Deck 11: Intangible Assets

Question 1

Lack of physical substance is the only characteristic of intangible assets that distinguishes them from all other assets reported on the balance sheet.

Answer 1

False

Question 2

Costs incurred internally to create intangibles are generally the basis for recording intangible assets, which are then amortized over the estimated life of the intangible asset.

Answer 2

False

Question 3

Intangible assets are amortized over their useful lives unless the intangible can remain in existence indefinitely.

Answer 3

True

Question 4

A trademark may properly be considered to have an indefinite life.

Question 5

A copyright is granted for the life of the creator or 50 years, whichever is longer.

Question 6

Legal fees and other costs incurred in successfully defending a patent suit are expensed as incurred.

Question 7

Goodwill is often identified on the balance sheet as the excess of the fair value over the cost of the net assets acquired.

Question 8

Use of the master valuation approach to measure goodwill requires an estimate of a firm's excess earning power.

Question 9

Badwill arises when the fair market value of the asset acquired is higher than the purchase price of the asset.

Question 10

For indefinite-life intangibles, a recoverability test is used to determine whether an impairment has occurred.

Question 11

When determining the impairment, if any, of goodwill, the fair value of the reporting unit should be compared to its carrying amount including goodwill.

Question 12

As a result of FASB Statement No. 2, all research and development (R & D) costs should normally be charged to expense when incurred.

Question 13

The costs of services performed by others in connection with the reporting company's R & D should be expensed as incurred.

Question 14

Start-up costs are usually charged to an account called Start-Up Costs and may be carried as an asset on the balance sheet.

Question 15

Acceptable accounting practice requires that disclosure be made in the financial statements of the total R & D costs charged to expense each period for which an income statement is presented.

Question 16

A large publicly held company has developed and registered a trademark during 2008. How should the cost of developing and registering the trademark be accounted for if it is considered to have a limited life?

A) Charged to an asset account that should not be amortized
B) Amortized over 10 years regardless of its useful life
C) Expensed as incurred
D) Amortized over its useful life

Question 17

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.

Question 18

Riser Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2007 a patent on a competing product which was originally issued on January 10, 2003. Because of its unique plant, Riser 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 11 years.
D) expensed in 2007.

Question 19

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 market 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.

Question 20

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 market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as

A) an extraordinary gain.
B) part of current income in the year of combination.
C) a deferred credit and amortize it.
D) paid-in capital.

Question 21

The amortization of goodwill

A) is dependent upon the number of years a company expects to use the benefits it provides.
B) does not happen as it is deemed to have an indefinite life.
C) represents as acceptable an accounting practice as does the immediate write-off method.
D) should be computed using the straight-line method unless another method is deemed more appropriate.

Question 22

The accounting profession does not allow the immediate write-off of goodwill. The best reason for this requirement seems to be that

A) goodwill has a useful life like all assets and should be charged as an expense at a normal rate.
B) to write off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential.
C) the immediate write-off would cause net income to be much lower than it had been for the company in recent years and comparability would be distorted.
D) because the amortization of goodwill is tax deductible, an immediate write-off serves no useful purpose.

Question 23

When the fair market value of the assets acquired in a business purchase exceed the purchase price, negative goodwill (also called badwill) arises. When negative goodwill arises, GAAP requires that it be allocated to

A) an extraordinary gain.
B) all periods benefited on an equitable basis.
C) reduce proportionately the values assigned to noncurrent assets.
D) reduce proportionately the values assigned to both current and noncurrent assets.

Question 24

Jo Jo Chong, Inc. needs to determine if its property, plant, and equipment has been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are): $\begin{array}{cc} & \text {Recoverability Test} &\text { Fair Value Test }\\\end{array}$

A) $\begin{array}{cc} &&& \text {Yes }&&&&&&\text { Yes} \\\end{array}$
B) $\begin{array}{cc} &&& \text {Yes} &&&&&&& \text {No} \\\end{array}$
C) $\begin{array}{cc} &&&\text { No} &&&&&&&\text { Yes} \\\end{array}$
D) $\begin{array}{cc} &&&\text { No} &&&&&&& \text {No} \\\end{array}$

Question 25

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

Question 26

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.

Question 27

Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January, 2003. The cost of the franchise was $125,000 and was estimated to have a limited life of 40 years. Early in the year 2009, the franchise was deemed worthless due to significant law suits that caused the franchisor to go out of business. What amount of cost or expense should be charged to the income statement of Hooker Corporation for the years noted below?
$\begin{array}{cc} &&& 2003 & 2009 \\\end{array}$

A) $\begin{array}{cc}& \$ 5,000 & \$ 5,000 \\\end{array}$
B) $\begin{array}{cc}& \$ 3,125 & \$ 3,125 \\\end{array}$
C) $\begin{array}{cc} & \$ 0 &&& \$ 125,000 \\\end{array}$
D) $\begin{array}{cc}& \$ 3,125 & \$ 106,250 \\\end{array}$

Question 28

Smith Co. bought a window franchise from Paine, Inc., on January 2, 2008, for $100,000. A highly regarded independent research company estimated that the remaining useful life of the franchise was 50 years. Its unamortized cost on Paine's books at January 1, 2008, was $15,000. Smith has decided to write off the franchise over the longest possible period. How much should be amortized by Smith Co. for the year ended December 31, 2008?

A) $375
B) $2,000
C) $2,500
D) $15,000

Question 29

In January, 2003, Findley Corporation purchased a patent for a new consumer product for $720,000. 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 2008, 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 2008, assuming amortization is recorded at the end of each year?

A) $480,000
B) $360,000
C) $72,000
D) $48,000

Question 30

Wildcat Baseball Company had a player contract with Carter that was recorded in its accounting records at $5,800,000. Aggie Baseball Company had a player contract with Jeter that was recorded in its accounting records at $5,600,000. Wildcat traded Carter to Aggie for Jeter by exchanging each player's contract. The fair value of each contract was $6,000,000. What amount should be shown in the accounting records after the exchange of player contracts?
$\begin{array}{cc}&&\text {Wildcat} &&\text { Aggie} \\\end{array}$

A) $\begin{array}{cc} \$ 5,600,000 &\$ 5,600,000 \\\end{array}$
B) $\begin{array}{cc} \$ 5,600,000 &\$ 5,800,000 \\\end{array}$
C) $\begin{array}{cc} \$ 5,800,000 & \$5,600,000 \\\end{array}$
D) $\begin{array}{cc}\$ 6,000,000& \$ 6,000,000 \\\end{array}$

Question 31

Distributor Company purchases Supplier Company for $800,000 cash on January 1, 2009. The book value of Supplier Company's net assets, as reflected on its December 31, 2008 balance sheet is $620,000. An analysis by Distributor on December 31, 2008 indicates that the fair value of Supplier's tangible assets exceeded the book value by $60,000, and the fair value of identifiable intangible assets exceeded book value by $45,000. How much goodwill should be recognized by Distributor Company when recording the purchase of Supplier Company?

A) $0
B) $180,000
C) $120,000
D) $75,000

Question 32

During 2008, Bond Company purchased the net assets of May Corporation for $950,000. On the date of the transaction, May had $300,000 of liabilities. The fair value of May's assets when acquired were as follows:
How should the $550,000 difference between the fair value of the net assets acquired ($1,500,000) and the cost ($950,000) be accounted for by Bond?

A) The $550,000 difference should be credited to retained earnings.
B) The $550,000 difference should be recognized as an extraordinary gain.
C) The current assets should be recorded at $375,000 and the noncurrent assets should be recorded at $875,000.
D) A deferred credit of $550,000 should be set up and then amortized to income over a period not to exceed forty years.

Question 33

General Products Company bought Special Products Division in 2007 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2008, the fair value of Special Products Division is $2,000,000 and it is carried on General Product's books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division's assets indicates that goodwill of $200,000 exists on December 31, 2008. What goodwill impairment should be recognized by General Products in 2008?

A) $0
B) $200,000
C) $50,000
D) $300,000

Question 34

The following information is available for Barkley Company's patents: Barkley would record a loss on impairment of

A) $1,080,000.
B) $220,000.
C) $160,000.
D) $60,000.

Question 35

Mining Company acquired a patent on an oil extraction technique on January 1, 2007 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2008, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining's market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2008 balance sheet?

A) $5,000,000
B) $4,800,000
C) $4,000,000
D) $2,800,000

Question 36

Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?

A) $0
B) $125,000
C) $175,000
D) $300,000

Question 37

In 2005, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2008, the Rousseau division reported net assets of $3,300,000 (including $1,700,000 of goodwill). Hume reviewed the Rousseau division and determined that expected net future cash flows equal $2,500,000 and the fair value is estimated to be only $1,800,000. What entry should Hume record concerning the Rousseau division on December 31, 2008?

A) No entry is needed.
B)
C)
D)

Question 38

Isa Company has equipment that, due to changes in use, is reviewed for possible impairment. The asset's carrying amount is $400,000 ($500,000 cost less $100,000 accumulated depreciation). The expected future net cash flows (undiscounted) from the use of the asset and its eventual disposition are determined to be $380,000 and it has a current market value of $350,000. What is the amount of the impairment, if any, that should be recorded by Isa Company?

A) $0
B) $20,000
C) $50,000
D) $400,000

Question 39

Calvin Company incurred the following costs related to the start-up of the business:

The company wishes to amortize these costs over the maximum period allowed under generally accepted accounting principles. Assuming that Calvin Company began operation on January 1, 2008, what amount of the start-up costs should be amortized in 2009?

A) $4,400
B) $2,200
C) $800
D) $0

Question 40

In 2008, Edwards Corporation incurred research and development costs as follows:
These costs relate to a product that will be marketed in 2009. It is estimated that these costs will be recouped by December 31, 2011. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2008?

A) $0
B) $200,000
C) $270,000
D) $350,000

Question 41

Hall Co. incurred research and development costs in 2008 as follows:
The amount of research and development costs charged to Hall's 2008 income statement should be

A) $1,500,000.
B) $1,650,000.
C) $1,875,000.
D) $4,050,000.

Question 42

Martin Inc. incurred the following costs during the year ended December 31, 2008: The total amount to be classified and expensed as research and development in 2008 is

A) $555,000.
B) $855,000.
C) $585,000.
D) $285,000.

Question 43

MaBelle Corporation incurred the following costs in 2008: What amount should MaBelle record as research & development expense in 2008?

A) $500,000
B) $640,000
C) $950,000
D) $1,340,000

Question 44

On June 30, 2008, Cey, Inc. exchanged 2,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2008 at a cost of $55,000. At the exchange date, Seely common stock had a fair value of $45 per share, and the patent had a net carrying value of $110,000 on Gore's books. Cey should record the patent at

A) $55,000.
B) $60,000.
C) $90,000.
D) $110,000.

Question 45

On January 2, 2005, Koll, Inc. purchased a patent for a new consumer product for $180,000. 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, 2008, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2008, assuming amortization is recorded at the end of each year?

A) $18,000
B) $108,000
C) $126,000
D) $144,000

Question 46

Which of the following legal fees should be capitalized?
$\begin{array}{cc}\text {Legal fees to} &\text {Legal fees to successfully} \\\text {obtain a copyright}&\text {defend a trademark}\\\end{array}$

A) $\begin{array}{cc}&&\text { No} &&&&&&&&\text { No} \\\end{array}$
B) $\begin{array}{cc}&& \text {No} &&&&&&&& \text {Yes} \\\end{array}$
C) $\begin{array}{cc}&&\text { Yes} &&&&&&&\text { Yes} \\\end{array}$
D) $\begin{array}{cc}&&\text { Yes} &&&&&&&\text { No} \\\end{array}$

Question 47

During 2008, Leon Co. incurred the following costs: In Leon's 2008 income statement, research and development expense should be

A) $510,000.
B) $835,000.
C) $1,185,000.
D) $1,435,000.

Question 48

Riley Co. incurred the following costs during 2008: In its income statement for the year ended December 31, 2008, Riley should report research and development expense of

A) $575,000.
B) $725,000.
C) $415,000.
D) $335,000.