MBA 500 Ch 11

Harbor Company has three assets: land with a cost of $500,000 and a fair value of $900,000, a building with a net book value of $2,100,000 and a fair value of $2,500,000, and a patent with no reported value (it has been fully amortized) but worth $600,000. Mox Company pays $5,200,000 for Harbor. What is the amount of goodwill recorded in this purchase? $1,800,000 $2,400,000 $1,200,000 $0

$1,200,000

Mickey Company creates a logo for a product line and gets a copyright on it. The entire cost is $80,000 and is expected to have a useful life of 11 years. One year later, Casey Company buys all of Mickey Company when the logo is worth $200,000 and has a remaining life 10 years. On Casey Company's consolidated balance sheet prepared one year after acquiring Mickey Company, what is reported for this logo? $181,818 $200,000 $180,000 $65,455

$180,000 $200,000 - ($200,000/10) = $180,000

On January 1, Year One, Munson Company paid $5,000,000 for a trademark that has a useful life of 10 years. At what amount will the trademark appear on the balance sheet at December 31, Year Three? $3,500,000 $4,000,000 $3,000,000 $5,000,000

$3,500,000 $5,000,000 - 3x($5,000,000/10)

Bill Martin successfully creates an invention and on January 1, Year One, received a patent that gives exclusive right for 17 years. One year later, Bill Martin sells all the right to the patent to George Corporation for $4,000,000. George pays another $500,000 to a law firm for services to ensure proper transfer. George hopes to use the patent 6 years and then sell it for $300,000. At the end of Year Two, another company offers George $5,000,000 for this intangible asset, but that amount is rejected as being too low. What does George report as the balance of the patent on December 31, Year Two? $3,750,000 $3,800,000 $3,952,941 $4,687,500

$3,800,000 $4,000,000 + $500,000 - (($4,500,000 - $300,000)/6) = $3,800,000

What is the approximate present value of receiving $6,000,000 at the end of 5 years assuming an annual interest rate of 9%? $4,200,000 $3,300,000 $3,900,000 $4,500,000

$3,900,000 $6,000,000 x (1/1.09)^5 = $3,900,000

Buehrle Company buys an intangible asset on January 1, Year One, for $600,000 to be paid in exactly six years with no additional cash being paid in the interim. A reasonable interest rate is 11% per year. The present value of $1 at an 11% rate over a six-year period is $.53464. What interest expense is recognized at the end of each of the second and third years? $0 Year Two and $0 Year Three. $39,168 Year Two and $43,476 Year Three. $35,286 Year Two and $39,168 Year Three. $55,000 Year Two and $55,000 Year Three.

$39,168 Year Two and $43,476 Year Three $320,784 = $600,000 x .53464 Y1 $35,286 = $320,784 x 0.11 Y2 $39,168 = $320,784 + $35,286) x 0.11 Y3 $43,476 = $320,784 + $35,286 + $39,168) x 0.11

What is the approximate present value of receiving $8,000,000 at the end of 6 years assuming an interest rate of 5%? $5,600,000 $5,686,000 $5,968,000 $5,978,000

$5,968,000

Johnny Company has three assets: land with a cost of $700,000 and a fair value of $1,100,000, a building with a net book value of $2,400,000 and a fair value of $3,000,000, and a patent with no reported value (it has been fully amortized) but worth $350,000. Bacon Company pays $5,000,000 for Johnny. What is the amount of goodwill recorded in this purchase? $550,000 $900,000 $1,900,000 $1,550,000

$550,000

What is the approximate present value of receiving $25,000 per year for the next 4 years at an interest rate of 8%, assuming payments are made at the end of the period (ordinary annuity)? $68,000 $82,803 $100,000 $89,427

$82,803

Hoops Company buys an intangible asset on January 1, Year One, for $500,000 to be paid in exactly four years. No additional amounts are to be paid although a reasonable interest rate is 6% per year. The present value of $1 at 6% over a four year period is $.79209. What does the company report as of the date of acquisition? Asset $500,000 and liability $500,000. Asset $396,045 and liability $396,045. Asset $396,045 and liability $500,000. Asset $500,000 and liability $396,045.

Asset $396,045 and liability $396,045. $500,000 x 0.79209 = $396,045

The translation of new knowledge into actual products or services or into significant improvements in existing products or services; these costs are expensed as incurred according to U.S. GAAP.

Development

Accounting rules typically use fair value to record and account for intangible assets on a balance sheet throughout the asset's life when the fair value is increasing. True or False

False

An account called customer loyalty is reported on the balance sheet as an intangible asset when a parent acquires a subsidiary. True or False

False

An annuity due is an annuity with payments made at the end of each period. True of False

False

In buying a company, a parent records all assets of the company it buys at their fair values in every situation. True or False

False

Most companies use an accumulated amortization contra account to reduce an intangible asset balance. True or False

False

When goodwill has increased in value, a gain is recorded to augment the reported balance. True or False

False

Which of the following is NOT an intangible asset? Trademark Franchise Patent Inventory

Inventory

According to U.S. GAAP, research and development costs are generally expensed as incurred. True or False

True

An annuity due is an annuity with payments that start immediately and are made at the beginning of each period. True or False

True

An intangible asset lacks physical substance but is expected to provide future benefits for longer than one year. True or False

True

Goodwill is the amount paid to acquire a company that exceeds all of the identified and recorded net assets. True or False

True

Intangible assets that can be separated from a subsidiary and sold should be reported by the parent at fair value when a subsidiary is purchased. True or False

True

Intangible assets with infinite lives are not amortized but rather are accounted for on an impairment basis True or False

True

No attempt is made to determine an anticipated life for goodwill. True or False

True

The cost of a successful defense of an intangible asset is capitalized and then amortized over the shorter of the remaining legal life or the estimated useful life. True or False

True

Sandberg Company buys an intangible asset on January 1, Year One, for $700,000 to be paid in exactly five years with no additional cash being paid in the interim. A reasonable interest rate is 8% per year. The present value of $1 at 8% over a five-year period is $.68058. How does the recognition of interest over those five years impact the recorded amount of the intangible asset? a. It has no effect. b. It increases the reported asset by $38,112 per year. c. It increases the reported asset by $56,000 per year. d. It increases the reported asset by $6,806 per year.

a.

A mechanically derived pattern allocating the cost of an intangible asset to expense over the shorter of the legal life or estimated useful life; it is the equivalent of depreciation but relates to intangible assets

amortization

A series of equal payments made at equal time intervals.

annuity

An annuity with payments made at the beginning of each period; it is also referred to as an annuity in advance.

annuity due

Goodwill is recorded a. when the company acquires a good location for its business b. only when there is a transaction involving the purchase of an entire business c. when customers keep returning because they are satisfied with the company's products d. when the company has exceptional management

b

Identify the item below where the terms are not related. a. Equipment - depreciation b. Franchise - depreciation c. Oil well - depletion d. Patent - amortization

b

According to U.S. GAAP, research and development costs are generally expensed as incurred. a. IFRS requires research costs to be capitalized. b. IFRS requires development costs to be capitalized. c. Both of these. d. Neither of these.

b.

Natural resources are generally shown on the balance sheet under a. stockholders' equity b. intangibles c. property, plant and equipment d. investments

c

Which of the following is not an intangible asset that is reported on the balance sheet? a. Goodwill b. Copyrights c. Employees d. Trademarks

c

An intangible asset that provides the owner with the right to use literary, dramatic, musical, artistic, and certain other intellectual works.

copyright

Research and development costs a. should be included in the cost of the patent they relate to b. are capitalized and then amortized over a period not to exceed 20 years c. are classified as intangible assets d. must be expenses when incurred under generally accepted accounting principles

d

Which of the following is/are true about research and development under U.S. GAAP? a. Research is the search for new ideas. b. Development is the process of turning new ideas into saleable products. c. Research and development costs are expenses as incurred. d. All of these are true.

d.

The price paid by one company to acquire another that is in excess of the fair value of net identifiable assets and liabilities; this cost is often associated with intangibles that do not meet the criteria for accounting recognition, such as employee expertise and customer loyalty.

goodwill

An asset lacking physical substance that is expected to help generate revenues for more than one year; common examples are patents, copyrights, and trademarks.

intangible asset

The charge for using money over time, often associated with long-term loans; even if not specifically mentioned in the debt agreement, financial accounting rules require it to be computed and reported based on a reasonable rate.

interest

An annuity with payments made at the end of each period; it is also referred to as an annuity in arrears.

ordinary annuity

The amount associated with cash flows after all future interest—computed at a reasonable rate—has been mathematically removed; this figure is the principal of those future cash flows.

present value

The attempt to find new knowledge with the hope that the results will eventually be useful in creating new products or services or significant improvements in existing products or services; these costs are expensed as incurred according to U.S. GAAP.

research