Chapter 12—Intangibles Key
1. Which of the following characteristics is not common to both tangible and intangible assets?
2. Which of the following is not a characteristic of an intangible asset which distinguishes it from a tangible
asset?
3. The cost of an internally developed unidentifiable intangible is expensed as incurred. Accordingly, which one
of the following costs would be expensed in the year it was incurred?
4. Which of the following groups would be classified as intangible assets for financial accounting and reporting
purposes?
5. Which of the following is not required to be disclosed in an entity’s financial statements or accompanying
footnotes?
6. Which of the following is not true regarding the accounting for the cost of intangibles per GAAP?
Category
Account for cost by
I.
Purchased identifiable intangibles
Capitalizing all costs
II.
Purchased unidentifiable intangibles
Capitalizing all costs
III.
Internally developed identifiable intangibles
Capitalizing all costs
IV.
Internally developed unidentifiable intangibles
Expensing all costs
7. Which of the following costs should always be expensed as incurred?
8. Which of the following relationships between category of intangibles and amortization is not true?
Category
Amortize
I.
Intangible assets with a finite life
Yes
II.
Intangible assets with an indefinite life
No
III.
Goodwill
Yes
IV.
Internally developed unidentifiable intangibles
No
9. Which of the following methods is used to amortize intangible assets over their useful lives?
10. Which amortization method should be used for intangibles that are amortized?
11. Which of the following describes the appropriate accounting for intangible assets with a finite life?
Amortize
Write down if impaired
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
12. Costs for which of the following activities should not be included in research and development (R&D)?
13. At the date of purchase, materials, equipment, facilities, and intangibles purchased from others that have
alternative future uses in research and development should be
14. At the date of purchase, materials, equipment, facilities, and intangibles purchased from others that have no
alternative future uses in research and development or other activities should be
15. Which of the following expenditures cannot be included in R&D costs?
16. The Walters Company made the following expenditures for research and development early in 2010:
$40,000 for materials, $50,000 for contract services, $40,000 for employee salaries, and $400,000 for a building
with an expected life of 20 years to be used for current and future research projects. Walters uses straight-line
depreciation. The company allocated $10,000 in overhead to research and development. What is Walters’
research and development expense for 2010?
17. Which of the following research and development costs should always be capitalized?
18. Burrell Co. incurred the following costs during 2010 in the development and production of a new product:
$ 30,000
in legal fees to obtain a patent
$200,000
in the design, construction, and testing of a preproduction prototype and model
$280,000
in engineering activity required to advance the design of the product to the point that it was ready for manufacture
$ 35,000
in trouble-shooting in connection with breakdowns during commercial production
How much should be included in R&D expense for 2010?
19. Which of the following accounting principles or conventions is contradictory to the GAAP requirement to
expense R&D costs immediately?
20. GAAP requires that research and development costs be
21. Costs for which of the following activities would not be included as part of research and development
(R&D) costs?
22. Which of the following statements is not true with regard to international accounting standards for research
and development costs?
23. When deciding how to account for research and development costs, FASB had to choose between
24. Which of the following is an intangible asset that is not typically amortized?
25. 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
26. 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?
27. 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
28. 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
29. 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
30. The amortization period for a patent is
31. 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
32. 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?
33. 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
34. 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?
35. Based on GAAP, most software production costs are likely to be
36. 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?
37. 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?
38. For financial reporting purposes, GAAP requires organization costs to be
39. The Cougar Company was formed in early 2010. At the time of formation, Cougar spent the following
amounts: accounting fees, $4,000; legal fees, $8,000; stock certificate costs, $3,000; initial franchise fee,
$10,000; initial lease payment, $5,000; promotional fees, $3,000. Cougar intends to capitalize and amortize
intangibles over the maximum allowable period in accordance with generally accepted accounting principles.
Based on this strategy, what is Cougar’s expense associated with organization costs in 2010?
40. On January 1, 2010, Cooseck Co. purchased for $360,000 a patent that had been granted two years earlier.
On January 1, 2012, legal costs of $64,000 were incurred in a successful defense of the patent. Assuming the
maximum period allowable is used for patent amortization, what is Cooseck’s patent amortization expense for
2012?
41. Which of the following statements concerning intangibles is true?
42. Concerning computer software to be sold, leased, or otherwise marketed, which of the following costs are
inventoriable and thus included in cost of goods sold?
43. As computer software to be sold, leased, or otherwise marketed is developed, software production costs
should be accounted for according to which of the following?
Expense up to
Capitalize after
technological feasibility
general release
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
44. The Hui Company incurred the following expenditures in January 2010: (1) research and development costs
of $210,000 that resulted in a new product that was patented near year-end, (2) $6,000 in legal fees to have the
patent registered, (3) $90,000 in advertising costs to develop a trademark for the newly patented product, (4)
Legal fees of $8,000 incurred with the registration of the trademark, and (5) $18,000 of advertising costs to
promote its good name. Benefits to be derived from the patent are expected to last for five years. The president
believes the promotion of Hui’s good name will benefit the firm for three years. How much amortization
expense should Hui recognize for 2010?
45. The cost of a copyright should
46. Trademarks or trade names
47. Which statement regarding goodwill is true?
48. Which statement about negative goodwill is true?
49. Which of the following statements regarding goodwill is not true?
50. Which of the following is not an internally developed intangible?
51. Which of the following statements concerning internally developed goodwill is true?
52. The Apple Company agreed to purchase the Pear Company for $750,000. At the date of purchase, Pear had
current assets with a fair market value of $500,000, noncurrent assets (including no marketable securities) with
a fair market value of $800,000, and liabilities of $600,000. In accounting for this transaction, Apple should
53. At the beginning of 2010, Rector Corporation is considering the purchase of the Daphne Corporation.
Daphne’s recorded book value of its net assets is $390,000, but the current market value of these net assets is
$490,000. In addition, the market value of an unrecorded identifiable intangible asset of the company is
$75,000. The estimated annual income of Daphne is $68,000. The purchase price will be equal to the income is
to be discounted in perpetuity at 10%. If Rector acquires Daphne, how much goodwill will be reported in the
consolidated financial statements prepared at the end of 2010?
54. At the beginning of 2010, Billy Co. purchased Willie Corp. The agreed fair value of Willie’s net assets was
$900,000. The expected annual income for Willie was $60,000. The normal return for the industry was 6%.
Excess earnings were capitalized at 10%. How much of a premium (in excess of $900,000) did Billy pay for
Willie?
55. Which of the following statements regarding intangible assets is true?
56. Which of the following is not a required disclosure regarding intangible assets in the period a company
acquires intangible assets?
57. Which of the following is not a required disclosure regarding intangible assets that are amortized for each
period a company presents a balance sheet?
58. Which of the following is not a required disclosure regarding goodwill for each period a company presents a
balance sheet?
59. Related to in-process R&D, the acquiring company may
60. An inconsistency in accounting theory can occur because
61. FASB has argued that not amortizing certain intangible assets is inappropriate because they have indefinite
lives. This argument is supported by which theoretical characteristic?
62. An argument in favor of capitalizing purchased goodwill is that the cost of the purchased goodwill is
supported by which theoretical characteristic?
63. Impairment losses may be reversed under
GAAP
IFRS
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
64. The determination of impairment losses differs under IFRS versus GAAP in that
65. Routine accounting for goodwill under IFRS versus GAAP is
66. Consider the following information from a company’s records for 2010:
Materials used in research and development projects
$2,000
Equipment acquired that will have alternative future uses in future
R&D projects for five years
1,200
Personnel costs of employees involved in R&D projects
5,000
Consulting fees paid to outsiders for R&D projects
2,000
Indirect costs reasonably allocable to R&D projects
100
Legal fees associated with registration of a patent resulting from a 2010
R&D project
1,500
Required:
a.
Compute the amount of R&D costs that should be classified as expenses in determining 2010 net income.
b.
For any listed item not included in your answer to requirement 1, provide the rationale for not expensing it.