Deck 8: Reporting and Analyzing Long-Term Operating Assets

Question 1

Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations.

Answer 1

True

Question 2

Depreciation requires only two estimates-useful life and residual value-both of which are specified by GAAP depending on the asset type.

Answer 2

False

Question 3

We can estimate the percent of a company's depreciable assets that are "used up," reflecting the percent of plant assets that are no longer productive, by the following formula: Accumulated depreciation / Cost of depreciable assets

Answer 3

False

Question 4

Changes in accounting estimates affect only the current and future periods' income statements.

Question 5

Companies that have property, plant, and equipment that increase in market value should recognize a gain on the income statement in the period the increase in value occurs.

Question 6

Impairment of long-term plant assets is determined by comparing the sum of expected future (undiscounted) cash flows from the asset with the asset's net book value.

Question 7

Depreciation is the recognition of the change in market value of a plant asset over time.

Question 8

Asset write-downs have two potential challenges. One is making sure the write-down is not insufficient, and the other is to make sure the write-down is not too aggressive.

Question 9

An analyst should consider any goodwill write-downs as a non-recurring operating expense.

Question 10

R&D expense is treated as an operating expense, not a capital expenditure, unless the assets have an alternative future use.

Question 11

Under IFRS, research and development costs can be capitalized as intangible assets when specific criteria are met.

Question 12

Internally generated intangible assets are not capitalized, which allows the financial statements to be more transparent for users.

Question 13

Franchise rights are considered to be an identifiable intangible asset and must be amortized.

Question 14

U.S. GAAP requires recognition of the impairment of property, plant, and equipment, while IFRS does not.

Question 15

On January 1, 2015, Dunlop Company purchased a copy machine. The machine costs $600,000, its estimated useful life is 8 years, and its expected salvage value is $40,000.
What is the depreciation expense for 2016 using double-declining-balance method?

A) $ 95,000
B) $150,000
C) $112,500
D) $ 70,000

Question 16

Which of the following estimates are required when calculating depreciation expense?
1) Depreciation rate
2) Useful life
3) Expected maintenance costs
4) Salvage value

A) 1, 2, and 4
B) 1, 2, 3, and 4
C) 2 and 4
D) 2, 3, and 4

Question 17

Which statement is true concerning the straight-line method of depreciation?

A) Depreciation is recognized evenly over the estimated useful life of the asset.
B) Purchase cost is expensed in the year of acquisition.
C) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset.
D) Annual depreciation expense is highest in the early years and decreases over the life of the asset.

Question 18

Which of the following purchased assets would not be capitalized?

A) Factory machine used to fabricate part for new product to be introduced
B) Building constructed as a warehouse for a company's inventory
C) Machine used to test the durability of high tech chair in development for a technology company. The machine will not be used to test any other products.
D) Building constructed to house management and administrative personnel

Question 19

Which of the following is not necessary in calculating the depreciation expense for the first year for a newly purchased factory forklift?

A) Estimated useful life
B) Market value of the forklift during its useful life
C) Estimated salvage value
D) Depreciation rate
E) Total cost of the forklift at acquisition

Question 20

An estimate of how an asset will be used up over its useful life is known as what?

A) Useful life
B) Salvage value
C) Depreciation rate
D) Impairment value

Question 21

How is the gain (loss) on a plant asset sale calculated?

A) Asset sale price - Asset purchase cost
B) Book value on balance sheet - Asset sale price
C) Asset sale price - Book value on balance sheet
D) Asset sale price - Total accumulated depreciation

Question 22

Major Carmaker Co. plans to build a laboratory dedicated to testing car crashes. The company will not use the laboratory after the project is finished.
Under GAAP, how should this laboratory be accounted for?

A) Capitalized and depreciated
B) Expensed when acquired
C) Capitalized, but not depreciated
D) Depreciated and expensed
E) Capitalized at its original cost and then tested for impairment annually

Question 23

Under which section of an income statement would the amount of cost allocated to a particular accounting period for long-term depreciable assets most likely appear?

A) Nonoperating expense
B) Selling, general, & administrative
C) Accumulated depreciation
D) Long-term assets

Question 24

Under which section of a statement of cash flows would the proceeds received from the sale of long-term depreciable assets most likely appear?

A) Operating cash flows
B) Investing cash flows
C) Financing cash flows
D) Long-term assets

Question 25

At what point is an asset considered to be impaired?

A) When the net book value is greater than the sum of undiscounted expected cash flows
B) When the net book value is less than the sum of discounted expected cash flows
C) When the net book value is less than the sum of undiscounted expected cash flows
D) When the net book value is greater than the sum of discounted expected cash flows

Question 26

Leaping Deer Company purchased a tractor at a cost of $240,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,200 hours in 2016.
What method of depreciation will produce the maximum depreciation expense in 2015?

A) Straight-line
B) Double-declining-balance
C) Units-of-production
D) All methods produce the same expense in 2015

Question 27

Leaping Deer Company purchased a tractor at a cost of $240,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,200 hours in 2016.
What method of depreciation will produce the maximum depreciation expense in 2016?

A) Straight-line
B) Double-declining-balance
C) Units-of-production
D) All methods produce the same expense in 2016

Question 28

Leaping Deer Company purchased a tractor at a cost of $440,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,200 hours in 2016.
What amount will Leaping Deer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation?

A) $ 40,000
B) $240,000
C) $400,000
D) $200,000

Question 29

Leaping Deer Company purchased a tractor at a cost of $240,000 on January 1, 2015. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years.
If Leaping Deer uses the straight-line method, what is the book value at January 1, 2019?

A) $ 40,000
B) $140,000
C) $160,000
D) Some other answer

Question 30

Green Garden Company purchased a tractor at a cost of $240,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,100 hours in 2016. On January 1, 2017, the company decided to sell the tractor for $140,000. Green Garden Co. uses the units-of- production method to account for the depreciation on the tractor.
Based on this information, the entry to record the sale of the tractor will show:

A) No gain or loss on the sale
B) A loss of $15,000
C) A loss of $10,000
D) A gain of $30,000

Question 31

Green Garden Company purchased a tractor at a cost of $240,000 on January 1, 2015. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years. At the end of two years of service, Green Garden Co. reevaluated the tractor's useful life. Management extended the useful life an additional four years, but estimated that the tractor would have no residual value at the end of this time.
If the company uses straight-line depreciation, what amount would be recorded as the depreciation expense each year, beginning with the third year?

A) $19,000
B) $15,000
C) $25,000
D) $15,834

Question 32

Mighty Mining Company acquired property for $20,000,000 containing a palladium mine on January 1, 2016. Mighty Mining Co. estimated that the mine would produce 1,200,000 tons of palladium and once mining is completed, the property could be sold for $2,000,000. During the first year, 200,000 tons were mined.
What is the depletion expense per ton of palladium?

A) $ 7.50 per ton
B) $16.67 per ton
C) $15.00 per ton
D) $ 2.48 per ton

Question 33

Mighty Mining Company acquired property for $16,800,000 containing platinum ore mine on January 1, 2016. Mighty Mining estimated that the mine would produce 500,000 tons of ore and once mining is completed, the property could be sold for $300,000. During 2016, 2017, and 2018, Mighty Mining recovered 40,000, 60,000, and 150,000 tons of ore, respectively.
As a result, the mine should appear on Mighty Mining's balance sheet at what amount (net of depletion)?

A) $ 8,550,000
B) $ 4,275,000
C) $ 8,200,000
D) $16,250,000

Question 34

Which statement is true as it relates to IFRS' reporting requirements for internally-developed intangibles?

A) IFRS allows both research and development costs to be capitalized when specific criteria are met
B) IFRS allows research costs to be capitalized when specific criteria are met
C) IFRS allows development costs to be capitalized when specific criteria are met
D) IFRS requires that both research and development costs be expensed when incurred

Question 35

Which of the following is not part of IFRS' accounting for impairment property, plant and equipment?

A) The asset's balance sheet book value is compared to its recoverable amount to determine if an impairment loss exists.
B) The asset's recoverable amount is measured by the higher of its fair value or the asset's value in current use.
C) The difference between an asset's recoverable amount and its balance sheet book value is recognized as an impairment loss.
D) The asset may be revalued down, but may not be revalued upward to fair value in the future.

Question 36

True Sound Wireless, Inc. acquired Clarity Networks, Inc. in 2015. The carrying amount of the investment on the balance sheet is reported as $700 million, including goodwill of $200 million. In performing its annual impairment test in 2016, True Sound estimates that the fair market value of Clarity Network's assets and liabilities, including identifiable intangible assets, to be $600 million, and estimates goodwill is impaired by $100 million.
What effect, if any, will this analysis have on True Sound's financial statements?

Question 37

Foam Pellet Packaging sold a machine for $60,000. The company bought this machine for $160,000 seven years ago and was depreciating it on a straight-line basis over ten years to a $16,000 salvage value.
What is the gain (loss) that Foam Pellet Packaging should report?

Question 38

Determine the 2016 property, plant, and equipment asset turnover for Starfish Laboratories using the financial statement information below:

Question 39

EMG Industries, a large clothing mail-order retailer, purchased a new industrial sewing machine for $208,000. This machine is expected to operate for 5 years after which it will be sold for salvage value estimated to be $12,000.
What is the yearly depreciation expense under the straight-line method?

Question 40

A health care technology company purchases a machine in 2016 to conduct a 2-year test on the effectiveness of a product prototype that may revolutionize the health care industry. The product will either be produced or completely abandoned resulting in no future use of the machine. The machine costs $20 million. Technology is increasing such that it will only be useful for 2 years with no estimated value at the end of two years.
A. How should the cost of this machine be accounted for under GAAP?
B. What is the effect of the purchase of the machine on 2016's net income?
C. What is the effect of the purchase of the machine on 2017's net income?

Question 41

NOLA Industries provides the following information relating to its land, buildings and equipment:
Reported depreciation expense is $2,600 million. Calculate the plant assets' percent depreciated for 2016.

Question 42

Perfect Weld buys a specialty table saw for its metal fabrication business on January 1, 2016. The machine cost $240,000 and is expected to be used for five years. At the end of the five years it is expected that the machine can be sold for $16,000.
Compute the depreciation expense for the third year (2018) using both straight-line and double-declining-balance depreciation methods.

Question 43

Pollyanna Publishing, a textbook publishing firm, purchased a new machine for $80,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $8,000).
How much will the first and second year's depreciation expense be under the double-declining-balance method?

Question 44

For each of the following items, indicate whether the costs should be capitalized or expensed immediately.
1. Purchased a patent for $48,000
2. Paid $22,000 to overhaul a drilling rig. The overhaul will extend the useful life by 3 years.
3. Paid $2,400 for routine maintenance and lubrication of a tractor.
4. Paid $26,000 to install new equipment in the production line that will "super-cool" the product and allow for faster shipping of fresher merchandise
5. Equipment is purchased for $32,000 for a specific R&D project

Question 45

Starbright International has the following plant, property, and equipment assets on its balance sheet for 2016 and 2015:
Determine what percent of the company's depreciable assets are depreciated at the end of 2015 and 2016. What does this tell you about the company's future cash flows?

Question 46

Entire Foods Market, Inc. provides the following information in the footnote to its 2016 10-K (amounts in thousands):
Entire Foods reported a depreciation expense of $667.8 million in 2016.
What percent depreciated are Entire Foods' depreciable assets at the end of 2016?

Question 47

Yellow School Bus Company had machinery that had originally cost $328,000. The machinery was three years old and had been depreciated using the double-declining-balance method, over a five-year useful life with a residual value of $24,000. Answer each of the following independent questions:
A. If the company sold the machinery for $140,000, prepare a journal entry to record the sale.
B. If the company sold the machinery for $64,000, prepare a journal entry to record the sale.

Question 48

The following information is reported for the high-tech manufacturing companies, Electronics Company and Tech Industries (amounts in millions):
A. Compute the 2016 PPE turnover for both companies. Comment on any differences you observe.
B. Discuss ways in which companies in this industry can increase their PPE turnover.

Question 49

Oil Rig Company estimated that the oil reserve that it acquired on January 1, 2014 would produce 3,500,000 barrels of oil. The company extracted 250,000 barrels in 2014, 275,000 barrels in 2015, and 250,000 barrels in 2016. Oil Rig paid $56,000,000 for the oil reserve. The land is estimated to have no residual value once the oil is depleted.
A. Compute the depletion expense for 2014, 2015, and 2016.
B. Prepare the journal entries to record (1) the acquisition of the oil reserve and (2) the depletion for 2014, 2015, and 2016.
C. Create T-accounts and post the entries for 2014.

Question 50

In 2015, Marvin's Mining Company purchased land for $41,600,000 that had a natural resource reserve estimated to be 690,000 tons. Development and road construction costs on the land were $1,440,000 and a building was constructed at a cost of $880,000. When the natural resources are completely extracted, the land has an estimated residual value of $5,600,000. In addition, the cost to restore the property to comply with environmental regulations is estimated to be $3,080,000. Production in 2015 and 2016 was 50,000 tons and 65,000 tons, respectively.
A. Compute the depletion charge for 2015 and 2016. Include depreciation on the building, if any, as part of the depletion charge.
B. Prepare a journal entry to record each year's depletion expense.

Question 51

Marvelous Materials presented the following partial balance sheet, income statements, and note disclosure for its fiscal years ending in 2016 and 2015. All amounts are in millions.
The following appeared in Note 7 of the company's annual report:
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings and improvements, 3 to 30 years; demonstration and manufacturing equipment, 3 to 5 years; software, 3 to 5 years; and furniture, fixtures and other equipment, 3 to 15 years. Land improvements are amortized over the shorter of 15 years or the estimated useful life. Leasehold improvements are amortized over the shorter of five years or the lease term.
Analyze and interpret Marvelous Materials' plant assets and the company's related ratios and disclosures by answering the questions that follow:
A. Compute PPE turnover for 2016 and 2015 if net plant assets for 2014 are $3,197 in millions. Interpret and explain any change in turnover.
B. What long-term assets might not be reflected on its balance sheet?
C. Estimated depreciation expense is $510 (in millions) for 2016. Compute the percent depreciated for 2016. What implication does the used up computation have for future cash flows?

Question 52

Consider the following schedule from a footnote in the Adventure Corporation's 2016 financial statements related to its acquisition of Shoot for the Moon, Inc. (amounts in millions):
Identify (1) the total value received by Shoot for the Moon, Inc. shareholders for the acquisition, (2) what portion of the sale was for existing intangibles?

Question 53

Following are selected financial information from Foster Toys, Inc.'s 2016 10-K report:
A. Compute the PPE turnover for 2016 and 2015 (net PP&E is $467,160 for 2014).
B. Is there an identifiable trend and is this an improvement for the company?

Question 54

Following is financial information (millions) from Tractor & Company's two segments as of October 31, 2016:
A summary of property and equipment at October 31 in millions of dollars follows:
Tractor & Company uses straight-line depreciation. Depreciation expense for 2016 is $1,110.
A. Compute PPE turnover for 2016 and 2015. PPE net for 2014 is $9,478 million. Analyze your findings. Sales for 2016 are $83,753 million and are $73,665 million for 2015.
B. By what percentage are Tractor's depreciable assets depreciated at the end of 2016? Analyze your computations.

Question 55

The following income statements, balance sheets, and plant asset disclosures are presented by Terrific Toys, Inc., a toy manufacturer, in its 2016 annual report.

Terrific Toys, Inc.'s plant asset note disclosure follows:
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 30 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for leasehold improvements. Tools, dies, and molds are amortized using the straight-line method over 3 years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property, plant, and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Any potential impairment identified is assessed by evaluating the operating performance and future undiscounted cash flows of the underlying assets. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is included in the results of operations.
A. Compute property, plant, and equipment turnover (PPET) (disregard Other Noncurrent Assets) for 2016 and 2015. Property, plant and equipment, net for 2014 was $1,211,763. Is there any significant change? What assets may not be reflected on Terrific Toys' balance sheet?
B. When does Terrific Toys check for asset impairment? What process do they use to assess impairment? Does this follow GAAP guidelines? Do these charges affect cash flows? How should these charges be treated for analysis purposes?

Question 56

The following are the income statement and a portion of the long-term asset section of NASDAQ EGN Group's balance sheet for 2016. Amounts are in millions.
NASDAQ EGN Group's property and equipment is primarily shorter-term data processing equipment without the long-term buildings or other real estate owned. This equipment readily defines the company through its primary business, the running of exchanges for the stock market. The company is very active in reacting to changes in the way trading is done by also acquiring other global companies (exchanges).
A. Compute property, plant and equipment turnover for 2016 and 2015 and explain any changes. Net plant and equipment for 2014 totaled $492 million. Are there any unique considerations for a company like NASDAQ EGN Group? Explain.
B. How much has NASDAQ EGN Group invested in property plant and equipment as compared to intangibles, primarily goodwill in 2016? Does this seem odd? What may account for this?

Question 57

What are the main issues in reporting a company's gains (losses) on asset sales? What is the related concern in the analysis of the company?

Question 58

Explain the considerations a CFO would make when deciding between using the straight-line depreciation method, the double-declining-balance depreciation method, or another use-based depreciation.