Unit 9 questions Flashcards
Organization costs are those incurred in the formation of a business entity. Under the federal tax code, organization and start-up costs must be capitalized and amortized over a period of not less than 15 years. However, for financial accounting purposes, nongovernmental entities must:
expense all start-up and organization costs as incurred.
IAS 38, Intangible Assets, defines an intangible asset as an:
nonmonetary asset without physical substance.
Costs of start-up activities, including organization costs, should be ________as incurred.
expensed
On June 30, Year 5, Finn, Inc., exchanged 2,000 shares of Edlow Corp. $30 par-value common stock for a patent owned by Bisk Co. The Edlow stock was acquired in Year 1 at a cost of $50,000. At the exchange date, Edlow common stock had a fair value of $40 per share, and the patent had a net carrying amount of $100,000 on Bisk’s books. Finn should record the patent at A. $80,000 B. $100,000 C. $50,000 D. $60,000
Answer (A) is correct.
When an intangible asset is acquired in an exchange transaction, initial recognition is at the fair value of the more clearly evident of the consideration given or the asset acquired. The fair value of the assets given in return for the patent was $80,000 (2,000 shares of stock × $40 per share fair value).
Organization costs are those incurred in the formation of a business entity. For financial accounting purposes, nongovernmental entities must:s.
expense all start-up and organization costs as incurred. Thus, the legal fees should be expensed because they are organization costs. Fees for an initial stock offering are customarily treated as a reduction in the proceeds rather than as organization costs, and exploration costs and purchases of mineral rights are capitalizable items that are not organization costs.
are R&D costs expenses or capitalized?
Expensed as they are incurred
If cash is the consideration given in an exchange transaction, the cash paid is the measure of the transaction. If noncash consideration (noncash assets, liabilities incurred, or equity interests issued) is given, the measure is based on the more reliably determinable of the fair value of the consideration given or the fair value of the asset or net assets acquired. Furthermore, the only objective of present value used in initial recognition and fresh-start measurements is to estimate fair value in the absence of a market price. Consequently, only the carrying amount of the previous owner is
not a proper measure of cost.
Vair Publishing Company owns a copyright. A material amount of legal fees and other costs it incurred in successfully defending a copyright suit should be
Capitalized as part of the cost of the copyright and amortized over the remaining useful life of the copyright
Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if
An active market exists for the intangible asset.
IFRS uses cost or revaluation model
An intangible asset is carried at cost minus any accumulated amortization and impairment losses, or at a revalued amount. The revaluation model is similar to that for items of PPE (initial recognition of an asset at cost). However, fair value must be determined based on an active market.
A purchased patent has a remaining legal life of 15 years. If it’s useful life is known, it should be amortized over:
Amortized over its useful life if less than 15 years.
The amortization period for an intangible asset distinct from goodwill is the shorter of its useful life or the legal life remaining after acquisition.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is allowed or not?
It is prohibited.
To measure an intangible asset after initial recognition, an entity must choose either the cost model or the revaluation model as its accounting policy. The revaluation model may be chosen only if an intangible asset has:
an active market.
What kind of intangible assets are subject to recoverability test when testing for impairment?
Intangible assets include those with finite useful lives
The default method of amortization of intangible assets is the:
straight-line method.
Hy Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amounts should Hy capitalize for patents? A. $112,000 B. $65,000 C. $45,000 D. $162,000
$65,000 (40+5+20)
The costs associated with Patent B should be written off immediately because its unsuccessful defense suggests that no asset exists.
Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for 3 years. The royalties paid should be reported as expense
A. At the date the royalty agreement expired.
B. In the period paid.
C. At the date the royalty agreement began.
D. In the period incurred.
In the period incurred.
Royalty expense is recognized when it is incurred as determined by a contractual arrangement. The basic principles of accrual accounting regarding the matching of revenues and expenses are applicable. Thus, the expense should be recognized as the economic benefits of the assets are consumed.
A patent is amortized over the:
shorter of its useful life or legal life
A company should recognize goodwill in its balance sheet at which time?
When goodwill has been created in the purchase of a business.
Goodwill is tested for impairment at least annually but is never:
amortized.
Goodwill arises from a business combination. For the purposes of impairment testing, IFRS provide for goodwill to be allocated to which components of the acquirer’s entity?
A. Reportable segments.
B. Operating segments.
C. Cash-generating units that benefit from the combination.
D. Long-lived tangible assets affected by the combination.
Answer (C) is correct.
For the purpose of impairment testing, goodwill acquired in a business combination must from the acquisition date be allocated to each of the acquirer’s cash-generating units (CGUs) expected to benefit from the combinations. A CGU is the smallest identifiable asset group that generates cash inflows substantially independent of inflows from other assets or asset groups.
Potential impairment of goodwill is deemed to exist only if:
carrying amount of a reporting unit is greater than its fair value.
Goodwill should be tested for value impairment at which levels?
Each reporting unit.
Under both U.S. GAAP and IFRS, internally generated goodwill must be recognized as an asset?
Under both U.S. GAAP and IFRS, internally generated goodwill must not be recognized as an asset. Goodwill can be recognized only in a business combination.
An entire acquired entity is sold. The goodwill remaining from the acquisition should be
Included in the carrying amount of the net assets sold.
When a reporting unit is disposed of in its entirety, goodwill of that reporting unit (to the extent an impairment loss has not been recognized) is included in the carrying amount of the reporting unit to determine the gain or loss on disposal. Consequently, the unimpaired goodwill of each reporting unit of the acquired entity is included in the total carrying amount of that entity.
