Ch 12

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $381,490. The Johnson Division's net assets, including the goodwill, have a carrying amount of $781,110. The fair value of the division is estimated to be $1,018,500. Prepare Waters' journal entry to record impairment of the goodwill.

Because the fair value of the division exceeds the carrying amount of the assets, goodwill is not considered to be impaired. No entry is necessary.

Sinise Industries acquired two copyrights during 2014. One copyright related to a textbook that was developed internally at a cost of $9,920. This textbook is estimated to have a useful life of 4 years from September 1, 2014, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2014, for $20,250. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise's balance sheet as of December 31, 2014?

Copyright No. 1 for $9,920 should be expensed and therefore not reported on the balance sheet. Copyright No. 2 for $20,250 should be capitalized. Because the useful life is indefinite, copyright No. 2 should be tested at least annually for impairment using a fair value test. It would be reflected on the December 31, 2014 balance sheet at its cost of $20,250.

Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $200,000 on April 1, 2014. The franchise grants Gershwin the right to sell certain products and services for a period of 10 years. Prepare Gershwin's April 1 journal entry and December 31 adjusting entry.

Franchises.........200000 CR-Cash...............................200000 Amortization Expense......15000 CR-Franchises.........................................15000 Amortization Expense = ($200,000 x 1/10 x 9/12) = $15,000

Kenoly Corporation owns a patent that has a carrying amount of $328,050. Kenoly expects future net cash flows from this patent to total $202,110. The fair value of the patent is $124,230. Prepare Kenoly's journal entry to record the loss on impairment.

Loss on Impairment.........203820 CR-Patents...............................................203820 Loss on Impairment = ($328,050 - $124,230) = $203,820

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $392,580. The Johnson Division's net assets, including the goodwill, have a carrying amount of $780,370. The fair value of the division is estimated to be $711,060 and the implied goodwill is $323,270. Prepare Waters' journal entry to record impairment of the goodwill.

Loss on Impairment........69310 CR-Goodwill.............................................69310

Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $59,310. The patent has a remaining legal life of 16 years. Celine Dion feels the patent will be useful for 10 years. Assume that at January 1, 2016, the carrying amount of the patent on Celine Dion's books is $47,448. In January, Celine Dion spends $18,312 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of 2023. Prepare the journal entries to record the $18,312 expenditure and 2016 amortization

Patents...... 18312 CR-Cash..............................18312 (To record expenditure of patents) Amortization Expense...8220 CR-Patents..........................................8220 (To record amortization of patents) Patents = [($47,448 + $18,312) x 1/8] = $8,220

Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $61,290. The patent has a remaining legal life of 15 years. Celine Dion feels the patent will be useful for 10 years. Prepare Celine Dion's journal entries to record the purchase of the patent and 2014 amortization

Patents...... 61290 CR-Cash...............................61290 (To record purchase of patents) Amortization Expense.....6129 CR-Patents..........................................6129 (To record amortization of patents) Patents = ($61,290 x 1/10) = $6,129

On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $704,300. At the time of purchase, Aumont's balance sheet showed assets of $618,600, liabilities of $190,850, and owners' equity of $427,750. The fair value of Aumont's assets is estimated to be $826,850. Compute the amount of goodwill acquired by Winans. Value assigned to goodwill =

Purchase price $704,300 Fair value of assets ($826,850) Fair value of liabilities (190,850) Fair value of net assets 636,000 Value assigned to goodwill $68,300

Treasure Land Corporation incurred the following costs in 2014. Cost of laboratory research aimed at discovery of new knowledge $121,210 Cost of testing in search for product alternatives 144,010 Cost of engineering activity required to advance the design of a product to the manufacturing stage 208,920 $474,140

Research and Development Expense....474140 CR- Cash...................................................................474140

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 fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. Proper accounting treatment by Easton is to report the excess amount as a. a gain. b. part of current income in the year of combination. c. a deferred credit and amortize it. d. paid-in capital.

a

One factor that is not considered in determining the useful life of an intangible asset is a. salvage value. b. provisions for renewal or extension. c. legal life. d. expected actions of competitors.

a

Operating losses incurred during the start-up years of a new business should be a. accounted for and reported like the operating losses of any other business. b. written off directly against retained earnings. c. capitalized as a deferred charge and amortized over five years. d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

a

The intangible asset goodwill may be a. capitalized only when purchased. b. capitalized either when purchased or created internally. c. capitalized only when created internally. d. written off directly to retained earnings.

a

When a patent is amortized, the credit is usually made to a. the Patent account. b. an Accumulated Amortization account. c. a Deferred Credit account. d. an expense account.

a

Which characteristic is not possessed by intangible assets? a. Physical existence. b. Short-lived. c. Result in future benefits. d. Expensed over current and/or future years

a

Which of the following intangible assets should be shown as a separate item on the balance sheet? a. Goodwill b. Franchise c. Patent d. Trademark

a

Which of the following research and development related costs should be capitalized and depreciated over current and future periods? a. Research and development general laboratory building which can be put to alternative uses in the future b. Inventory used for a specific research project c. Administrative salaries allocated to research and development d. Research findings purchased from another company to aid a particular research project currently in process

a

Which of the following would not be considered an R & D activity? a. Adaptation of an existing capability to a particular requirement or customer's need. b. Searching for applications of new research findings. c. Laboratory research aimed at discovery of new knowledge. d. Conceptual formulation and design of possible product or process alternatives.

a

A loss on impairment of an intangible asset is the difference between the asset's a. carrying amount and the expected future net cash flows. b. carrying amount and its fair value. c. fair value and the expected future net cash flows. d. book value and its fair value.

b

Goodwill may be recorded when: a. it is identified within a company. b. one company acquires another in a business combination. c. the fair value of a company's assets exceeds their cost. d. a company has exceptional customer relations.

b

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 a. research and development expense in the period(s) of construction. b. depreciation deducted as part of research and development costs. c. depreciation or immediate write-off depending on company policy. d. an expense at such time as productive research and development has been obtained from the facility.

b

Research and development costs a. are intangible assets. b. may result in the development of a patent. c. are easily identified with specific projects. d. all of the above.

b

The carrying amount of an intangible is a. the fair value of the asset at a balance sheet date. b. the asset's acquisition cost less the total related amortization recorded to date. c. equal to the balance of the related accumulated amortization account. d. the assessed value of the asset for intangible tax purposes.

b

The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years? a. 6 b. 5 c. 4 d. 3

b

The reason goodwill is sometimes referred to as a master valuation account is because a. it represents the purchase price of a business that is about to be sold. b. it is the difference between the fair value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business. c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation. d. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.

b

Under current accounting practice, intangible assets are classified as a. amortizable or unamortizable. b. limited-life or indefinite-life. c. specifically identifiable or goodwill-type. d. legally restricted or goodwill-type.

b

Which intangible assets are amortized? Limited-Life Indefinite-Life a. Yes Yes b. Yes No c. No Yes d. No No

b

Which of the following is not an intangible asset? a. Trade name b. Research and development costs c. Franchise d. Copyrights

b

Which of the following methods of amortization is normally used for intangible assets? a. Sum-of-the-years'-digits b. Straight-line c. Units of production d. Double-declining-balance

b

Broadway Corporation was granted a patent on a product on January 1, 2001. To protect its patent, the corporation purchased on January 1, 2012 a patent on a competing product which was originally issued on January 10, 2008. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be a. amortized over a maximum period of 20 years. b. amortized over a maximum period of 16 years. c. amortized over a maximum period of 9 years. d. expensed in 2012.

c

Buerhle 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 a. Yes............................ Yes b. Yes............................... No c No................................. Yes d. No............................... No

c

Capitalized costs incurred to develop internal use computer software should be amortized using the: a. percent-of-revenue approach. b. percent-of-completion approach. c. straight-line approach. d. accelerated amortization approach

c

Companies should test indefinite life intangible assets at least annually for: a. recoverability. b. amortization. c. impairment. d. estimated useful life.

c

Costs incurred internally to create intangibles are a. capitalized. b. capitalized if they have an indefinite life. c. expensed as incurred. d. expensed only if they have a limited life.

c

In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as: a. other assets. b. indirect costs. c. goodwill. d. direct costs.

c

Intangible assets are reported on the balance sheet a. with an accumulated depreciation account. b. in the property, plant, and equipment section. c. separately from other assets. d. none of the above

c

The total amount of patent cost amortized to date is usually a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patents account. b. shown in the current income statement. c. reflected as credits in the Patents account. d. reflected as a contra property, plant and equipment item.

c

When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized? a. Attorney fees. b. Consulting fees. c. Research and development fees. d. Design costs.

c

Which of the following characteristics do intangible assets possess? a. Physical existence. b. Claim to a specific amount of cash in the future. c. Long-lived. d. Held for resale

c

Which of the following costs should be excluded from research and development expense? a. Modification of the design of a product b. Acquisition of R & D equipment for use on a current project only c. Cost of marketing research for a new product d. Engineering activity required to advance the design of a product to the manufacturing stage

c

Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project? a. Patent. b. Copyright. c. Goodwill. d. Brand Name.

c

Which of the following intangible assets should not be amortized? a. Copyrights b. Customer lists c. Perpetual franchises d. All of these intangible assets should be amortized

c

Which of the following is considered research and development costs? a. Planned search or critical investigation aimed at discovery of new knowledge. b. Translation of research findings or other knowledge into a plan or design for a new product or process. c. Neither a nor b. d. Both a and b.

d

Capitalized costs incurred while developing computer software to be sold should be amortized using the: a. lower of the straight-line method or the percent-of-revenue method. b. higher of the percent-of-revenue method or the percent-of-completion method. c. lower of the percent-of-revenue method or the percent-of-completion method. d. higher of the straight-line method or the percent-of-revenue method

d

Factors considered in determining an intangible asset's useful life include all of the following except a. the expected use of the asset. b. any legal or contractual provisions that may limit the useful life. c. any provisions for renewal or extension of the asset's legal life. d. the amortization method used.

d

How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement? a. Must be capitalized when incurred and then amortized over their estimated useful lives. b. Must be expensed in the period incurred. c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved. d. 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.

d

Purchased goodwill should a. be written off as soon as possible against retained earnings. b. be written off as soon as possible as an extraordinary item. c. be written off by systematic charges as a regular operating expense over the period benefited. d. not be amortized.

d

The cost of an intangible asset includes all of the following except a. purchase price. b. legal fees. c. other incidental expenses. d. all of these are included.

d

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 a. charged off in the current period. b. amortized over the legal life of the purchased patent. c. added to factory overhead and allocated to production of the purchaser's product. d. 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.

d

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 a. capitalized and never amortized. b. capitalized and amortized over 40 years. c. capitalized and amortized over 5 years. d. expensed as incurred.

d

The recoverability test is used to determine any impairment loss on which of the following types of intangible assets? a. Indefinite life intangibles other than goodwill. b. Indefinite life intangibles. c. Goodwill. d. Limited life intangibles.

d

When a new company is acquired, which of these intangible assets, unrecorded on the acquired company's books, might be recorded in addition to goodwill? a. A brand name. b. A patent. c. A customer list. d. All of the above.

d

Which of the following costs incurred internally to create an intangible asset is generally expensed? a. Research and development costs. b. Filing costs. c. Legal costs. d. All of the above.

d

Which of the following costs should be capitalized in the year incurred? a. Research and development costs. b. Costs to internally generate goodwill. c. Organizational costs. d. Costs to successfully defend a patent.

d

Which of the following does not describe intangible assets? a. They lack physical existence. b. They are financial instruments. c. They provide long-term benefits. d. They are classified as long-term assets

d

Which of the following is considered research and development costs? a. Planned search or critical investigation aimed at discovery of new knowledge. b. Translation of research findings or other knowledge into a plan or design for a new product or process. c. Translation of research findings or other knowledge into a significant improvement of an existing product. d. all of the above

d

Which of the following is often reported as an extraordinary item? a. Amortization expense. b. Impairment losses for intangible assets. c. Research and development costs. d. None of the above.

d

Which of the following is often reported as part of discontinued operations? a. Amortization expense. b. Impairment losses for intangible assets other than goodwill. c. Impairment losses on goodwill. d. None of the above.

d

Which of the following principles best describes the current method of accounting for research and development costs? a. Associating cause and effect b. Systematic and rational allocation c. Income tax minimization d. Immediate recognition as an expense

d

Which of the following should be reported under the "Other Expenses and Losses" section of the income statement? a. Goodwill impairment losses. b. Trade name amortization expense. c. Patent impairment losses d. None of the above.

d

Which of the following would be considered research and development? a. Routine efforts to refine an existing product. b. Periodic alterations to existing production lines. c. Marketing research to promote a new product. d. Construction of prototypes.

d

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 a. patents and amortized over the legal life of the patent. b. legal fees and amortized over 5 years or less. c. expenses of the period. d. patents and amortized over the remaining useful life of the patent

d