Accy 303: Chapter 12

T/F A copyright is granted for the life of the creator or 70 years, whichever is longer.

false - copyright is granted for the life of the creator plus the 70 years

When the fair value of the assets acquired in a business purchase exceed the purchase price, a bargain purchase arises. When this happens, GAAP requires that the difference be allocated: a. to a gain. b. to all periods benefited on an equitable basis. c. to reduce proportionately the values assigned to certain non-current assets. d. to reduce proportionately the values assigned to both current and non-current assets.

(A) a gain - required by FASB

On January 15, 2011, Machiavelli Corporation was granted a patent on a product. On January 2, 2020, to protect its patent, Machiavelli purchased a patent on a competing product that originally was issued on January 10, 2013. Because of its unique plant, Machiavelli does not feel that the competing patent can be used in producing a product. The cost of acquiring the competing patent should be: a. amortized over a maximum period of 11 years. b. amortized over a maximum period of 16 years. c. amortized over a maximum period of 20 years. d. expensed in 2020.

(A) amortized over a max period of 11 years

When intangible assets are amortized, a journal entry may be made by debiting an expense account and crediting

(A) debit accumulated depreciation and credit the intangible asset - When intangible assets are amortized, the charges should be shown as expenses, and the credits should be made either to the appropriate asset accounts or to separate accumulated amortization accounts.

Jo Jo Chong, Inc. needs to determine if its property, plant, and equipment has been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are):

(A) should conduct A recoverability test first, to determine whether an impairment has occurred for property, plant, and equipment and for limited-life intangibles. If the asset's cost is not recoverable, a fair value test is then used to measure the impairment loss.

Smith Co. bought a window franchise from Paine, Inc., on January 2, 2020, for $100,000. A highly regarded independent research company estimated that the remaining useful life of the franchise was 50 years. Its unamortized cost on Paine's books at January 1, 2020, was $15,000. Smith has decided to write off the franchise over the longest possible period. How much should be amortized by Smith Co. for the year ended December 31, 2020? a. $ 375 b. $ 2,000 c. $ 2,500 d. $ 15,000

(B) 100000/50years=2000

The amortization of goodwill: a. is dependent upon the number of years a company expects to use the benefits it provides. b. does not happen as it is deemed to have an indefinite life. c. represents as acceptable an accounting practice as does the immediate write-off method. d. should be computed using the straight-line method unless another method is deemed more appropriate.

(B) does not happen as it is deemed to have an indefinite life

n 2017, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2020, the Rousseau division reported net assets of $3,300,000 (including $1,700,000 of goodwill). Hume reviewed the Rousseau division and determined that the fair value is estimated to be only $1,800,000 and the fair value of the net assets excluding goodwill is $1,600,000. What entry should Hume record concerning the Rousseau division on December 31, 2020?

(B) entry: Debit loss on impairment Credit: Goodwill - see study guide solution for math worked out

How should research and development costs be accounted for? a. Capitalized when incurred and then amortized over their estimated useful lives. b. Expensed in the period incurred. c.. May be either capitalized or expensed when incurred. d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will result in the discovery of a profitable product.

(B) expensed in the period they were incurred

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 market 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. at 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) 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.

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) limited-life or indefinite-life

The accounting profession does NOT allow the immediate write-off of goodwill. The best reason for this requirement seems to be that: a. goodwill has a useful life like all assets and should be charged as an expense at a normal rate. b. to write-off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential. c. the immediate write-off would cause net income to be much lower than it had been for the company in recent years and comparability would be distorted. d. because the amortization of goodwill is tax deductible, an immediate write-off serves no useful purpose.

(B) to write-off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential

Isa Company has equipment that, due to changes in its use, is reviewedfor possible impairment. The asset's carrying amount is $400,000 ($500,000 cost less $100,000 accumulated depreciation). The expected future net cash flows (undiscounted) from the use of the asset and its eventual disposition are determined to be $380,000 and it has a current market value of $350,000. What is the amount of the impairment, if any, that should be recorded by Isa Company? a. $0 b. $ 20,000 c. $50,000 d. $400,000

(C) (400,000-$350,000) = $50,000 - difference between carrying around of company asset and the fair value is the impairment loss.

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

(C) R&D fees would be expensed

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):

(C) for indefinite life intangibles other than goodwill, only the fair value test is employed to determine impairment.

Goodwill: a. generated internally should not be capitalized unless it is measured by an individual independent of the enterprise involved. b. is easily computed by assigning a value to the individual attributes that comprise its existence. c. represents a unique asset in that its value can be identified only with the business as a whole. d. exists in any company that has earnings that differ from those of a competitor.

(C) represents a unique asset in that its value can be identified only with the business as a whole - because goodwill is a going-concern valuation and cannot be separated from the business as a whole - should not be capitalized

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

(C) residual value - The useful life of an intangible asset may be limited by its legal life. Actions of competitors as well as renewal or extension provisions affect the useful life of an intangible asset. Residual value is a concept related to the computation of depreciation on tangible fixed assets. Residual value is not a factor used in determining useful life of an intangible.

Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January 2017. The cost of the franchise was $125,000 and was estimated to have a useful life of 40 years. Early in the year 2020, the franchise was deemed worthless due to significant law suits that caused the franchisor to go out of business.What amount of statement of Hooker Corporation cost or expense should be charged to the income for the years noted below?

(D) 2017: $31125 2022: $31125 2023: $106,250

These costs relate to a product that will be marketed in 2020. It is estimated that these costs will be recovered by the end of 2023. What amount of R&D costs should be charged against 2020 income? a. $0. b. $ 25,000. c. $190,000. d. $215,000.

(D) $215,000 - all R&D costs are incurred and charged to expense when incurred

A large publicly held company has developed and registered a trademark during 2017. How should the cost of acquiring and registering the trademark be accounted for if it is considered to have a limited-life? a. Charged to an asset account that should not be amortized. b. Amortized over 10 years regardless of its useful life. c. Expensed as incurred. d. Amortized over its useful life.

(D) amortized over useful life

Which of the following is not an intangible asset? A) Accounts receivable. B) Patents. C) Copyrights. D) Franchises.

Accounts receivable

T/F A copyright would generally not be amortized.

False - Because a copyright has a limited life and the useful life is usually less than the legal life, a copyright is generally amortized.

T/F Legal fees and other costs incurred in successfully defending a patent suit are expensed as they are incurred.

False - Legal fees and other costs incurred in successfully defending a patent suit are debited to Patents, an asset account, because such a suit establishes the legal rights of the holder of the patent.

T/F Use of the master valuation approach to measure goodwill requires an estimate of a firm's excess earning power.

False - When the master valuation approach is used to measure goodwill, it is considered to be the excess of the cost over the fair value of the identifiable net assets acquired.

T/F Lack of physical substance is the only characteristic of intangible assets that distinguishes them from all other assets reported on the balance sheet.

False - characteristics include: 1. lack physical existence 2. are not a financial instrument.

T/F Costs incurred internally to create intangibles are generally the basis for recording intangible assets, which are then amortized over the estimated life of the intangible asset.

False. - Costs incurred internally to create intangibles are generally expensed as incurred.

T/F Start-up costs are usually charged to an account called Start-Up Costs and may be carried as an asset on the balance sheet.

False. - Start up costs are expensed as incurred

T/F For indefinite-life intangibles a recoverability test is used to determine whether an impairment has occurred.

False - For indefinite-life intangibles other than goodwill, only the fair value test is employed. For goodwill, a more complex fair value test is used.

T/F Goodwill generated internally should be capitalized in the accounts.

False - Goodwill generated internally should not be capitalized in the accounts. it is expensed (see Brief exercise 12-13)

T/F Goodwill is often identified on the balance sheet as the excess of the fair value over the cost of the net assets acquired.

False - Goodwill is often identified on the balance sheet as the excess of the cost over the fair value of the net assets acquired.

T/F Goodwill should be amortized over its useful life.

False - goodwill has an indefinite life and therefore should not be amortized

T/F A trademark may properly be considered to have an indefinite life.

True

T/F Acceptable accounting practice requires that disclosure be made in the financial statements (generally in the notes) of the total R&D costs charged to expense each period for which an income statement is presented.

True

T/F All research and development (R&D) costs should normally be charged to expense when incurred.

True

T/F Amortization is the systematic charge to income of the cost of an intangible asset.

True

T/F An impairment loss is reported as a part of income from continuing operations, generally in the "Other expenses and losses" section.

True

T/F Cost is the basis for recording intangible assets, including acquisition price and all expenditures incurred to prepare the asset for its intended use.

True

T/F If goodwill is present, it should be reported as a separate item on the balance sheet.

True

T/F Intangible assets are amortized over their useful lives unless the intangible can remain in existence indefinitely.

True

T/F Marsilius Company secured a copyright on a unique literary work. All conservative estimates indicate that the copyright will be useful for its maximum useful life; thus, this is the period over which the copyright should be amortized.

True

T/F The general rules that apply to impairments of long-lived assets also apply to intangibles.

True

T/F Under the recoverability test, the fair value of an asset is measured by its market value if an active market for it exists. If no active market exists, the present value of expected future net cash flows should be used.

True

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

T/F A bargain purchase arises when the fair value of the asset acquired is higher than the purchase price of the asset.

true

T/F The costs of services performed by others in connection with the reporting company's R&D should be expensed as incurred.

true