Accounting Quiz 6

Examples of contract-related intangible assets

Franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts

Goodwill Write-Off

Goodwill considered to have an indefinite life; should not be amortized; only adjust carrying value when goodwill is impaired

IFRS vs. GAAP R&D costs

IFRS requires the capitalization of appropriate development expenditures

Recoverability test

If the sum of the expected future net cash flows (undercounted) is less than the carrying amount of the asset, an impairment has occured

Where do you put goodwill in a journal entry

In debit to balance the credit side of buying the business

Example of research activities

Laboratory research aimed at discovery of new knowledge; searching for applications of new research findings

Characteristics of intangible assets

Lack physical existence, not financial instruments

Impairment of Goodwill

1. If far value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment 2. Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount

Patent gives holder exclusive use for

20 years

Amortization of technology-related intangible assets

Amortize over legal life or useful life, whichever is shorter; capitalize costs of purchasing a patent; expense any r&d costs in developing a patent

Amortization of customer-related intangible assets

Amortized to expense over useful life; capitalize acquisition costs

Amortization of artistic-related intangible assets

Amortized to expense over useful life; capitalize costs of a acquiring and defending

Examples of development activities

Conceptual formulation and design of possible product or process alternatives; construction of prototypes and operation of pilot plants

Amortization of intangibles journal entry

Debit amortization expense, credit accumulated amortization or asset account

Goodwill impairment journal entry

Debit loss on impairment, credit goodwill

Journal entry for loss of impairment - limited life

Debit loss on impairment, credit the intangible

What do companies must do with all R&D costs when incurred?

Expense

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)

Fair value test, not recoverability test

T/F: Goodwill is considered a master valuation account because it measures the value of specifically identifiable intangible assets.

False

T/F: If a company develops a trademark, it should expense the costs related to attorney fees, registration fees and design costs.

False

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

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 are reported as intangible assets if they will provide economic benefits in future years.

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

Are R&D costs intangible assets?

No

Are contra accounts normally shown for intangibles on the balance sheet?

No

Should internally created goodwill be capitalized?

No

Examples of technology-related intangible assets

Patented technology and trade secrets granted by the U.S. Patent and Trademark Office

Research activities

Planned search or critical investigation aimed at discovery of new knowledge

Examples of artistic-related intangible assets

Plays, literary works, musical works, pictures, photographs and video and audiovisual material

What price are internally created intangibles recorded at?

Recorded at cost, generally expenses, only capitalize direct costs incurred in developing the intangible, such as legal costs

What price are purchased intangibles recorded at?

Recorded at cost; includes all costs necessary to make the intangible asset ready for its intended use, including purchase price, legal fees, other incidental expenses

Which research and development related costs should be capitalized and depreciated over current and future periods?

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

Impairment of Indefinite-Life Intangible Other than Goodwill

Should be tested for impairment at least annually, impairment test is a fair value test (if the fair value of the asset is less than the carrying amount, an impairment loss is recognized for the difference - recoverability test is not used)

Fair value test

The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset

Development activities

Transaction of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use

T/F: After an impairment loss is recorded for a limited-life intangible asset, the carrying amount becomes the basis for the impaired asset and is used to calculate amortization in future periods

True

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

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 net 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 lives

True

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

True

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

True

On the balance sheet, intangible assets shown as

a separate item

Goodwill impairment losses should be presented as

a separate line item in the continuing operations section, unless the goodwill impairment is associated with a discontinued operation

Amortization of limited life intangibles

amortize to expense over useful life (the periods over which the asset will contribute to cash flows)

Amortization of marketing-related intangible assets

capitalize acquisition costs, no amortization

Indefinite life franchise amortization

carried at cost and not amortized

Examples of marketing-related intangible assets

trademarks or trade names, newspaper mastheads, internet domain names and non-competition agreements

Goodwill

conceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized

On the income statement, report amortization expense and impairment losses in

continuing operations

Examples of customer-related intangible assets

customer lists, order or production backlogs and both contractual and non-contractual customer relationships

Companies should report on the balance sheet as a separate item all intangible assets except

goodwill

Goodwill is measured as the

excess of cost of the purchase over the FMV of identifiable net assets (assets less liabilities) purchased

Companies should evaluate the limited-life intangibles for

impairment

Companies should test indefinite life intangible assets at least annually for

impairment

In the US, trademarks or trade names have legal protection for

indefinite number of 10 year renewal periods

what are intangible assets normally classified as

long-term asset

Costs associated with R&D activities

material, equipment and facilities, personnel, purchased intangibles, contract services, indirect costs

Amortization of indefinite-life intangibles

no foreseeable limit on time the asset is expected to provide cash flows, must test indefinite-life intangibles for impairment at least annually, no amortization

The loss of impairment of limited-life intangibles is reported as

part of income from continuing operations, "other expense and losses" section

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

common types of intangibles

patents, copyrights, franchises or licenses, trademarks or trade names, goodwill

Bargain purchase

purchase price less than fair value of net assets acquired; amount is recorded as a gain by the purchaser

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

purchase price, legal fees and other incidental expenses

Amortization should cost less than

residual value

Costs similar to R&D costs

start-up costs for a new operation, initial operating losses, advertising costs, computer software costs

Goodwill is the difference between

the fair value of the net tangible and identifiable intangible assets and the purchase price of the acquired business

Copyright of artistic-related intangible assets is granted for

the life of the creator + 70 years

Limited life franchise (or license) amortized

to expense over the life of the franchise

When is goodwill recorded

when an entire business is purchased