Final Exam 6

Which cost is NOT an intangible asset according to GAAP? Franchises Goodwill Trademarks Research and development

Research and development costs are not intangible assets according to GAAP because the likelihood of future benefits from these costs is uncertain. GAAP requires these costs to be expensed as operating expenses as incurred. Franchises, goodwill, and trademarks are all intangible assets, the cost for which is capitalized on the balance sheet.

The accounting treatment and reporting of research and development (R&D) costs under U.S. Generally Accepted Accounting Standards (GAAP) and International Financial Reporting Standards (IFRS) differs in that GAAP requires

GAAP requires all research and development costs to be expensed when incurred, while IFRS allows certain development costs to be capitalized as assets when incurred if it is probable future benefits will be received. Both GAAP and IFRS are in agreement on expensing research costs.

Winslow Inc. incurred costs in Year 1 to develop a new machine totaling $85,000. In December of Year 1, the company applied for and was granted a trademark for its machine at a cost of $18,500 for 10 years. The company began selling the machines with the new trademark on January 1 of Year 2. What is the amount of amortization expense for Year 2?

Amortization Expense = $0. Trademarks are reviewed for impairment and are not amortized. Trademarks are protected for 10 years with renewal registrations for 10 years. As such, there is no end to the time period in which the trademark will generate future benefits for the company, so the cost of the trademark remains in the accounting records and is not amortized.

Harper House Goods applied for and was granted a copyright on a new app for cell phones at a cost of $36,400 for 70 years. The company estimates the copyright will generate future benefits for five years. What is the amount of amortization expense for Year 2?

Amortization Expense = Cost of Intangible Asset ÷ Estimated Useful Life. Amortization Expense = $36,400 ÷ 5 = $7,280. The copyright cost is amortized over the useful life, the time over which the company expects to receive benefits.

Lanigan Products applied for and was granted a patent for a new product at a cost of $56,000. The government granted rights to the patent for 20 years. The company estimates the patent will generate future benefits for eight years. What journal entry is prepared to record the amount of amortization expense for Year 3?

Amortization Expense = Cost of Intangible Asset ÷ Estimated Useful Life. Amortization Expense = $56,000 ÷ 8 = $7,000. Debit Patent Amortization Expense $7,000; Credit Patents $7,000. Even though the government granted the patent for 20 years, the company thinks it will generate benefits for only eight years. As such, the patents cost is amortized over the useful life of eight years.

Mixology Inc. incurred costs in Year 1 to develop a new smoothie blender totaling $44,000. In December of Year 1, the company applied for and was granted a patent at a cost of $76,500 for the new smoothie blender. On December 14, a competitor sued Mixology. An additional $11,500 was spent by Mixology successfully defending the patent in court. What are the total debits to be posted to the patent account during Year 1?

Cost of Patent = Cost to Acquire + Costs of a Successful Patent Defense. $76,500 + $11,500 = $88,000. The costs to acquire the patent and cost of legally defending the patent are debited to the patent account, both of which maintain the right to use the patent to generate future benefits. Generally Accepted Accounting Principles (GAAP) requires that all research and development costs be expensed when incurred because the likelihood of future benefits from these costs is uncertain.

Charm Industries purchased a 12-year franchise from Burger Joint for $204,000 by signing a 4% note due in one year. The company spent $560,000 building the Burger Joint restaurant during Year 1 and opened for operations on January 1 of Year 2. The company paid cash for the building. At the beginning of Year 2, the company also acquired $80,000 of inventory. Which journal is prepared to record the franchise?

Debit Franchise $204,000; Credit Notes Payable $204,000. The requirement is to record only the franchise. The cost of the building is debited to Buildings, and the cost of inventory is debited to Inventory. Neither of these costs are part of the cost of the franchise.

During Year 1, Solid Ground acquired a business and properly recorded Goodwill in the amount of $624,000. At the end of Year 2, the company determined that the amount of goodwill impaired is $118,000. The company believes the goodwill will generate future benefits for an indeterminable time period. What entry will be made at the end of Year 2 for goodwill?

Debit Loss from Impairment of Goodwill $118,000; credit Goodwill $118,000.Goodwill is an intangible asset of a business that can only be recorded when a company purchases another business. It is not amortized because the time period from which the company expects to benefit is indefinite. Each year, the company must review goodwill for impairment and recognize a loss for the amount of the impairment. The amount of the loss recognizes the impairment amount, and the credit to Goodwill decreases the asset.

During Year 1, Roundabout Road Work purchased a business costing $8,900,000 and properly recorded goodwill in the amount of $1,340,000. At the end of Year 2, the company determined that the value of goodwill is $1,165,000. The company believes the goodwill will generate future benefits for an indeterminable time period. How much is the impairment of goodwill?

Loss on Impairment of Goodwill = Value of Goodwill − Original Cost of Goodwill. Loss on Impairment of Goodwill = $1,165,000 − $1,340,000 = ($175,000). Goodwill is an intangible asset of a business that can only be recorded when a company purchases another business. It is not amortized because the time period from which the company expects to benefit is indefinite. Each year, the company must review goodwill for impairment and recognize a loss for the amount of the impairment. The amount of the loss recognizes the impairment amount, and the credit to Goodwill decreases the asset.