

33
Q

A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In year 1, the company acquired the land for $100,000. At the end of year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the year 2 change in fair value?

A

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.

Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement

34
Q

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?

A

A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.

The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.

35
Q

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

A

Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.

36
Q

The exchange was made to facilitate sales to their respective customers.

What amount of gain (loss) should Beam record related to the inventory exchange?

A

Under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. Therefore, no gain or loss is recognized

37
Q

In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.

A

When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5)

38
Q

Which one of the following is not considered an equity investment for investment accounting purposes?

A

Redeemable preferred stock

Redeemable preferred stock, also known as callable preferred stock, may be reacquired by the issuing corporation under prescribed conditions.

39
Q

In which one of the following circumstances would an investor most likely have control of an investee?

A

The investor owns more than 50% of the voting common stock of an investee.

40
Q

Which one of the following is least likely to be a factor in determining how an investment in debt or equity securities is accounted for and reported in financial statements?

A

The method of payment used to acquire the investment

41
Q

In the absence of other relevant factors, what minimum level of voting ownership is considered to give an investor significant influence over an investee?

A

20%

42
Q

Which of the following is not an indication that an equity security has readily determinable fair value?

A

Prices must be estimated based on similar securities in inactive markets.

43
Q

When an investor does not exert influence over the investee and accounts for an equity investment at fair value, cash dividends received by the investor from the investee should normally be recorded as

A

Dividend income

44
Q

Assume an entity is holding an equity security where there is not a readily determinable fair value. Which of the following are factors to consider in the evaluation of potential impairment?

A

A significant deterioration in the earnings performance, credit rating, asset quality, or business outlook of the investee
A significant adverse change in the regulatory, economic, or technological environment of the investee

A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates

45
Q

How is an impairment loss recognized on the financial statements for a cost method equity investment?

A

Impairment losses on equity investments carried at cost are recognized in current earnings.

46
Q

Which of the following describes a factor when an entity can invoke the practicability exception to using fair value when reporting an equity security?

A

There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market.

47
Q

Ott’s December 31 balance sheet should report the equity securities as

A

Investments in equity securities are reported at fair value if the control is not significant and there is a readily determinable fair value. If the control is not significant and there is not a readily determinable fair value, then the entity may elect to use the cost method. In this situation, only the investment in Kemo Inc. qualifies to be reported using the cost method.

48
Q

When an investor acquires sufficient voting common stock of an investee so that it has significant influence, which, if any, of the following kinds of investee data must the investor “capture” at the time the investment is made?

A

At the time an investor acquires sufficient voting stock of an investee to give it significant influence over the investee, it must “capture” both the book values and fair values of the investee’s assets and liabilities in order to apply the equity method of accounting to the investment.

49
Q

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?

A

The company’s accounting policy for the investment.

It is possible for the investor to use equity method accounting or elect the fair value option to account for the investee.

50
Q

When the equity method is used to account for investments in common stock, which of the following affects the investor’s reported investment income?

A

Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor’s investment income

51
Q

In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, 2005, Pulham has a receivable from Angles.

How should the receivable be reported in Pulham’s 2005 financial statements?

A

The total receivable should be disclosed separately.

Intercompany receivables remain separate from the investment account

52
Q

What amount of dividend revenue should Green report in its Income Statement for the year ended December 31, 2004 under equity method accounting?

A

Only the dividends received on the preferred stock are recognized as revenue: $60,000 = 100% × ($60,000). The common stock investment is accounted for under the equity method, which treats all dividends received as a return of capital. Dividends reduce the investment account under this method.

53
Q

Liquidating dividend

A

Liquidating dividends are returns of capital, not income.

54
Q

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it accounts for the investment as held-for-trading or uses the equity method of accounting?

A

A dividend never increases the investment account under any accounting method.

Under the cost method, the dividend is recorded as revenue. Under the equity method, the dividend is recorded as a decrease in the investment account.

55
Q

What amount should Pare report in its December 31, Year 1, Balance Sheet as investment in Tot?

A

Once the investor has acquired a sufficient percentage of the stock to use the equity method, it is prospectively applied. In this question, the equity method becomes the required method only at the very end of the year, and Pare would begin applying the equity method beginning on December 31. The ending balance of the investment account is: $50,000 (original investment) + $150,000 (second investment).

56
Q

In year 1, a company reported in other comprehensive income an unrealized holding loss on a debt investment classified as available-for-sale. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?

A

The unrealized loss should be credited to the other comprehensive income account.

57
Q

At what amount should Barton report the bonds in its balance sheet at the end of the current year?

A

For investments in debt securities other than those intended to be held-to-maturity, the fair value method is applied. $1,020,000 is the fair value of the investment in bonds and is the appropriate amount for reporting the investment.

58
Q

For a debt securities portfolio classified as available-for-sale, which of the following amounts should be included in the period’s net income?

I. Unrealized temporary losses during the period
II. Realized gains during the period
III. Changes in the valuation allowance during the period

A

II…Only realized gains (from sale or reclassification) on available-for-sale securities are recognized in income for the period. The unrealized changes in fair value are recorded in owners’ equity.

59
Q

Jent Corp. purchased bonds at a discount of $10,000. Jent classified the bonds as available-for-sale and subsequently sold them at a premium of $14,000. At the time of the sale, $2,000 of the discount had been amortized. What amount should Jent report as gain on the sale of bonds?

A

The book value at the date of sale was $8,000 below face value ($10,000 original discount – $2,000 amortization). The fair value of the bonds at date of sale was $14,000 above face value ($14,000 premium). Thus, the difference between the price of the bonds at sale and the book value was $22,000 ($8,000 + $14,000). That difference is the gain on sale.

60
Q

Which of the following is true with respect to impairment of available-for-sale securities?

A

If the decline in fair value is considered to be other-than-temporary, the unrealized losses in OCI are reclassified to earnings.

61
Q

Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?

I. Only investments in debt securities may be transferred between categories.

II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.

A

I only

62
Q

Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities?

A

Under IFRS No. 9, investments in debt securities may be (1) transferred from amortized cost (when the investment originally meets both the business model test and the cash flow characteristic test) to fair value when the investment fails to continue to meet both the business model test and the cash flow characteristic test and (2) transferred from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.

63
Q

Which of the following are possible ways that gains or losses on changes in the fair value of investments in equity securities may be reported under IFRS requirements?

A

In profit/loss (Income Statement)
In other comprehensive income

Under IFRS, changes in fair value may be reported in profit/loss or in other comprehensive income, depending on whether or not the investment is held for trading purposes or not. If an investment in equity securities is held-for-trading purposes (i.e., to make a profit on price appreciation), changes in fair value will be reported through profit/loss. If an investment in equity securities is not held-for-trading purposes, the investor may elect to report changes in fair value through other comprehensive income.

64
Q

Inco normally does not invest in debt but made this investment with the expectation that it could profit from short-term decreases in the market interest rate. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31 IFRS-based Statement of Financial Position?

A

Under IFRS No. 9, investments in debt securities that are not made under an entity’s business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment should be reported at fair value. Thus, this investment should be reported at the fair value, $105,000.

65
Q

Which, if any, of the following characteristics concerning the categories of investments under IFRS No. 9 is/are correct?

I. There is a single category for debt investments and a single category for equity investments.

II. The business model test used in evaluating debt instruments for classification purposes is concerned with the investor’s intent.

A

II Only

The business model test used in evaluating debt instruments for classification purposes is concerned with the investor’s intent. Specifically, did the investor make the investment to collect cash flows from interest and return of principal, rather than to make a profit on sale of the investment (Statement II)? While there is a single category for equity investments (at fair value), there are two categories for debt investments (at amortized cost and at fair value) (Statement I).

66
Q

An investor purchased a bond as a long-term investment between interest dates at a premium. At the purchase date, the cash paid to the seller is

A

More than the face amount of the bond. Would include interest accrued since last interest date plus the premium.

67
Q

The credit losses associated with the impairment of debt securities are separated in which of the following circumstances?

A

When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security- credit losses are reported in earnings

68
Q

Clara Corp. does not elect to use the fair value option to report financial assets. For marketable debt securities included in Clara’s held-to-maturity portfolio, which of the following amounts should be included in the period’s net income?
Unrealized temporary losses during the period
Gains on securities sold during the period
Permanent decline in value

A

Both II and III should be reported on the income statement. Unrealized gains and losses on held-to-maturity securities are not reported. Gains on securities sold always should be included as realized gains in the income statement of the applicable period. A permanent decline in value requires that the impaired security be written down to fair value. The amount of such a write-down is included in earnings as a realized loss.

69
Q

Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc’s held-to-maturity portfolio of marketable debt securities should be reflected in the current financial statements as

A

A footnote or parenthetical disclosure only.

70
Q

What amount should Evan report on its September 30, 2017, Balance Sheet for investment in stock rights?

A

The original stock investment cost is allocated to the stock and the rights based on their relative market values. Total market value of the stock is $95,000 and of the rights is $5,000. The original cost of the stock is $80,000. Thus the investment in stock rights is reported at [$5,000/($5,000 + $95,000)]$80,000 = $4,000.

71
Q

ASC Topic 320 requires that held-to-maturity securities be carried at amortized cost and that

A

available-for-sale and trading securities be carried at fair value (FV) (does not matter if question says FV option not selected for these securities)

72
Q

The method of accounting for debt investments is based on the investor’s intent for holding the investment. When investor intent changes, the classification of and accounting for the debt investment changes. When debt investments are transferred between classifications, which one of the following valuation basies is most likely to be used when recording the investment in the new classification?

A

Fair value

Fair value is the valuation basis used when debt investments are transferred between classifications. Conceptually, the existing carrying value is written off and the current fair value is written on in the new classification, with any difference being an unrealized gain or loss.

73
Q

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company’s next step in performing its impairment test is to

A

Perform a recoverability test on the carrying amount of the division’s assets.

74
Q

A company reported $6 million of goodwill in last year’s statement of financial position. How should the company account for the reported goodwill in the current year?

A

Perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value.

75
Q

Large purchased all of Small’s voting stock for $11 million when Small’s total owners’ equity was $4 million. The book value and market value of Small’s liabilities equal $3 million. However, the market value of Small’s total assets equals $9 million. What amount of goodwill is recorded by Large (in millions)?

A

The market value of Small’s net assets is $6 ($9 − $3). Goodwill ($5) is the difference between the purchase price of $11 and the market value of Small’s net assets of $6. Goodwill is the portion of the purchase price not attributable to identifiable assets.

76
Q

If both an asset group and goodwill in one of a company’s reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?

A

The other asset group should be tested for an impairment loss before goodwill is tested.

When conducting goodwill impairment testing in a reporting unit, one must first determine the fair value of the identifiable net assets (assets minus liabilities). The fair value of the identifiable net assets is used to calculate implied goodwill to test recorded goodwill for impairment. The measurement of the fair value of the identifiable net assets is essentially measuring (and recognizing) any impairment in that asset group before the impairment testing for goodwill is completed.

77
Q

Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?

A

A patent, The recoverability test is applied to definite-life intangible assets.

78
Q

Which of the following types of assets would typically be reported on a company’s balance sheet as an intangible asset?

A

Cost of patent registrations

79
Q

Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?

A

Fair value, carrying value.

80
Q

West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?

A

$4000

Unless there is evidence otherwise, amortization is on a straight-line basis.

81
Q

Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP?

A

Expensed immediately.

In the past, firms capitalized and amortized organization costs. However, now, organization costs are expensed immediately. Such costs are internally generated. Typically, only costs paid to outside entities are capitalized to intangible assets, and only those intangibles with definite lives are amortized

82
Q

Which of the following statements is correct concerning start-up costs?

A

Costs of start-up activities, including organization costs, should be expensed as incurred.

83
Q

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

A

Prohibited

All intangibles are subject to impairment, but the resulting impairment losses cannot be reversed.

84
Q

Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?

A

$0

When the intangible asset can be renewed indefinitely, and the company has the positive ability and intent to continuously renew, then the intangible asset is an indefinite life intangible. Indefinite life intangibles are not amortized, but are tested for impairment on an annual basis.

85
Q

An increase in the cash-surrender value of a life insurance policy owned by a company would be recorded by:

A

Decreasing annual insurance expense.

86
Q

Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash-surrender value had been recorded on Jung’s books at the time of payment.

What amount of revenue should Jung report in its statements?

A

Proceeds received less cash surrender value.

The cash surrender value (CSV) is an asset that has been recorded previously and is considered paid when the firm decides to cash the policy in, or upon death of the insured

87
Q

Which of the following should a company classify as a research and development expense?

A

Redesign of a product prerelease.

Redesign of a product prerelease would be considered R&D because it is discovering new technology, process, or function of the product.

88
Q

Which of the following is an indication that a cloud computing arrangement includes a software license?

I. The customer has contractual right to take possession of the software at any time during the hosting period without significant penalty.

II. The cloud computing arrangement has an indefinite life because the contract is renewable indefinitely.

III. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

A

I and III

89
Q

Under IFRS, the test for asset impairment is to compare the carrying value of the intangible asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?

A

The greater of fair value less cost to sell or value in use.

90
Q

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Under IFRS, which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

A

Under IFRS impairment losses associated with identifiable intangibles are recoverable. Impairment losses associated with goodwill are NOT recoverable.

91
Q

Under IFRS, which of the following is a criterion, other than goodwill, that must be met in order for an item to be recognized as an intangible asset?

A

IAS 38 defines an intangible asset as a nonmonetary asset without physical substance that is identifiable.

92
Q

Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if:

A

An active market exists for the intangible asset.

93
Q

Assume a company does not elect the fair value option for reporting financial assets. Realized gains from the sale of marketable debt securities should be included in net income of the period of sale when the marketable debt securities portfolio of which they are a part is classified as

A

Realized gains and losses shall be included in the determination of net income of the period in which they occur for both available-for-sale and held-to-maturity securities.

94
Q

A short-term marketable debt security was purchased on September 1, Year 1, between interest dates. The next interest payment date was February 1, Year 2. On the balance sheet at December 31, Year 1, the debt security should be carried at

A

FV

Accrued interest is not included, it is reported separately as a receivable.