Exam 4 - Chapter 12

When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?

ALLOWED TO: - attorney fees - consulting fees - design costs NOT ALLOWED TO: - research and development fees

Factors considered in determining an intangible asset's useful life include all of the following except

CONSIDERED: - the expected use of the asset - any legal or contractual provisions that may limit the useful life - any provisions for renewal or extension of the asset's legal life NOT: - the amortization method used

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)

Recoverability test: No Fair value test: Yes

Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?

goodwill

impairment of limited-life intangibles

if impairment has occurred, recognize an impairment loss for the amount by which the carrying value of the asset exceeds the fair value of the asset (i.e., fair value test). a. if no active market exists, use the present value of expected future net cash flows

Goodwill may be recorded when

one company acquires another in a business combination

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

the total amount of patent cost amortized to date is usually

reflected as credits in the patent account

Which of the following costs incurred internally to create an intangible asset is generally expensed?

research and development costs

When a patent is amortized, the credit is usually made to

the patent account

If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.

true

Carrying value

"Big GAAP" Public Company: not amortized "Small GAAP" Non-public company: amortized over 10 years, or less

Which of the following is not an intangible asset

IS: - trade name - franchise - copyrights IS NOT: - research and development costs

Presentation of intangibles and related items

Intangibles: are usually reported at their amortized cost (net) and usually do not have a separate accumulated amortization account.

Which intangible assets are amortized?

Limited Life: Yes Indefinite Life: No

Which of the following characteristics do intangible assets possess?

Long-lived

presentation of intangibles and related items - 2

a. all intangibles other than goodwill should be reported as a separate item b. if goodwill is present, it should be reported as a separate item c. the income statement should reflect: 1. amortization expense and impairment losses for all intangibles other than goodwill. 2. goodwill impairment losses should be shown as a separate item in continuing operations d. the notes to the financial statements should include: 1. aggregate amortization expense for each of next 5 years 2. changes in the carrying amount of goodwill for the period.

The intangible asset goodwill may be

capitalized only when purchased

Costs incurred internally to create intangibles are

expensed as incurred

The reason goodwill is sometimes referred to as a master valuation account is because

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.

The recoverability test is used to determine any impairment loss on which of the following types of intangible assets?

limited life intangibles

Under current accounting practice, intangible assets are classified as

limited-life or indefinite-life

Goodwill for non-public entities - 2

need to know both "big GAAP" and "small GAAP" for the CPA exam

Types of intangible assets: artistic-related intangible assets

ownership rights to plays, literary works, music, pictures, photos, and video and audiovisual material. a. copyrights are granted for the life of the creator plus 70 years b. useful life is usually less than legal life c. costs of successfully defending a copyright are capitalized

Which of the following methods of amortization is normally used for intangible assets?

straight-line

level of testing for impairment

"big gaap" public company: reporting unit "small gaap" non-public company: reporting unit-not entity level

operating losses incurred during the start-up years of a new business should be

accounted for and reported like the operating losses of any other business

which of the following is often reported as an extroardinary item?

none of the above -amortization expense - impairment losses for intangible assets other than goodwill - impairment losses on goodwill - impairment losses for intangible assets - research and development costs (this question is put twice with same answer)

Purchased goodwill should

not be amortized

intangible assets are reported on the balance sheet

separately from other assets

all intangibles are subject to periodic consideration of impairment with corresponding potential write-downs

true

Intangible asset issues: characteristics

- they lack physical existence - they are not financial instruments

In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as

goodwill

Companies should test indefinite life intangible assets at least annually for:

impairment

Impairment of limited-life intangibles

impairment occurs when the expected future net cash flows (undiscounted) of an asset is less than the asset's carrying value. a. review events for possible impairment b. apply the recoverability test to determine if impairment has occurred.

Types of intangible assets: goodwill

is only recorded when an entire business is purchased because goodwill is a "going concern" valuation and cannot be separated from the business as a whole a. internally generated goodwill is not recorded b. purchased goodwill is recorded as the excess of the purchase price of an acquired business over the fair value of the identifiable net assets acquired. c. goodwill is the residual amount-the excess of cost over the fair value of identifiable net assets acquired. d. goodwill write-off 1. goodwill is considered an indefinite-life intangible, therefore is not subject to amortization. 2. goodwill is only charged if it has been impaired. e. a bargain purchase-occurs when fair value of net assets acquired is greater than the purchase price 1. FASB required that the excess be recognized as a gain by the purchaser 2. FASB also requires companies to disclose the nature of the gain

The carrying amount of an intangible is

the asset's acquisition cost less the total related amortization recorded to date

impairment of limited-life intangibles

the new cost basis of the asset is the reduced carrying amount. the cost basis is not written up, even if the fair value of the asset increases in future years. a. amortization is taken on the new cost basis over the asset's remaining useful life, or legal life, whichever is shorter

Broadway Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2009 a patent on a competing product which was originally issued on January 10, 2005. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be

amortized over a maximum period of 9 years

A loss on impairment of an intangible asset is the difference between the asset's

carrying amount and its fair value

which of the following intangible assets should be shown as a separate item on the balance sheet

goodwill

When a new company is acquired, which of these intangible assets, unrecorded on the acquired company's books, might be recorded in addition to goodwill?

- a brand name - a patent - a customer list

The cost of an intangible asset includes all of the following

- purchase price - legal fees - other incidental expenses

Which of the following costs should be capitalized in the year incurred?

costs to successfully defend a patent

One factor that is not considered in determining the useful life of an intangible asset is

salvage value

Which characteristic is not possessed by intangible assets?

IS: - short-lived - result in future benefits - expensed over current and/or future years IS NOT: - physical existence

intangible asset issues: amortization of intangibles - limited life intangibles are amortized over their useful lives. factors affecting useful life are:

1. expected use of the asset 2. expected useful life of related asset 3. any legal, regulatory, or contractual provision that may limit the useful life 4. provisions that enable renewal of extension of the asset's legal or contractual life without substantial cost 5. the effects of obsolescence, demand, competition, and other economic factors. 6. the level of maintenance expenditure required to obtain the expected future cash flows from the asset

Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as

a gain

impairment of indefinite-life intangibles: goodwill

a. involves a two-step process 1. if the fair value of the reporting unit is less than its carrying amount including goodwill (step 1), then the second step is performed. 2. in the second step, the fair value (implied value) of the goodwill must be determined and compared to its carrying amount. (i) implied value of goodwill = fair value of reporting unit - carrying value of net assets (excluding goodwill) (ii) if implied goodwill is less than the carrying amount of goodwill an impairment loss has occurred and must be recognized

intangible asset issues: amortization of intangibles - amortizable base is equal to cost less residual value

1. residual value is assumed to be zero, unless 2. the intangible has value to another company at the end of its useful life

the notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for many succeeding years?

5

Which of the following does not describe intangible assets?

DOES: - they lack physical existence - they provide long-term benefits - they are classified as long-term assets DONT: - they are financial instruments

intangible asset issues: valuation

Purchased intangibles are recorded at cost - includes purchase price, legal fees, and other incidental expenses - if acquired for stock or other assets, cost is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident. Internally-created intangibles - only direct costs incurred in obtaining the intangible are capitalized, e.g., legal costs.

Which of the following intangible assets should not be amortized?

SHOULD BE: - copyrights - customer lists SHOULDN'T BE: - perpetual franchises

Goodwill for non-public entities - 1

The FASB established the private company council (PCC) that creates a set of standards for non-public entities (referred to as "small GAAP). - some GAAP is getting too burdensome for smaller non-public entities (too complex, too many and unnecessary disclosures, and requirements where the costs of compliance outweigh the benefits).

Impairment of indefinite-life intangibles: intangibles other than goodwill

a. should be tested for impairment at least annually b. a one-step test (fair value test) 1. if the fair value of the intangible is less than its carrying amount, an impairment has occurred and must be recognized.

Goodwill for non-public entities - 3

alternate accounting approach for non-public companies (the differences): a. amortize goodwills straight-line for 10 years (or shorter time if more appropriate). b. no need to test for impairment unless there is a "triggering" event that makes it more likely than not that goodwill is impaired c. goodwill can be evaluated on an "entity" level, rather than on a "reporting unit" level. Therefore, only one assessment of goodwill at the company level.

The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should be

amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.

intangible asset issues: amortization of intangibles - indefinite-life intangibles

are not amortized

the costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entitys entire life. These costs should be

expensed as incurred

How should research and developmental costs be accounted for, according to a financial accounting standards board statement?

must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses contractually reimbursable

which of the following should be reported under the "other expenses and losses" section of the income statement?

none of the above

Types of intangible assets: Marketing related intangible assets

primarily used in the marketing or promotion of products or services. a. Trademarks and trade names 1. considered indefinite-life intangibles, therefore, not usually amortized 2. if insignificant cost, it is usually expensed b. company names

Types of intangible assets: technology-related intangible assets

relate to innovations or technological advances a. patents-exclusive right to use, manufacture, and sell a product or process for 20 years b. amortized over the useful life or legal life, whichever is shorter c. legal fees and other costs incurred in successfully defending a patent suit are capitalized

Types of intangible assets: customer-related intangible assets

results from interactions with outside parties a. customer lists, order or production backlogs, and contractual or noncontractual customer relationships b. amortized over the asset's useful life c. residual value is assumed to be zero, unless the useful life is less than the economic life and reliable evidence exists about the residual value

Types of intangible assets: contract-related intangible assets

the rights that arise from contractual arrangements a. Franchise--contractual arrangement under which the franchisor grants the franchisee certain rights. 1. corporate 2. governmental-licenses or permits 3. limited-life franchises should be amortized over the term of the contract 4. indefinite-life franchises should be carried at cost and not amortized

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

In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.

true

Internally generated goodwill should not be capitalized in the accounts

true

Limited life intangibles are amortized by systematic charges to expense over their useful life

true

Some intangible assets are not required to be amortized every year

true

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

true