A. add capitalized interest to reported interest expense.

B. subtract capitalized interest from reported interest expense.

C. add any depreciation from previously capitalized interest to interest expense.

3. Anna Lyssette is evaluating the performance of two biotechnology companies: Biotech

Holdings and Advanced Biotech. Both companies released their fi rst new drugs early in

the year, but Lyssette is worried about a possible lack of comparability due to differing

strategies. Biotech Holdings acquired the research and development for its drug from

another company while Advanced Biotech developed its drug internally. In the current

accounting period, all else equal, Biotech Holdings would most likely report

A. lower total assets.

B. higher net income.

C. similar cash fl ow from operations.

4. Amerisoft complies with U.S. GAAP, while EuroWare complies with IFRS. When comparing

the two companies, it would most likely be necessary to adjust the fi nancial statements

of

A. Amerisoft to remove charges related to acquired in - process R & D.

B. EuroWare to remove charges related to acquired in - process R & D.

C. Both companies to remove charges related to acquired in - process R & D.

5. When comparing a company that complies with IFRS to a company that complies with

U.S. GAAP, it is most important to remember that under IFRS

A. research - phase R & D expenditures are capitalized.

B. acquired in - process R & D is expensed immediately.

C. development - phase R & D expenditures may be capitalized.

The following information relates to Problems 6 through 9:

The Asset Intensive Company (AIC) has purchased equipment for $1 million. The

equipment is expected to have a three - year useful life and a salvage value of $100,000. AIC

reports under U.S. GAAP.

6. Over the full life of the machine, all else equal, the volatility of AIC ’ s net income will be

A. the same regardless of whether AIC expenses or capitalizes the cost of the machine.

B. highest if the company expenses the entire cost of the machine in the year of its

Purchase.

C. highest if the company capitalizes the cost of the machine and depreciates it over its

useful life.

7. Assuming AIC capitalizes the cost of the equipment, depreciation expense over the life

of the machine will be

A. the same regardless of the chosen depreciation method.

B. lowest if the company uses the double - declining balance method.

C. highest if the company uses the double - declining balance method.

8. In year 3, the return on equity will most likely be

A. highest if the company expenses the cost of the equipment.

B. highest if the company capitalizes the cost of the equipment.

C. the same regardless of whether the cost of the equipment is expensed or capitalized.

9. Regardless of the depreciation method used for reporting purposes, the company will use

MACRS for tax purposes. In year 1, the reported income tax expense will be

A. the same regardless of depreciation method.

Date: 2016-03-03; view: 754