Question 1

What is economic profit as it would be defined in finance or economics? Why is accounting net income not the same as an economist's determination of earnings, as measured from a shareholder's perspective?

Accepted Answer

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Question 2

What factor will not affect the estimated useful life of a finite lived intangible asset?

Accepted Answer

The physical condition of the asset does not affect the estimated useful life of a finite lived intangible asset because intangible assets do not have a physical component. The legal life of the asset, technological obsolescence, and certainty of future cash flows are all factors that can impact the estimated useful life of an intangible asset.

Question 3

Which criteria under IAS 38 would be met if there is a "project budget that outlines the specific costs, so the costs of the project are likely to be measured with sufficient reliability"?

Accepted Answer

The project budget outlining specific costs indicates that the costs of the project can be reliably measured, which is a characteristic of measurement reliability under IAS 38. Management intention relates to the intention to use the asset, technical feasibility relates to the ability to develop or create the asset, and resource adequacy relates to the availability of resources to complete the project. While these may also be important considerations for recognizing an intangible asset under IAS 38, they are not directly related to the given criteria.

Question 4

What are the unique features that lead to the differing accounting treatment between research and development costs?

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Question 5

Which of the following statements is correct about intangible assets that have an indefinite life span?

Accepted Answer

Intangible assets with an indefinite life span are expected to continue providing economic benefits for the foreseeable future, but management may not be able to estimate their exact life span. They do not have fixed and determinable cash flows, which is a characteristic of tangible assets. While the asset may technically be infinite, it is not appropriate to use the term "infinite lived asset" in accounting terminology.

Question 6

Explain how earnings can be manipulated through choices made in the estimated useful lives for intangible assets.

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Question 7

Which of the following is NOT a "class" of intangible assets?

Accepted Answer

Raw materials are tangible assets, not intangible. The other options (industrial designs, patents, and computer software) are all classes of intangible assets.

Question 8

Which statement is not correct?

Accepted Answer

The residual value of an intangible asset is not necessarily the same as its salvage value. While both terms refer to the estimated value of the asset at the end of its useful life, residual value pertains specifically to intangible assets that have no physical form or market value, such as patents or copyrights. Salvage value typically applies to tangible assets that can be sold for their parts or materials, such as machinery or equipment.

Question 9

Explain the accounting for internally developed intangible assets.

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Question 10

Explain the accounting requirements for externally purchased intangibles and internally developed intangibles.

Accepted Answer

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Question 11

Which of the following is not a parameter of amortization?

Accepted Answer

Salvage value is not a parameter of amortization; it is more commonly associated with depreciation. Amortization typically involves the amortizable amount, residual value, and the pattern of amortization.

Question 12

A professional sports team and related items (including a stadium)were bought by an exceedingly wealthy investor and sports fan. The negotiated price was $225,000,000. Details of what was purchased and the agreed fair values are as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Stadium } & \begin{array} { r } 
\text { Fair value in } \
\$ \text { millions }
\end{array} \
\hline \text { Land } & 70 \
\hline \text { Cable TV broadcasting contract } & 20 \
\hline \text { Player contracts } & 91 \
\hline \text { Spectator leases on luxury viewing boxes } & 9 \
\hline \text { Product licensing agreements } & 17 \
\hline \text { Season ticker subscriber list } & 18 \
\hline \text { Contacts and commitments for use of stadium } & 24 \
\hline \text { The "team" imputed or residual value } & 225 \
\hline \text { Total } & 34 \
\hline
\end{array}$$ The team has been less than successful in its professional sports league and has been recording losses of $1,000,000 to $8,000,000 per year on its audited financial statements for the past five years. It was these losses that prompted the last owner to sell the team and related assets.
Required:
a. There are several identifiable intangible assets noted on the list. Group these assets into three classes, being those that are
(i)easily measurable and identifiable;
(ii)reasonably measurable and identifiable; and
(iii)very difficult to measure and identify.
For each group, what common quality or feature of these items distinguishes their classification?
b. While all the items can be assigned a value, would you capitalize all these amounts?
Explain your conclusion.

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Question 13

What factor will not affect the estimated useful life of a finite lived intangible asset?

Accepted Answer

Productive capacity is not a factor that affects the estimated useful life of a finite-lived intangible asset because intangible assets do not have physical substance and therefore do not have a productive capacity in the same way that tangible assets do. Factors like legal life, competitive pressures, and technological obsolescence are more relevant in determining the useful life of intangible assets.

Question 14

Listed below are several transactions that occurred during the year. In each case, all the amounts were debited to an account called "R and D costs." At the end of the year the company wants this account closed out and the amounts either expensed or capitalized to an asset account called "Development costs." a. During the year $5,500,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer in mice. Evidence showed it materially reduced the effects of this cancer in the mice.
b. During the year $12,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer for terminally ill cancer patients. The trials were successful in a limited number of cases but the results were mixed.
c. During the year $44,000,000 was paid to staff to investigate whether a drug combination was effective in reducing a specific type of cancer. The drug was very successful in most cases. Market research shows a huge market for this drug. The Board has committed further resources to complete the development of this project and to market the drug.
d. During the year $41,000,000 was paid to staff to investigate whether a drug combination was effective in reducing a specific type of cancer. The drug combination was very successful in most cases. Market research shows huge a market for this drug combination. The company is too small and does not have adequate funds to complete the balance of the drug testing, so it is looking for a large pharmaceutical firm to take it over and complete the process.
Required:
Prepare the journal entry required for each case. Explain your proposed treatment.

Accepted Answer

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Question 15

New Ventures Corp., a publicly accountable entity, capitalized the following costs: $$\begin{array} { | l | r | r | } 
\hline & \text { Jan 1 - April 30, 2021 } & \text { May 1 - Dec. 31, 2021 } \
\hline \text { Patents } & 10,000 & 12,000 \
\hline \text { Copyrights } & 15,000 & 32,000 \
\hline
\end{array}$$ Which statement is correct?

Accepted Answer

These costs are related to patents and copyrights, which have legal lives but may also have shorter useful lives depending on factors such as obsolescence, competition, and technology advancements. Therefore, the useful life could be shorter than the legal life.

Question 16

Why is it important to understand the difference between research costs and development costs?

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Question 17

A professional sports team and related items (including a stadium)were bought by an exceedingly wealthy investor and sports fan. The negotiated price was $225,000,000. Details of what was purchased and the agreed fair values are as follows:
 $$\begin{array} { | l | r | } 
\hline & \begin{array} { r } 
\text { Fair value in } \$ \
\text { millions }
\end{array} \
\hline\text { Stadium }&70 \
\hline \text { Land } & 20 \
\hline \text { Cable TV broadcasting contract } &9 \
\hline \text { Player contracts } & 31 \
\hline \text { Spectator leases on luxury viewing boxes } & 9 \
\hline \text { Product licensing agreements } & 17 \
\hline \text { Season ticker subscriber list } & 18 \
\hline \text { Contacts and commitments for use of stadium } & 27 \
\hline \text { The "team" imputed or residual value } & \underline{24}\
\hline \text { Total } &225 \
\hline
\end{array}$$ The team has been less than successful in its professional sports league and has been recording losses of $1,000,000 to $8,000,000 per year on its audited financial statements for the past five years. It was these losses that prompted the last owner to sell the team and related assets.
Required:
a. Of the $225 million purchase price, how much of it relates to tangible assets? What percentage of the purchase price relates to tangible assets?
b. Describe the nature of the future economic benefits associated with each of the intangible assets acquired. For example, for the cablevision broadcasting contract, this would be the present value of the future payments expected from contracts for the broadcast of games on cablevision channels plus potential renewal contracts thereafter.

Accepted Answer

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Question 18

Patent Corp., a publicly accountable entity, purchased a company with the following assets and liabilities for $100,000: $$\begin{array} { | l | r | r | } 
\hline & \text { Carrying value } & \text { Fair value } \
\hline \text { Cash } & 10,000 & 10,000 \
\hline \text { Inventories } & 18,000 & 17,000 \
\hline \text { Property, plant and equipment } & 12,000 & 10,000 \
\hline \text { Intangible assets } & 32,000 & 40,000 \
\hline \text { Accounts payable } & 15,000 & 15,000 \
\hline \text { Long-term liabilities } & 10,000 & 15,000 \
\hline \text { Equity } & 47,000 & \
\hline
\end{array}$$ How much goodwill should be recorded?

Accepted Answer

The fair value of the assets acquired is $10,000 + $17,000 + $10,000 + $40,000 = $77,000. The fair value of the liabilities is $15,000 + $15,000 = $30,000.
Therefore, the net assets acquired is $77,000 - $30,000 = $47,000.
As Patent Corp. paid $100,000 for the acquisition, the goodwill is $100,000 - $47,000 = $53,000.

Question 19

Listed below are several transactions that occurred during the year. In each case, all the amounts were debited to an account called "R and D costs." At the end of the year the company wants this account closed out and the amounts either expensed or capitalized to an asset account called "Development costs."
a. During the year $34,000,000 was paid to staff in the research division of a pharmaceutical firm. Supplies used totaled $3,000,000. Rent on the research building totaled $1,000,000. Utilities totaled $1,400,000. Head office allocated $1,500,000 in general overhead to the research division. The total spent on research was $40,900,000. The company is completing five different projects investigating whether five different drug combinations effectively reduce cancer in patients. One of the five drugs was very successful in most cases. Market research shows there is a huge market for this drug. The Board has committed resources to complete the project and market the drug; 10% of the total research staff is working on the successful drug combination.
b. During the year $22,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer. The drug was very successful in most cases. Management is committed to continuing this project and has secured financial and technical resources to see if the drug will prove to be commercially viable.
c. Last year $70,000,000 in costs were capitalized as all the development cost criteria were satisfied for a specific drug combination. During the current year a further $10,000,000 was spent that can be directly attributed to this drug's development. Near the end of the year a competitor surprisingly started selling a similar drug. The first-mover advantage of the competing drug seriously challenges the market usefulness and success of the drug this company is researching. Management and the Board are nonetheless financially and strategically committed to launching their drug in 18 months.
Required:
Prepare the journal entry required for each case. Explain your proposed treatment

Accepted Answer

The answer of Listed below are several transactions that occurred...

Question 20

Explain four differences in the recognition of externally acquired intangibles versus internally developed intangibles.

Accepted Answer

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Quiz 9: Intangible Assets, Goodwill, Mineral Resources, and Government Grants

What is economic profit as it would be defined in finance or economics? Why is accounting net income not the same as an economist's determination of earnings, as measured from a shareholder's perspective?

What factor will not affect the estimated useful life of a finite lived intangible asset?

Which criteria under IAS 38 would be met if there is a "project budget that outlines the specific costs, so the costs of the project are likely to be measured with sufficient reliability"?

What are the unique features that lead to the differing accounting treatment between research and development costs?

Which of the following statements is correct about intangible assets that have an indefinite life span?

Explain how earnings can be manipulated through choices made in the estimated useful lives for intangible assets.

Which of the following is NOT a "class" of intangible assets?

Which statement is not correct?

Explain the accounting for internally developed intangible assets.

Explain the accounting requirements for externally purchased intangibles and internally developed intangibles.

Which of the following is not a parameter of amortization?

What factor will not affect the estimated useful life of a finite lived intangible asset?

Why is it important to understand the difference between research costs and development costs?

Explain four differences in the recognition of externally acquired intangibles versus internally developed intangibles.