ACCT211 Practice Questions
During the reporting period ended 30 June 2012 Point Leo Limited made the following expenditures: • $250,000 on promoting the recognition of its brand name • $400,000 on the acquisition of a patent (a right to produce a certain product) • $90,000 on the acquisition of a customer database, but after further consideration Point Leo Limited is not sure that the list will provide very many customers In relation to the above expenditures, which items will be carried forward to future periods as intangible assets?
$250,000 on promoting the recognition of its brand name Internally generated intangible --> Expense $400,000 on the acquisition of a patent (a right to produce a certain product) Acquisition --> Capitalise on intangible assets $90,000 on the acquisition of a customer database, but after further consideration Point Leo Limited is not sure that the list will provide very many customers Associated economic benefits are not probable --> Expense
Portsea Limited is developing a new product called a burble. The company spent $300,000 researching the demand for the burble. It then spent $250,000 working out whether the compounds out of which the burble is made will biodegrade over less than 20 years. As a result of the knowledge gained in the preceding steps, the company designed machinery to produce the burbles. This design phase cost $600,000. It is expected that millions of burbles will be sold for at least $10 each. All the expenditures was incurred within the one reporting period. How much of the above expenditure would qualify to be shown as an intangible asset?
$550,000 ($300,000 +$250,000) --> research --> expense $600,000 --> development --> capitalise as intangible asset (and then subject to amortisation)
ABC S.A. purchases equipment for $300,000 on January 1, 2014. The equipment has a useful life of ten years, is depreciated using the straight-line method and its residual value is zero. Do the journal entries to record the depreciation of the equipment 31 December 2014, 30 June 2015 and 31 December 2015.
300,000/10 = 30,000 each year 300,000/120 = 2,500 each month 1) 31/12/14-->30,000 depreciation 2) 30/06/15-->15,000 depreciation 3) 31/12/15-->15,000 depreciation
Match each item with a type of liability 1. Loan 2. Legal proceedings against the entity for injuries from the use of its product 3. Trade creditors 4. Warranties (unclaimed) A) Accounts payable and accruals B) Borrowing C) Contingent Liability D) Provisions
1. B) 2. C) 3. A) 4. D)
Indicate whether the following items are capitalised or expensed in the current year: A) Purchase cost of a patent from a competitor B) Research costs C) Development costs (after achieving economic viability) D) Organisational costs E) Costs incurred internally to create goodwill
A) Purchase cost of a patent from a competitor → Capitalize B) Research costs → Expense C) Development costs (after achieving economic viability) → Capitalize D) Organisational costs → Expense E) Costs incurred internally to create goodwill → Expense
Assume that on January 1, 2011, Stora Enso signs a 10-year non-cancelable lease agreement to lease a storage building from Balesteros Storage Company. The following information pertains to this lease agreement. a) The agreement requires equal rental payments of $90,000 beginning on January 1, 2011. b) The fair value of the building on January 1, 2011 is $550,000. c) The building has an estimated economic life of 12 years, with an unguaranteed residual value of 10,000. Stora Enso depreciates similar buildings on the straight-line method. d) The lease is non-renewable. At the termination of the lease, the building reverts to the lessor. e) Stora Enso's incremental borrowing rate is 12% per year. It is impracticable to determine the lessor's implicit rate. f) The yearly rental payment includes $3,088.14 of executory cost related to taxes on the property. g) Consider a PVIFA (n=10; i=12%) of 6.32825 Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2011 and 2012. Stora Enso's corporate year-end is December 31.
Capitalized amount of the lease: Yearly payment 90,00.00 Executory costs (3088.14) Minimum annual lease payment 86,911.86 Present value of minimum lease payments $86,911.86 x 6.32825 = $550,000.00
What is the difference between an unidentifiable intangible asset and an identifiable intangible asset?
Identifiable intangible assets would include such things as patents, trademarks, licences, research and development, brand names, mastheads and copyrights. They are considered identifiable because they can typically be separately identified and valued, and perhaps individually sold. Unidentifiable intangible assets are those intangible assets that cannot be separately identified or separately sold, for example goodwill. Goodwill relates to the benefits generated through reputation, good employees, location, and so on. As with most intangible assets, NZ IAS 38 requires that goodwill shall only be recognised when it is purchased. This restriction has been imposed on the basis of the uncertainty surrounding the value of internally generated goodwill. Goodwill cannot subsequently be revalued and is to be subject to ongoing impairment testing. Other intangibles can be revalued to the extent that they are initially acquired at cost and as long as there is an 'active market' for the asset.
Provide an argument in support of the accounting requirement that research be written off as incurred. Is this requirement overly 'conservative'?
Paragraph 54 of NZ IAS 38 states: No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. In justifying this requirement, paragraph 55 of NZ IAS 38 states: In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred. Hence, the argument is that the nexus between the expenditure and the subsequent economic benefits is too uncertain to allow an asset to be recognised for statement of financial position purposes. Certainly, much research expenditure will not lead to future economic benefits. But while a great deal of research does not lead to subsequent economic benefits, some does (indeed, this is the general reason that profit-seeking entities undertake research). Some users of financial information can consider highly conservative to have a 'blanket rule' that all research must be written off as incurred.
Presented below is selected accounts information related to Matt Perry Inc. as of December 21, 2015. All this accounts have debit balances. Cable, television franchises Music copyrights Research costs Development costs Goodwill Cash Notes payable Account receivable Property, plant and equipment Internet domain name Film contract rights Customer lists Prepaid expenses Patents Brand names Notes receivable Investments in associated companies organization costs Land Provision for warranty Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.
The following items would be classified as an intangible asset: Cable television franchises Music copyrights Goodwill Internet domain name Film contract rights Customer lists Patents Brand names Research and development costs would be classified as an operating expense or intangible asset depending on the type of expense. Research costs are considered expenses while development costs are capitalised as intangible asset. Cash, accounts receivable, notes receivable and prepaid expenses would be classified as current assets. Property, plant, and equipment, and land would be classified as non-current assets in the property, plant, and equipment section. Investments in associated companies would be classified as part of the investments section of the statement of financial position. Notes payable and provision for warranty are shown as liabilities on the statement of financial position. Organization costs are start-up costs and should be expensed as incurred
The following facts pertain to a non-cancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee. Inception date - May 1, 2010 Annual Lease payment due to at the beginning of each year, beginning with May 1, 2010 - $18,829.49 Bargain-purchase option price at the end of lease term - $4,000 Lease term - 5 years Economic life of leased equipment - 10 years Lessor's cost - $65,000 Fair value of asset at May 1, 2010 - $81,000 Lessor's implicit rate - 10% Lessee's incremental borrowing rate - 10% PVIF (n=5, i=10%) - 0.62092 PVIFA (n=5, i=10%) - 4.16986 Instructions (Round all numbers to the nearest cent.) a) Discuss the nature of this lease to Gill Company. b) Discuss the nature of this lease to Lennox Leasing Company. c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term.
a) Although the lease is just for the 50% of the useful life of the equipment (5/10), the lease agreement has a bargain-purchase option and thus meets the criteria to be classified as a finance lease from the viewpoint of the lessee. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset (81,000 > 90%*81,000). b) The lease agreement has a bargain-purchase option. The lease, therefore, qualifies as a finance lease from the viewpoint of the lessor. Due to the fact that the present value of the minimum lease payments (€81,000) exceeds the lessor's cost (€65,000), the lease is a sales-type lease.
