Chapter 12

Question 1

Which of the following is a research and development cost?

a. Development or improvement of techniques and processes.

b. Offshore oil exploration that is the primary activity of a company.

c. Research and development performed under contract for others.

d. Market research related to a major product for the company.

Answer 1

a. Development or improvement of techniques and processes.

Question 2

Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?

A. Litigation costs would be capitalized regardless of the outcome of the litigation.
B. Litigation costs would be expensed regardless of the outcome of the litigation.
C. Litigation costs would be capitalized only if the patent was purchased rather than internally developed.
D. Litigation costs would be capitalized if the patent right is successfully defended.

Answer 2

D. Litigation costs would be capitalized if the patent right is successfully defended.

Question 3

Which of the following is not a characteristic of intangible assets?

A. All answer choices are characteristics of intangible assets.
B. They are not financial instruments.
C. They are classified as long-term assets.
D. They lack physical existence.

Answer 3

A. All answer choices are characteristics of intangible assets.

Question 4

Which of the following is not a characteristic of intangible assets?

A. They are all subject to amortization.
B. They are long-term in nature.
C. They lack physical existence.
D. They are not financial instruments.

Answer 4

A. They are all subject to amortization.

Question 5

The controversy surrounding the policy to expense all research and development costs associated with internally created intangible assets results in

A. Understating assets and understating expenses
B. Overstating assets and understating expenses
C. Understating assets and overstating expenses
D. Overstating assets and overstating expenses

Answer 5

C. Understating assets and overstating expenses

Question 6

A purchased limited-life intangible asset ______ amortized and is impairment tested using _______________.

A. is; the recoverability test and then the fair value test
B. is; the fair value test only
C. is not; the fair value test only
D. is not; the recoverability test and then the fair value test

Answer 6

A. is; the recoverability test and then the fair value test

Question 7

For indefinite-life intangibles other than goodwill, an impairment test should be conducted at least:

a. monthly
b. once during its useful life
c. quarterly
d. annually

Answer 7

d. annually

Question 8

Which of the following does not describe intangible assets?

A. They provide long-term benefits
B. They lack physical existence
C. They are classified as long-term assets
D. They are financial instruments

Answer 8

D. They are financial instruments

Question 9

Cost incurred internally to create intangibles are

A. capitalized
B. capitalized if they have an indefinite life
C. expensed as incurred
D. expensed only if they have a limited life

Answer 9

C. expensed as incurred

Question 10

The cost of successfully defending a patent suit should be

A. charged off in the current period
B. added to factory overhead and allocated to production of the product.
C. capitalized and amortized over the remaining estimated useful life of the patent
D. capitalized and amortized over the legal life of the purchased patent

Answer 10

C. capitalized and amortized over the remaining estimated useful life of the patent

Question 11

Martinez Corporation purchases a patent from Carla Vista Company on January 1, 2020, for $71,000. The patent has a remaining legal life of 16 years. Martinez feels the patent will be useful for 10 years. Assume that at January 1, 2022, the carrying amount of the patent on Martinez’s books is $56,800. In January, Martinez spends $30,400 successfully defending a patent suit. Martinez still feels the patent will be useful until the end of 2029.

Prepare the journal entries to record the $30,400 expenditure and 2022 amortization.

Account Titles and Explanation Debit Credit
_______________________________ ______ ______
_______________________________ ______ ______
(To record expenditure of patents)
_______________________________ ______ ______
_______________________________ ______ ______
(To record amortization expense)

Answer 11

Account Titles and Explanation Debit Credit
Patents 30,400
Cash 30,400
(To record expenditure of patents)
Amortization Expense 10,900
Patents 10,900
(To record amortization expense)

(56,800+30,400) / 8 = 10,900

Question 12

On September 1, 2020, Sarasota Corporation acquired Metlock Enterprises for a cash payment of $690,000. At the time of purchase, Metlock’s balance sheet showed assets of $550,000, liabilities of $250,000, and owners’ equity of $300,000. The fair value of Metlock’s assets is estimated to be $750,000.

Compute the amount of goodwill acquired by Sarasota.

Value assigned to goodwill $__________________

Answer 12

$190,000

To Calculate:

Assets: 750,000
Less: Liabilities (250,000)
Net Asset 500,000
Acquisition Cost (690,000)
Goodwill 190,000

Question 13

Culver Corporation owns a patent that has a carrying amount of $360,000. Culver expects future net cash flows from this patent to total $290,000. The fair value of the patent is $206,000.

Prepare Culver’s journal entry to record the loss on impairment.

Account Titles and Explanation Debit Credit
_______________________________ ______ ______
_______________________________ ______ ______

Answer 13

Account Titles and Explanation Debit Credit
Loss on Impairment 154,000
Patents 154,000

Step 1: Test for Impairment
$360,000 - carrying value of patent
$290,000 - net future cash flows from patent
Since, net future cash flows are less than the carrying value of patent, then such patent should be impaired.

Step 2: Calculation of Impairment Loss
$360,000 - carrying value of patent
$(206,000) - less: fair value of patent
$154,000 - Impairment loss

Question 14

On December 31, 2018, Appalachian Corporation paid $5,550,000 to acquire Grandview Company and recorded $1,630,000 of goodwill as a result of the purchase. On December 31, 2020, Appalachian determines that the fair value of the Grandview division is $6,500,000 and the carrying amount of Grandview’s net assets on that date is $6,200,000 (the carrying value and the fair value of identifiable net assets are the same). What amount of loss on impairment of goodwill should Appalachian record at December 31,2020.

A. $1,330,000
B. $0
C. $300,000
D. $1,630,000

Answer 14

B. $0

As the fair value of the Grandview division exceeds the carrying amount of Division’s net Assets, there is no impairment on Goodwill.

Question 15

Tiburon Corporation purchased a patent for $1,8500,000 on November 30,2018. It has a remaining legal life of 18 years. Tiburon estimates that the remaining useful life of the patent is useful life of 15 years. What balance will be reported on the December 31, 2020 balance sheet for the patent (if necessary, round your answer to the nearest dollar)?

A. $1,583,678
B. $1,850,000
C. $1,485,606
D. $1,593,056

Answer 15

D. $1,593,056

$1,850,000 (cost) /180 months (useful life) X 25 months (11/30/18 - 12/31/20) = $256,944.

$1,8500,000 - $256,944 = $1,593,056

Question 16

Truffle Inc. acquired a patent on January 1, 2018 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2021, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle’s market interest rate, is $2,120,000. What amount, if any, of impairment loss will be reported on Truffle’s 2021 income statement?

A. $4,680,000
B. $2,120,000
C. $1,340,000
D. $2,560,000

Answer 16

D. $2,560,000

$7,800,000 (cost) /10 yeas (useful life) X 4 years = $3,120,000

$7,800,000 - $3,120,000 = $4,680,000 (carrying value of patent 12/31/21)

$4,680,000 - $2,120,000 = $2,560,000

Question 17

Pinkerton Corp. uses the cost model for intangible assets. On April 10, year 3, Pinkerton acquired assets for $100,000. On December 31, year 3, it was determined that the recoverable amount for these intangible assets was $80,000. On December 31, year 4, it was determined that the intangible assets had a recoverable amount of $84,000. What is the impairment gain or loss recognized in year 3 and year 4 on the income statement?

      Year 3                    Year 4 A.  $20,000 loss       $16,000 loss B.  $20,000 loss       $0 C.  $20,000 loss       $4,000 gain D.  $0                        $0

Answer 17

C. $20,000 loss $4,000 gain

Question 18

Blossom Corporation purchased a limited-life intangible asset for $405,000 on May 1, 2019. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2021?

A. $121,500
B. $0
C. $108,000
D. $81,000

Answer 18

C. $108,000

2019 - 405,000/10*8/12 = 27,000
2020 - 405,000/10 = 40,500
2021 - 405,000/10 = 40,500

27,000 + 40,500 + 40,500 = 108,000

Question 19

Oscar Company acquired a patent on a manufacturing process on January 1,2018 for $5,100,000. It was expected to have a 12 year life and no residual value. Oscar uses straight-line amortization for patents. On December 31,2019, the expected future cash flows for the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Oscar’s market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2019 balance sheet.

A. $5,100,000
B. $3,050,000
C. $4,250,000
D. $3,875,000

Answer 19

B. $3,050,000

$5,100,000 - Cost of the patent
12 years - Useful life
$5,100,000/12 = $425000 - Annual depreciation
Jan 1, 2015 - Date of purchase

At the end of 12-31-2016, Book value patent =
$5,100,000 - $4,250,000 * 2 year = $4,250,000

$3,050,000 - Present value of cash inflows

Amount should be recorded for patent = cost or fair value whichever is lower

$4,250,000 or $3,050,000

Question 20

Jacky Inc. purchased Manzanita Marine on June 1, 2018 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2021 the Manzanita Marine Division had a fair value of $25,400,000. The carrying amount of the net assets of Manzanita (including goodwill) had a value of $24,900,000 at the time. What amount of loss on impairment of goodwill should Jacky record in 2021?

A. $600,000
B. $2,600,000
C. $500,000
D $0

Answer 20

D $0

Goodwill is considered impaired when the fair market value of division is less than it’s carrying value.

The Manzanita Marine Division fair value $25,400,000 exceeds the carrying value of division $24,900,000 ,so the Goodwill is not impaired.

Question 20

Ivanhoe Corporation purchased a patent for $138,000 on September 1, 2019. It had a useful life of 10 years. On January 1, 2021, Ivanhoe spent $35000 to successfully defend the patent in a lawsuit. Ivanhoe feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2021?

A. $29080
B. $30920
C. $31840
D. $23920

Answer 20

B. $30920

Total # of month = 1012 = 120 months
Amortization expense = 138,000/12016 = 18,400
(138,000 - 18,400 + 35,000) / 5 = $30,920

Question 21

The management of Devin Corporation is testing two of its reporting units for impairment of goodwill. Information about results of these tests are shown below.

Segment carrying amount $2,500,000 $3,00,000
(including goodwill)

Carrying value of goodwill 500,000 500,000

Estimated fair value of total 2,900,000 2,800,000

Estimated fair value of assets 2,100,000 2,500,000
and liabilities other than goodwill impairment loss reported by Devin Corporation?

A. $500,000
B. $0
C. $300,000
D. $200,000

Answer 21

D. $200,000

Question 22

Grouper Corporation purchased Skysong Company 3 years ago and at that time recorded goodwill of $380,000. The Skysong Division’s net assets, including the goodwill, have a carrying amount of $790,000. The fair value of the division is estimated to be $720,000.

Prepare Groupers’ journal entry, if necessary, to record impairment of the goodwill.

Account Titles and Explanation Debit Credit
_______________________________ ______ ______
_______________________________ ______ ______

Answer 22

Account Titles and Explanation Debit Credit
Loss on Impairment 70,000
Goodwill 70,000

$790,000 - 720,000 = 70,000

Question 23

Crane purchased a patent for Vania Co. for $1,110,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Crane determined that the economic benefits of the patent would not last longer than 6 years from the date of accumulated amortization, at December 31, 2020?

The amount to be reported $ _______________

Answer 23

$666,000

Amortization for 2018 & 2019
$1,110,000 / 10 years X 2 years = $222,000

Amortization for 2020
($1,110,000 - $222,000) / (6-2 years) = $222,000

Accumulated amortization on 12-31-2020
$222,000 + 222,000 = 444,000

Amount for balance sheet
$1,110,000 - 444,000 = 666,000

Question 24

Crane bought a franchise from Alexander Co. on January 1, 2019 for $305,000. The carrying amount of the franchise on Alexander's books on January 1, 2019 was $305,000. The franchise agreement had an estimated useful life of 30 years. Because Crane must enter a competitive bidding at the end of 2021, it is unlikely that the franchise will be retained beyond 2028. What amount should be amortized for the year ended December 31, 2020? The amount to be amortized $ _______________

Answer 24

30,500 $305,000 / 10 years = 30,500

Question 25

On January 1, 2020, Crane incurred organization costs of $252,500. What amount of organization expense should be reported in 2020? The amount to be reported $_________________

Answer 25

$252,500

Question 26

Crane purchased the license for distribution of a popular consumer product on January 1, 2020, for $141,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Crane can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2020? The amount to be amortized $ ______________

Answer 26

0

Question 27

During 2016, Flounder Corporation spent $151,200 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2016, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $19,200 related to the patent were incurred as of October 1, 2016. Prepare all journal entries required in 2016 and 2017 as a result of the transactions above. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ (To record research & development exp.) _______________________________ ______ ______ _______________________________ ______ ______ (To record legal expenses) _______________________________ ______ ______ _______________________________ ______ ______ (To record amortization expenses) _______________________________ ______ ______ _______________________________ ______ ______

Answer 27

Account Titles and Explanation Debit Credit Research & development Exp. 151,200 Cash 151,200 (To record research & development exp.) Patents 19,200 Cash 19,200 (To record legal expenses) Amortization Expense 480 Patents 480 (To record amortization expenses) Amortization Expense 1,920 Patents 1,920

Question 28

On June 1, 2018 Flounder spent $9,920 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years for June 1, 2018. Prepare all journal entries requires in 2018 and 2019. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ (To record patents) _______________________________ ______ ______ _______________________________ ______ ______ (To record amortization expenses) _______________________________ ______ ______ _______________________________ ______ ______

Answer 28

Account Titles and Explanation Debit Credit Patents 9,920 Cash 9,920 (To record patents) Amortization Expense 2,060 Patents 2,060 (To record amortization expenses) Amortization Expense 2,160 Patents 2,160

Question 29

In 2020, Flounder determined that a competitor's product would make the New Age Piano obsolete and the patent worthless by December 31, 2021. Prepare all journal entries requires in 2020 and 2021. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______

Answer 29

Account Titles and Explanation Debit Credit Amortization Expense 11,250 Patents 11,250 ($25,920 - 1,260 - 2,160) / 2 = 11,250

Question 30

On July 1, 2020, Sheffield Corporation purchased Johnson Company by paying $187,700 cash and issuing a $65,200 note payable to Steve Johnson. At July 1, 2020, the balance sheet of Johnson Company was as follows. Cash $38,200 A/R 66,000 Inventory 47,800 Land 29,500 Building(net) 56,800 Equipment(net) 52,600 Copyrights 7,500 $325,400 Accounts Payable $162,000 Stockholders' equity 163,400 $325,400 The recorded amounts all approximate current fair values except for land (worth $45,500), inventory (worth $93,700) and copyrights (worth $11,100). Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ Prepare the December 31 entry for Sheffield Corporation to record amortization of intangibles. The copyrights have an estimated remaining useful life of 4 years with a residual value of $2,700. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______

Answer 30

Account Titles and Explanation Debit Credit Cash 38,200 Accounts Receivable 66,000 Inventory 93,700 Land 45,500 Buildings 56,800 Equipment 52,600 Copyrights 11,100 Goodwill 51,000 Accounts Payable 162,000 Notes Payable 65,200 Cash 187,700 Account Titles and Explanation Debit Credit Amortization Expense 1,050 Copyright 1,050 11,100 - 2,700 = 8,400 8,400 /4 X 6/12 = 1,050

Question 31

In January, 2016 Pharaoh Corporation purchased a patent for a new consumer product for $972,000. At the time of the purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only 10 years. During 2021 the product was determined to be obsolete due to a competitors new product. What amount should Pharaoh charge to expense during 2021, assuming amortization is recorded at the end of each year? A. $64800 B. $486000 C. $648000 D. $97200

Answer 31

B. $486000 (972,000 / 10) * 5 = $486,000

Question 32

In January, 2016 Wildhorse Corporation purchased a patent for a new consumer product for $987,000. At the time of the purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only 10 years. During 2021 the product was determined to be obsolete due to a competitors new product. What amount should Wildhorse charge to expense during 2021, assuming amortization is recorded at the end of each year? A. $65800 B. $493500 C. $658000 D. $98700

Answer 32

B. $493500 (987,000 / 10) * 5 = $493,500

Question 33

Presented below is information related to copyrights owned by Sheridan Company at December 31, 2020. Cost 8,555,000 Carrying Amount 4,350,000 Expected future net cash flows 4,180,000 Fair Value 3,240,000 Assume the Sheridan Company will continue to use this copyright in the future. As of December 31, 2020, the copyright is estimated to have a remaining useful life of 10 years. (A) Prepare the journal entry to record the impairment of the asset at December 31, 2020. The company does not use accumulated amortization. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ (B) Prepare the journal entry to record amortization expense for 2021 related to the copyrights. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ (C) The fair value of the copyright at December 31, 2021, is $3,660,000. Prepare the journal entry necessary to record the increase in fair value. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______

Answer 33

(A) Account Titles and Explanation Debit Credit Loss on Impairment 1,110,000 Copyright 1,110,000 $4,350,000 - Carrying Amount $3,240,000 - Fair Value $1,110,000 - Impairment Loss (B) Account Titles and Explanation Debit Credit Amortization Expenses 324,000 Copyrights 324,000 $3,240,000 - Carrying Value of Copyrights 10 Years - Remaining useful life Amortization Expenses = $3,240,000 / 10 years = $324,000 (C) Account Titles and Explanation Debit Credit No Entry 0 No Entry 0

Question 34

Presented below is net asset information related to the Larkspur Division of Santana, Inc. Larkspur Division Net Assets As of December 31, 2020 (in Millions) Cash $52 Accounts receivable 201 Property, Plant and Equipment (net) 2,596 Goodwill 202 Less: Notes Payable (2,591) Net assets $460 The purpose of the Larkspur Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be $415 million. Management has also received an offer to purchase the division for $330 million (deemed an appropriate fair value.) All identifiable assets' and liabilities' book and fair value amounts are the same. (A) Prepare the journal entry to record the impairment at December 31, 2020. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ (B) At December 31,2021, it is estimated that the division's fair value increased to $344 million. Prepare the journal entry to record this increase in fair value. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______

Answer 34

(A) Account Titles and Explanation Debit Credit Loss on Impairment 130,000,000 Goodwill 130,000,000 $330,000,000 - fair value $460,000,000 - carrying value $130,000,000 - difference between Fair and Carrying Value Because carrying value is higher than fair value there is an impairment $330,000,000 - fair value $258,000,000 - Carrying amount, net of goodwill $ 72,000,000 - Implied value of goodwill $202,000,000 - Carrying Value of goodwill $130,000,000 (B) Account Titles and Explanation Debit Credit No entry 0 No Entry 0

Question 35

On July 31, 2020, Sheridan Company paid $2,850,000 to acquire all of the common stock of Conchita Incorporated, which became a division (a reporting unit) of Sheridan. Conchita reported the following balance sheet at the time of the acquisition. Current Assets $720,000 Noncurrent assets 2,550,000 Total assets 3,270,000 Current liabilities $550,000 Long-term liabilities 450,000 Stockholder's equity 2,270,000 Total $3,270,000 It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,625,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2020, Conchita reports the following balance sheet information. Current Assets $410,000 Noncurrent assets 2,510,000 (including goodwill recognized in purchase) Current liabilities (600,000) Long-term liabilities (400,000) Net assets $1,920,000 Finally, it is determined that the fair value of the Conchita Division is $1,960,000 (A)Compute the amount of goodwill recognized, if any, on July 31, 2020. The amount of goodwill $______________ (B) Determine the impairment loss, if any, to be recorded on December 31, 2020. The impairment loss $ _____________ (C) Assume that fair value of the Conchita Division is $1,854,000 instead of $1,960,000. Determine the impairment loss, if any, to be recorded on December 31, 2020. The Impairment loss $ ____________ (D) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ This loss will be reported in income as a separate line item before the subtotal _____________________

Answer 35

(A) 225.000 Amount of goodwill is: Acquisition Price - Fair Value of net assets $2,850,000 - 2,625,000 = 225,000 (B) 0 Fair value is more than the net asset value so impairment is $0 $1,960,000 > $1,920,000 (C)6 6,000 Impairment Loss = Book Value 12-31-20 - Fair Value 12-31-20 $1,920,000 - 1,854,000 = 66,000 (D) Account Titles and Explanation Debit Credit Impairment Loss 66,000 Goodwill 66,000

Question 36

The purchase price of a limited life intangible asset should be ________ amortized. A. expensed and B. capitalized but not C. expensed but not D. capitalized and

Answer 36

D. capitalized and

Question 37

Research and development costs could include A. marketing research to promote a new product. b. periodic alterations to existing production lines. c. construction of prototypes. d. routine efforts to refine an existing product.

Answer 37

c. construction of prototypes.

Question 38

The fair value of a firm’s identifiable net assets is $7.5 million. If another company pays $7 million to purchase this firm, the purchasing company should record A. goodwill of $500,000. B. a gain of $500,000. C. goodwill of $7 million. D. a gain of $7 million.

Answer 38

B. a gain of $500,000.

Question 39

On January 1, 2019, Harris Company acquired a patent on a particular oil extraction technique for $6.25 million. The patent was expected to have a 10-year life and no residual value. On December 31, 2020, Harris determined its expected future cash flows from the patent were $750,000 per year for each of the next eight years. The present value of these flows, discounted at Harris’ market interest rate, is $3.5 million. Note that Harris uses straight-line amortization for patents. Given this information, the oil-extraction patent should be carried on the firm’s December 31, 2020, balance sheet at an amount of A. $3.5 million. B. $5 million. C. $6 million. D. $6.25 million.

Answer 39

B. $5 million. $6,250,000 - Cost $1,250,000 - Less: amortization for 3 years (6250000*2 years / 10) $5,000,000 $6,000,000 - Undiscounted sum of future cash flows (750000*8)

Question 40

Salisbury Enterprises purchased a patent for $525,600 on August 1, 2018. It had a useful life of 15 years. On January 1, 2020, Salisbury spent $75,000 successfully defending the patent in a lawsuit. Salisbury feels that as of that date, the remaining useful life is 10 years. What amount should be reported for patent amortization expense for 2020? A. $53,052 B. $56,556 C. $55,096 D. $42,382

Answer 40

C. $55,096 By the date of the lawsuit, the patent would have been amortized by [($525,600/15) * 5/12] + ($525,600/15) = $14,600 + $35,040 = $49,640. This leaves a balance of $525,600 – $49,640 = $475,960. The cost for defending the patent would be added to this balance for a new balance of $475,960 + $75,000 = $550,960. The amortization expense for 2020 would then be $550,960/10 = $55,096.

Question 41

Ramsay Enterprises incurred research and development costs of $450,000 and legal fees of $18,000 to acquire a patent. The patent has a legal life of 15 years and a useful life of 9 years. What amount should Ramsay record as Patent Amortization Expense in the first year? A. $52,000 B. $2,000 C. $1,200 D. $31,200

Answer 41

B. $2,000 The useful life of the patent is 9 years, so amortization should be based on 9 years rather than the legal life of 15 years. In addition, only legal fees are capitalized. Research and development costs are expensed as incurred. Therefore, in the first year Ramsay should amortize $18,000/9 = $2,000.

Question 42

Which of the following characteristics are considered when determining the useful life of an intangible asset? I. Expected actions of competitors. II. Salvage value, except when it is of value to another company. III. Provisions for renewal or extension. IV. Legal life. A. II, III, and IV. B. I, III, and IV. C. I, II, and III. D. I, II, and IV.

Answer 42

B. I, III, and IV. When determining the useful life of an intangible asset, companies consider the legal life of the asset, competitors' actions, and provisions for renewals. They do not consider salvage or residual value.

Question 43

Matthew and Addison are both analyzing intangible assets for their useful life. After the analysis, Matthew concludes that his asset should not be amortized, but Addison concludes that her asset should be amortized. What is the difference between Matthew’s and Addison’s assets? A. Matthew’s asset was purchased, whereas Addison’s asset was created in-house. B. Matthew’s asset has a limited life, whereas Addison’s asset has an indefinite life. C. Matthew’s asset has an indefinite life, whereas Addison’s asset has a limited life. D. Matthew’s asset was created in-house, whereas Addison’s asset was purchased.

Answer 43

C. Matthew’s asset has an indefinite life, whereas Addison’s asset has a limited life. If no factors limit the useful life of an intangible asset, a company considers its useful life indefinite. A company does not amortize an intangible asset with an indefinite life. However, companies amortize their limited-life intangibles by systematic charges to expense over their useful life.

Question 44

On April 30, 2020, Miranda Industries exchanged 10,000 shares of Carrillo Enterprises $25 par value common stock for a patent owned by Mejia United. The Carrillo stock was acquired in 2020 at a cost of $230,000. At the exchange date, Carrillo common stock had a fair value of $43 per share, and the patent had a net carrying value of $490,000 on Mejia’s books. Miranda should record the patent at A. $430,000. B. $490,000. C. $230,000. D. $250,000.

Answer 44

A. $430,000. The cost of the patent would be recorded at fair value of the shares, or $43 * 10,000 = $430,000.

Question 45

Chan Resources incurred $280,000 of research and development costs to develop a product for which a patent was granted on January 2, 2014. Costs associated with obtaining the patent totaled $97,000. On March 31, 2020, Chan paid $180,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2020 should be A. $460,000. B. $277,000. C. $557,000. D. $377,000.

Answer 45

B. $277,000. Only the patent fees are capitalized. Research and development costs are not amortized. Therefore, the total amortized should be $97,000 + $180,000 = $277,000.

Question 46

Which of the following is a marketing-related intangible asset? A. A copyright B. A brand name C. A customer list D. A franchise

Answer 46

B. A brand name Companies primarily use marketing-related intangible assets in the marketing or promotion of products or services. Examples are trademarks or trade names, brand names, Internet domain names, and noncompetition agreements.

Question 47

On January 1, 2020, Dennis Company purchases Miles Company for $5 million in cash. Miles’ financial statement dated December 31, 2019, indicates the firm’s net assets have a book value of $3.8 million. An analysis conducted by Dennis on December 31 suggests that the book value of Miles’ tangible assets is $600,000 lower than their fair value. This analysis also indicates that the fair value of Miles’ identifiable intangible assets exceeds their book value by $320,000. Given these figures, what was the fair value of Miles’ identifiable net assets? A. $3,800,000 B. $4,720,000 C. $4,400,000 D. $0

Answer 47

B. $4,720,000 Miles’ net assets have a book value of $3.8 million. However, the tangible portions of these assets (which are by their nature identifiable) are undervalued by $600,000, while the identifiable intangible portion are undervalued by $320,000. Thus, the fair value of Miles’ identifiable net assets is $3.8 million + $600,000 + $320,000 = $4.72 million.

Question 48

On January 1, 2020, Dennis Company purchases Miles Company for $4.2 million in cash. Miles’ financial statement dated December 31, 2019, indicates the firm’s net assets have a book value of $3.8 million. An analysis conducted by Dennis on December 31 suggests that the book value of Miles’ tangible assets is $600,000 lower than their fair value. This analysis also indicates that the fair value of Miles’ identifiable intangible assets exceeds their book value by $320,000. Given these figures, Dennis should recognize A. a $920,000 gain. B. $400,000 in goodwill. C. a $520,000 gain. D. $520,000 in goodwill.

Answer 48

C. a $520,000 gain. 3,800,000 - Book Value + 600,000 - increase in fair value tangible + 320,000 - increase in fair value intangible - 4,200,000 - Cash Paid for purchaser 520,000 - Gain

Question 49

In 2020, Bond Inc. bought May Corporation’s net assets for $2 million. At that time, May had total liabilities of $600,000, total current assets of $1.08 million, and total noncurrent assets of $2.52 million. Given these figures, Bond should account for the $1 million difference between the fair value of the net assets acquired and May’s purchase price by A. recording the current assets at $1.08 million and the noncurrent assets at $1.52 million. B. recognizing the $1 million difference as a gain. C. crediting the $1 million difference to retained earnings. D. setting up a deferred credit of $1 million and then amortizing it to income over a period not to exceed 40 years.

Answer 49

B. recognizing the $1 million difference as a gain.

Question 50

On January 1, 2019, Maelstrom Corporation acquired a patent on a particular manufacturing process for $3.75 million. The patent was expected to have a 10-year life and no residual value. On December 31, 2020, Maelstrom determined its expected future cash flows from the patent were $300,000 per year for each of the next eight years. The present value of these flows, discounted at Maelstrom’s market interest rate, is $1.8 million. Note that Maelstrom uses straight-line amortization for patents. Given this information, the manufacturing process patent should be carried on the firm’s December 31, 2020, balance sheet at an amount of A. $1.8 million. B. $2.4 million. C. $3.75 million. D. $300,000.

Answer 50

A. $1.8 million. Patents are considered limited-life intangibles, a recoverability test—comparing the undiscounted future net cash flows from the patent to the carrying amount, must be carried out first. Here, the firm expects undiscounted flows of $300,000 per year for eight years, for a total of $2.4 million. Since Maelstrom uses straight-line amortization and expects this patent to have a 10-year life and no residual value, it should amortize one-tenth of the acquisition price per year, or $3.75 million/10 = $375,000. The book value of the patent decreased (held for two years) by $375,000 x 2 = $750,000 to a total of $3.75 million – $750,000 = $3 million. This means the patent’s fair value of $2.4 million is greater than its carrying amount of $3 million, so there is a loss on impairment. Accordingly, the firm should use the patent’s expected future net cash flows of $1.8 million as its new carrying cost

Question 51

On January 1, 2020, Jordan Corporation acquired Lincoln Industries for $9 million. Jordan recorded $2.5 million in goodwill as a result of the purchase. As of December 31, 2020, the Lincoln Industries Division of Jordan Corporation had a fair value of $7.8 million, and the division’s net identifiable assets (excluding goodwill) had a fair value of $6.8 million. Given this information, Jordan should record a _______ loss on impairment of goodwill in 2020. A. $1.7 million B. $1.2 million C. $1.4 million D. $1.5 million

Answer 51

D. $1.5 million To find the implied value of the Lincoln Industries Division’s goodwill as of December 31, 2020, subtract the division’s net identifiable assets (excluding goodwill) from the division’s fair value: $7.8 million – $6.8 million = $1 million. This amount is $2.5 million – $1 million = $1.5 million less than the recorded goodwill, which means the firm should record a $1.5 million loss on impairment of goodwill.

Question 52

Darwin Manufacturing just determined that a particular patent has a carrying amount of $2 million and is expected to generate $2.2 million in future net cash flows. Based on this information, Darwin should A. assume there is no impairment on the patent. B. write off the full carrying amount of the patent. C. proceed to a fair value test. D. proceed to a recoverability test.

Answer 52

A. assume there is no impairment on the patent. A company compares the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. The company does not have to do anything else. If the sum of the expected future net cash flows is less than the carrying amount of the asset, the company measures and recognizes an impairment loss.

Question 53

Starr Enterprises plans to spend $6.2 million to build a new research facility that will be used to research and develop a prototype flying car with auto-pilot. The building will be built over a two-year period, with 60% of costs incurred in the first year and 40% in the second year. They expect the flying car project to be complete in 20 years after the completion of the building, and they hope to sell the building at the end of the project for $5.7 million. How much of the building costs should they expense in the second year of construction? A. $281,818 B. $0 C. $2,480,000 D. $310,000

Answer 53

B. $0 Although Starr Enterprises is not going to use the new construction facility for another research project, it does have a future use because they plan to sell it at the end of the project. Therefore, they should capitalize the cost of the building over the two years it is being built and then amortize the expected net cost of the building (cost – salvage value) over the 20 years of the research project. Therefore, in the second year of construction, no building costs would be expensed.

Question 54

Which of the following are considered to be research and development costs? I. Costs associated with marketing research to promote a new product. II. Costs associated with planned search or critical investigation aimed at discovery of new knowledge. III. Costs associated with translation of research findings or other knowledge into a significant improvement of an existing product. IV. Costs associated with translation of research findings or other knowledge into a plan or design for a new product or process. A. I, II, and III. B. I, III, and IV. C. I, II, and IV. D. II, III, and IV.

Answer 54

D. II, III, and IV. R&D costs can be divided into research activities, activities that involve planned search or critical investigation aimed at discovery of new knowledge, and development activities, activities that translate research findings or other knowledge into a plan or design for a new product or process. Marketing research is not part of R&D.

Question 55

Which of the following is an example of a development cost? A. Robin spent $52,000 in office supplies for their administrative offices. B. Rhodes Industries spent $350,000 to install upgraded software to run their automated production process. C. Patrick spent $82,000 for laboratory materials in his quest to discover an insulin substitute for diabetes patients. D. Holland Manufacturing spent $4 million to open a pilot production facility that will use only green energy to operate.

Answer 55

D. Holland Manufacturing spent $4 million to open a pilot production facility that will use only green energy to operate.