Chapter 12 Intermediate

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? a. $0 b. $500,000 c. $600,000 d. $2,600,000

a. $0 fair value is greater than carrying amount = no impairment

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. a gain b. a loss c. a liability d. paid-in capital

a. a gain

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

a. is amortized, tested using the recoverability test then the fair value test

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

b. 2 1. compare fair value to CV including goodwill 2. compare implied fair value of goodwill to its CV

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. financing related

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)? a. $1,850,000. b. $1,583,678. c. $1,593,056. d. $1,485,606

c. $1,593,056 $1,850,000 - 256,944 = 1,593,056 ($1,850,000/180months)*25 = $256,944 *180 months = 15years*12 months *25 months = 2 years and one month

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? a. $1,340,000 b. $2,120,000 c. $2,560,000 d. $4,680,000

c. $2,560,000 Amortization to date: (7,800,000/10years)*4years = $3,120,000 CV = $4,680,000 ($7,800,000 - $3,120,000) Impairment loss = difference between CV and discounted exp. future net cash flows 4,680,000 - 2,120,000 = $2,560,000

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

c. Cost of marketing research for a new product.

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

c. Critical investigation aimed at discovery of new knowledge.

Expensing R&D costs associated with internal created intangible assets could result in: a. overstating assets and overstating expenses b. overstating assets and understating expenses c. understating assets and overstating expenses d. understating assets and understating expenses

c. understating assets and overstating expenses

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? a. $67,500 b. $133,333 c. $80,000 d. $112,500

d. $112,500 (400,000-62,500)/3years = 112,500

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? a. $5,100,000 b. $4,250,000 c. $3,875,000 d. $3,050,000

d. $3,050,000 (5,100,000/12)*2 years = $850,000 CV or book value = (5,100,000 - 850,000) = $4,250,000 > than 3,875,0000 so impairment loss. On balance sheet record patent at present value of expected annual cash flows for next 10 years

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? a. $150,000 b. $400,000 c. $550,000 d. $700,000

d. $700,000 (300,000+250,000=150,000)

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.

d. All of these answer choices are correct.

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

d. Immediate recognition as an expense.

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

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. master valuation account b. goodwill c. gap filler d. all are correct

d. all are correct Goodwill is the difference between the purchase price and the fair market value of the company's net assets. Since it is measured as a residual amount, it is sometimes called a master valuation account or a gap filler.

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 effect of obsolescence d. all of the answers are correct

d. all of the above

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

d. they are all subject to amortization