Intangibles

14. 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

A A A recoverability test is first performed 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.

23. Expensing all R&D costs associated with internally created intangible assets results in a. Understating assets and overstating expenses. b. Understating assets and understating expenses. c. Overstating assets and overstating expenses. d. Overstating assets and understating expenses.

A

24. Which of the following is a factor to be considered in determining a limited-life intangible asset's useful life? a. All of these answer choices are correct. b. Any legal provisions that may limit the useful life. c. The expected useful life of any related asset. d. The effects of obsolescence.

A

25. A purchased limited-life intangible asset ______ amortized and is impairment tested using _______________. a. is; the recoverability test and then the fair value test. b. is not; the fair value test only. c. is not; the recoverability test and then the fair value test. d. is; the fair value test only.

A

40. Which of the following statements concerning intangible assets is correct? a. Intangible assets derive their value from the rights and privileges granted to the company using them. b. Intangible assets are normally classified as current assets. c. Intangible assets include the right to receive cash or cash equivalents at a future date. d. All of these answer choices are correct.

A

43. Which of the following represents a federally granted right? a. Copyrights. b. Franchise. c. Goodwill. d. Internet domain names.

A

44. Which of the following would not be amortized? a. Trade name. b. Copyright. c. Patent. d. Customer List.

A

47. Which of the following is not an example of a contract-related intangible asset? a. Copyright. b. Broadcast rights. c. Franchise. d. Construction permits.

A

51. Which of the following is considered a research activity? a. Critical investigation aimed at discovery of new knowledge. b. All of these answer choices are correct. c. Operation of a pilot plant. d. Construction of a prototype.

A

54. Which of the following is a characteristic of intangible assets? a. They are long-term in nature. b. They are all subject to amortization. c. They are financial instruments. d. They have physical existence.

A

56. For indefinite-life intangibles other than goodwill, an impairment test should be conducted at least: a. annually. b. quarterly. c. once during its useful life. d. monthly.

A

60. Which of the following is not a characteristic of intangible assets? a. All answer choices are characteristics of intangible assets. b. They are classified as long-term assets. c. They lack physical existence. d. They are not financial instruments.

A

63. When the purchaser in a business combination pays less than the fair value of the identifiable net assets, ________ is recorded by the purchaser. a. a gain. b. R&D expense. c. goodwill. d. a liability.

A

64. On December 31, 2019, Appalachian Corporation paid $5,550,000 to acquire Grandview Company and recorded $1,630,000 of goodwill as a result of the purchase. On December 31, 2021, Appalachian determines that the fair value of the Grandview division is $6,500,000 and the carrying amount of Grandview's net assets on that date is $6,200,000 (the carrying value and the fair value of identifiable net assets are the same). What amount of loss on impairment of goodwill should Appalachian record at December 31, 2021? a. $0. b. $300,000. c. $1,630,000. d.$1,330,000.

A

31. On January 1, 2021, Bumper Corp. acquires a customer list for $400,000. Bumper estimates that this customer list will generate value for at least 5 years. At time of purchase, Bumper plans to sell the customer list at the end of 3 years to another company for $62,500. On Bumper's income statement for the year ended December 31, 2021, how much amortization expense should it report? a. $112,500 b. $80,000 c. $67,500 d. $133,333

A (400,000-62,500)/3=112,500

45. Bryson Corporation purchased a limited-life intangible asset for $1,162,500 on May 1, 2019. It has a remaining useful life of 15 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2021 (if necessary, round your answer to the nearest dollar)? a. $206,667 b. $129,167 c. $66,667 d. $155,000

A 1,162,500 / (15X12) = 6,458.33 monthly amortization 6,458.33 X 32 months = 206,667

53. Lumberyard Inc. incurred the following costs during the year ended December 31, 2021: Laboratory research aimed at discovery of new knowledge 4,925,000 Costs of testing prototype and design modifications 712,500 Quality control during commercial production, including routine testing of products 485,000 On January 1, 2021, purchase of research facilities having an estimated useful life of 20 years with alternative future use in other research & development projects 7,360,000 Lumberyard Inc. uses the straight-line method of depreciation. The total amount to be classified and expensed as research and development in 2021 is a. $6,005,500. b. $12,997,500. c. $13,482,500. d. $6,490,500.

A 4,925,000 + 712,500 + (7,360,000/20) = $6,005,500

35. Truffle Inc. acquired a patent on January 1, 2018 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2021, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle's market interest rate, is $2,120,000. What amount, if any, of impairment loss will be reported on Truffle's 2021 income statement? a. $2,560,000. b. $1,340,000. c. $4,680,000. d. $2,120,000.

A 7,800,000 / 10 years = 780,000 annual amortization 7,800,000-(780,000X 4 years) = 4,680,000 book value at 12/31/21 before recording impairment. 4,680,000-2,120,000 = 2,560,000.

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

A Accounts receivable would be considered a financial instrument and therefore would not be classified as an intangible asset. B, C, and D are all examples of intangible assets

20. 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 R & D costs are expenditures made to develop new products or processes, to improve present products, and to discover new knowledge that may be valuable at some future date. The only alternative that does not fit the general classification of R & D expenditures is alternative A. Adapting existing capabilities to a specific requirement or need does not involve R & D.

9. On January 15, 2012, Machiavelli Corporation was granted a patent on a product. On January 2, 2021, to protect its patent, Machiavelli purchased a patent on a competing product that originally was issued on January 10, 2014. 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 2021.

A The reason for acquiring the patent on the competing product is to protect the original patent acquired on 1/15/12. The original patent will expire during 2032. Thus, the cost of the patent on the competing product should be amortized over 11 years, the time between its acquisition (2021) and the expiration of the original patent's useful life (2032).

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

A 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.

22. Which of the following is not a characteristic of intangible assets? a. They lack physical existence. b. They are all subject to amortization. c. They are not financial instruments. d. They are long-term in nature.

B

27. Which of the following is not one of the major categories of intangibles? a. Contract-related. b. Financing-related. c. Artistic-related. d. Marketing-related.

B

28. Marketing-related intangibles would include a. a franchise. b. a brand name. c. a copyright. d. a customer list.

B

34. St. Sebastian Company and A. Jamison Company were combined in a purchase transaction. St. Sebastian was able to acquire Jamison at a bargain price. The fair market value of Jamison's net assets exceeded the price paid by St. Sebastian to acquire the company. Proper accounting treatment by St. Sebastian is to report the excess fair value over purchase price as a. paid-in capital. b. a gain. c. a loss. d. a liability.

B

37. Which of the following principles best describes the current method of accounting for research and development costs? a. Systematic and rational allocation b. Immediate recognition as an expense c. Income tax minimization d. Associating cause and effect

B

39. The presentation of intangible assets in the financial statements a. Includes the disclosure of the amortization expense for the next 5 years. b. All of these answer choices are correct. c. Includes reporting R & D costs as an expense in the income statement. d. Involves crediting amortization directly to the intangible asset account.

B

41. Coral Corporation began operating as a business in 2021. During January 2021, the company paid $300,000 in design costs to develop its trademark and $250,000 in legal and registration fees to secure the trademark. During October 2021, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Coral Corporation report its trademark on its December 31, 2021 balance sheet, before any amortization? a. $550,000 b. $700,000 c. $150,000 d.$400,000

B

49. Oscar Company acquired a patent on a manufacturing process on January 1, 2019 for $5,100,000. It was expected to have a 12 year life and no residual value. Oscar uses straight-line amortization for patents. On December 31, 2020, the expected future cash flows from the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Oscar's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2020 balance sheet? a. $3,875,000 b. $3,050,000 c. $5,100,000 d. $4,250,000

B

50. Jacky Inc. purchased Manzanita Marine on June 1, 2021 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2024, the Manzanita Marine Division had a fair value of $25,400,000. The net assets of Manzanita (including goodwill) had a fair value of $24,900,000 at that time. What amount of loss on impairment of goodwill should Jacky record in 2024? a. $600,000. b. $0. c. $2,600,000. d. $500,000.

B

66. Fern Company is a U.S.-based company that designs and builds compressors for large HVAC units. Fern decides to build a new plant in China, its first attempt at doing business internationally. During its start-up phase, Fern incurs $2,000,000 of start-up costs including $1,000,000 in legal fees, $700,000 to introduce its product, and another $300,000 in state fees to the Chinese government to organize the new business entity. Fern Company's CEO fully expects the company to become profitable during its 3rd year of operations. How should Fern Company account for these costs? a. Fern can capitalize $1,300,000 related to legal and state fees, but the other costs must be expensed as incurred. b. Fern must expense all $2,000,000 start-up costs as incurred. c. Fern can capitalize $1,000,000 in legal fees, but the other costs must be expensed as incurred. d. Fern can capitalize $700,000 related to introducing its product, but the other costs must be expensed as incurred.

B

18. How should research and development costs be accounted for? A. Must be capitalized when incurred and then amortized over their estimated useful lives. B. Must be expensed in the period incurred unless contractually reimbursable. 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 FASB Statement No. 2 has standardized and simplified accounting practice in the area of R & D expenditures by requiring that all research and development costs be charged to expense when incurred. The obvious exception to this rule is when the R & D costs are contractually reimbursed.

11. 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 Goodwill is considered to have an indefinite life and therefore should not be amortized. Income statements are not charged unless goodwill has been impaired.

12. 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.

B Goodwill is the difference between the fair value of the net tangible and identifiable intangible assets and the purchase price of a business organization. It does not represent the entire purchase price nor is it an amount added to the purchase price to arrive at a master valuation. Also, there are many accounts that appear in the financial statements at their fair market value, so alternative D is not correct.

8. Smith Co. bought a window franchise from Paine, Inc., on January 2, 2021, 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, 2021, 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, 2021? A. $ 375 B. $ 2,000 C. $ 2,500 D. $15,000

B Smith Corporation should record franchise amortization expense of $2,000 in 2021 ($100,000/50 years = $2,000).

3. 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 The current classification of intangibles is either limited-life or indefinite life. An intangible asset with a limited life is amortized; an intangible asset with an indefinite life is not amortized.

17. In 2018, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2021, the Rousseau division reported net assets of $3,300,000 (including $1,700,000 of goodwill). Hume reviewed the Rousseau division and determined that expected net future cash flows equal $2,500,000 and the fair value is estimated to be only $1,800,000. What entry should Hume record concerning the Rousseau division on December 31, 2021? A. No entry is needed. B. Loss on impairment 1,500,000 Goodwill 1,500,000 C. Loss on impairment 1,200,000 Goodwill 1,200,000 D. Loss on impairment 1,500,000 Prorata deduction of all assets 1,500,000

B The general rules that apply to impairments of long-lived assets also apply to intangibles; however, goodwill impairments involve a grouping of net assets. In performing the review for recoverability, the sum of expected future net cash flows ($2,500,000) is less than the carrying amount of the net assets ($3,300,000); therefore an impairment loss should be measured and recognized. The impairment loss is the amount by which the carrying amount of the assets exceeds the fair value of the assets ($3,300,000 - $1,800,000 = $1,500,000). Where goodwill is associated with assets that are subject to impairment loss, the carrying amount of the associated goodwill should be eliminated before the carrying amounts of impaired long-lived assets and identifiable intangibles are reduced to their fair values.

7. Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January, 2015. The cost of the franchise was $125,000 and was estimated to have a limited life of 40 years. Early in the year 2021, 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? 2019 2020 2021 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

D During the first six years of the franchise useful life the amortization would be the cost ($125,000) divided by the 40 year maximum life. This would result in an annual charge to expense of $3,125 ($125,000/40) for the first six years (2015 through 2020). Thus, at the beginning of 2021, when the franchise was considered worthless, the book value of the franchise account would be $106,250 [$125,000 - ($3,125 X 6)]. When the franchise is deemed worthless, it should be written off immediately.

21. Calvin Company incurred the following cost related to the start-up 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, 2021, what amount of the start-up costs should be amortized in 2022? A. $4,400. B. $2,200. C. $ 800. D. $ 0.

D Start-up costs are to be expensed as incurred; therefore, there should be no costs associated with the organization in 2021 that will be amortized in 2022.

13. 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 The reason goodwill arises is because the future earnings potential of a purchased business is in excess of what would be considered normal. Thus, goodwill reflects the future positive results that were purchased. To write this amount off immediately would be inconsistent with the reason for its initial recording.

26. Construction permits are a. marketing-related intangible assets. b. customer-related intangible assets. c. contract-related intangible assets. d. not considered to be intangible assets.

C

29. The difference between the price paid to acquire another company and the fair market value of that company's net assets can be referred to as a. a master valuation account. b. a gap filler. c. all of these answer choices are correct. d. goodwill.

C

33. Which of the following costs of goodwill should be amortized over their estimated useful lives? Costs of goodwill from a business combination accounted for as a purchase Costs of developing goodwill internally a. YES NO b. YES YES c. NO NO d. NO YES

C

42. Production backlogs fall under which category of intangible assets? a. Marketing-related. b. Artistic-related. c. Customer-related. d. Technology-related.

C

57. Research and development costs do not include: a. construction of prototypes. b. searching for applications of new research findings. c. routine ongoing efforts to improve the qualities of an existing product. d. critical investigation aimed at discovering new knowledge.

C

59. The requirement that companies expense all R&D costs as incurred is an example of the conflict between: a. consistency and neutrality. b. comparability and consistency. c. relevance and faithful representation. d. neutrality and relevance.

C

61. The cost of a purchased intangible asset includes a. legal fees. b. purchase price. c. all of these answer choices are correct. d. incidental expenses.

C

62. Which of the following is an example of a marketing-related intangible asset? a. Broadcast rights. b. Customer list. c. Noncompetition agreements. d. Goodwill.

C

67. Which intangible asset should be disclosed separately on the balance sheet? a. Patents. b. Copyrights. c. Goodwill. d. Customer lists.

C

55. Bend Company's December 31, 2021 balance sheet reports assets of $13,210,000 and liabilities of $4,275,000. The book values of Bend's assets approximate their fair values, except for land, which has a fair value $600,000 greater than its book value. On December 31, 2021, Blue Corporation paid $11,775,000 to acquire Bend. What amount of goodwill should Blue record as a result of this purchase? a. $1,640,000 b. $0 c. $2,240,000 d. $2,840,000

C 11,775,000-(13,210,000-4,275,000+600,000) = 2,240,000

46. On July 2, 2021, Adele Company bought a trademark from Robert, Inc. for $2,750,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Robert's books was $1,600,000. In Adele's 2021 income statement, what amount should be reported as amortization expense? a. $160,000. b. $275,000. c. $137,500. d.$80,000.

C 2,750,000/10 years X .5 years = 137,500

16. 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

C For indefinite-life intangibles other than goodwill, only the fair value test is employed to determine impairments

10. 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 Goodwill is recorded only when an entire business is purchased because goodwill is a going concern valuation and cannot be separated from the business as a whole. Goodwill generated internally should not be capitalized in the accounts because measuring the components of goodwill is simply too complex and associating any costs with future benefits is too difficult.

15. 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

C 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).

4. 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. salvage value D. provisions for renewal or extension.

C 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. Salvage value is a concept related to the computation of depreciation on tangible fixed assets. Salvage value is not a factor used in determining useful life of an intangible.

5. 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 When a trademark or trade name is developed by a company, the costs associated with that development should be capitalized. The only cost that is not appropriately capitalized are costs related to research and development.

30. The two principal types of patents issued by the U.S. Patent and Trademark Office are a. artistic-related patents and customer-related patents. b. marketing-related patents and contract-related patents. c. limited-life patents and indefinite-life patents. d. process patents and product patents.

D

36. The impairment rule for goodwill involves how many steps? a. 3 b. 4 c. 1 d. 2

D

38. Which of the following research and development costs may be capitalized? a. Contract services. b. Personnel. c. Indirect costs. d. Research and development equipment to be used on current and future projects.

D

48. Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of a. financial accounting winning out over managerial accounting. b. GAAP winning out over IFRS. c. accrual accounting winning out over cash-basis accounting. d. faithful representation winning out over relevance.

D

52. Which of the following costs should be excluded from research and development expense? a. Engineering activity required to advance the design of a product to the manufacturing stage. b. Modification of the design of a product. c. Acquisition of R & D equipment for use on a current project only. d. Cost of marketing research for a new product.

D

58. Which of the following costs are similar to R & D costs? a. Start-up costs for a new operation. b. Computer software costs. c. Advertising costs. d. All of these answer choices are correct.

D

65. Which of the following costs incurred by Berber Corporation are considered R&D costs? a. Periodic alterations to existing products. b. Routine ongoing efforts to refine an existing product. c. All of these answer choices are correct. d. Operation of pilot plants.

D

32. Tiburon Corporation purchased a patent for $1,850,000 on November 30, 2019. It has a remaining legal life of 11 years. Tiburon estimates that the remaining useful life of the patent is useful life of 15 years. What balance will be reported on the December 31, 2021 balance sheet for the patent (if necessary, round your answer to the nearest dollar)? a. $1,850,000. b. $1,485,606. c. $1,583,678. d. $1,499,625.

D (1,850,000/(11X12)) = 14,015 monthly amortization 1,850,000-(14,015X25 months) = 1,499,625

6. A large publicly held company has developed and registered a trademark during 2021. How should the cost of developing 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 A trademark is no different than any other limited-life intangible asset. The costs associated with the acquisition of the trademark are to be amortized over its useful life.

19. In 2021, 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 2021. It is estimated that these costs will be recovered by the end of 2024. What amount of R&D costs should be charged against 2021 income? A. $ 0. B. $ 25,000. C. $190,000. D. $215,000.

D All R & D costs are charged to expense when incurred. Thus, the 2021 expenditures of $215,000 should be charged against 2021 income.