Intangible & Goodwill - Chapter 12

What are artistic-related intangible asset activities? Give examples

Artistic-related intangible assets represent the right to reproduce, copy, or perform artistic works. ex: copyrights

What are customer related intangible asset activities? Give examples

Customer-related intangible assets arise from the relationship between a company and its customers. Ex: customer lists, order/production backlogs, and customer relationships

What is the JE for impairment loss?

Debit: Loss on Impairment of Goodwill Credit: Goodwill

True or False: An unidentifiable intangible asset can be separated from the entity and be sold, transferred, rented, or exchanged.

False

True or False: Research and development costs related to a company's own business activities should be capitalized as incurred.

False

True or False: If a company's internally-developed goodwill is impaired, a reported loss on its income statement should be recorded.

False: Only purchased intangibles can have a recorded loss due to impairment.

Finite intangible assets are _________ (unidentifiable/identifiable) assets.

Identifiable

Which type of intangible assets appear on the balance sheet?

ONLY ones that are outright purchased

When do you stop expensing and start amortizing the software development?

When technology feasibility is established

Purchased intangible assets are _______, while internally developed intangible assets are _______. What's the exception here?

capitalized; expensed Internally developed intangible assets that are identifiable are capitalized; all else (R&D or unidentifiable assets) are expensed.

Before testing for impairments, a company should do what?

company should be sure that all other asset and liability adjustments have been made (ex: LCM, asset write-downs, estimating bad debts).

What does the JE look like with an indeterminable life?

cost isn't amortized so you go through the process of testing if it has a determinable life

When can intangible assets be amortized?

either: - if a legal battle has been won - if purchased outright with a determinable life (finite life)

GAAP requires that the costs of start-up activities be ______ as incurred.

expensed

What do you call the test to determine the severity of impairment?

fair value test

Customer-related intangible assets are generally considered to have a _____ life (finite/infinite) and are therefore _________ (expensed/amortized) using ______.

finite; amortized; straight-line basis

__________ is defined and measured as the excess of the purchase price over the fair value of the acquired company's identifiable net assets, only recognized when one company purchases another company

goodwill

The fair value is reported in the _____. Impairment on the other hand is reported on the _______.

intangible aspect of the balance sheet; on the income statement

What do you call the test to see if impairment exists?

recoverability test

Which of the two impairment tests is qualitative? What do companies call this analysis? Explain

recoverability; "more likely than not" analysis If "more likely than not" the fair value > CV/BV, no test is needed

_______ is a the planned search or critical investigation aimed at discovering new knowledge that hopefully will be useful in developing or improving a new product or process or in significantly improving an existing product or process.

research

What do most companies use for amortization? What does the JE look like with a determinable life?

straight-line method; JE: Amortization Expense (Debit) ___________ <--Intangible Asset (Credit)

When is technology feasibility established?

the date the company completes a detailed program design or, in its absence, when it completes a working model of a product.

Goodwill is considered a ______ (unidentifiable/identifiable) assets. This is because _____.

unidentifable; b/c it has an indefinite life

True or False: The legal costs incurred to file for a patent on an internally-developed product should be capitalized.

True

Strummer Corp. was organized in late 20X6 and began retail operations in early 20X7. Prior to the start of operations, it incurred a variety of costs which are indicated below. Required: Indicate which account should be debited in the journal entry to record each of these costs. a) Cost of hiring new employees b) Attorney fees in connection with the organization of the company c) Franchise fee costs d) Advertising to promote the opening of the business e) Filing fees in the states in which it will do business f) Costs of leasehold improvements on leased property g) Costs of inventory purchased for resale

a & b) Start-up Expense c) Franchisee d &e) Start-up Expense f) leasehold improvements g) inventory

Below are examples of common types of purchased intangible assets. For each intangible asset, indicate whether it is an example of a marketing-related, customer-related, artistic-related, contract-based, or technology-based intangible. a) franchises b) patent c) internet domain name d) copyright e) trademark f) licensing and royalty agreements g) customer lists

a) franchises → contract-based b) patent → technology-based c) internet domain name → marketing-related d) copyright → artistic-related e) trademark → marketing-related f) licensing and royalty agreements → contract-based g) customer lists → customer-related

What are technology-based intangible asset activities? Give examples

Technology-based intangible assets are assets that represent technological advancement and provide economic benefits to companies through either legal or contractual protection Ex: patent

Identifiable intangible assets can be classified into five basic categories related to:

- Marketing - Customers - Artistic works - Contracts - Technology

How is cost allocated with franchisees?

A franchisee capitalizes the initial cost it pays to acquire the franchise or license, but it expenses any continuing fees

What are contract-based intangible asset activities? Give examples

Contract-based intangible assets represent the value of rights arising from contractual agreements. Ex: franchise agreements Licensing and royalty agreements Construction permits Broadcast rights Use rights

T/F: GAAP requires start-up costs, such as accounting fees incurred to form a new company, to be capitalized and amortized over the expected life of the new business.

False

True or False: Software development costs incurred after technological feasibility is established but before the software's general release should be expensed as incurred.

False

During 20X6, Bluebeard Corp. had the following transactions occur: Incurred costs of $847,000 on the research and development of a new machine to use in its manufacturing facility. Incurred patent application costs of $10,000, and Incurred $23052 in legal costs related to the successful defense of a patent infringement lawsuit. Question: Assuming none of the patent's cost has been amortized, what should be the capitalized cost of the patent at the end of 20X6?

Feedback: The initial capitalized cost of the patent is equal to the patent application costs plus the legal costs to successful defend. The R&D costs will be expensed as incurred. The correct answer is: 33052

Because goodwill has an indefinite life, the only way for cost to be allocated away from balance sheet and onto the income statement is through ___________. This applies to _________ (company type).

impairment; publicly held corporation

What are examples of finite intangible assets?

- patents - copyrights - licensee - franchisee - computer software

What is entailed in the recoverability test?

you see if: estimated Fair Value < Book Value (CV) (including goodwill during both sides of the test)

Describe patent

- Is an exclusive right granted by the federal government, giving the owner control of the manufacture, sale, or other use of the invention - Is granted for 20 years from the date of the filing - Is an intangible asset that cannot be renewed because it has a finite life

During 20X6, Daly Corp., a calendar year-end company, incurred and paid $70,000 for start-up costs. Required: Using the drop-down menus below, indicate how these start-up costs affect each component of the balance sheet equation. - Assets: - Liabilities: - Stockholder's Equity:

- Assets: decrease - Liabilities: n/e - Stockholder's Equity: decrease

When a company records amortization on an intangible asset, what is the effect on the balance sheet equation? Required: Using the drop-down menus below, indicate how these start-up costs affect each component of the balance sheet equation. - Assets: - Liabilities: - Stockholder's Equity:

- Assets: decrease - Liabilities: n/e - Stockholder's Equity: decrease

When should publicly held companies review goodwill for impairment? How is identifiable assets different from goodwill? What makes it so complicated?

- Review goodwill annually - identifiable assets are usually sold separately from other identifiable assets, which helps establish FV - goodwill can't be separated, hence making it more complicated.

What are included as part of R&D

- lab research aimed at discovery of new knowledge - searching for applications of new findings - conceptual formulation and design of possible products or process alternatives - testing in search for OR evaluation of product process or alternatives - design, construction, and testing of preproduction prototypes & models - design of tools, jigs, and models involving new technology - design, construction, and operation of pilot plant not of scale for economic feasibility to commercial production - engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready to manufacture.

What are examples of infinite intangible assets?

- trademark - goodwill - internet domain names

What is entailed in the fair value test?

1) Determine Implied goodwill: (Fair value of reporting unit w/ good will MINUS fair value of IDENTIFIABLE net assets of reporting units) 2) Compare Implied Goodwill vs. Book Value of Goodwill; the greater amount is Loss on Impairment

Patel Corp. has current and long-term assets on its balance sheet. Among its various long-term assets, it has a copyright and goodwill. Assume it is Patel's year-end and time for it to do its adjustments. Patel will need to decide if certain adjustments should be completed before others. Required: Indicate whether each of the following statements is true or false. 1) The company should test for and, if applicable, record the impairment of its machinery before recording its depreciation for the year. 2) The company should compute and record its estimate of bad debts for the year before testing for impairment of its goodwill. 3) The company should compute and record income tax expense for the year after it records accrued interest revenue and accrued interest expense. 4) The company should test for and, if applicable, record the impairment of its copyright after testing for the impairment of its goodwill.

1) False 2) True 3) True 4) False

Aggy Corp. purchased a patent several years ago for $500,000. As of 12/31/X6, amortization totaling $250,000 on the patent has been taken. At the end of 20X6, Iggy believes the future cash flows generated by the patent will be $230,000. It estimates the fair value of the patent to be $220,000. Question: How much of an impairment loss, if any, should Iggy record in 20X6 related to this patent? Do not include decimals or cents in your response.

30000; Feedback: An intangible asset with a finite life is considered to be impaired if its book value exceeds the estimated future cash flows. The amount of the impairment is the amount by which the book value exceeds the asset's fair value.

Below are various transactions and adjustments Grainger Corp., a calendar year-end company, had during December of 20X6. Required: Prepare the journal entry for each transaction or adjustment in the spaces below. Dec 1: Made a cash purchase of $50,000 for materials for use in future R&D activities Dec 31: Used materials costing $35,000 for R&D activities.

Dec 1: (D) Materials Inventory $50k (C) Cash $50k Dec 31: (D) R&D Expense $35k (C) Materials Inventory $35k

Below are various transactions and adjustments Grainger Corp., a calendar year-end company, had during December of 20X6. Required: Prepare the journal entry for each transaction or adjustment in the spaces below. Dec 1: Issued a $100,000, 12%, one-year note for the purchase of machinery to be used for multiple R&D activities. The note's principal plus interest are due when the note matures. The machinery is estimated to have a 10-year useful life with no residual value. The company will use the straight-line method. Dec 31: Recorded accrued interest on the above note. Dec 31: Recorded depreciation on the above machine.

Dec 1: (D): Cash $100k (C): NP $100k Dec 31: Accrued interest = $100,000 x .12 x 1/12 = 1,000 (D): Interest Expense **$1000 (C): Interest Payable $1000 **Accrued interest = $100,000 x .12 x 1/12 = 1,000 Dec 31: (D) R&D Expense **$833 (C) Accumulated Depreciation $833 **Depreciation expense = (100,000 ÷ 10 years) x 1/12 = 833.33 or 833 when rounded

Below are various transactions and adjustments Grainger Corp., a calendar year-end company, had during December of 20X6. Give me the JE: Dec 30: Paid R&D employees their net wages. These wages had not been previously recorded. Additional information for these wages is as follows: Gross wages = $75,000 Federal Income Taxes Withheld = $18,000 FICA Taxes Withheld = $6,000 Dec 31: Accrued wages of $7,000 for work performed by R&D employees during 20X6 to be paid next year.

Dec 30 - (D) R&D Expense: $75k (C) Cash $51k (C) Federal Income Taxes Withheld Payable $18k (C) FICA Taxes W/held Payable: $6k ------------------------ Dec. 31: R&D Expense $7K Wages Payable $7k

What are marketing related intangible asset activities? Give examples

Marketing-related intangible assets are resources used to market or promote a company's products or services. Ex: trademark and internet domain

True or False: Assume a company has already established that its goodwill is impaired. Under the current impairment rules, the amount of the impairment is equal to the amount by which the goodwill's carrying value exceeds its implied value.

True

For each type, indicate whether the intangible asset's capitalized cost is or is not subject to amortization. a) The capitalized cost of purchased identifiable intangibles with a finite life b) The capitalized cost of purchased identifiable intangibles with an indefinite life

a) is subject to amortizaiton b) isn't subject to amortization

You were asked to read an article on how private companies may account for their goodwill. Question: What is the maximum number of years a private company with no public filing requirement may elect to amortize its goodwill over? Select one: a. 8 years b. 5 years c. 10 years d. 20 years e. 15 years f. 50 years g. 4 years

c. 10 years

Intangible assets fall into two broad categories - those that are purchased and those that are internally developed. Which of the following statements is true with respect to whether their acquisition or development costs should be capitalized? Select one: a. Only internally developed intangible assets should have their acquisition and development costs capitalized. b. Neither purchased nor internally developed intangible assets should have their acquisition and development costs capitalized. c. Both purchased and internally developed intangible assets should have their acquisition and development costs capitalized. d. Only purchased intangible assets should have their acquisition and development costs capitalized.

d)

_______ is the translation of research findings into a plan or design for a new product or process or for significantly improving an existing product or process.

development

Lowman Corp. paid $700,000 to purchase Vera Inc. The following information regarding Vera is available at the time of purchase. The book value of its identifiable net assets is $710,000. The fair value of its identifiable net assets is $750,000. In Lowman's entry to record the purchase of Vera Inc., which of the following statements is true? Select one: a. A loss of $50,000 should be recorded. b. A gain of $10,000 should be recorded. c. Goodwill of $10,000 should be recorded. d. Goodwill of $50,000 should be recorded. e. A gain of $50,000 should be recorded. f. A loss of $10,000 should be recorded.

e. A gain of $50,000 should be recorded. Feedback: If the price paid is less than the fair value of the identifiable net assets of the other company, negative goodwill exists. The difference should be credited to a gain account.

The cost to develop an intangible asset is ______ as incurred. These costs are often known as ________.

expensed; R&D

After this date, a company capitalizes all software development costs until when ?

the product is available for general release to customers.

What parts of the software development must be treated as R&D expense according to GAAP?

the: -testing -coding - designing

Under GAAP, increase in market value of artistic related asset activities are accounted for how in financial statements?

they aren't