303 ch 11,12(?)

Which of the following principles best describes the current method of accounting for research and development costs?

Immediate recognition as an expense

Which of the following intangible assets should not be amortized?

Perpetual franchises

T/F: All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.

True

T/F: Some intangible assets are not required to be amortized every year.

True

Which of the following legal fees should be capitalized? Legal fees to Legal fees to successfully obtain a copyright defend a trademark

Yes Yes

Lynne Corporation acquired a patent on May 1, 2008. Lynne paid cash of $20,000 to the seller. Legal fees of $800 were paid related to the acquisition. What amount should be debited to the patent account?

$20,000 + $800 = $20,800.

Lopez Corp. incurred $420,000 of research and development costs to develop a product for which a patent was granted on January 2, 2002. Legal fees and other costs associated with registration of the patent totaled $80,000. On March 31, 2007, Lopez paid $120,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2007 should be

$80,000 + $120,000 = $200,000.

Jeff Corporation purchased a limited-life intangible asset for $120,000 on May 1, 2006. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2008

($120,000 ÷ 10) × 2 2/3 = $32,000

Which of the following costs should be excluded from research and development expense?

Cost of marketing research for a new product

Operating losses incurred during the start-up years of a new business should be

accounted for and reported like the operating losses of any other business.

If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as

depreciation deducted as part of research and development costs

Costs incurred internally to create intangibles are

expensed as incurred.

Under current accounting practice, intangible assets are classified as

limited-life or indefinite-life.

A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2005 for $1,200,000. The company uses straight-line amortization for patents. On January 2, 2007, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2007 is

$1,200,000 - [($1,200,000 ÷ 6) × 2] = $800,000. $800,000 ÷ 20 = $40,000

During 2007, Bond Company purchased the net assets of May Corporation for $950,000. On the date of the transaction, May had $300,000 of liabilities. The fair value of May's assets when acquired were as follows: Current assets $ 540,000 Noncurrent assets 1,260,000 $1,800,000 How should the $550,000 difference between the fair value of the net assets acquired ($1,500,000) and the cost ($950,000) be accounted for by Bond?

$1,500,000 - $950,000 =$550,000 difference should be recognized as an extraordinary gain.

Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?

$1,700,000 - $1,450,000 = $250,000 $375,000 - $250,000 = $125,000.

Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom's market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

$10,000,000 - [($10,000,000 ÷ 10) × 2] = $8,000,000. Since $8,000,000 > ($800,000 × 8), patent is reported at $4,800,000 (present value of cash flows.

Riley Co. incurred the following costs during 2007: Modification to the formulation of a chemical product $160,000 Trouble-shooting in connection with breakdowns during commercial production 150,000 Costs of marketing research for new product 200,000 Seasonal or other periodic design changes to existing products 185,000 Laboratory research aimed at discovery of new technology 215,000 In its income statement for the year ended December 31, 2007, Riley should report research and development expense of

$160,000 + $200,000 + $215,000 = $575,000.

Martin Inc. incurred the following costs during the year ended December 31, 2007: Laboratory research aimed at discovery of new knowledge $180,000 Costs of testing prototype and design modifications 45,000 Quality control during commercial production, including routine testing of products 270,000 Construction of research facilities having an estimated useful life of 6 years but no alternative future use 360,000 The total amount to be classified and expensed as research and development in 2007 is

$180,000 + $45,000 + $360,000 = $585,000.

ELO Corporation purchased a patent for $180,000 on September 1, 2006. It had a useful life of 10 years. On January 1, 2008, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2008?

$180,000 - [($180,000 ÷ 10) × 1 1/3] = $156,000. ($156,000 + $44,000) ÷ 5 = $40,000.

January 2, 2004, Koll, Inc. purchased a patent for a new consumer product for $180,000. At the time of purchase, the patent was valid for 15 years; however, the patent's useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2007, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2007, assuming amortization is recorded at the end of each year?

$180,000 - [($180,000 ÷ 10) × 3] = $126,000.

On May 5, 2007, Flynn Corp. exchanged 2,000 shares of its $25 par value treasury common stock for a patent owned by Denson Co. The treasury shares were acquired in 2006 for $45,000. At May 5, 2007, Flynn's common stock was quoted at $32 per share, and the patent had a carrying value of $55,000 on Denson's books. Flynn should record the patent at

$2,000 × $32 = $64,000.

The general ledger of Vance Corporation as of December 31, 2007, includes the following accounts: Copyrights $ 20,000 Deposits with advertising agency (will be used to promote goodwill) 27,000 Discount on bonds payable 67,500 Excess of cost over fair value of identifiable net assets of Acquired subsidiary 390,000 Trademarks 90,000 In the preparation of Vance's balance sheet as of December 31, 2007, what should be reported as total intangible assets

$20,000 + $390,000 + $90,000 = $500,000.

Maris Corporation acquired a patent on May 1, 2008. Maris paid cash of $25,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?

$25,000 + $1,000 = $26,000.

Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Fleming record in 2008?

$3,400,000 - $2,900,000 = $500,000 $750,000 - $500,000 = $250,000.

Ely Co. bought a patent from Baden Corp. on January 1, 2007, for $300,000. An independent consultant retained by Ely estimated that the remaining useful life is 30 years. Its unamortized cost on Baden 's accounting records was $150,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2007?

$300,000 ÷ (20 - 5) = $20,000

During 2007, Leon Co. incurred the following costs: Testing in search for process alternatives $ 350,000 Costs of marketing research for new product 250,000 Modification of the formulation of a process 510,000 Research and development services performed by Beck Corp. for Leon 325,000 In Leon's 2007 income statement, research and development expense should b

$350,000 + $510,000 + $325,000 = $1,185,000.

Hall Co. incurred research and development costs in 2007 as follows: Materials used in research and development projects $ 450,000 Equipment acquired that will have alternate future uses in future research and development projects 3,000,000 Depreciation for 2007 on above equipment 300,000 Personnel costs of persons involved in research and development projects 750,000 Consulting fees paid to outsiders for research and development projects 150,000 Indirect costs reasonably allocable to research and development projects 225,000 $4,875,000 The amount of research and development costs charged to Hall's 2007 income statement should be

$4,875,000 - $3,000,000 = $1,875,000

LRF Corporation purchased a patent for $450,000 on September 1, 2006. It had a useful life of 10 years. On January 1, 2008, LRF spent $110,000 to successfully defend the patent in a lawsuit. LRF feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2008?

$450,000 - [($450,000 ÷ 10) × 1 1/3] = $390,000. ($390,000 + $110,000) ÷ 5 = $100,000

Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining's market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

$5,000,000 - [($5,000,000 ÷ 10) × 2] = $4,000,000

On January 2, 2007, Klein Co. bought a trademark from Royce, Inc. for $500,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce's books was $400,000. In Klein's 2007 income statement, what amount should be reported as amortization expense?

$500,000 ÷ 10 = $50,000.

Distributor Company purchases Supplier Company for $800,000 cash on January 1, 2007. The book value of Supplier Company's net assets, as reflected on its December 31, 2006 balance sheet is $620,000. An analysis by Distributor on December 31, 2006 indicates that the fair value of Supplier's tangible assets exceeded the book value by $60,000, and the fair value of identifiable intangible assets exceeded book value by $45,000. How much goodwill should be recognized by Distributor Company when recording the purchase of Supplier Company

$620,000 + $60,000 + $45,000 = $725,000. $800,000 - $725,000 = $75,000.

The following information is available for Barkley Company's patents: Cost $1,720,000 Carrying amount 860,000 Expected future net cash flows 800,000 Fair value 640,000 Barkley would record a loss on impairment of

$860,000 - $640,000 = $220,000

Shangra-La Company incurred $1,500,000 ($400,000 in 2007 and $1,100,000 in 2008) to develop a computer software product. $500,000 of this amount was expended before technological feasibility was established in early 2008. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2008 - $1,000,000; 2009 - $1,000,000; 2010 - $800,000; 2011 - $800,000; and 2012 - $400,000. What portion of the $1,500,000 computer software costs should be expensed in 2008?

($1,500,000 - $500,000) × ($1,000,000 ÷ $4,000,000) = $250,000. $250,000 + ($500,000 - $400,000) = $350,000

Rich Corporation purchased a limited-life intangible asset for $180,000 on May 1, 2006. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2008?

($180,000 ÷ 10) × 2 2/3 = $48,000

Pesavento Company incurred $3,000,000 ($800,000 in 2007 and $2,200,000 in 2008) to develop a computer software product. $1,000,000 of this amount was expended before technological feasibility was established in early 2008. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2008 - $2,000,000; 2009 - $2,000,000; 2010 - $1,600,000; 2011 - $1,600,000; and 2012 - $800,000. What portion of the $3,000,000 computer software costs should be expensed in 2008?

($3,000,000 - $1,000,000) × ($2,000,000 ÷ $8,000,000) = $500,000. $500,000 + ($1,000,000 - $800,000) = $700,000.

Blue Sky Company's 12/31/08 balance sheet reports assets of $5,000,000 and liabilities of $2,000,000. All of Blue Sky's assets' book values approximate their fair value, except for land, which has a fair value that is $300,000 greater than its book value. On 12/31/08, Horace Wimp Corporation paid $5,100,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?

($5,000,000 + $300,000) - $2,000,000 = $3,300,000 $5,100,000 - $3,300,000 = $1,800,000

Turner Company's 12/31/08 balance sheet reports assets of $6,000,000 and liabilities of $2,500,000. All of Turner's assets' book values approximate their fair value, except for land, which has a fair value that is $400,000 greater than its book value. On 12/31/08, Benedict Corporation paid $6,100,000 to acquire Turner. What amount of goodwill should Benedict record as a result of this purchase?

($6,000,000 + $400,000) - $2,500,000 = $3,900,000. $6,100,000 - $3,900,000 = $2,200,000.

MaBelle Corporation incurred the following costs in 2008: Acquisition of R&D equipment with a useful life of4 years in R&D projects $600,000 Start-up costs incurred when opening a new plant 140,000 Advertising expense to introduce a new product 700,000 Engineering costs incurred to advance a product to full production stage 350,000 What amount should MaBelle record as research & development expense in 2008?

($600,000 ÷ 4) + $350,000 = $500,000

In January, 2002, Findley Corporation purchased a patent for a new consumer product for $720,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2007 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2007, assuming amortization is recorded at the end of each year?

($720,000 ÷ 10) × 5 = $360,000

On January 1, 2003, Unruh Company purchased a copyright for $800,000, having an estimated useful life of 16 years. In January 2007, Unruh paid $120,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2007, should be

($800,000 - [($800,000 ÷ 16) × 4] = $600,000 ($600,000 + $120,000) ÷ 12 = $60,000.

Leeper Corporation incurred the following costs in 2008: Acquisition of R&D equipment with a useful life of 4 years in R&D projects $800,000 Start-up costs incurred when opening a new plant 140,000 Advertising expense to introduce a new product 700,000 Engineering costs incurred to advance a product to full production stage 500,000 What amount should Leeper record as research & development expense in 2008?

($800,000 ÷ 4) + $500,000 = $700,000.

On June 30, 2007, Cey, Inc. exchanged 2,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2007 at a cost of $55,000. At the exchange date, Seely common stock had a fair value of $45 per share, and the patent had a net carrying value of $110,000 on Gore's books. Cey should record the patent at

2,000 × $45 = $90,000.

In 2006, Edwards Corporation incurred research and development costs as follows: Materials and equipment $ 80,000 Personnel 120,000 Indirect costs 150,000 $350,000 These costs relate to a product that will be marketed in 2007. It is estimated that these costs will be recouped by December 31, 2009. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2006?

350,000

Which of the following would not be considered an R & D activity?

Adaptation of an existing capability to a particular requirement or customer's need.

Which of the following costs of goodwill should be amortized over their estimated useful lives? Costs of goodwill from Costs of developing a business combination goodwill internally accounted for as a purchase

No No

Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are) Recoverability Test Fair Value Test

No Yes

Which of the following is not an intangible asset?

Research and development costs

Which of the following research and development related costs should be capitalized andcamortized over current and future periods?

Research and development general laboratory building which can be put to alternative uses in the future

General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product's books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division's assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?

Since $2,000,000 > $1,700,000, $0 impairment.

T/F: If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.

True

T/F: If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized.

True

T/F: In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.

True

T/F: Internally generated goodwill should not be capitalized in the accounts.

True

T/F: Limited-life intangibles are amortized by systematic charges to expense over their useful life.

True

T/F: Periodic alterations to existing products are an example of research and development costs.

True

T/F: Research and development costs are recorded as an intangible asset if it is felt they will provide economic benefits in future years

True

T/F: The cost of acquiring a customer list from another company is recorded as an intangible asset

True

Wildcat Baseball Company had a player contract with Carter that was recorded in its accounting records at $5,800,000. Aggie Baseball Company had a player contract with Jeter that was recorded in its accounting records at $5,600,000. Wildcat traded Carter to Aggie for Jeter by exchanging each player's contract. The fair value of each contract was $6,000,000. What amount should be shown in the accounting records after the exchange of player contracts?

Wildcat - $6,000,000 - $200,000 (deferred gain) = $5,800,000. Aggie - $6,000,000 - $400,000 (deferred gain) = $5,600,000.

Kerr Company purchased a patent on January 1, 2006 for $180,000. The patent had a remaining useful life of 10 years at that date. In January of 2007, Kerr successfully defends the patent at a cost of $81,000, extending the patent's life to 12/31/18. What amount of amortization expense would Kerr record in 2007

[($180,000 - $18,000) + $81,000] ÷ 12 = $20,250.

The cost of an intangible asset includes all of the following except

all of these are included.

Riser Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2007 a patent on a competing product which was originally issued on January 10, 2003. Because of its unique plant, Riser Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be

amortized over a maximum period of 11 years

The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should be

amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.

Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as

an extraordinary gain.

The intangible asset goodwill may be

capitalized only when purchased.

A loss on impairment of an intangible asset is the difference between the asset's

carrying amount and its fair value.

The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life. These costs should be

expensed as incurred

The reason goodwill is sometimes referred to as a master valuation account is because

it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.

Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be charged to

patents and amortized over the remaining useful life of the patent.

The total amount of patent cost amortized to date is usually

reflected as credits in the Patent account.

Goodwill

represents a unique asset in that its value can be identified only with the business as a whole.

T/F: Internally created intangibles are recorded at cost.

False

T/F: Internally generated goodwill associated with a business may be recorded as an asset when a firm offer to purchase that business unit has been received

False

T/F: Internally generated intangible assets are initially recorded at fair value.

False

T/F: Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent

False

T/F: Amortization of limited-life intangible assets should not be impacted by expected residual values.

False

T/F: Contra accounts must be reported for intangible assets in a manner similar to accumulated depreciation and property, plant, and equipment.

False

T/F: If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period.

False

T/F: Intangible assets derive their value from the right (claim) to receive cash in the future.

False

T/F: The cost of purchased patents should be amortized over the remaining legal life of the patent.

False

T/F: The same recoverability test that is used for impairments of property, plant, and equipment is used for impairments of indefinite-life intangibles.

False

Purchased goodwill should

not be amortized

How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?

Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.

When a patent is amortized, the credit is usually made to

the Patent account.

Factors considered in determining an intangible asset's useful life include all of the following except

the amortization method used.

The carrying amount of an intangible is

the asset's acquisition cost less the total related amortization recorded to date.

Which of the following methods of amortization is normally used for intangible assets?

Straight-line