Question 1

Which of the following is not a required disclosure regarding goodwill for each period a company presents a balance sheet?

Accepted Answer

The amount of goodwill sold is not a required disclosure for each period a company presents a balance sheet. The other options, i.e. the amount of goodwill acquired, any impairment loss recognized, and any goodwill included in the disposal of a reporting unit, are required disclosures regarding goodwill for each period a company presents a balance sheet.

Question 2

In January 2014, Western Co. purchased a patent for $750,000 that had an estimated remaining economic life of ten years. On January 2, 2017, the company incurred $140,000 in legal fees to successfully defend the validity of the patent. In January 2019, the company incurred $88,000 in legal fees in a new infringement lawsuit. In this situation, the lawsuit was lost, and the patent was determined to be worthless as a result. What is the expense to be recognized in 2019 by Western with regard to the patent?

Accepted Answer

The expense recognized in 2019 includes the original cost of the patent ($750,000), the cost of legal fees to defend the patent in 2017 ($140,000), and the legal fees incurred in 2019 ($88,000) before it was deemed worthless. The total expense is $750,000 + $140,000 + $88,000 = $978,000. However, since the patent was being amortized over its useful life, by 2019, it would have been amortized for 5 years (2014-2018), which means 5/10 of its original cost would have already been expensed. Thus, the remaining book value by 2019 would be $750,000 - ($750,000 * 5/10) = $375,000. Adding the legal fees from 2017 and 2019 to this amount gives $375,000 + $140,000 + $88,000 = $603,000. However, due to an error in calculation, the correct total expense recognized should be based on the remaining unamortized amount plus the additional legal fees, which was not accurately represented in the provided options. The correct approach involves recognizing the loss of the remaining book value plus the incurred legal fees, which was intended to be calculated as the sum of the remaining unamortized patent cost and the legal fees. The explanation mistakenly provided a total that does not match any of the options due to a calculation oversight. The correct answer should reflect the expense related to the patent's remaining value and the legal costs directly associated with its defense and the final lawsuit, adjusted for any amortization up to the point the patent was deemed worthless.

Question 3

During 2016, Debbie Company incurred $240,000 in legal fees in defending a patent with a carrying value of $4,500,000 against an infringement. Debbie's lawyers were not successful with the defense of the patent. The legal fees should be

Accepted Answer

Legal fees incurred in defending a patent, regardless of the outcome, are considered period costs and should be expensed in the period they are incurred. They are treated as ordinary expenses because they do not meet the criteria for capitalization or classification as extraordinary items.

Question 4

All of the following items are expensed as start-up costs except

Accepted Answer

Licensing fees for starting a new franchise are not expensed as start-up costs; instead, they are typically capitalized and amortized over their useful life because they provide a benefit over multiple periods.

Question 5

R Company registered a patent on January 1, 2015. P Company purchased the patent from R Company for $450,000 on January 1, 2020, and began to amortize the patent over its remaining legal life. In early 2021, P Company determined that the patent's economic benefits would last only until the end of 2025. What amount should P Company record for patent amortization in 2021?

Accepted Answer

The answer of R Company registered a patent on January...

Question 6

All of the following items are included in research and development costs except

Accepted Answer

Legal work in connection with patent application is not included in research and development costs; it is typically considered a separate legal expense related to protecting intellectual property, not a direct R&D cost.

Question 7

Trademarks or trade names

Accepted Answer

Trademarks or trade names can be considered intangibles with indefinite lives if they are expected to generate cash flows indefinitely and are not subject to legal, contractual, competitive, economic, or other factors that might limit their useful life. This means they do not have to be amortized but should be tested annually for impairment.

Question 8

Which of the following statements regarding intangible assets is true?

Accepted Answer

The accumulated amortization for intangible assets that are subject to amortization must be disclosed in the financial statements. Option A is not true as the estimation of useful life for intangible assets is difficult due to factors such as obsolescence, market competition, technological developments, etc. Option B is incorrect as the cost of an intangible asset is eligible for amortization for income tax purposes. Option C is also not true as the future benefits of intangible assets are dependent on many uncertain factors, such as market competition and technological changes.

Question 9

In January 2014, the Jennifer Corporation purchased a patent for $231,000 from Travis Company that had a remaining legal life of 14 years. Jennifer estimated that the remaining economic life would be seven years. In January 2018, the company incurred $30,000 in legal costs to defend the patent from an infringement. Jennifer's lawyers were successful, and the remaining years of benefit from the patent were estimated to be six years. What is the patent amortization expense for 2018?

Accepted Answer

The answer of In January 2014, the Jennifer Corporation purchased...

Question 10

Which of the following is not a required disclosure regarding intangible assets in the period a company acquires intangible assets?

Accepted Answer

The rate of return used to estimate the value of goodwill purchased is not a required disclosure regarding intangible assets in the period a company acquires intangible assets. Financial reporting standards require disclosure of cost, amortization methods, and research and development costs, but not the internal rate of return for goodwill valuation.

Question 11

In 1975, Riveria Company had acquired copyrights for $750,000 on several literary works from some obscure 18th century authors. These copyrights were fully amortized by 2015. In early 2015, a new anthropological discovery made these copyrights worth $2,500,000. As a result, Riveria should report which of the following in its financial statements for 2015?

Accepted Answer

Under U.S. GAAP, once an intangible asset like copyrights is fully amortized, any subsequent increase in value cannot be recognized in the financial statements. The historical cost principle and the conservatism principle prevent the recognition of unrealized gains.

Question 12

The amortization period for a patent is

Accepted Answer

The amortization period for a patent is typically the shorter of its legal life (20 years) or its expected useful life. This is because the value of the patent to the company may diminish before the legal expiration due to technological advancements or changes in market demand.

Question 13

_____are contractual agreements which grant the right to perform certain functions or sell certain products or services.

Accepted Answer

Franchises are contractual agreements that allow individuals or entities the right to operate a business under the franchisor's brand and sell its products or services, often including operational support and guidelines.

Question 14

Which of the following is an intangible asset that is not typically amortized?

Accepted Answer

Goodwill is an intangible asset that is not typically amortized because it has an indefinite useful life, unlike patents, copyrights, and franchises which have finite useful lives and are amortized over their useful periods.

Question 15

All of the following are considered marketing-related intangible assets except

Accepted Answer

The answer of All of the following are considered marketing-related...

Question 16

During 2016, Frank Company incurred $200,000 in legal fees in defending a patent with a carrying value of $3,500,000 against an infringement. Farver's lawyers were successful with the defense of the patent. The legal fees should be

Accepted Answer

The legal fees incurred in successfully defending a patent should be capitalized and amortized over the shorter of the remaining economic life or legal life of the patent.

Question 17

The cost of a copyright should

Accepted Answer

The cost of a copyright should be amortized over a period not to exceed its economic life. This is because copyrights have a finite life and their economic value decreases over time. Therefore, it is appropriate to amortize the cost of a copyright over its estimated economic life, which may be less than its legal life.

Question 18

Debbie acquired a franchise to operate a donut shop from Dollar Donuts, Inc., for $100,000. She incurred an additional $4,000 in legal costs to negotiate the terms with the franchiser. In five years, the franchise contract will be renegotiated. The current contract also states that there will be a $3,000 annual fee plus a two percent charge based on the store's annual revenue, which is expected to average 90,000 per year. What is the franchise cost that should be capitalized?

Accepted Answer

The franchise cost that should be capitalized includes the initial fee paid to acquire the franchise ($100,000) plus the legal costs incurred to negotiate the franchise terms ($4,000), totaling $104,000. The annual fees and percentage charges based on revenue are considered operating expenses and are not capitalized.

Question 19

A patent is amortized over its expected useful life or 20 years. The expected useful life can be impacted by all of the following except

Accepted Answer

The renewal of the original patent by the federal government does not impact the expected useful life of the patent, as the amortization period is based on the original patent's life or 20 years, whichever is shorter.

Question 20

Which of the following is not a required disclosure regarding intangible assets that are amortized for each period a company presents a balance sheet?

Accepted Answer

The estimated amortization expense for the next ten years is not a required disclosure. The other three options, total cost, accumulated amortization, and amortization expense, are required disclosures for intangible assets that are amortized.

Quiz 12: Intangibles