Chapter 12: Intangible Assets

Calvin Company incurred the following cost related to the startup of the business: Attorney's fee ........................................................$10,000 Underwriter's fee ....................................................15,000 State incorporation fee ........................................+7,000 .......................................................................................$32,000 The company wishes to amortize these costs over the maximum period allowed under generally accepted accounting principles. Assuming that Calvin Company began operation on January 1, 2017, what amount of the startup costs should be amortized in 2018? A. $4,400. B. $2,200. C. $ 800. D. $ 0.

$ 0; Startup costs are to be expensed as incurred; therefore, there should be no costs associated with the organization in 2017 that will be amortized in 2018.

Smith Co. bought a window franchise from Paine, Inc., on January 2, 2017, 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, 2017, 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, 2017? A. $ 375 B. $ 2,000 C. $ 2,500 D. $15,000

$ 2,000; Smith Corporation should record franchise amortization expense of $2,000 in 2017 ($100,000/50 years = $2,000).

Isa Company has equipment that, due to changes in its use, is reviewed for 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

$ 50,000; The recoverability test indicates that the expected future net cash flows of $380,000 from the use of the asset are less than its carrying amount of $400,000. Therefore, an impairment has occurred. The difference between the carrying amount of Isa Company's asset and its fair value is the impairment loss of $50,000 or ($400,000 - $350,000).

In 2017, Descartes Corporation incurred R&D costs as follows: Materials and facilities ..........................................$80,000 Personnel ......................................................................110,000 Indirect costs .............................................................+25,000 .........................................................................................$215,000 These costs relate to a product that will be marketed in 2017. It is estimated that these costs will be recovered by the end of 2020. What amount of R&D costs should be charged against 2017 income? A. $ 0. B. $ 25,000. C. $190,000. D. $215,000.

$215,000; All R&D costs are charged to expense when incurred. Thus, the 2017 expenditures of $215,000 should be charged against 2017 income.

Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January 2014. 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 cost or expense should be charged to the income statement of Hooker Corporation for the years noted below? .........................2014..................2019 ..................2020 A.................$5,000.............$5,000................$5,000 B..................$3,125..............$3,125..................$3,125 C.......................0.........................0......................$125,000 D.................$3,125..............$3,125..................$106,250

.................$3,125..............$3,125..................$106,250; Expense of $3,125 ($125,000/40) for the first six years (2014 through 2020). Thus, at the beginning of 2020, when the franchise was considered worthless, the book value of the franchise account would be $106,250 [$125,000 − ($3,125 × 6)]. When the franchise is deemed worthless, it should be written off immediately.

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

Accounts receivable.

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.

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

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.

Amortized over its useful life.

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): Recoverability Test - Fair Value Test A. Yes - Yes B. Yes - No C. No - Yes D. No - No

Yes - Yes

When intangible assets are amortized, a journal entry may be made by debiting an expense account and crediting The Intangible Asset - Accumulated Amortization A. Yes - Yes B. Yes - No C. No - Yes D. No - No

Yes - Yes

On January 15, 2008, Machiavelli Corporation was granted a patent on a product. On January 2, 2017, to protect its patent, Machiavelli purchased a patent on a competing product that originally was issued on January 10, 2010. 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 2017.

amortized over a maximum period of 11 years; The reason for acquiring the patent on the competing product is to protect the original patent acquired on 1/15/08. The original patent will expire during 2028. Thus, the cost of the patent on the competing product should be amortized over 11 years, the time between its acquisition (2017) and the expiration of the original patent's useful life (2028).

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.

does not happen as it is deemed to have an indefinite life.

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. it 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.

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 un-amortizable. B. limited-life or indefinite-life. C. specifically identifiable or goodwill-type. D. legally restricted or goodwill-type.

limited-life or indefinite-life.

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.

represents a unique asset in that its value can be identified only with the business as a whole.

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.

residual value

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.

to a gain.

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.

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

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.

Expensed in the period incurred.

In 2014, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2017, 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, 2017? A. No entry is needed. B. Loss on impairment.............1,500,000 ..........Goodwill....................................................1,500,000 C. Loss on impairment.............1,700,000 ..........Goodwill....................................................1,700,000 D. Loss on impairment.............100,000 ..........Goodwill....................................................100,000

Loss on impairment.............1,500,000 ..........Goodwill....................................................1,500,000; The impairment rule for goodwill is a two-step process. First, a company compares the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value is less than the carrying amount, a second step is performed to determine the fair value of goodwill. The fair value ($1,800,000) is less than the carrying amount of the net assets ($3,300,000); therefore an impairment loss should be measured and recognized. The implied value of goodwill is $200,000 which is the difference between the fair value of the division ($1,800,000) and the fair value of the assets excluding goodwill ($1,600,000). The impairment loss is the amount by which the carrying amount of the goodwill exceeds its fair value ($1,700,000 − $200,000 = $1,500,000).

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): Recoverability Test - Fair Value Test A. Yes - Yes B. Yes - No C. No - Yes D. No - No

No - Yes

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.

Research and development fees.