Two firms are identical in every way except that one uses straight-line deprecia

Question

Two firms are identical in every way except that one uses straight-line depreciation for its fixed assets and the other uses accelerated depreciation for its fixed assets. All equipment has a seven-year life and no residual value. During the early years of the equipment's life, A) the firm that uses straight-line depreciation will appear to have lower total assets B) the firm that uses straight-line depreciation will appear to be less profitable C) the firm that uses straight-ine depreciation will appear to have higher total equity After reading the financial statements and footnotes of a company, an analyst identified the following intangible assets: . Product patent expiring in 40 years. . Copyright with no expiration date. Goodwill acquired 2 years ago in a business combination The firm should amortize: A) The Patent B) The Copyright C) The Goodwill A company considers a tangible asset to be impaired. The effect this impairment will have on the financial statements in the period the impairment is recognized is (comparing the with and without impairment values): A) higher net income B) higher debt to equity ratio C) higher total assets

Explanation / Answer

1) Option C

Straight will deperciate lesser -> high profits -> high retained earnings -> high equity

2) Option A

Patent will be amortized,

Goodwill is impaired,

3) Option B

Tangible assets impaired -> lower equity -> high debt to equity ratio

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