Deck 8: Operating Activities

Question 1

The term used to describe the amount of a company's annual interest cost that should be capitalized is known as:

A) tangible interest
B) actual interest
C) average accumulated expenditures
D) avoidable interest

Answer 1

D

Question 2

All of the following are types of intercorporate investments in capital stock except :

A) minority, passive
B) minority, active
C) majority, active
D) majority, passive

Answer 2

D

Question 3

GAAP stipulates that firms should do what with expenditures that increase the service potential of an asset beyond that originally anticipated?

A) Expense the expenditure immediately.
B) Capitalize the expenditure and depreciate it over the remaining service life of the asset.
C) Capitalize the expenditure, but do not depreciate the asset.
D) Charge it off to shareholders' equity.

Answer 3

B

Question 4

A company would need to record an impairment loss for its equipment when:

A) the original cost of the equipment exceeds its fair value and is deemed not recoverable.
B) management determines that the equipment will no longer be used.
C) the carrying amount of the equipment exceeds its fair value and is deemed not recoverable.
D) the cash flows from the equipment are less than its fair value.

Question 5

All of the following are difficulties encountered in determining fair values except :

A) the need to make assumptions about the effect of technological and other improvements when using the prices of new assets currently available on the market in the valuation process
B) the need to identify comparable assets currently available in the market to value assets in place
C) the absence of U.S. GAAP and IFRS standards related to reporting long-lived assets
D) the absence of active markets for many used fixed assets, particularly those specific to a particular firm's needs

Question 6

A key characteristic of asset measurement is best described as:

A) average value based on all assets held by the company
B) disposal cost less depreciation
C) fair value at the acquisition date
D) fair value less depreciation

Question 7

All of the following are typically costs that fail the future benefits test of long-lived operating assets except :

A) costs related to research and development
B) costs related to marketing
C) costs related to brand-building activities
D) costs of equipment used in production

Question 8

Which of the following is the least effective way for an analyst to understand whether existing long-lived assets must be replaced?

A) understand industry conditions and firm strategies for capital expenditure growth
B) calculate the average age of depreciable assets
C) calculate the percentage of ownership the firm has in another entity
D) calculate the proportion of depreciable assets consumed

Question 9

All of the following statements are true regarding accounting for software development costs except :

A) Firms must expense as incurred all costs incurred internally in developing computer software until such development achieves the technological feasibility of a product.
B) Firms must capitalize as incurred all costs incurred internally in developing computer software.
C) Researchers have found a significant association between costs and future earnings, which support capitalizing and amortizing product development costs permitted by U.S. GAAP and IFRS.
D) The interpretation of the meaning of technological feasibility has created diversity in the practice of accounting for software development costs.

Question 10

Using the information below, calculate the average total depreciable life of the assets:
Information from the Balance Sheet:

A) 6.54 years
B) 7.25 years
C) 6.91 years
D) 9.15 years

Question 11

Which of the following terms is least consistent with the allocation of costs using a rational and systematic method?

A) depreciation
B) amortization
C) depletion
D) upward revaluation

Question 12

Which of the following is a difficulty in determining current market values when determining the value of fixed assets?

A) There is an absence of active markets for many fixed assets.
B) It is difficult to identify comparable assets currently available in the marketplace to value assets in place.
C) It is difficult to make assumptions about the effects of technology and other improvements when using the prices of new assets currently available on the market in the valuation process.
D) All of these are correct.

Question 13

Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed "not recoverable" as specified by GAAP. GAAP defines a carrying amount as "not recoverable" if:

A) it is greater than the sum of the cash flows expected from the asset's use and disposal.
B) it is greater than the sum of the undiscounted cash flows expected from the asset's use and disposal.
C) it is less valuable than its current carrying value.
D) it is less valuable than its current fair value.

Question 14

An analyst can estimate the average total life of depreciable assets by:

A) dividing average depreciable assets by depreciation expense for the year.
B) dividing depreciation expense for the year by average depreciable assets.
C) dividing average gross depreciable assets by accumulated depreciation.
D) Subtracting depreciation expense from accumulated depreciation.

Question 15

How should Focus Company record expenditures for research and development costs according to U.S. GAAP?

A) expense as incurred
B) capitalize and depreciate
C) amortize them over 60 months
D) None of these are correct.

Question 16

All of the following are consistent with the purpose of determining the useful life of a long-lived asset except :

A) using the information to convey expectations about the future usefulness of the assets to stakeholders.
B) using the information to help project a rational basis for depreciation
C) using the information to help project a systematic basis for depreciation
D) using the information to manage earnings upward.

Question 17

Currently, the FASB's Statements of Accounting Concepts (Nos. 5 and 6) define an asset as having all of the following characteristics except :

A) costs not guided by management's judgment
B) probable future benefits
C) resulting from past transactions and events
D) something that is obtained/controlled by the entity

Question 18

Which of the following would not be used to determine the cost of an asset?

A) cash paid
B) sales and excise taxes
C) cost incurred to get the asset ready for its intended use
D) depreciation method

Question 19

Managers are typically faced with all of the following primary choices and estimates when allocating acquisition costs of tangible assets and intangible assets to the periods benefited except :

A) choosing an allocation method
B) estimating useful life
C) estimating salvage value
D) establishing a reserve for obsolescence

Question 20

Using the information below, calculate the average total depreciable life of the assets:
Information from the Balance Sheet:

A) 5.8 years
B) 10 years
C) 2.9 years
D) 5.3 years

Question 21

Based on the information concerning Snowflake Corp. what is the value of the goodwill related to the acquisition?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $1,325,000

Question 22

Snowflake Corp.
Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:

Based on the information concerning Snowflake Corp. what is the market value of the company's shareholders' equity at the acquisition date?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $0

Question 23

When a firm sells a trading security, it recognizes:

A) the average of the selling price and the book value as a gain or loss in measuring net income.
B) the difference between the selling price and the book value as a gain or loss in measuring net income.
C) amortizes any difference between the acquisition cost and maturity value as interest revenue over the life of the debt.
D) the difference between the selling price and the acquisition cost of the security as a realized gain or loss on the income statement.

Question 24

Which one of the following is an example of the expected benefit approach for valuing long-lived assets?

A) Current cost.
B) Historical cost.
C) Discounted present value.
D) Current replacement value.

Question 25

Ashley Company
Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share.
If Ashley Company accounts for the investment as a minority, passive investment and classifies it as an available-for-sale security, then the investment will appear in the December 31, 2010 balance sheet at what amount?

A) $60,000
B) $65,000
C) $64,000
D) $75,000

Question 26

Expenditures included in the cost of a long-lived asset are:

A) intangible.
B) charged off.
C) expensed.
D) capitalized.

Question 27

When a company records the cost of cutting down timber, this cost is deemed to be:

A) exploration cost.
B) asset retirement obligation.
C) development cost.
D) depletion cost.

Question 28

Under IFRS, when an asset is revalued upwards, subsequent depreciation is based on:

A) the asset's fair value.
B) the asset's original cost.
C) the method used for determining depreciation on the company's tax returns.
D) the amount of future cash flows the asset is expected to generate.

Question 29

When dividends from an investment are recognized as income, the investment must have been of which type?

A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment

Question 30

The method used to account for oil and gas exploration costs that capitalizes the exploration costs of productive wells is the:

A) reserve recognition accounting.
B) successful efforts approach.
C) soft asset approach.
D) full-cost approach.

Question 31

Goodwill represents:

A) the synergies that will be achieved through the acquisition.
B) the difference between the acquisition cost and the market value of the identifiable assets and liabilities.
C) the difference between the acquisition cost and the book value of the identifiable assets and liabilities.
D) the merger premium.

Question 32

If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, then the investment will appear in the December 31, 2010 balance sheet at what amount?

A) $60,000
B) $65,000
C) $64,000
D) $75,000

Question 33

Which of the following items would be charged to the cost of the building?

A) Architectural fees.
B) Cost of foundation.
C) Capitalization of interest financing charges.
D) All of these are correct.

Question 34

When dividends from an investment are recognized as a reduction of the investment account, the investment must have been of which type?

A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment

Question 35

Solo Corp. purchased $500,000 of bonds for $515,000 as an investment. If Solo expects to hold the bonds until they mature, the initial investment should be recorded at:

A) Investment in Bonds - $500,000
Additional Investment Expense - $15,000
B) Investment in Bonds - $515,000
C) Investment in Bonds - $500,000
Prepaid Interest Revenue - $15,000
D) Accumulated Other Comprehensive Investment - $500,000

Question 36

Which of the following is not a classification for a minority, passive investment?

A) trading securities
B) equity securities
C) available-for-sale securities
D) held-to-maturity securities

Question 37

When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life:

A) these asset retirement costs are expensed when asset retirement occurs.
B) a liability simultaneously arises.
C) these estimated future expenditures are added to the carrying value of the asset.
D) this fact is only reported in the financial statement footnotes.

Question 38

For U.S. GAAP, software development costs are capitalized as intangible assets:

A) after a copyright is obtained.
B) once the technological feasibility of the product is established.
C) from the beginning of development.
D) once the product is introduced into the marketplace.

Question 39

Based on the information concerning Snowflake Corp. by what amount would Penguin increase depreciable assets when it consolidates Snowflake on the acquisition date?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $375,000

Question 40

If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, then Ashley will recognize what amount of 2010 income from the investment?

A) $4,000
B) $10,000
C) $25,000
D) $15,000

Question 41

Specifically identifiable intangible assets acquired from others may have either a(n) ____________________ useful life or a(n) ____________________ useful life.

Question 42

Based on the information concerning Record Corp., what amount of goodwill should CD record at the acquisition date?

A) ($294,000)
B) $614,000
C) $1,200,000
D) $350,000

Question 43

When an intangible asset has a finite life, it is reported on the balance sheet at original cost with no ____________ taken.

Question 44

Financial reporting requires firms to ____________________ immediately all R&D costs incurred internally.

Question 45

If Ashley Company accounts for the investment as a minority, passive and classifies the investment as an available-for-sale investment, then Ashley will recognize what amount of 2010 income from the investment?

A) $4,000
B) $10,000
C) $25,000
D) $15,000

Question 46

When a long-lived asset loses its ability to generate future benefits, U.S. GAAP requires firms to write down the assets to their fair values and recognize a(n) ______________________________ in income from continuing operations.

Question 47

Firms that capitalize routine maintenance and repair charges will end up with the result of having the current period's income being ____________________.

Question 48

U.S. GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated

Question 49

___________________________________ include trade and brand names, trademarks, patents, copyrights, franchise rights, customer lists and goodwill.

Question 50

Record Corporation
CD Inc. acquires 100% of the outstanding shares of Record Corp. for $1,200,000 and accounts for the transaction using the purchase method. Record Corp's balance sheet at the date of acquisition appears below:

Based on the information concerning Record Corp., what is the market value of the company's shareholders' equity at the acquisition date?

A) $0
B) $908,000
C) $1,200,000
D) $1,458,000

Question 51

Firms recognize a(n) ______________________________ when the carrying amount of a fixed asset exceeds its fair value and is deemed not recoverable.

Question 52

Most publicly traded firms in the United States use the _________________________ method of depreciation for ______________ statement purposes.

Question 53

Under U.S. GAAP, when an asset's carrying amount is deemed _______________, the asset is considered impaired.

Question 54

When a foreign entity has the U.S. dollar as its functional currency, it uses which exchange rate to translate monetary assets and liabilities?

A) the average exchange rate during the period
B) the end of the period exchange rate
C) the historical exchange rate
D) the exchange rate on the date the asset or liability was obtained

Question 55

Olivia Co. owns 5,600 of the 14,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2011, Hobbitt earns $90,000 and pays cash dividends of $25,000. If the beginning balance in the investment account was $190,000, the balance at December 31, 2011 should be:

A) $192,000
B) $172,000
C) $180,000
D) $216,000

Question 56

When a foreign entity has the foreign currency as its functional currency, it uses which exchange rate to translate revenues and expenses in the income statement?

A) the average exchange rate during the period
B) the end of the period exchange rate
C) the historical exchange rate
D) the exchange rate on the date the asset or liability was obtained

Question 57

Unrealized holding gains or losses that are recognized in the income statement are from securities classified as:

A) trading
B) available for sale
C) held-to-maturity
D) equity

Question 58

The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.

Question 59

Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2011, Hobbitt earns $80,000 and pays cash dividends of $30,000. For the year ended December 31, 2011, Olivia should report income related to the investment equal to:

A) $0
B) $12,000
C) $32,000
D) $20,000

Question 60

Under which of the following scenarios would an entity not be classified as a variable interest entity?

A) The equity investing firms do not have the obligation to absorb the expected losses of the variable interest entity if they occur.
B) The investing firms do not have the right to receive the expected residual returns of the variable interest entity if they occur.
C) The total equity investment at risk is sufficient to permit the variable interest entity to finance its activities without additional subordinated financial support from other parties.
D) The equity investing firms do not have the direct or indirect ability to make decisions about the variable interest entity's activities through voting rights or similar rights.

Question 61

Held-to-maturity securities are accounted for at __________________________________________________.

Question 62

Assume that Morrison Company used cash to acquire machinery expected to contribute to the generation of revenues over a three-year period and the company erroneously expensed the cost to acquire the machine.
Required:
a. Describe the effects on ROA of the error over the three-year period.
b. Explain how the error would affect the statement of cash flows.

Question 63

Securities that are purchased in order to take advantage of short-term changes in market value should be classified as ____________________ securities.

Question 64

When the purchase price of another entity exceeds the book value of the entity's net assets the purchaser allocates the excess to identifiable assets and liabilities in order to revalue them to market value and any additional excess is allocated to ____________________.

Question 65

Ownership of 50% or more of the voting stock of another company implies an ability to ____________________ the company and _________________ should be prepared

Question 66

Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.

Question 67

When a company has a minority passive investment it will recognize changes in the market value of the investment as ____________________ gains and losses.

Question 68

When a foreign entity operates as a direct and integral extension of the U.S. parent, normally, its functional currency is the _________________________.

Question 69

When the functional currency is the U.S. dollar, financial reporting requires firms to use the ___________________________________ translation method.

Question 70

The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency and not usually remitted to parent company is the ______________________________.

Question 71

Assume that Hsu Company needs to acquire a large special-purpose materials handling facility. Given that no outside vendor exists for this type of facility and that the company has available engineering, management, and productive capacity, the Hsu borrows funds and builds the facility. Identify the costs that should be capitalized as part of this facility.

Question 72

Orman Company is a large international canning company. Orman uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax reporting. The company's tax rate is 35%. Selected financial information about Orman appears below.

Required:
a. Compute the amount of depreciation expense that Orman recognized for income tax purposes for year 2010 and 2009. The amount reported as the deferred tax liability relating to temporary depreciation differences represents the cumulative income tax delayed as of each balance sheet date because Orman uses accelerated depreciation for tax purposes and straight-line depreciation for financial statement reporting.
b. Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for financial statement purposes.
c. Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for tax purposes.

Question 73

When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in, it should account for the investment using the ______________________________.

Question 74

An investing firm consolidates the variable interest entity if it absorbs the majority of the entity's expected ____________________ if they occur, receives a majority of the entity's expected ______________________________ if they occur, or both.

Question 75

Under the equity method the investor's share of investee income ____________________ the investment account and dividends ____________________ the investment account.

Question 76

Discuss how firms should account for intangible assets under U.S. GAAP. Your answer should include discussion of the following areas:
a. Internally generated intangible assets versus specifically identifiable intangible assets acquired from others
b. Amortization and impairment testing

Question 77

Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.

Question 78

When a foreign entity operates as a relatively self-contained and integrated unit within a foreign country, normally, its functional currency is the ____________________________________________________________.

Question 79

When one company acquires another company it may not be able to estimate the potential losses inherent in the acquired assets or the potential liability of the acquired company, for these reasons the acquirer may establish ________________________________________.

Question 80

Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________________ securities.