Chapter 12 Intermediate Accounting: Review - Intangible Assets

Q 12.9: Which of the following statements is true about the amortization of goodwill? A : It is dependent upon the number of years a company expects to use the benefits it provides. B : It should be computed using the straight-line method unless another method is deemed more appropriate. C : It represents as acceptable an accounting practice as does the immediate write-off method. D : It is not recorded as goodwill is deemed to have an indefinite life.

D

Q 12.5: Which of the following characteristics are considered when determining the useful life of an intangible asset? I. Expected actions of competitors. II. Salvage value, except when it is of value to another company. III. Provisions for renewal or extension. IV. Legal life. A : II, III, and IV. B : I, II, and IV. C : I, II, and III. D : I, III, and IV.

D

Q 12.16: In 2016, Sinclair Enterprises had the following research and development costs: Materials and facilities $112,000 Personnel 87,000 Indirect costs 26,000 These costs relate to a product that will be marketed in 2016. It is estimated that these costs will be recovered by the end of 2020. If the materials and facilities will not be used for future projects, what amount of research and development costs should be charged against 2016 income? A : $61,000 B : $199,000. C : $56,250 D : $225,000

D Because all the costs apply to this one project, they should all be expensed as incurred. Therefore, the total $225,000 of R&D costs will be expensed in 2016.

Q 12.18: Beatty Incorporated had the following start-up costs: Attorney's fee $15,000 Underwriter's fee 18,000 State incorporation fee 9,000 = $42,000 If the company plans to amortize these costs according to GAAP, what amount of start-up costs should be amortized in 2017, assuming Beatty Incorporated began operation in 2016? A : $4,200 B : $2,100 C : $1,050 D : $ 0

D According to GAAP, start-up costs are expensed as incurred, not capitalized and amortized. Therefore, no start-up costs will be amortized in 2017.

Q 12.15: What is the difference in accounting between a research cost and a development cost? A : There are no differences in accounting between research costs and development costs. B : Research costs are capitalized and amortized until the product goes to market, whereas development costs are capitalized and amortized from the time the product hits the market until the product is withdrawn from the market. C : Research costs are expensed as incurred, whereas development costs are capitalized and amortized over the life of the new product. D : Research costs are capitalized and amortized over the life of the project, whereas development costs are expensed as incurred.

A

Q 12.2: Which of the following are intangible assets? I. Franchises. II. Accounts receivable. III. Patents. IV. Copyrights. A : I, III, and IV. B : I, II, and III. C : I, II, and IV. D : II, III, and IV.

A

Q 12.3: A company plans to amortize an intangible asset. When they journalize the amortization amount, they should debit an expense account and credit A : either the intangible asset account or an associated accumulated amortization account. B : both the intangible asset account and an associated accumulated amortization account. C : the intangible asset account but not the accumulated amortization account. D : the accumulated amortization account but not the intangible asset account.

A

Q 12.10: Which of the following is the correct reason for why the accounting profession does not allow the immediate write-off of goodwill? A : 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. B : To write-off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential. C : Because the amortization of goodwill is tax deductible, an immediate write-off serves no useful purpose. D : Goodwill has a useful life like all assets and should be charged as an expense at a normal rate.

B

Q 12.4: For companies using GAAP, they should characterize their intangible assets as either A : amortizable or unamortizable. B : limited-life or indefinite-life. C : legally restricted or goodwill-type. D : specifically identifiable or goodwill-type.

B

Q 12.7: Costs associated with developing a trademark or trade name should be capitalized if they result from: I. Consulting fees. II. Design costs. III. Attorney fees. IV. Research and development cost. A : II, III, and IV. B : I, II, and III. C : I, III, and IV. D : I, II, and IV.

B

Q 12.11: Burris Enterprises is testing their limited-life intangible assets for impairment. The impairment test(s) they should use include(s) A : the fair value test but not the recoverability test. B : the recoverability test but not the fair value test. C : both the recoverability test and the fair value test. D : neither the recoverability test nor the fair value test.

C

Q 12.12: Dickinson Outerwear is calculating impairment of their indefinite-life intangibles other than goodwill. The impairment test(s) they should use include(s) A : neither the recoverability test nor the fair value test. B : the recoverability test but not the fair value test. C : the fair value test but not the recoverability test. D : both the recoverability test and the fair value test.

C

Q 12.14: Research and development costs that have no future alternative use A : 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 : must be capitalized when incurred and then amortized over their estimated useful lives. C : must be expensed in the period incurred unless contractually reimbursable. D : may be either capitalized or expensed when incurred.

C

Q 12.17: Which of the following are research and development activities? I. Adaptation of an existing capability to a particular requirement or customer's need. II. Searching for applications of new research findings. III. Laboratory research aimed at discovery of new knowledge. IV. Conceptual formulation and design of possible product or process alternatives. A : I, II, and IV. B : I, III, and IV C : II, III, and IV. D : conceptual formulation and design of possible product or process alternatives.

C

Q 12.8: Which of the following is true about goodwill? A : Goodwill exists in any company that has earnings that differ from those of a competitor. B : Goodwill generated internally should not be capitalized unless it is measured by an individual independent of the enterprise involved. C : Goodwill represents a unique asset in that its value can be identified only with the business as a whole. D : Goodwill is easily computed by assigning a value to the individual attributes that comprise its existence.

C

Q 12.6: Jamison Enterprises acquired a franchise to operate a Good Burger Joint in January, 2013. The cost of the franchise was $360,000 and was estimated to have a limited life of 30 years. Early in the year 2018, the franchise was forced out of business due to lawsuits. Jamison should record which of the following series of expenses to their income statement for the years noted? 2013/2014/2015 a. 10,000/10,000/10,000 b. 12,000/12,000/12,000 c. 12,000/12,000/300,000 d. 0/0/360,000 A : b. B : d. C : c. D : a.

C Each year before 2018, the franchise cost should be amortized over the life of the franchise. Therefore, yearly amortization expenses are $360,000/30 = $12,000. However, in the year the franchise was forced out of business, the remaining book value of the franchise would be expensed [$360,000 - ($12,000*5) = $300,000].

Q 12.13: In 2014, Herron Resources purchased Stinson Tile for $4.5 million. On December 31, 2017, the Stinson division reported net assets of $5,600,000 (including $1,800,000 of goodwill). Herron reviewed the Stinson division and determined that expected net future cash flows equaled $4,700,000 and the fair value is estimated to be only $3,900,000. What entry should Herron record concerning the Stinson division on December 31, 2017? A : Loss on impairment 900,000 Dr. Goodwill 900,000 Cr. B : Loss on impairment 1,700,000 Dr. Prorata deduction of all assets 1,700,000 Cr. C : Loss on impairment 1,700,000 Dr. Goodwill 1,700,000 Cr. D : No entry is needed.

C Loss on impairment is calculated by subtracting the fair value from the book value. Here, $5,600,000 - $3,900,000 = $1,700,000. Because goodwill is equal to more than the cost of the impairment, the loss on impairment should be taken from goodwill rather than another account.

Valuing and Amortizing Intangibles 3. __ is the appropriate basis for recording purchased intangible assets. Like tangible assets, cost includes acquisition price and all other expenditures necessary in making the asset ready for its intended use—for example, purchase price, legal fees, and other incidental expenses. When intangibles are acquired for consideration other than cash, the cost of the intangible is the fair market value of the consideration given or the intangible asset received, whichever is more clearly evident. Costs incurred to create internally created __ are generally expensed as incurred.

Cost, internally created intangibles

Q 12.19: Financial reporting of intangible assets is most similar to reporting for A : investments. B : accounts receivable. C : inventory. D : equipment.

D

Q 12.1: If a company develops and registers a trademark in-house, how should they handle the accounting for the fees associated with registering the trademark? A : Costs should be capitalized and amortized over its useful life. B : Costs should be expensed as incurred. C : Costs should be capitalized and amortized over 10 years regardless of its useful life. D : Costs should be charged to an asset account that should not be amortized.

D

Q 12.20: On January 3, 2006, Hamm Enterprises was granted a patent on a product. On January 8, 2018, to protect its patent, Hamm purchased a patent on a competing product that originally was issued on January 15, 2010. Because of its unique plant, Hamm does not feel that the competing patent can be used in producing a product. The cost of acquiring the competing patent should be: A : expensed in 2016. B : amortized over a maximum period of 8 years. C : amortized over a maximum period of 12 years. D : amortized over a maximum period of 20 years.

D