Ch 12 - Intangible Assets

If a company buys several intangible assets in a "basket purchase," the company should allocate the cost on the basis of the book values of the purchased intangible assets.

false

Intangible assets are normally classified as current assets.

false

The controversy surrounding the policy to expense all research and development costs associated with internally created intangible assets results in

understating assets and overstating expenses.

Felhofer Inc. purchased McKinley Marine on June 1, 2012 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2015, the McKinley Marine Division had a fair value of $25,400,000. The net identifiable assets of McKinley (including goodwill) had a fair value of $24,900,000 at that time. What amount of loss on impairment of goodwill should Felhofer record in 2015?

$0. The fair value of McKinley is greater than its carrying amount so no impairment has occurred.

On July 1, 2017, 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 2017 income statement, what amount should be reported as amortization expense?

$137,500. Straight-line amortization, $2,750,000 (cost) / 10 years (useful life) X 6/12 (July 1 - December 31, 2017) results in an amortization expense of $137,500

Eisenhower Corporation purchased a patent for $1,850,000 on November 30, 2015. It has a remaining legal life of 18 years. Eisenhower estimates that the remaining useful life of the patent is 15 years. What balance will be reported on the December 31, 2017 balance sheet for the patent (if necessary, round your answer to the nearest dollar)?

$1,593,056. Total amortization expense charged between November 30, 2012 and December 31, 2017: $1,850,000 / 180 months - $256,94 = $1,593,056

Tiburon Corporation purchased a patent for $1,850,000 on November 30, 2015. It has a remaining legal life of 18 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, 2017 balance sheet for the patent (if necessary, round your answer to the nearest dollar)?

$1,593,056. Total amortization expense charged between November 30, 2015 and December 31, 2017: $1,850,000 (cost)/ 180 months (useful life) X 25 months (November 30, 2015 - December 31, 2017) = $256,944. The balance in the Patent account would be: $1,850,000 (cost) - $256,944 (amortization) = $1,593,056.

On January 1, 2017, Bumper Corp. acquires a customer list for $400,000. Bumper estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Bumper plans to sell the customer list to another company for $62,500. On Bumper's income statement for the year ended December 31, 2017, how much amortization expense should it report?

$112,500 Amortization Expense = Cost less residual value / useful life: ($400,000 - 62,500)/ 3 years = $112,500 annual amortization expense.

On January 1, 2017, Springsteen Corp. acquires a customer list for $400,000. Springsteen estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Springsteen plans to sell the customer list to another company for $62,500. On Springsteen's income statement for the year ended December 31, 2017, how much amortization expense would it report?

$112,500 Customer lists should be amortized over their useful life: (⁄400,000 − $62,500) / 3 years = $112,500 annual amortization expense.

Kern Corporation began operating as a business in 2017. During January 2017, 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 2017, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Kern Corporation report its trademark on its December 31, 2017 balance sheet?

$150,000 When a company develops a trademark, it capitalizes the costs related to securing it including legal fees, registration fees, design costs, and successful defense costs. In the case, $300,000 + $250,000 + $150,000 = $700,000.

Truffle Inc. acquired a patent on January 1, 2014 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, 2017, 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 2017 income statement?

$2,560,000. Amortization charged to date is $7,800,000 / 10 years x 4 years = $3,120,000 so the carrying value of the patent at December 31, 2017 is: $4,680,000 ($7,800,000 - $3,120,000). The impairment loss is the difference between the carrying value and the discounted expected future net cash flows: $4,680,000 - $2,120,000 = $2,560,000

Bryson Corporation purchased a limited-life intangible asset for $1,162,500 on May 1, 2015. 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, 2017 (if necessary, round your answer to the nearest dollar)?

$206,667 $1,162,500 (cost) / 180 months (useful life) multiplied by 32 months (May 1, 2015 - December 31, 2017) is $206,667.

Kust Company acquired a patent on a manufacturing process on January 1, 2012 for $5,100,000. It was expected to have a 12 year life and no residual value. Kust uses straight-line amortization for patents. On December 31, 2013, 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 Kust's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?

$3,050,000. The book value of the patent at December 31, 2013 is $4,250,000 (cost of $5,100,000 less 2 years amortization at $425,000 per year). Since the sum of the undiscounted cash flows of $3,875,000 is less than the carrying value, the company must measure and recognize an impairment loss. The patent should be carried on the balance sheet at the present value of $387,500 expected annual cash lows for the next 10 years, $3,050,000.

Lumberyard Inc. incurred the following costs during the year ended December 31, 2017: Laboratory research aimed at discovery of new knowledge $ 4,295,000 Costs of testing prototype and design modifications 712,500 Quality control during commercial production, including routine testing of products 485,000 On December 31, 2017, purchase of research facilities having an estimated useful life of 20 years with alternative future use in other research & development projects 7,360,000

$5,007,500.

Which of the following principles best describes the current method of accounting for research and development costs?

Immediate recognition as an expense

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 1. NO NO 2. NO YES 3. YES YES 4. YES NO

1 Neither goodwill purchased or developed internally is amortized.

The impairment rule for goodwill involves how many steps?

2 There are two steps: first, compare the fair value of the company to its carrying value including goodwill; and second, compare the implied fair value of the goodwill to its carrying value.

Coral Corporation began operating as a business in 2017. During January 2017, 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 2017, 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, 2017 balance sheet?

700,000 When a company develops a trademark, it capitalizes the costs related to securing it including legal fees, registration fees, design costs, and successful defense costs. In this case, $300,000 + 250,000 + 150,000 = $700,000.

Zak Company and Clark Company were combined in a purchase transaction. Zak Company was able to acquire Clark at a bargain price. The fair market value of Clark's net assets exceed the price paid by Zak to acquire the company. Proper accounting treatment by Zak is to report the excess of fair value over purchase price as

A gain.

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

All of the answer choices are correct.

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)Goodwill. (c)A gap filler. (d)All of these answer choices are correct.

All of these answer choices are correct.

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

All of these answer choices are correct.

Which of the following is a factor to be considered in determining a limited-life intangible asset's useful life? The effects of obsolescence. All of these answer choices are correct. Any legal provisions that may limit the useful life. The expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate.

All of these answer choices are correct.

Which of the following represents a federally granted right?

Copyrights

Which of the following costs should be excluded from research and development expense?

Cost of marketing research for a new product.

Which of the following is considered a research activity?

Critical investigation aimed at discovery of new knowledge.

Production backlogs fall under which category of intangible assets?

Customer-related.

Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of

Faithful representation winning out over relevance.

Which of the following is not one of the major categories of intangibles?

Financing-related.

Which of the following principles best describes the current method of accounting for research and development costs?

Immediate recognition as an expense.

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

Intangible assets derive their value from the rights and privileges granted to the company using them.

Which of the following research and development costs may be capitalized?

Research and development equipment to be used on current and future projects.

Which of the following research and development costs may be capitalized?

Research and development equipment with alternative future uses in other research & development projects or otherwise.

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

They are all subject to amortization.

Which of the following would not be amortized?

Trade name.

Expensing all R&D costs associated with internally created intangible assets could result in

Understating assets and overstating expenses.

Marketing-related intangibles would include

a trade name.

The presentation of intangible assets in the financial statements involves crediting amortization directly to the intangible asset account. includes reporting Research & Development costs as an expense in the income statement. includes the disclosure of the amortization expense for the next 5 years. all of these answer choices are correct.

all of these answer choices are correct.

Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of

faithful representation winning out over relevance.

A purchased limited-life intangible asset ________ amortized and is impairment tested using ________.

is; the recoverability test and then the fair value test.

If the life of a limited-life intangible asset changes, the remaining carrying amount is amortized over the revised remaining useful life.

true

The residual value of an intangible asset should be assumed to be zero unless, at the end of its useful life, the intangible asset has value to another company

true