Topic 25 Intangibles

On January 1, Year 1, a company with a calendar year-end began developing a software program that it intends to market and sell to its customers. The software coding was completed on March 31, Year 1, at a cost of $200,000, and the software testing was completed on June 30, Year 1, at a cost of $100,000. The company achieved technological feasibility on July 31, Year 1, at which time the company began producing product masters at a cost of $125,000. What amount should the company report for the total research and development expense for the year ended December 31, Year 1? a. $100,000 b. $200,000 c. $300,000 d. $425,000

Choice "C" is correct. Costs related to the planning, design, coding, and testing of software that are incurred until technological feasibility has been reached will be recorded as research and development expense. Therefore, the coding of $200,000 and the testing of $ 100,000 will both be expensed

Exercises: FM0262 Which of the following items would be classified as a research and development cost? a. Periodic design changes to an existing product. b. Engineering follow-up in an early phase of commercial production. c. Testing in search of product or process alternatives. d. Legal work in connection with a patent application.

Choice "C" is correct. Testing in search of a product or process alternatives would be classified as a research and development cost.

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized? a. $200,000 b. $250,000 c. $270,000 d. $320,000

Choice "a" is correct. Any costs incurred during the preliminary project state, as well as costs for training and commitment maintenance, to the should project be has expensed been made, Costs can be incurred capitalized after the These preliminary costs include project costs state, for once materials and services, direct labor costs, and interest costs incurred for the project. In this case, the only expense eligible for relate preliminary to capitalization phase, is the and the $200, 000 $70,000 to write general the and code. The administrative $50,( 000 costs payroll cannot costs be were incurred in because the capitalized they training and maintenance

Exercises: FM0251 Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year? a. $0 b. $15,000 c. $40,000 d. $120,000

Choice "a" is correct. Because the trademark is expected to be renewed indefinitely, there will be no amortization expense on the books. Amortization is only recorded for intangible assets with a definite life

Exercises: FM0252 West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year? a. $4,000 b. $4,500 c. $5,000 d. $5,500

Choice "a" is correct. Purchased intangible assets are recorded at cost; therefore West Co. will record the intangible at a value of $ 50,000. The intangible should be amortized under the straight -line method over the shorter of its estimated life or remaining legal life. As West Co. intends to sell the asset for $10,000 in 10 years, it will be amortized down to $10,000(50000-10000)= ($40,000 total amortization)÷10= over a period of 10 years, or $4,000 per year.

Exercises: FM0266 A corporation is in the final stages of developing a computer software program that will be sold to the general public. The company's costs related to the software are as follows: Development of a working model of the software $4 million Customer support and training. 2 million Product master production. 1 million The costs associated with the product master production were incurred after the establishment of technological feasibility. What amount, if any, should the corporation expense against earnings? a. $6 million. b. $5 million. c. $4 million. d. $0

Choice "a" is correct. The accounting treatment under GAAP for computer software development costs is that costs before technological feasibility is established and during the preliminary project stage are expensed. Costs incurred after technological feasibility is established and the preliminary project stage are capitalized. Thus, the costs incurred prior to technological feasibility including the $4 million of the development of a working model of the software and the $2 million of the customer support and training will be e expensed against earnings.

Exercises: FM0258 How should NSB, Inc. report significant research and development costs incurred? a. Expense all costs in the year incurred. b. Capitalize the costs and amortize over a five-year period c. Capitalize the costs and amortize over a 40-year period. d. Expense all costs two years before and five years after the year incurred.

Choice "a" is correct. Under U.S. GAAP, the only acceptable method of accounting for research and development costs is a direct charge to expense, except for materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful lives.

Exercises: FM0255 During 2002, Fleet Co.'s trademark was licensed to Hitch Corp. for royalties of 10% of net sales of the trademarked items. Returns were estimated to be 1% of gross sales. On signing the licensing agreement, Hitch paid Fleet $75,000 as an advance against future royalty earnings. Gross sales of the trademarked items during the year were $600,000. What amount should Fleet report as royalty income for 2002? a. $54,000 b. $59,400 c. $60,000 d. $75,000

Choice "b" is correct. Fleet earns royalties based on 1 0% of net sales, so the first step is the calculation of net sales: Sale: $600,000 Net Sales $ 600,000 x ( 100%-1% ) = 594,000 Net sales can then be used to Calculate Fleet's royalty income : Net sales x Royalty % = 594000x 10% = 59400

Exercises: FM0253 A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes? a. 0 years. b. 25 years. c. 30 years. d. 38 years

Choice "b" is correct. Intangible assets should be amortized over the lesser of the useful meconomic life or the legal life. The useful economic life is 25 years and the legal life is 30 years, the copyright wii be amortized over 25 years. (The copyright initially had a 38-year useful life assigned to it)这是原来使用寿命跟现在一点关系没有,不要被疑惑

Exercises: FM0250 Johan Co. has an intangible asset, which it estimates will have a useful life of 10 years, while Abco Co. has goodwill, which has an indefinite life. Which company should report amortization in its financial statements? lohan Abco a. Yes. Yes b. Yes. No c. No. Yes d. No. No

Choice "b" is correct. Johan Co.'s intangible asset is a finite life intangible asset. Finite lifeintangibles are amortized over the period to be benefited. Abco Co.'s goodwill is not amortizes but is instead analyzed periodiçally (at least annually) for impairment.

Exercises: FM0257 During the current year, Beta Motor Co. incurred the following costs related to a new solar-powered car: Salaries of laboratory employees researching how to build the new car: $250,000 Legal fees for the patent application for the new car: 20,000 Engineering follow-up during the early stages of commercial production (the follow-up occurred during the current year): 50,000 Marketing research to promote the new car:30,000 Design, testing, and construction of a prototype:400,000 What amount should Beta Motor report as research and development expense in its income statement for the current year? a. $250,000 b. $650,000 c. $720,000 d. $750,000

Choice "b" is correct. Personnel costs and design/testing/construction both fall under R&D expenses. $250,000 + 400,000 = $650,000

Exercises: FM0270 On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1? a. $5,000 b. $13,500 c. $16,000 d. $20,000

Choice "b" is correct. The software maintenance costs are expensed, and the software modification costs are capitalized and amortized using the straight line method over five years. Thus, the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the yea ended December 31, Year 1, will be an expense related to the software maintenance cost in the amount of $12,500 ($15,000 / 12 = $1,250 per month x 10 months) + amortization expense of $1,000 ($5,000/5 years = $1,000 per year).

Exercises: FM0265 Brand Co. incurred the following research and development project costs at the beginning of the current year: Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only 200,000 Research and development salaries for current project 400,000 Equipment has a five-year life and is depreciated using the straight-line method. What amount should Brandrecord as depreciation for research and development projects at December 31? a. $0 b. $20,000 c. $60,000 d. $140,000

Choice "b" is correct. Under U.S. GAAP, the only acceptable method of accounting for research and development is a direct charge to expense, except for materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful lives. The equipment purchased for current projects only must be expensed as research and development cost. Only the equipment purchased for current and future projects projects will will be capitalized and deprecated: $100,000 5 years $20,000.

Exercises: FM0248 Alta Co. spent $400,000 during the current year developing a new idea for a product that waspatented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000was spent to successfully defend the rights of the patent against a competitor. The patent has a lifeof 20 years. What amount should Alta capitalize related to the patent? a. $40,000 b. $50,000 c. $90,000 d. $490,000

Choice "c" is correct. Development costs of a new product idea are a direct expense. Legal feesincurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset.

Exercises: FM0246 In Year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for Year 3? a. $500,000 b. $400,000 c. $100,000 d. $0

Choice "c" is correct. Legal costs associated with unsuccessfuly defending a patent are immediately expensed.

Exercises: FM0247 Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs? a. Litigation costs would be capitalized regardless of the outcome of the litigation. b. Litigation costs would be expensed regardless of the outcome of the litigation. c. Litigation costs would be capitalized if the patent right is successfully defended. d. Litigation costs would be capitalized only if the patent was purchased rather than internally developed.

Choice "c" is correct. Litigation costs can only be capitalized as a part of the patent asset account if they result in a successful patent defense so that the patent can be retained and continue to provide benefit. 羸了资本化,输了费用化

Exercises: FM0260 Which of the following should a company classify as a research and development expense? a. Periodic design changes to existing products. b. Routine design of tools, jigs, molds, and dies. c. Redesign of a product prerelease. d. Legal work on patent applications.

Choice "c" is correct. The redesign of a product does qualify as research and development expense as the costs incurred contribute to creating an improved product.

Exercises: FM0263 Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses? a. Expensed in the year in which the research and development project started. b. Capitalized and depreciated over the term of the research and development project. c. Capitalized and depreciated over its estimated useful life. d. Either capitalized or expensed, but not both, depending on the term of the research and development project.

Choice "c" is correct. Equipment used in research and deveiopment activities that has aiternative future uses is capitalized and depreciated over its useful life

Exercises: FM0249 Which of the following types of assets would typically be reported on a company's balancesheet as an intangible asset? a. Derivative securities. b. Cost of research and development. c. Leasehold improvements. d. Cost of patent registrations.

Choice "d" is correct. Patents are intangibie assets. Legai and registration fees incurred to obtain a patent are capitalized and reported as an asset

Exercises: FM0259 A company's research department incurred $1,000,000 in material, labor, and overhead costs to construct a prototype of a new product and $100,000 to test and modify the prototype. Which of the following statements correctly describes the accounting treatment of prototype costs incurred by thecompany? a. Capitalize $1,100,000 and amortize it over the expected sales life of the new product. b. Capitalize $1,100,000 and amortize it over the life of the prototype. c. Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred. d. Expense $1,100,000 as incurred.

Choice "d" is correct. The method of accounting for research and development costs requires that all R&D costs be expensed when incurred. The only exceptions to the rule are: 1) if materials, equipment or facilities developed have alternative future uses, or 2) research and development costs are undertaken on behalf of others under a contractual arrangement. There is no evidence to s suggest a future use exists or that the research and development was being done on behalf of others; therefore all $1,100,000 will be recorded to expense. Though it is true that R&D costs may result in the development of a patent or copyright.

Exercises: FM0261 The following information relates to two projects performed by Miley Co. during the year for laboratory research aimed at discovering new knowledge: Project Costs Likelihood That Effort Will Result in Future Benefits I. $100,000. Probable II. $ 50,000. Reasonably possible What should Miley report as research and development expenses in its income statement for the year? a. $0 b. $50,000 c. $100,000 d. $150,000

Choice "d" is correct. Under U.S. GAAP, unless the tangible assets associated with the research and development (R&D) expenses have alternative future uses or the work is undertaken on behalf of others under a contractual agreement, the costs associated with the R&D expenses are direct charged as an expense on the income statement.

Exercises: FM0245 Which of the following expenditures qualifies for asset capitalization? a. Cost of materials used in prototype testing. b. Costs of testing a prototype and modifying its design. c. Salaries of engineering staff developing a new product. d. Legal costs associated with obtaining a patent on a new product.

Choice capitalized "d" is correct. Legal costs associated with obtaining a patent on a new product are research and development costs related to developing a new product, including prototype testing, design modification and engineering salaries, must be expensed.

Exercises: FM0256 Which of the following statements is correct concerning start-up costs? a. Costs of start-up activities, including organization costs, should be expensed as incurred. b. Costs of start-up activities, including organization costs, should be capitalized and expensed only if an impairment exists. c. Costs of start-up activities, including organization costs, should be capitalized and amortized on a straightline basis over the lesser of the estimated economic life of the company, or 60 months. d. Costs of start-up activities should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company, or 60 months, while organization cost should be expensed as incurred.

Choice incurred, "a" is correct. GAAP requires that start-up costs, including organizational costs, be expensed as incurred , without exception.

Exercises: FM0271 Stam Co. incurred the following research and development project costs during the current year: Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only. 200,000 Research and development salaries for current projects 400,000 Legal fees to obtain patent. 50,000 Material and labor costs for prototype product. 600,000 The equipment has a five-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end? a. $450,000 b. $1,000,000 c. $1,220,000 d. $1,350,000

Depreciation of equipment for current & future periods $ . 20000 Equipment for current projects only periods 200, 000 R&D salaries. 400,000 Material and labor costs for prototype. 600,000 Total R&D Expense. $1,220,000 Research and development expense does not include the amount paid for the equipment purchased for current and future projects because the equipment has alternate fu ture uses. This equipment will be capitalized, but the related depreciation expense will be allocated to R&D while the equipment is being used for R&D. The legal fees to obtain the patent are capitalized as an intangible asset.

Exercises:FM0264 During the current year ended December 31, Metal Inc.incurred the following costs: Laboratory research aimed at discovery of new knowledge $ 75,000 Design of tools, jigs, molds, and dies involving new technology 22,000 Quality control during commercial production,including routine testing 35,000 Equipment acquired two years ago, having an estimated useful life of fiveyears with no salvage value, used in various R&D projects 150,000 Research and development services performed by Stone Co. for Metal Inc. 23,000 Research and development services performed by Metal Inc, for Clay Co. 32,000 What amount of research and development expenses should Metal report in its current-year income statement? a. $120,000 b. $150,000 c. $187,000 d. $217,000

Research and development services performed by Metal Inc, for Clay Co. 32,000- invoice