Long Lived Assets

Primco is a mall developer.  On 1 Jan 2010, Primco obtained a bank loan of $100 million to build a mall.  The mall was completed on 31 Dec 2012, and Primco fully repaid the loan on 31 Dec 2014.  For each year of the loan, Primco paid an interest of $5 million.

How much of the interest cost can Primco capitalise?

LuxHotels owns a number of hotels in Brazil.  The company has traditionally expensed all renovation costs.  This year, the management decided to capitalise certain renovation costs that are deemed as facility upgrades.

What is the most likely effect on the company’s cash flow statement for this year, as compared to the case where the costs are expensed?

LuxHotels owns a number of hotels in Brazil.  The company has traditionally expensed all renovation costs.  This year, the management decided to capitalise certain renovation costs that are deemed as facility upgrades.

Going forward, what is the most likely effect on the company’s operating income if the company continues this practise of capitalising certain renovation costs.

Sly Corp’s CEO would like to book less income taxes for the current financial year. The company has just bought a machine at $50 million.  Which of the following will LEAST likely help achieve the CEO’s goal?

An industrial washing machine that costs $32,000 can perform an estimated 10,000 washes in its lifetime, after which, it can be scrapped for $2,000.

In the first year of use, the machine performed 800 washes.  In the second year, the machine performed 1,400 washes.

What is the carrying value of the machine after the first 2 years of use, assuming that the units-of-production depreciation method was used.

An asset was purchased for $40,000 one year ago.  At the point of purchase, the useful life was estimated to be 4 years, with a residual value of $5,000. For the past year, the asset was depreciated using the double declining balance method.

Going forward, the company decided to raise its residual value to $15,000.

Calculate the depreciation expense for the second year, using the double declining balance method.

IndieSoft has been developing a new AI-based spreadsheet software for years, incurring costs of $400,000 in the process.  The software has just passed initial testing, and is being prepared to be publicly tested.  It is expected to have a useful life of 10 years, with no salvage value.  The company has decided that the software is to be amortised yearly using the straight line method.  The company reports under IFRS.

What is the most likely carrying value of the software 1 year from now?

BERRY acquired RaspBerry for $1 million at the beginning of the year. The fair value of RaspBerry’s tangible assets was $500,000, and a trademark that has 10 years to expiry was valued at $300,000.

What is the amortisation expense that BERRY expects to book from this acquisition at the end of the year, using the straight line method?

An asset classified as PP&E was bought for $50,000 on 1 Jan 2014.

The fair value of the asset dropped to $30,000 on 1 Jan 2015, but rose to $60,000 on 1 Jan 2016.

Assuming no depreciation, and that the revaluation model is used, what is the most likely carrying value of the asset on 1 Jan 2016, and what is recognised in the income statement?

An asset classified as PP&E was bought for $50,000 on 1 Jan 2014.

The fair value of the asset dropped to $30,000 on 1 Jan 2015, but rose to $60,000 on 1 Jan 2016.

Assuming no depreciation and that there was a writedown of $20,000 on 1 Jan 2015, and that the cost model is used under US GAAP, what is the most likely carrying value of the asset on 1 Jan 2016, and what is recognised in the income statement?

An asset was acquired 3 years ago for $50,000. At that point of time, the useful life of the asset was deemed as 3 years, and a residual value of $20,000.  The asset was depreciated using the straight line method.

After the 3 years, the asset was sold for $15,000.  What is the effect of the sale on the income statement and statement of cash flow?

The newly appointed CEO of a company wishes to manipulate earnings such that the current period’s look bad compared to the subsequent periods after his appointment.

Which of the following is most likely to achieve his purpose?