Unit 9 - Intangibles Flashcards
Which of the following is not an intangible asset?
A. Accounts receivable.
B. Patents.
C. Copyrights.
D. Franchises.
A. Accounts receivable.
Accounts receivable would be considered a financial instrument and therefore would not be classified as an intangible asset. B, C, and D are all examples of intangible assets.
When intangible assets are amortized, a journal entry may be made by debiting an expense account and crediting
The Intangible Accumulated
Asset Amortization
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
When intangible assets are amortized, the charges should be shown as expenses, and the credits should be made either to the appropriate asset accounts or to separate accumulated amortization accounts.
Under current accounting practice, intangible assets are classified as:
A. amortizable or unamortizable.
B. limited-life or indefinite-life.
C. specifically identifiable or goodwill-type.
D. legally restricted or goodwill-type.
B. limited-life or indefinite-life.
The current classification of intangibles is either limited-life or indefinite life. An intangible asset with a limited life is amortized; an intangible asset with an indefinite life is not amortized.
One factor that is not considered in determining the useful life of an intangible asset is:
A. legal life.
B. expected actions of competitors.
C. salvage value
D. provisions for renewal or extension.
C. salvage value
The useful life of an intangible asset may be limited by its legal life. Actions of competitors as well as renewal or extension provisions affect the useful life of an intangible asset. Salvage value is a concept related to the computation of depreciation on tangible fixed assets. Salvage value is not a factor used in determining useful life of an intangible.
When a company develops a trademark or trade name, the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark or trade name would not be allowed to be capitalized?
A. Attorney fees.
B. Consulting fees.
C. Research and development fees.
D. Design costs.
C. Research and development fees.
When a trademark or trade name is developed by a company, the costs associated with that development should be capitalized. The only cost that is not appropriately capitalized are costs related to research and development.
A large publicly held company has developed and registered a trademark during 2021. 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.
D. Amortized over its useful life.
A trademark is no different than any other limited-life intangible asset. The costs associated with the acquisition of the trademark are to be amortized over its useful life.
Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January, 2015. The cost of the franchise was $125,000 and was estimated to have a limited life of 40 years. Early in the year 2021, 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?
2019 2020 2021
A. $5,000 $5,000 $ 5,000
B. $3,125 $3,125 $ 3,125
C. 0 0 $125,000
D. $3,125 $3,125 $106,250
D. $3,125 $3,125 $106,250
During the first six years of the franchise useful life the amortization would be the cost ($125,000) divided by the 40 year maximum life. This would result in an annual charge to expense of $3,125 ($125,000/40) for the first six years (2015 through 2020). Thus, at the beginning of 2021, when the franchise was considered worthless, the book value of the franchise account would be $106,250 [$125,000 - ($3,125 X 6)]. When the franchise is deemed worthless, it should be written off immediately.
Smith Co. bought a window franchise from Paine, Inc., on January 2, 2021, 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, 2021, 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, 2021?
A. $ 375
B. $ 2,000
C. $ 2,500
D. $15,000
B. $ 2,000
Smith Corporation should record franchise amortization expense of $2,000 in 2021 ($100,000/50 years = $2,000).
On January 15, 2012, Machiavelli Corporation was granted a patent on a product. On January 2, 2021, to protect its patent, Machiavelli purchased a patent on a competing product that originally was issued on January 10, 2014. Because of its unique plant, Machiavelli does not feel that the competing patent can be used in producing a product. The cost of acquiring the competing patent should be:
A. amortized over a maximum period of 11 years.
B. amortized over a maximum period of 16 years.
C. amortized over a maximum period of 20 years.
D. expensed in 2021.
A. amortized over a maximum period of 11 years.
The reason for acquiring the patent on the competing product is to protect the original patent acquired on 1/15/12. The original patent will expire during 2032. Thus, the cost of the patent on the competing product should be amortized over 11 years, the time between its acquisition (2021) and the expiration of the original patent’s useful life (2032).
Goodwill:
A. generated internally should not be capitalized unless it is measured by an individual independent of the enterprise involved.
B. is easily computed by assigning a value to the individual attributes that comprise its existence.
C. represents a unique asset in that its value can be identified only with the business as a whole.
D. exists in any company that has earnings that differ from those of a competitor.
C. represents a unique asset in that its value can be identified only with the business as a whole.
Goodwill is recorded only when an entire business is purchased because goodwill is a going concern valuation and cannot be separated from the business as a whole. Goodwill generated internally should not be capitalized in the accounts because measuring the components of goodwill is simply too complex and associating any costs with future benefits is too difficult.
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.
B. does not happen as it is deemed to have an indefinite life.
Goodwill is considered to have an indefinite life and therefore should not be amortized. Income statements are not charged unless goodwill has been impaired.
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.
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.
Goodwill is the difference between the fair value of the net tangible and identifiable intangible assets and the purchase price of a business organization. It does not represent the entire purchase price nor is it an amount added to the purchase price to arrive at a master valuation. Also, there are many accounts that appear in the financial statements at their fair market value, so alternative D is not correct.
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.
B. to write-off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential.
The reason goodwill arises is because the future earnings potential of a purchased business is in excess of what would be considered normal. Thus, goodwill reflects the future positive results that were purchased. To write this amount off immediately would be inconsistent with the reason for its initial recording.
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):
Recoverability Test Fair Value Test
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
A recoverability test is first performed to determine whether an impairment has occurred for property, plant, and equipment and for limited-life intangibles. If the asset’s cost is not recoverable, a fair value test is then used to measure the impairment loss.
Isa Company has equipment that, due to changes in its 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
C. $ 50,000
The recoverability test indicates that the expected future net cash flows of $380,000 from the use of the asset are less than its carrying amount of $400,000. Therefore, an impairment has occurred. The difference between the carrying amount of Isa Company’s asset and its fair value is the impairment loss of $50,000 or ($400,000 - $350,000).
Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are):
Recoverability Test Fair Value Test
A. Yes Yes
B. Yes No
C. No Yes
D. No No
C. No Yes
For indefinite-life intangibles other than goodwill, only the fair value test is employed to determine impairments.
In 2018, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2021, 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, 2021?
A. No entry is needed.
B. Loss on impairment 1,500,000 Goodwill 1,500,000
C. Loss on impairment 1,200,000 Goodwill 1,200,000
D. Loss on impairment 1,500,000 Prorata deduction of all assets 1,500,000
B. Loss on impairment 1,500,000 Goodwill 1,500,000
The general rules that apply to impairments of long-lived assets also apply to intangibles; however, goodwill impairments involve a grouping of net assets. In performing the review for recoverability, the sum of expected future net cash flows ($2,500,000) is less than the carrying amount of the net assets ($3,300,000); therefore an impairment loss should be measured and recognized. The impairment loss is the amount by which the carrying amount of the assets exceeds the fair value of the assets ($3,300,000 - $1,800,000 = $1,500,000). Where goodwill is associated with assets that are subject to impairment loss, the carrying amount of the associated goodwill should be eliminated before the carrying amounts of impaired long-lived assets and identifiable intangibles are reduced to their fair values.
How should research and development costs be accounted for?
A. Must be capitalized when incurred and then amortized over their estimated useful lives.
B. Must be expensed in the period incurred unless contractually reimbursable.
C. May be either capitalized or expensed when incurred.
D. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will result in the discovery of a profitable product.
B. Must be expensed in the period incurred unless contractually reimbursable.
FASB Statement No. 2 has standardized and simplified accounting practice in the area of R & D expenditures by requiring that all research and development costs be charged to expense when incurred. The obvious exception to this rule is when the R & D costs are contractually reimbursed.
In 2021, Descartes Corporation incurred R & D costs as follows:
Materials and facilities …………………………………………………….. $ 80,000
Personnel ……………………………………………………………………….. 110,000
Indirect costs ………………………………………………………………….. 25,000
$215,000
These costs relate to a product that will be marketed in 2021. It is estimated that these costs will be recovered by the end of 2024. What amount of R&D costs should be charged against 2021 income?
A. $ 0.
B. $ 25,000.
C. $190,000.
D. $215,000.
D. $215,000.
All R & D costs are charged to expense when incurred. Thus, the 2021 expenditures of $215,000 should be charged against 2021 income.
Which of the following would not be considered an R & D activity?
A. Adaptation of an existing capability to a particular requirement or customer’s need.
B. Searching for applications of new research findings.
C. Laboratory research aimed at discovery of new knowledge.
D. Conceptual formulation and design of possible product or process alternatives.
A. Adaptation of an existing capability to a particular requirement or customer’s need.
R & D costs are expenditures made to develop new products or processes, to improve present products, and to discover new knowledge that may be valuable at some future date. The only alternative that does not fit the general classification of R & D expenditures is alternative A. Adapting existing capabilities to a specific requirement or need does not involve R & D.
Calvin Company incurred the following cost related to the start-up of the business:
Attorney’s fee …………………………………………………………. $10,000
Underwriter’s fee …………………………………………………….. 15,000
State incorporation fee …………………………………………….. 7,000
$32,000
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, 2021, what amount of the start-up costs should be amortized in 2022?
A. $4,400.
B. $2,200.
C. $ 800.
D. $ 0.
D. $ 0.
Start-up costs are to be expensed as incurred; therefore, there should be no costs associated with the organization in 2021 that will be amortized in 2022.
Which of the following is not a characteristic of intangible assets?
a. They lack physical existence.
b. They are all subject to amortization.
c. They are not financial instruments.
d. They are long-term in nature.
b. They are all subject to amortization.
Expensing all R&D costs associated with internally created intangible assets results in
a. Understating assets and overstating expenses.
b. Understating assets and understating expenses.
c. Overstating assets and overstating expenses.
d. Overstating assets and understating expenses.
a. Understating assets and overstating expenses.
Which of the following is a factor to be considered in determining a limited-life intangible asset’s useful life?
a. All of these answer choices are correct.
b. Any legal provisions that may limit the useful life.
c. The expected useful life of any related asset.
d. The effects of obsolescence.
a. All of these answer choices are correct.
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 not; the fair value test only.
c. is not; the recoverability test and then the fair value test.
d. is; the fair value test only.
a. is; the recoverability test and then the fair value test.
Construction permits are
a. marketing-related intangible assets.
b. customer-related intangible assets.
c. contract-related intangible assets.
d. not considered to be intangible assets.
c. contract-related intangible assets.
