Question 1

The release of IAS 38 has had what impact on the methods of amortising goodwill?

Accepted Answer

The release of IAS 38 removed the option to amortise goodwill and replaced it with annual impairment testing.

Question 2

Which of the following statement(s)in regard to goodwill is/are correct in accordance with IAS 36 Impairment of Assets?

Accepted Answer

All of the given statements are correct in accordance with IAS 36 Impairment of Assets.

Question 3

IAS 38 contains some elements that seem to be reactions to opportunistic behaviour by preparers of accounts and to the degree of uncertainty surrounding goodwill as an unidentifiable intangible asset.These elements include:

Accepted Answer

IAS 38 prohibits the recording of internally generated goodwill and specifies impairment testing as a response to opportunistic behavior by preparers of accounts and the uncertainty surrounding goodwill as an unidentifiable intangible asset. The requirement to use a specific rate of amortisation is not mentioned as a response to such behavior and uncertainty.

Question 4

Earth Ltd acquired Moon Plc on 1 July 2013 for the sum of £100 000.On the same date Moon Plc has the following assets and liabilities: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Carrying amount } & \text { Recoverable amount } & \text { Fair value } \
\hline \text { Assets: } & & & \
\hline \text { Land } & 100000 & 130000 & 150000 \
\hline \text { Machinery } & 50000 & 30000 & 40000 \
\hline \text { Cash } & 20000 & & \
\hline \text { Liabilities: } & & & \
\hline \text { Loan } & 105000 & & \
\hline \text { Contingent liabilities } & 80000 & & \
\hline
\end{array}$$ What is the value of goodwill,if any?

Accepted Answer

The answer of Earth Ltd acquired Moon Plc on 1...

Question 5

During 2001 the Financial Accounting Standards Board in the United States indicated they would look to change a requirement for the treatment of goodwill.That change is:

Accepted Answer

The question specifically mentions that the Financial Accounting Standards Board in the US indicated they would look to change the treatment of goodwill in 2001. Option A is the correct change that the Board made, as it removes the requirement to amortize goodwill and replaces it with a requirement to write down goodwill to reflect any impairment in value. This change was officially implemented in 2002 through the issuance of Statement of Financial Accounting Standards (SFAS) No. 142.  Options B, C, and D are not related to the stated change in the requirements for the treatment of goodwill.

Question 6

Prior to the introduction of impairment testing companies had attempted to manipulate their financial statements through amortisation:

Accepted Answer

Both options A and B are correct, as they reflect the incentives that managers had to manipulate financial statements through amortisation. Option C is not relevant to the manipulation of financial statements through amortisation. Therefore, the best answer is D, which includes both A and B.

Question 7

Big Ltd has purchased 100% of Little Ltd for a cash payment of $800 000.The additional costs to Big Ltd to complete the purchase were $3000.An extract from the statement of financial position for Little Ltd at the date of acquisition shows:  Additional information:
The assets and liabilities of Little Ltd are stated at fair value except that:
Land and buildings have a fair value of $300 000
Accounts receivable have a fair value of $20 000.
Little owns a licence that has not been recorded in the financial statements.Its fair value is $150 000.
What is the amount of purchased goodwill that has been acquired by Big Ltd?

Accepted Answer

The answer of Big Ltd has purchased 100% of Little...

Question 8

Purchased goodwill is recognised as the amount of:

Accepted Answer

The answer of Purchased goodwill is recognised as the amount...

Question 9

Castle Co Ltd is working on three research projects.Project Jonah is government-sponsored research on synthesising currently available research results on the possible triggers of asthma attacks.Project Beta involves researching the genetic tags associated with heart disease based on the genome project.A test to identify the predisposition to heart disease in children has been developed and will be on the market in 2013.Since 2011 research and development expenditures on this project are applied development costs only.Project Sigma is cutting edge research being conducted to try and discover a means of 'disassembling' molecules and then 'reassembling' them in their original form.The company hopes that this work will lay the basis for future dreams of teleportation as a method of transport.Details of expenditures and recoverable amounts expected beyond a reasonable doubt at this time are:  What is the total research and development deferral for each project as at the end of the year 2012?

Accepted Answer

The answer of Castle Co Ltd is working on three...

Question 10

Which of the following statements is correct with respect to intangible assets?

Accepted Answer

Internally generated brands are not recognised as intangible assets under accounting standards because the costs associated with developing them are not separable from the cost of developing the business as a whole. This makes it difficult to measure the cost of the brand reliably.

Question 11

Broadbeach Plc is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Plc for the year ended 30 June 2013: $$\begin{array} { | l | r | r | r | r | } 
\hline\text { (in dollars) } & \text { Goodwill } & \begin{array} { c } 
\text { Accumulated } \
\text { impairment loss }
\end{array} & \begin{array} { c } 
\text { Carrying amount } \
\text { of CGU }
\end{array} & \begin{array} { c } 
\text { Recoverable amount } \
\text { of CGU }
\end{array} \
\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \
\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \
\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \
\hline
\end{array}$$ What is the carrying amount of goodwill as at 30 June 2013 consistent with IAS 36 Impairment of Assets?

Accepted Answer

The answer of Broadbeach Plc is a manufacturing company with...

Question 12

Which of the following statements in regard to goodwill is/are correct in accordance with IAS 36 Impairment of Assets?

Accepted Answer

None of the given statements are correct in accordance with IAS 36 Impairment of Assets. Goodwill is no longer amortized under IFRS but is tested for impairment on an annual basis or more frequently if there are indications of impairment. There is no provision for upward revaluation of goodwill.

Question 13

As part of adopting IFRS,goodwill acquired in a business combination is no longer amortised.Instead,the acquirer shall test goodwill for impairment (IFRS 3 Business Combinations).When is goodwill considered to be impaired?

Accepted Answer

Goodwill is considered to be impaired if the recoverable amount of the cash generating unit is less than the carrying amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use, which is the present value of expected future cash flows. If the recoverable amount is less than the carrying amount, the goodwill is impaired and must be written down to its recoverable amount.

Question 14

Buster Plc had purchased goodwill to the value of €100 000 recorded in its consolidated financial statements.The goodwill has been determined to have an indefinite useful life.However,one year later Buster Plc's cash generating units has been determined to have incurred an impairment loss of €13 000.What is the appropriate action for Buster limited to comply with IAS 38 Intangible Assets and IAS 36 Impairment of Assets?

Accepted Answer

The impairment loss should be recognized in the income statement and credited to the goodwill account, reducing its carrying value.

Question 15

Which of the following combination best demonstrates the value of goodwill?
I.purchase consideration of subsidiary
II.book value of net assets held by subsidiary
III.fair value of net identifiable assets
IV.contingent liabilities

Accepted Answer

Goodwill is calculated as the difference between purchase consideration paid for a subsidiary and the fair value of the net identifiable assets acquired. Therefore, the best combination to demonstrate the value of goodwill is I (purchase consideration of subsidiary) less (III-IV) (fair value of net identifiable assets adjusted for contingent liabilities).

Question 16

After initial recognition,the acquirer shall recognise goodwill at:

Accepted Answer

Goodwill is initially recognized at cost, but after initial recognition, it is measured at cost less any accumulated impairment losses. Goodwill is not amortized but is tested annually for impairment.

Question 17

Which of the following expenses are likely to satisfy the definition of an asset,and hence may be capitalised as an intangible asset?

Accepted Answer

According to the International Financial Reporting Standards (IFRS), specifically IAS 38 Intangible Assets, expenses incurred to develop a brand name, advertising expenses, and research expenses generally do not qualify for recognition as intangible assets. These expenses are typically expensed as incurred because they do not meet the criteria for capitalization, such as the ability to demonstrate future economic benefits and the cost of the asset can be measured reliably.

Question 18

Serendipity Ltd is working on two independent research and development projects.Project A has recently been fruitful and the resulting product has been marketed,unfortunately with limited success.Development of the product is continuing in an effort to improve its marketability.Project B is due for product release in one year's time.The initial marketing surveys and forward contracts suggest that the outcome for this product is very favourable.The following information relates to the expenditures for the current period and budgeted figures for the next 3 years.All research costs in prior periods were expensed.The budgeted figures are considered accurate beyond a reasonable doubt.  What is the research and development deferral for each project in 2013?

Accepted Answer

The research and development deferral for Project A is $30,000 (total expenditures of $55,000 minus the $25,000 recognized as an expense) and for Project B is $90,000 (total expenditures of $221,000 minus the $131,000 recognized as an expense).

Question 19

Broadbeach Plc is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Plc for the year ended 30 June 2013. $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Goodwill } & \begin{array} { c } 
\text { Accumulated } \
\text { impairment loss }
\end{array} & \begin{array} { c } 
\text { Carrying amount } \
\text { of CGU }
\end{array} & \begin{array} { c } 
\text { Recoverable amount } \
\text { of CGU }
\end{array} \
\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \
\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \
\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \
\hline
\end{array}$$ In accordance with IAS 36,what is the net effect of above goodwill accounts on the statement of comprehensive income and statement of financial position of Broadbeach Plc?

Accepted Answer

The impairment loss for Oceania Ltd is $60,000 (Carrying amount $310,000 - Recoverable amount $250,000). This loss decreases the statement of comprehensive income and the carrying amount of goodwill on the statement of financial position.

Question 20

Far-flung Co Ltd purchases Local Co Ltd for the purchase consideration of: $\begin{array}{|l|l|}
\hline \text { Cash } & \$ 100,000 \
\hline \text { Shares in Far-flung Co Ltd } & 50000 \text { shares with a market value of } \$ 1.60 \
\hline{\text { Land }} & \text { Carrying value of } \$ 90,000 \
\hline& \text { Fair value of } \$ 100,000\\hline
\end{array}$ Far-flung incurred legal fees of $6000 to complete the acquisition.Local Co Ltd had the following assets and liabilities at the time of the purchase $$\begin{array} { | l | r | r | r | } 
\hline & \text { Carrying amount } & \text { Recoverable amount } & \text { Fair value } \
\hline \text { Assets: } & & & \
\hline \text { Land } & 100000 & 150000 & 200000 \
\hline \text { Machinery } & 50000 & 80000 & 85000 \
\hline \text { Cash } & 20000 & & \
\hline \text { Liabilities: } & & & \
\hline \text { Loan } & 105000 & & \
\hline
\end{array}$$ What is the value of goodwill,if any?

Accepted Answer

The answer of Far-flung Co Ltd purchases Local Co Ltd...

Quiz 8: Accounting for Intangibles