Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

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CHAPTER 12 INTANGIBLE ASSETS

MULTIPLE CHOICE—Conceptual

21. Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are financial instruments.
c. They provide long-term benefits.
d. They are classified as long-term assets.


22. Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.

23. Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Short-lived.
c. Result in future benefits.
d. Expensed over current and/or future years.


24. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.


25. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research and development costs.
b. Filing costs.
c. Legal costs.
d. All of the above.


26. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance


27. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.


28. Factors considered in determining an intangible asset’s useful life include all of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life.
d. the amortization method used.


29. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.



30. Companies should test indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.



S31. One factor that is not considered in determining the useful life of an intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.


32. Which intangible assets are amortized?
Limited-Life Indefinite-Life
a.      Yes        Yes
b.      Yes         No
c.      No        Yes
d.      No         No


33. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.

34. Broadway Corporation was granted a patent on a product on January 1, 2001. To protect its patent, the corporation purchased on January 1, 2012 a patent on a competing product which was originally issued on January 10, 2008. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2012.


35. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor.  The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.



36. Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights


37. Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.


38. When a patent is amortized, the credit is usually made to
a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.



39. When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.


40. In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as:
a. other assets.
b. indirect costs.
c. goodwill.
d. direct costs.

41. Goodwill may be recorded when:
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.



42. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill?
a. A brand name.
b. A patent.
c. A customer list.
d. All of the above.


43. Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Brand Name.


44. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.


45. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. Proper accounting treatment by Easton is to report the excess amount as
a. a gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.


46. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.



47. The intangible asset goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.


48. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.


49. The recoverability test is used to determine any impairment loss on which of the following types of intangible assets?
a. Indefinite life intangibles other than goodwill.
b. Indefinite life intangibles.
c. Goodwill.
d. Limited life intangibles.


50. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No


51. The carrying amount of an intangible is
a. the fair value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related amortization recorded to date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.


52. Which of the following research and development related costs should be capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in process


53. 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


54. How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.


55. Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.


56. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.


57. Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.


58. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Translation of research findings or other knowledge into a significant improvement of an existing product.
d. all of the above.



59. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Neither a nor b.
d. Both a and b.


60. 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


61. If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from the facility.


62. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.


63. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.



64. Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer's need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.


65. Which of the following intangible assets should be shown as a separate item on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark


66. The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?
a. 6
b. 5
c. 4
d. 3


67. Which of the following should be reported under the “Other Expenses and Losses” section of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Patent impairment losses
d. None of the above.


68. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patents account.
b. shown in the current income statement.
c. reflected as credits in the Patents account.
d. reflected as a contra property, plant and equipment item.


69. Intangible assets are reported on the balance sheet
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.



70. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets other than goodwill.
c. Impairment losses on goodwill.
d. None of the above.


71. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets.
c. Research and development costs.
d. None of the above.


*72. Which of the following costs incurred with developing computer software for internal use should be capitalized?
a. Evaluation of alternatives.
b. Coding.
c. Training.
d. Maintenance.


*73. When developing computer software to be sold, which of the following costs should be capitalized?
a. Designing.
b. Coding.
c. Testing.
d. None of the above.


*74. Capitalized costs incurred to develop internal use computer software should be amortized using the:
a. percent-of-revenue approach.
b. percent-of-completion approach.
c. straight-line approach.
d. accelerated amortization approach.


*75. Capitalized costs incurred while developing computer software to be sold should be amortized using the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.


MULTIPLE CHOICE—Computational

76. Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000


77. Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000 to the seller. Legal fees of $900 were paid related to the acquisition. What amount should be debited to the patent account?
a. $900
b. $34,100
c. $35,000
d. $35,900


78. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5 par value common stock and $90,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the patent, its stock was selling for $9 a share. Mini Corp. should record the patent at what amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000



79. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC: $3,000. When Alonzo acquired the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo record Patent BB?
a. $100,000
b. $200,000
c.    $2,000
d. $225,000


80. Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $    -0-
b. $30,000
c. $40,000
d. $45,000


81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $    -0-.
b. $54,000
c. $72,000
d. $81,000


82. Thompson Company incurred research and development costs of $100,000 and legal fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?
a. $    -0-.
b. $  2,000.
c. $  6,000.
d. $12,000.


83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.


84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.


85. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
Copyrights $  30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.


86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for $960,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2013 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product.  What amount should Findley charge to expense during 2013, assuming amortization is recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.


87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining useful life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000

88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $  90,000.
c. $  60,000.
d. $  45,000.


89. A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2011 for $2,100,000. The company uses straight-line amortization for patents. On January 2, 2013, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2013 is
a. $350,000.
b. $  70,000.
c. $  95,454.
d. $  80,500.


90. Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?
a. $    -0-
b. $150,000
c. $2,700,000
d. $3,150,000


91. Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of $5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land, which has a fair value that is $800,000 greater than its book value. On 12/31/12, Egbert Corporation paid $12,200,000 to acquire Dotel. What amount of goodwill should Egbert record as a result of this purchase?
a. $     -0-
b. $   200,000
c. $4,400,000
d. $5,200,000



92. Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013.  The book value of Haeger Company’s net assets, as reflected on its December 31, 2012 balance sheet is $2,480,000.  An analysis by Floyd on December 31, 2012 indicates that the fair value of Haeger’s tangible assets exceeded the book value by $240,000, and the fair value of identifiable intangible assets exceeded book value by $180,000.  How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company?
a. $   -0-
b. $720,000
c. $480,000
d. $300,000


93. General Products Company bought Special Products Division in 2012 and appropriately recorded $500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products Division is $4,000,000 and it is carried on General Product’s books for a total of $3,400,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.


94. During 2012, Bond Company purchased the net assets of May Corporation for $2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value of May's assets when acquired were as follows:
Current assets $   1,080,000
Noncurrent assets  2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired ($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a period not to exceed forty years.


95. The following information is available for Barkley Company’s patents:
Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of
a. $     90,000.
b. $   315,000.
c. $1,290,000.
d. $1,380,000.


96. Harrel Company acquired a patent on an oil extraction technique on January 1, 2012 for $7,500,000.  It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $900,000 per year for the next eight years. The present value of these cash flows, discounted at Harrel’s market interest rate, is $4,200,000.  At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $7,500,000
b. $7,200,000
c. $6,000,000
d. $4,200,000


97. Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2012 for $6,250,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $500,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $3,000,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $6,250,000
b. $5,000,000
c. $4,000,000
d. $3,000,000


98. Twilight Corporation acquired End-of-the-World Products on January 1, 2012 for $8,000,000, and recorded goodwill of $1,500,000 as a result of that purchase. At December 31, 2012, the End-of-the-World Products Division had a fair value of $6,800,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $5,800,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2012?
a. $     -0-
b. $500,000
c. $700,000
d. $1,200,000


99. Jenks Corporation acquired Linebrink Products on January 1, 2012 for $6,000,000, and recorded goodwill of $1,125,000 as a result of that purchase. At December 31, 2012, Linebrink Products had a fair value of $5,100,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair value of $4,350,000 at that time. What amount of loss on impairment of goodwill should Jenks record in 2012?
a. $     -0-
b. $375,000
c. $525,000
d. $900,000


100. In 2012, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $  90,000
Personnel 130,000
Indirect costs  150,000
$370,000
These costs relate to a product that will be marketed in 2011. It is estimated that these costs will be recouped by December 31, 2015. The equipment has no alternative future use.  What is the amount of research and development costs that should be expensed in 2012?
a. $0.
b. $220,000.
c. $280,000.
d. $370,000.


101. Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects $   450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2013 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects     225,000
$5,225,000
The amount of research and development costs charged to Hall's 2013 income statement should be
a. $1,700,000.
b. $2,000,000.
c. $2,225,000.
d. $4,700,000.




102. Loazia Inc. incurred the following costs during the year ended December 31, 2013:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2013 is
a. $605,000.
b. $905,000.
c. $635,000.
d. $335,000.


103. MaBelle Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2012?
a. $   650,000
b. $   740,000
c. $1,100,000
d. $1,240,000


104. Leeper Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2012?
a. $   950,000
b. $   940,000
c. $1,450,000
d. $1,640,000


105. Platteville Corporation has the following account balances at 12/31/12:
Amortization expense $  30,000
Goodwill 420,000
Patent, net of $90,000 amortization 210,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $210,000
b. $300,000
c. $630,000
d. $660,000


*106. Shangra-La Company incurred $2,000,000 ($500,000 in 2011 and $1,500,000 in 2012) to develop a computer software product. $600,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2012 – $1,000,000; 2013 – $1,000,000; 2014 – $800,000; 2015 – $800,000; and 2016 – $400,000. What portion of the $2,000,000 computer software costs should be expensed in 2012?
a. $350,000
b. $400,000
c. $450,000
d. $1,500,000


*107. Logan Company incurred $4,000,000 ($1,100,000 in 2011 and $2,900,000 in 2012) to develop a computer software product. $1,200,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2012 – $2,000,000; 2013 – $2,000,000; 2014 – $1,600,000; 2015 – $1,600,000; and 2016 – $800,000. What portion of the $4,000,000 computer software costs should be expensed in 2012?
a. $700,000.
b. $750,000.
c. $800,000.
d. $2,900,000.


*108. Geller Inc. incurred $700,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 4-year life as follows: 2012 - $400,000; 2013 - $500,000; 2014 - $600,000; and 2015 - $500,000. What amount of the computer software costs should be expensed in 2012?
a. $700,000
b. $140,000
c. $175,000
d. $245,000


*109. Tripiani Inc. incurred $800,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 5-year life as follows: 2012 - $500,000; 2013 - $600,000; 2014 - $600,000; 2015 - $200,000; and 2016 - $100,000. What amount of the computer software costs should be expensed in 2012?
a. $200,000
b. $160,000
c. $180,000
d. $266,667


*110. Tripiani Inc. incurred $900,000 of capitalizable costs to develop computer software during 2012. The software will be used internally over its 5-year life. What amount of the computer software costs should be expensed in 2012?
a. $900,000
b. $180,000
c. $202,500
d. $300,000

MULTIPLE CHOICE—CPA Adapted
111. Lopez Corp. incurred $1,260,000 of research and development costs to develop a product for which a patent was granted on January 2, 2008. Legal fees and other costs associated with registration of the patent totaled $240,000. On March 31, 2013, Lopez paid $450,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2013 should be
a. $690,000.
b. $1,500,000.
c. $1,710,000.
d. $1,950,000.



112. On June 30, 2013, Cey, Inc. exchanged 4,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of $110,000. At the exchange date, Seely common stock had a fair value of $46 per share, and the patent had a net carrying value of $220,000 on Gore's books. Cey should record the patent at
a. $110,000.
b. $120,000.
c. $184,000.
d. $220,000.


113. On May 5, 2013, MacDougal Corp. exchanged 6,000 shares of its $25 par value treasury common stock for a patent owned by Masset Co. The treasury shares were acquired in 2012 for $135,000. At May 5, 2013, MacDougal's common stock was quoted at $34 per share, and the patent had a carrying value of $165,000 on Masset's books. MacDougal should record the patent at
a. $135,000.
b. $150,000.
c. $165,000.
d. $204,000.


114. Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2013 is 15 years. Its unamortized cost on Baden’s accounting records was $225,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.


115. January 2, 2010, Koll, Inc. purchased a patent for a new consumer product for $450,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2013, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2013, assuming amortization is recorded at the end of each year?
a. $  45,000
b. $270,000
c. $315,000
d. $360,000


116. On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an estimated useful life of 16 years. In January 2013, Russell paid $300,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2013, should be
a. $0.
b. $125,000.
c. $143,750.
d. $150,000.


117. Which of the following legal fees should be capitalized?
Legal fees to Legal fees to successfully
obtain a copyright defend a trademark
a. No No
b. No Yes
c. Yes Yes
d. Yes No


118. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a Costs of developing
 business combination   goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No


119. During 2013, Leon Co. incurred the following costs:
Testing in search for process alternatives $   350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon's 2013 income statement, research and development expense should be
a. $560,000.
b. $985,000.
c. $1,335,000.
d. $1,585,000.



120. Riley Co. incurred the following costs during 2013:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2013, Riley should report research and development expense of
a. $635,000.
b. $785,000.
c. $820,000.
d. $970,000.



EXERCISES

Ex. 12-121
Intangible assets have two main characteristics: (1) they lack physical existence, and (2) they are not financial instruments.

Instructions
(a) Explain why intangibles are classified as assets if they have no physical existence.
(b) Explain why intangibles are not considered financial instruments.


Ex. 12-122
Intangible assets may be internally generated or purchased from another party. In either case, what costs should be included in the initial valuation of the asset is an issue.

Instructions
(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a “basket purchase.” Provide a numerical example involving intangibles being acquired for a total price of $90,000.



Ex. 12-123
Why does the accounting profession make a distinction between internally created intangible assets and purchased intangible assets?

Ex. 12-124—Short essay questions.
1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?



Ex. 12-125
If intangible assets are acquired for stock, how is the cost of the intangible determined?


Ex. 12-126
Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented. How should these costs be accounted for in the year they are incurred?

Ex. 12-127—Intangible assets questions.
Indicate the best answer by circling the proper letter.

1. Copyrights should be amortized over
a. their legal life.
b. the life of the creator plus fifty years.
c. twenty years.
d. their useful life or legal life, whichever is shorter.

2. A patent should be amortized over
a. twenty years.
b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.

3. The major problem of accounting for intangibles is determining
a. fair value.
b. separability.
c. salvage value.
d. useful life.

4. Limited-life intangibles are reported at their
a. replacement cost.
b. carrying amount unless impaired.
c. acquisition cost.
d. liquidation value.

5. Negative goodwill arises when the ______________ of the net assets acquired is higher than the purchase price of the assets.
a. useful life
b. carrying value
c. fair value
d. excess earnings


Ex. 12-128
Intangible assets have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?



Ex. 12-129
What are factors to be considered in estimating the useful life of an intangible asset?


Ex. 12-130
Barkley Corp. obtained a trade name in January 2011, incurring legal costs of $30,000. The company amortizes the trade name over 8 years. Barkley successfully defended its trade name in January 2012, incurring $9,800 in legal fees. At the beginning of 2013, based on new marketing research, Barkley determines that the fair value of the trade name is $24,000. Estimated total future cash flows from the trade name are $26,000 on January 4, 2013.

Instructions
Prepare the necessary journal entries for the years ending December 31, 2011, 2012, and 2013. Show all computations.




Ex. 12-131—Intangible assets theory.
It has been argued on the grounds of conservatism that all intangible assets should be written off immediately after acquisition.  Discuss the accounting arguments against this treatment.

Ex. 12-132
Listed below is a selection of accounts found in the general ledger of Marshall Corporation as of December 31, 2013:

Accounts receivable Research & development costs
Goodwill Internet domain name
Organization costs Initial operating loss
Prepaid insurance Non-competition agreement
Radio broadcasting rights Customer list
Premium on bonds payable Video copyrights
Trade name Notes receivable

Instructions
List those accounts that should be classified as intangible assets.

Ex. 12-133
Define the following terms.
(a) Goodwill  (b) Negative goodwill


Ex. 12-134—Carrying value of patent.
Sisco Co. purchased a patent from Thornton Co. for $540,000 on July 1, 2010. Expenditures of $204,000 for successful litigation in defense of the patent were paid on July 1, 2013. Sisco estimates that the useful life of the patent will be 20 years from the date of acquisition.

Instructions
Prepare a computation of the carrying value of the patent at December 31, 2013.



Ex. 12-135—Accounting for patent.
In early January 2011, Lerner Corporation applied for a patent, incurring legal costs of $40,000. In January 2012, Lerner incurred $9,000 of legal fees in a successful defense of its patent.

Instructions
(a) Compute 2011 amortization, 12/31/11 carrying value, 2012 amortization, and 12/31/12 carrying value if the company amortizes the patent over 10 years.
(b) Compute the 2013 amortization and the 12/31/13 carrying value, assuming that at the beginning of 2013, based on new market research, Lerner determines that the fair value of the patent is $34,000. Estimated future cash flows from the patent are $35,000 on January 3, 2013.




Ex. 12-136
Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in accordance with generally accepted accounting principles?

Ex. 12-137
Fred’s Company is considering the write-off of a limited life intangible asset because of its lack of profitability. Explain to the management of Fred’s how to determine whether a writeoff is permitted.



Ex. 12-138
Leon Corp. purchased Spinks Co. 4 years ago and at that time recorded goodwill of $360,000. The Sinks Division’s net assets, including goodwill, have a carrying amount of $850,000. The fair value of the division is estimated to be $900,000.

Instructions
(a) Explain whether or not Leon Corp. must prepare an entry to record impairment of the goodwill. Include the entry, if necessary.
(b) Repeat instruction (a) assuming that the fair value of the division is estimated to be $800,000 and the implied goodwill is $270,000.


Ex. 12-139—Impairment of copyrights.
Presented below is information related to copyrights owned by Wamser Corporation at December 31, 2012.
Cost $3,600,000
Carrying amount 3,100,000
Expected future net cash flows 2,800,000
Fair value 1,900,000

Assume Wamser will continue to use this asset in the future. As of December 31, 2012, the copyrights have a remaining useful life of 5 years.

Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012.
(b) Prepare the journal entry to record amortization expense for 2013.
(c) The fair value of the copyright at December 31, 2013 is $2,000,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Ex. 12-140
Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?


Ex. 12-141
Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct and why?

Solution 12-141
These costs are referred to as start-up costs, or more specifically organizational costs in this case.  Accounting for start up costs is straightforward—expense these costs as incurred. The profession recognizes that these costs are incurred with the expectation that future revenues will occur or increased efficiencies will result. However, to determine the amount and timing of future benefits is so difficult that a conservative approach—expensing these costs as incurred—is required.


Ex. 12-142—Acquisition of tangible and intangible assets.
Vasquez Manufacturing Company decided to expand further by purchasing Wasserman Company. The balance sheet of Wasserman Company as of December 31, 2013 was as follows:

Wasserman Company
Balance Sheet
December 31, 2013

Assets Liabilities and Equities
Cash $   210,000 Accounts payable $   375,000
Receivables 550,000 Common stock 800,000
Inventory 275,000 Retained earnings    885,000
Plant assets (net)  1,025,000
Total assets $2,060,000 Total liabilities and equities $2,060,000

An appraisal, agreed to by the parties, indicated that the fair value of the inventory was $350,000 and that the fair value of the plant assets was $1,325,000. The fair value of the receivables is equal to the amount reported on the balance sheet. The agreed purchase price was $2,275,000, and this amount was paid in cash to the previous owners of Wasserman Company.

Instructions
Determine the amount of goodwill (if any) implied in the purchase price of $2,275,000. Show calculations.

*Ex. 12-143
MacroSoft Inc. has capitalized $900,000 of software costs. Sales from this product were $360,000 in the first year. MacroSoft estimates additional revenues of $840,000 over the product’s economic life of 5 years.

Instructions
Prepare the journal entry to record software cost amortization for the first year. Show all computations.



PROBLEMS

Pr. 12-144—Intangible assets.
The following transactions involving intangible assets of Minton Corporation occurred on or near December 31, 2012. Complete the chart below by writing the journal entry(ies) needed at that date to record the transaction and at December 31, 2013 to record any resultant amortization.  If no entry is required at a particular date, write "none needed."

On Date On
of Transaction December 31, 2013
1. Minton paid Grand Company $500,000 for the exclusive right to market a particular product, using the Grand name and logo in promotional material. The franchise runs for as long as Minton is in business.

2. Minton spent $600,000 developing a new manu-facturing process. It has applied for a patent, and it believes that its application will be successful.

3. In January, 2013, Minton's application for a patent (#2 above) was granted. Legal and registration costs incurred were $150,000. The patent runs for 20 years. The manufacturing process will be useful to Minton for 10 years.

4. Minton incurred $120,000 in successfully defend-ing one of its patents in an infringement suit. The patent expires during December, 2016.

5. Minton incurred $480,000 in an unsuccessful patent defense. As a result of the adverse verdict, the patent, with a remaining unamortized cost of $252,000, is deemed worthless.

6. Minton paid Sneed Laboratories $104,000 for research and development work performed by Sneed under contract for Minton. The benefits are expected to last six years.


Pr. 12-145—Goodwill, impairment.
On May 31, 2013, Armstrong Company paid $3,300,000 to acquire all of the common stock of Hall Corporation, which became a division of Armstrong. Hall reported the following balance sheet at the time of the acquisition:

Current assets $   900,000 Current liabilities $   600,000
Noncurrent assets  2,700,000 Long-term liabilities 500,000
Stockholders’ equity  2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Hall was $2,800,000. At December 31, 2013, Hall reports the following balance sheet information:

Current assets $   800,000
Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities    (500,000)
Net assets $2,000,000

It is determined that the fair value of the Hall division is $2,100,000. The recorded amount for Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $200,000 above the carrying value.

Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2013.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2013.
(c) Assume that the fair value of the Hall division is $1,950,000 instead of $2,100,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2013.


IFRS QUESTIONS

True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.


Multiple-Choice Questions

1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.


2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.

3. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge    $600,000
Search for application of new research findings      400,000
Salaries of research staff designing new laser bone scanner   1,200,000
Material, labor and overhead costs of prototype laser scanner      850,000
Costs of testing prototype and design modifications      450,000
Engineering costs incurred to advance the laser scanner to full production stage (technological feasibility reached)      700,000

Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP      IFRS¬¬¬¬¬¬¬¬¬¬¬¬¬
a. $1,000,000 $1,000,000
b.   2,200,000   1,200,000
c.   4,200,000   4,200,000
d.   4,200,000   3,500,000

4. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge    $600,000
Search for application of new research findings      400,000
Salaries of research staff designing new laser bone scanner   1,200,000
Material, labor and overhead costs of prototype laser scanner      850,000
Costs of testing prototype and design modifications      450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached)      700,000

Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.
   U.S. GAAP       IFRS
a. $1,000,000 $1,000,000
b.   2,200,000 1,200,000
c.   2,200,000 3,200,000
d.   3,200,000 3,200,000

5. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS   1 and IAS 34.
d. IAS 38 and IAS 36.


6. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company's operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.

7. Under U.S. GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company's operations.
c. cannot be reversed for assets to be held and used.
d. none of the above.

8. IFRS and U.S. GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.

9. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under U.S. GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company's fiscal year.