READING 29 ANALYZING BALANCE SHEETS

Question 1

Nonmonetary assets that lack physical substance.

Answer 1

Intangible assets

Question 2

Intangible assets that can be acquired separately or are the results of rights or privileges conveyed to their owners

Answer 2

Identifiable intangible assets

Question 3

True or false

Patents, trademarks, and copyrights are unidentifiable intangible assets

Answer 3

False

Patents, trademarks, and copyrights are identifiable intangible assets

Question 4

True or false

Goodwill is unidentifiable intangible assets

Answer 4

True

Question 5

Intangible assets that cannot be acquired separately and have unlimited life

Answer 5

Unidentifiable intangible assets

Question 6

True or false

Under IFRS identifiable intangible assets that are purchased can be reported on the balance sheet using only the cost method

Answer 6

False

Under IFRS identifiable intangible assets that are purchased can be reported on the balance sheet using the cost method and revaluation model

Question 7

True or false

Under U.S. GAAP identifiable intangible assets that purchased can be reported on the balance sheet using only the cost method

Answer 7

True

Question 8

Intangible assets that are created internally such as research development are expensed incurred under?

Answer 8

U.S. GAAP

Question 9

A firm must identify the research stage (discovery of new scientific or technical knowledge) and the development stage (using research results to plan or design products). The firm must expense costs incurred during the research stage but can capitalize costs incurred during the development stage. Under?

Answer 9

IFRS

Criteria a project must meet for the firm to capitalize development costs include the following: the project is technically feasible, the resources exist to complete the project, a market exists for the product, and the company has the intention and resources to complete the project and sell the product.

Question 10

True or false

Intangible assets with indefinite lives are amortized and are tested for impairment at least annually.

Answer 10

False

Intangible assets with indefinite lives are not amortized.

Question 11

True or false

Finite-lived intangible assets are amortized over their useful lives and tested for impairment in the same way as PP&E.

Answer 11

True

Question 12

Costs that are expensed incurred under both IFRS and U.S. GAAP?

Answer 12

Start-up and training costs
Administrative overhead
Advertising and promotion costs
Relocation and reorganization costs
Termination costs

Question 13

Amount by which the purchase price is greater than the fair value of the acquired company’s identifiable net assets (assets minus liabilities).

Answer 13

Goodwill

Question 14

Why are acquirers often willing to pay more than the fair value of a target’s identifiable net assets?

Answer 14

Because the target may have assets that are not reported on its balance sheet.

For example, the target’s reputation and customer loyalty certainly have value, but that value is not quantifiable.

Also, the target may have research and development assets that remain off the balance sheet because of accounting standards.

Question 15

True or false

Goodwill is only created in a purchase acquisition. Internally generated goodwill is expensed as incurred.

Answer 15

True

Question 16

True or false

Because it is an intangible asset with indefinite life, goodwill is not amortized but must be tested for impairment at least annually.

Answer 16

True

Question 17

If good will is impaired, the company decreases its value, what happens to the income statement?

Answer 17

Recognizes a loss in the income statement

Question 18

Complete the following

… goodwill derives from the expected future performance of the firm, while … goodwill is the result of past acquisitions.

Answer 18

economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions.

Question 19

Contracts that give rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.

Answer 19

Financial instruments

Question 20

Unquoted equity investments and loans to and notes receivable from other entities are financial assets measured at?

Answer 20

Costs (for which fair value cannot be reliably measured)

Question 20

Under U.S. GAAP, debt securities acquired with the intent to hold them until they mature and measured at amortized cost are classified as

Answer 20

Held-to-maturity securities

Amortized cost is equal to the original issue price
- Principal payments
+/- amortized discount/premium
- impairment losses

Unrealized Gains/Losses: Ignored (no impact on income statement or equity).

Question 20

Mark-to-market accounting, include trading securities, available-for-sale securities, and derivatives. are financial assets measured at?

Answer 20

Fair value

Question 21

Debt securities acquired with the intent to sell them in the near term. Reported on the balance sheet at fair value, with unrealized gains and losses (changes in market value before the securities are sold) recognized in the income statement.

Answer 21

Trading securities

Question 22

True or false

All equity securities holdings with quoted market prices (except those that give a company significant influence over a firm) are treated as trading securities

Answer 22

True

Question 23

True or false Derivative instruments are treated the same as trading securities.

Answer 23

True

Question 24

Debt securities that are not expected to be held to maturity or traded in the near term. Like trading securities, are reported on the balance sheet at fair value. However, any unrealized gains and losses are not recognized in the income statement but are reported in other comprehensive income as a part of shareholders’ equity.

Answer 24

Available for sale

Question 25

Triple D Corporation, a U.S. GAAP reporting firm, purchased a 6% bond, at par, for $1 million at the beginning of the year. Interest rates have recently increased, and the market value of the bond declined $20,000. Determine the bond’s effect on Triple D’s financial statements under each classification of securities.

Answer 25

If the bond is classified as a held-to-maturity security, the bond is reported on the balance sheet at $1,000,000. Interest income of $60,000 [$1,000,000 × 6%] is reported in the income statement. If the bond is classified as a trading security, the bond is reported on the balance sheet at $980,000. The $20,000 unrealized loss and $60,000 of interest income are both recognized in the income statement. If the bond is classified as an available-for-sale security, the bond is reported on the balance sheet at $980,000. Interest income of $60,000 is recognized in the income statement. The $20,000 unrealized loss is reported as part of other comprehensive income.

Question 26

True or false Under IFRS, firms can make an irrevocable choice to carry any financial asset at fair value through profit and loss. This choice is not available under U.S. GAAP.

Answer 26

True

Question 27

Under IFRS, firms may make an irrevocable choice at the time of purchase to account for equity securities as?

Answer 27

fair value through the other comprehensive income

Question 28

Under IFRS, financial assets that do not fit either of "measured at amortized cost" or "measured at fair value through comprehensive income" are measured at? fair value through profit and loss (unrealized gains and losses reported on the income statement).

Answer 28

fair value through profit and loss (unrealized gains and losses reported on the income statement).

Question 29

If the financial liabilities are not issued at face value, the liabilities are usually reported where?

Answer 29

On the balance sheet at amortized costs

Question 30

In some cases, financial liabilities are reported at fair value. Examples include held-for trading liabilities such as

Answer 30

short position in a stock, derivative liabilities, and nonderivative liabilities with exposures hedged by derivatives.

Question 31

Income taxes payable in future periods as a result of timing differences between financial accounting and tax accounting

Answer 31

Deferred tax liabilities

Question 32

True or false Deferred tax liabilities are created when the amount of income tax expense recognized in the income statement is lower than taxes payable using tax accounting.

Answer 32

False Deferred tax liabilities are created when the amount of income tax expense recognized in the income statement is greater than taxes payable