Question 1

In January 2009, Waterman Co.purchased a patent for $500, 000 that had an estimated remaining economic life of ten years.On January 2, 2012, the company incurred $56, 000 in legal fees to successfully defend the validity of the patent.In January 2014, the company incurred $48, 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.The expense to be recognized in 2014 by Waterman with regard to the patent is
A)$234, 000
B)$250, 000
C)$290, 000
D)$338, 000

Accepted Answer

Since the patent was determined to be worthless, we need to write off its remaining book value in 2014. The book value can be calculated as follows:
Purchase price: $500,000
Less: Amortization for 2012 and 2013 (2/10 x $500,000 per year): $100,000
Book value as of January 1, 2014: $400,000

In addition, we need to recognize the legal fees incurred in the infringement lawsuit, which was lost. Therefore, the total expense to be recognized in 2014 is:
Book value of the patent: $400,000
Legal fees incurred: $48,000
Total expense: $448,000

However, we also need to reverse the amortization expense that was recognized in previous years since the patent is now worthless. The total amortization expense recognized in 2012 and 2013 was $100,000, so we need to reverse that amount. Therefore, the net expense to be recognized in 2014 is:
Total expense: $448,000
Less: Reversal of amortization: $100,000
Net expense: $348,000, which rounds up to $338,000 (option D).

Question 2

In 1970, Ramirez Company had acquired copyrights for $750, 000 on several literary works from some obscure 18th century authors.These copyrights were fully amortized by 2010.In early 2010, a new anthropological discovery made these copyrights worth $2, 500, 000.As a result, Ramirez should report which of the following in its financial statements for 2010?
A)$2, 500, 000 as a holding gain
B)$ 750, 000 as copyrights-based recovery of value limited to historical cost
C)$2, 500, 000 as an extraordinary item
D)Footnote disclosure if the amount is material

Accepted Answer

Since the copyrights were fully amortized, their book value would be $0. Accounting principles generally prohibit revaluing intangible assets upwards in financial statements after they have been fully amortized. Therefore, the increase in value would not be recognized in the financial statements directly but should be disclosed in the footnotes if it is considered material.

Question 3

During the period from 2008 to the end of 2009, Innovation, Inc.spent $90, 000 on research and development for an invention that was patented on January 1, 2010.Innovation estimated that the patented invention would be useful in its production for 10 years.At the beginning of 2012, Innovation paid $16, 000 in legal fees in a successful defense of the patent.What is Innovation's patent amortization expense for 2012?
A)$25, 000
B)$11, 000
C)$10, 600
D)$ 2, 000

Accepted Answer

The answer of During the period from 2008 to the...

Question 4

During 2010, Farver Company incurred $240, 000 in legal fees in defending a patent with a carrying value of $2, 500, 000 against an infringement.Farver's lawyers were not successful with the defense of the patent.The legal fees should be
A)expensed in 2010 and classified as ordinary expense
B)classified as an extraordinary item on the income statement for 2010
C)capitalized and amortized over the remaining legal life of the patent
D)capitalized and amortized over the remaining economic life or legal life of the patent, whichever is shorter

Accepted Answer

The legal fees incurred in defending the patent should be expensed in 2010 as it did not increase the value of the patent nor did it create any future economic benefits. It should be classified as an ordinary expense in the income statement.

Question 5

For financial reporting purposes, GAAP requires organization costs to be
A)expensed in the period in which they are incurred
B)capitalized and amortized over 20 years
C)capitalized and amortized over the first five years of the company's existence
D)capitalized and treated as an intangible asset with an indefinite life

Accepted Answer

Under GAAP, organization costs must be expensed in the period in which they are incurred, rather than capitalized and amortized over time. This approach reflects the principle that the benefits of these costs are consumed quickly and do not provide future economic benefits that meet the criteria for capitalization.

Question 6

Based on GAAP, most software production costs are likely to be
A)expensed as R&D costs
B)allocated to inventory and expensed to cost of goods sold when the software is sold
C)capitalized and amortized over a 40-year period
D)capitalized and amortized over a relatively short period, such as five years

Accepted Answer

Most software production costs are expensed as R&D costs under GAAP, except for certain development costs incurred after technological feasibility is established, which can then be capitalized and amortized.

Question 7

GAAP requires that research and development costs be
A)capitalized
B)expensed as incurred
C)accumulated until the existence of future benefits is determined
D)expensed in part and capitalized in part

Accepted Answer

GAAP requires that research and development costs be expensed as incurred. This means that companies cannot capitalize such costs and must recognize them as expenses on their income statement in the period in which they are incurred.

Question 8

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
A)a successful lawsuit against a competitor
B)the federal government renewing the original patent
C)technical innovations by a competitor
D)product improvements by the patent holder

Accepted Answer

The federal government renewing the original patent would not impact the expected useful life of the patent, as the renewal would simply extend the patent protection for an additional period of time. The other choices could potentially impact the useful life of the patent by making it less valuable or reducing its market share.

Question 9

When deciding how to account for research and development costs, FASB had to choose between
A)predicative value and timeliness
B)verifiability and neutrality
C)relevance and reliability
D)understandability and decision usefulness

Accepted Answer

FASB had to balance the relevance of providing information about research and development costs with the reliability of that information. They chose to account for research and development costs as an expense when incurred because it provides relevant information about a company's expenses and future prospects while still maintaining the reliability of financial statements. This balances the two qualities of relevance and reliability.

Question 10

The Fallen Company began business early in 2010, when Fallen paid an initial fee of $100, 000 to purchase a franchise.In forming the company, Fallen also spent $11, 000 on legal fees and $4, 500 on accounting fees.During the year, Fallen spent $7, 500 on product development and paid $10, 000 in continuing franchise fees.What amount should Fallen capitalize for intangible assets in 2010?
A)$100, 000
B)$115, 500
C)$123, 000
D)$133, 000

Accepted Answer

The answer of The Fallen Company began business early in...

Question 11

Which of the following accounting principles or conventions is contradictory to the GAAP requirement to expense R&D costs immediately?
A)historical cost principle
B)comparability
C)conservatism
D)matching principle

Accepted Answer

The matching principle requires expenses to be recognized in the same period as the revenues they helped generate. However, since the benefits of R&D can be difficult to measure and are often realized over multiple periods, GAAP requires companies to immediately expense R&D costs instead of capitalizing them as an asset. This is contradictory to the matching principle, which would suggest capitalizing R&D costs to match them with the revenues they help generate over time.

Question 12

In January 2010, the Remy Corporation purchased a patent for $231, 000 from Nel Company that had a remaining legal life of 14 years.Remy estimated that the remaining economic life would be seven years.In January 2014, the company incurred $30, 000 in legal costs to defend the patent from an infringement.Remy's lawyers were successful, and the remaining years of benefit from the patent were estimated to be six years.The patent amortization expense for 2014 is
A)$ 7, 615
B)$ 9, 923
C)$16, 500
D)$21, 500

Accepted Answer

The answer of In January 2010, the Remy Corporation purchased...

Question 13

Which of the following statements is not true with regard to international accounting standards for research and development costs?
A)Some countries require research costs to be expensed and development costs to be capitalized.
B)Some countries allow the capitalization of R&D costs.
C)The universal practice with regard to R&D costs is to capitalize the expenditures.
D)R&D costs are accounted for in different ways in different countries.

Accepted Answer

The statement that "the universal practice with regard to R&D costs is to capitalize the expenditures" is not true. There is no universal practice or standard for accounting for R&D costs, and different countries or regions may have different requirements or guidelines.

Question 14

Costs for which of the following activities would not be included as part of research and development (R&D)costs?
A)testing in search for or evaluation of product or process alternatives
B)adaptation of an existing capability to a particular requirement or customer's need as part of a continuing commercial activity
C)laboratory research aimed at discovery of new knowledge
D)modification of the formulation or design of a product or process

Accepted Answer

Adaptation of an existing capability to a particular requirement or customer's need as part of a continuing commercial activity is not considered as part of research and development (R&D) costs. R&D costs refer to activities that are conducted to create new knowledge, products, or processes.

Question 15

A Company registered a patent on January 1, 2010.B Company purchased the patent from A Company for $450, 000 on January 1, 2015, and began to amortize the patent over its remaining legal life.In early 2016, B Company determined that the patent's economic benefits would last only until the end of 2021.What amount should B Company record for patent amortization in 2016?
A)$15, 000
B)$30, 000
C)$60, 000
D)$70, 000

Accepted Answer

B Company purchased the patent from A company on January 1, 2015. The original legal life of the patent is unknown, but since B Company started to amortize from the purchase date, we can assume that the remaining legal life was estimated as of January 1, 2015 to be the economic life of the patent.

Using the straight-line method, the annual amortization cost would be the purchase price of $450,000 divided by the estimated remaining life of the patent as of January 1, 2015.

$450,000 / Remaining legal life = $450,000 / (End of 2021 - January 1, 2015) = $75,000 per year

Since B Company determined in early 2016 that the economic benefits of the patent would last only until the end of 2021, the remaining amortization expense for 2016 would be:

($75,000 - $0) x (Remaining days in 2016 / Total days in year) = $75,000 x (365-31) / 365 = $70,136

Therefore, the appropriate amount for patent amortization in 2016 would be $70,000, which is closest to Choice D.

Question 16

The amortization period for a patent is
A)indefinite; patents should be reviewed for impairment annually
B)20 years
C)20 years or the expected useful life of the patent, whichever is longer
D)20 years or the expected useful life of the patent, whichever is shorter

Accepted Answer

The amortization period for a patent is the shorter of its legal life (typically 20 years) or its expected useful life. This ensures that the cost of the patent is expensed over the period it is expected to generate revenue.

Question 17

Marsha acquired a franchise to operate a beauty salon from Envincta, Inc., for $88, 000.She incurred an additional $4, 000 in legal costs to negotiate the terms with the franchisor.In five years, the franchise contract will be renegotiated.The current contract also states that there will be a $3, 000 annual fee plus a two percent charge based on the store's annual revenue, which is expected to average 90, 000 per year.The franchise cost that should be capitalized is
A)$ 88, 000
B)$ 92, 000
C)$107, 000
D)$116, 000

Accepted Answer

The franchise cost that should be capitalized is the initial cost of $88,000 plus any additional costs directly related to the acquisition of the franchise, which includes the $4,000 legal costs. Therefore, the total franchise cost that should be capitalized is $92,000.

Question 18

Production costs related to computer software that is to be sold, leased, or otherwise marketed should be accounted for in which of the following ways?
A)All software production costs should be recorded as R&D expense.
B)All software production costs should be capitalized.
C)All software production costs should be recorded as R&D expense until technological feasibility is established.
D)All software production costs should be recorded in R&D expense until the product is available for general release to customers.

Accepted Answer

According to generally accepted accounting principles (GAAP), production costs related to computer software should be capitalized once technological feasibility is established. Before this point, all costs should be recorded as research and development (R&D) expenses. Therefore, option C is the correct choice as it acknowledges the need to record software production costs as R&D expenses until this feasibility is established.

Question 19

Which of the following is an intangible asset that is not typically amortized?
A)patent
B)copyright
C)franchise
D)trademark

Accepted Answer

Trademarks are intangible assets that are not typically amortized. While patents, copyrights, and franchises are typically amortized over their useful lives, trademarks are generally not subject to amortization because their useful lives tend to be indefinite. Instead, companies periodically evaluate their trademarks to determine if any impairment has occurred, requiring a write-down in their value.

Question 20

During 2010, Farver Company incurred $200, 000 in legal fees in defending a patent with a carrying value of $2, 500, 000 against an infringement.Farver's lawyers were successful with the defense of the patent.The legal fees should be
A)expensed in 2010 and classified as ordinary expense
B)classified as an extraordinary item on the income statement for 2010
C)capitalized and amortized over the remaining legal life of the patent
D)capitalized and amortized over the remaining economic life or legal life of the patent, whichever is shorter

Accepted Answer

The legal fees incurred in defending the patent should be capitalized since they are directly related to the acquisition and protection of the patent. The capitalized amount should then be amortized over the remaining economic life or legal life of the patent, whichever is shorter. This treatment is in accordance with the generally accepted accounting principles for intangible assets under ASC 350-30-25.

Quiz 12: Intangibles

During 2010, Farver Company incurred $240, 000 in legal fees in defending a patent with a carrying value of $2, 500, 000 against an infringement.Farver's lawyers were not successful with the defense of the patent.The legal fees should be

For financial reporting purposes, GAAP requires organization costs to be

Based on GAAP, most software production costs are likely to be

GAAP requires that research and development costs be

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

When deciding how to account for research and development costs, FASB had to choose between

Which of the following accounting principles or conventions is contradictory to the GAAP requirement to expense R&D costs immediately?

Which of the following statements is not true with regard to international accounting standards for research and development costs?

Costs for which of the following activities would not be included as part of research and development (R&D) costs?

The amortization period for a patent is

Production costs related to computer software that is to be sold, leased, or otherwise marketed should be accounted for in which of the following ways?

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

During 2010, Farver Company incurred $200, 000 in legal fees in defending a patent with a carrying value of $2, 500, 000 against an infringement.Farver's lawyers were successful with the defense of the patent.The legal fees should be