Intangible Assets
12 – 21
101. Floyd Company purchases Haeger Company for $1,600,000 cash on January 1, 2015.
The book value of Haeger Company’s net assets, as reflected on its December 31, 2014
balance sheet is $1,240,000. An analysis by Floyd on December 31, 2012 indicates that
the fair value of Haeger’s tangible assets exceeded the book value by $120,000, and the
fair value of identifiable intangible assets exceeded book value by $90,000. How much
goodwill should be recognized by Floyd Company when recording the purchase of Haeger
Company?
a. $ -0-
b. $360,000
c. $240,000
d. $150,000
102. General Products Company bought Special Products Division in 2014 and appropriately
recorded $750,000 of goodwill related to the purchase. On December 31, 2015, the fair
value of Special Products Division is $6,000,000 and it is carried on General Product’s
books for a total of $5,100,000, including the goodwill. An analysis of Special Products
Division’s assets indicates that goodwill of $600,000 exists on December 31, 2015. What
goodwill impairment should be recognized by General Products in 2015?
a. $0.
b. $300,000.
c. $75,000.
d. $450,000.
103. During 2015, Bond Company purchased the net assets of May Corporation for
$2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value
of May’s assets when acquired were as follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired
($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets
should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a
period not to exceed forty years.
104. Dennis Company purchases Miles Company for $5,000,000 cash on January 1, 2015.
The book value of Miles Company’s net assets reported on its December 31, 2014
financial statement was $3,800,000. An analysis indicated that the fair value of Miles’s
tangible assets exceeded the book value by $600,000, and the fair value of identifiable
intangible assets exceeded book value by $320,000. Determine the fair value of
identifiable net assets used to record goodwill.
a. $280,000.
b. $4,720,000.
c. $4,400,000.
d. $3,800,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 22
105. Dennis Company purchases Miles Company for $4,200,000 cash on January 1, 2015.
The book value of Miles Company’s net assets reported on its December 31, 2014
financial statement was $3,800,000. An analysis indicated that the fair value of Miles’s
tangible assets exceeded the book value by $600,000, and the fair value of identifiable
intangible assets exceeded book value by $320,000. What amount of gain or goodwill is
recognized by Dennis?
a. $920,000 gain.
b. $400,000 goodwill.
c. $520,000 gain.
d. $520,000 goodwill.
106. The following information is available for Barkley Company’s patents:
Cost $3,440,000
Carrying amount 1,720,000
Expected future net cash flows 1,600,000
Fair value 1,300,000
Barkley would record a loss on impairment of
a. $ 120,000.
b. $ 420,000.
c. $1,720,000.
d. $1,840,000.
107. Harrel Company acquired a patent on an oil extraction technique on January 1, 2014 for
$6,250,000. It was expected to have a 10 year life and no residual value. Harrel uses
straight-line amortization for patents. On December 31, 2015, the expected future cash
flows expected from the patent were expected to be $750,000 per year for the next eight
years. The present value of these cash flows, discounted at Harrel’s market interest rate,
is $3,500,000. At what amount should the patent be carried on the December 31, 2015
balance sheet?
a. $6,250,000
b. $6,000,000
c. $5,000,000
d. $3,500,000
108. Malrom Manufacturing Company acquired a patent on a manufacturing process on
January 1, 2014 for $3,750,000. It was expected to have a 10 year life and no residual
value. Malrom uses straight-line amortization for patents. On December 31, 2015, the
expected future cash flows expected from the patent were expected to be $300,000 per
year for the next eight years. The present value of these cash flows, discounted at
Malrom’s market interest rate, is $1,800,000. At what amount should the patent be carried
on the December 31, 2015 balance sheet?
a. $3,750,000
b. $ 3,000
c. $2,400,000
d. $1,800,000
Intangible Assets
12 – 23
109. Twilight Corporation acquired End-of-the-World Products on January 1, 2014 for
$6,400,000, and recorded goodwill of $1,200,000 as a result of that purchase. At
December 31, 2015, the End-of-the-World Products Division had a fair value of
$5,440,000. The net identifiable assets of the Division (excluding goodwill) had a fair value
of $4,640,000 at that time. What amount of loss on impairment of goodwill should Twilight
record in 2015?
a. $ -0-
b. $400,000
c. $560,000
d. $960,000
110. Jenks Corporation acquired Linebrink Products on January 1, 2015 for $8,000,000, and
recorded goodwill of $1,500,000 as a result of that purchase. At December 31, 2015,
Linebrink Products had a fair value of $6,800,000. The net identifiable assets of the
Linebrink (excluding goodwill) had a fair value of $5,800,000 at that time. What amount of
loss on impairment of goodwill should Jenks record in 2015?
a. $ -0-
b. $500,000
c. $700,000
d. $1,200,000
111. In 2015, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 110,000
Personnel 130,000
Indirect costs 150,000
$ 390,000
These costs relate to a product that will be marketed in 2016. It is estimated that these
costs will be recouped by December 31, 2018. The equipment has no alternative future
use. What is the amount of research and development costs that should be expensed in
2015?
a. $0.
b. $250,000.
c. $280,000.
d. $390,000.
112. Hall Co. incurred research and development costs in 2015 as follows:
Materials used in research and development projects $ 650,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2015 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects 225,000
$5,425,000
The amount of research and development costs charged to Hall’s 2015 income statement
should be
a. $1,700,000.
b. $2,000,000.
c. $2,425,000.
d. $4,700,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 24
113. Loazia Inc. incurred the following costs during the year ended December 31, 2015:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 75,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2015 is
a. $635,000.
b. $935,000.
c. $665,000.
d. $365,000.
114. MaBelle Corporation incurred the following costs in 2015:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2015?
a. $ 700,000
b. $ 940,000
c. $1,300,000
d. $1,440,000
115. Leeper Corporation incurred the following costs in 2015:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $900,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2015?
a. $ 975,000
b. $1,040,000
c. $1,450,000
d. $1,740,000
116. Platteville Corporation has the following account balances at 12/31/15:
Amortization expense $ 20,000
Goodwill 280,000
Patent, net of $60,000 amortization 140,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $140,000
b. $200,000
c. $420,000
d. $440,000
Intangible Assets
12 – 25
Multiple Choice Answers—Computational
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MULTIPLE CHOICE—CPA Adapted
117. Lopez Corp. incurred $840,000 of research and development costs to develop a product
for which a patent was granted on January 2, 2012. Legal fees and other costs associated
with registration of the patent totaled $160,000. On March 31, 2015, Lopez paid $300,000
for legal fees in a successful defense of the patent. The total amount capitalized for the
patent through March 31, 2015 should be
a. $460,000.
b. $1,000,000.
c. $1,140,000.
d. $1,300,000.
118. On June 30, 2015, Cey, Inc. exchanged 6,000 shares of Seely Corp. $30 par value
common stock for a patent owned by Gore Co. The Seely stock was acquired in 2015 at a
cost of $165,000. At the exchange date, Seely common stock had a fair value of $46 per
share, and the patent had a net carrying value of $330,000 on Gore’s books. Cey should
record the patent at
a. $165,000.
b. $180,000.
c. $276,000.
d. $330,000.
119. On May 5, 2015, MacDougal Corp. exchanged 4,000 shares of its $25 par value treasury
common stock for a patent owned by Masset Co. The treasury shares were acquired in
2014 for $90,000. At May 5, 2015, MacDougal’s common stock was quoted at $34 per
share, and the patent had a carrying value of $110,000 on Masset’s books. MacDougal
should record the patent at
a. $90,000.
b. $100,000.
c. $110,000.
d. $136,000.
120. Ely Co. bought a patent from Baden Corp. on January 1, 2015, for $600,000. An
independent consultant retained by Ely estimated that the remaining useful life at January
1, 2015 is 15 years. Its unamortized cost on Baden’s accounting records was $300,000;
the patent had been amortized for 5 years by Baden. How much should be amortized for
the year ended December 31, 2015 by Ely Co.?
a. $0.
b. $30,000.
c. $40,000.
d. $60,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 26
121. January 2, 2012, Koll, Inc. purchased a patent for a new consumer product for $600,000.
At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life
was estimated to be only 10 years due to the competitive nature of the product. On
December 31, 2015, the product was permanently withdrawn from the market under
governmental order because of a potential health hazard in the product. What amount
should Koll charge against income during 2015, assuming amortization is recorded at the
end of each year?
a. $ 60,000
b. $360,000
c. $420,000
d. $480,000
122. On January 1, 2011, Russell Company purchased a copyright for $1,500,000, having an
estimated useful life of 16 years. In January 2015, Russell paid $225,000 for legal fees in
a successful defense of the copyright. Copyright amortization expense for the year ended
December 31, 2015, should be
a. $0.
b. $93,750.
c. $107,812.
d. $112,500.
123. Which of the following legal fees should be capitalized?
Legal fees to Legal fees to successfully
obtain a copyright defend a trademark
a. No No
b. No Yes
c. Yes Yes
d. Yes No
124. Which of the following costs of goodwill should be amortized over their estimated useful
lives?
Costs of goodwill from a Costs of developing
business combination goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No
125. During 2015, Leon Co. incurred the following costs:
Testing in search for process alternatives $ 350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 475,000
In Leon‘s 2015 income statement, research and development expense should be
a. $560,000.
b. $1,035,000.
c. $1,385,000.
d. $1,635,000.
Intangible Assets
12 – 27
126. Riley Co. incurred the following costs during 2015:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 325,000
In its income statement for the year ended December 31, 2015, Riley should report
research and development expense of
a. $685,000.
b. $835,000.
c. $870,000.
d. $1,020,000.
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 28
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Intangible Assets
12 – 29
DERIVATIONS — CPA Adapted
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 30
BRIEF EXERCISES
BE. 12-127
Remington Corporation purchases a patent from Durler Company on January.1, 2014, for
$72,000. The patent has a remaining legal of 16 years. Remington feels the patent will be useful
for 10 years. Assume that at January 1, 2016, the carrying amount of the patent on Remington’s
books is $64,800. In January, Remington spends $20,000 successfully defending a patent suit.
Remington still feels the patent will be useful until the end of 2013. Prepare Remington’s journal
entries to record the amortization for 2014 and 2016.
Solution 12-127
BE. 12-128
Snyder Industries had one patent recorded on its books as of January 1, 2015. This patent had a
book value of $168,000 and a remaining useful life of 7 years. During 2015, Snyder brought a
patent infringement suit against a competitor. On October 1, 2015, Snyder received the goods
news that its patent was valid and that its competitor could not use the process Snyder had
patented. The company incurred $60,000 to defined this carrying value of the patent. Compute
the patent that would be reported on the December 31, 2015, balance sheet, assuming monthly
amortization of carrying value of the patents.
Solution 12-128
BE. 12-129
On September 1, 2015, Vernon Corporation acquired Barlow Enterprises for a cash payment of
$850,000. At the time of purchases, Barlow’s balance sheet showed assets of $620,000, liabilities
of $240,000, and owner’s equity of $420,000. The fair value of Barlow’s assets is estimated to be
$970,000. Compute the amount of goodwill acquired by Vernon.
Intangible Assets
12 – 31
Solution 12-129
BE. 12-130
Merlin Corporation owns a patent that has a carrying amount of $400,000. Merlin expects future
net cash flows from this patent to total $250,000. The fair value of the patent is $310,000.
Prepare journal entry, if necessary, to record the loss on Impairment.
Solution 12-130
BE. 12-131
Weaver Corporation purchased Merando Company 3 years ago and at that time recorded
goodwill of $600,000. The Division’s net assets, including the goodwill, have a carrying amount of
$1,200,000. The fair value of the division is estimated to be $1,100,000 and implied goodwill is
$525,000. Prepare Weaver’s journal entry, if necessary, to record impairment of the goodwill.
Solution 12-131
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 32
EXERCISES
Ex. 12-132
Intangible assets have two main characteristics: (1) they lack physical existence, and (2)
they are not financial instruments.
Instructions
(a) Explain why intangible assets are classified as assets if they have no physical
existence.
(b) Explain why intangible assets are not considered financial instruments.
Ex. 12-133
Intangible assets may be internally generated or purchased from another party. In either
case, what costs should be included in the initial valuation of the asset is an issue.
Instructions
(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash
transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a “basket
purchase.” Provide a numerical example involving intangibles being acquired for a
total price of $90,000.
Solution 12-133
Intangible Assets
12 – 33
Ex. 12-134
Why does the accounting profession make a distinction between internally created intangible
assets and purchased intangible assets?
Solution 12-134
Ex. 12-135—Short essay questions.
1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?
Solution 12-135
Ex. 12-136
Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to
obtain a patent, and $91,000 to market the process that was patented. How should these
costs be accounted for in the year they are incurred?
Solution 12-136
Ex. 12-137
Intangible assets have either a limited useful life or an indefinite useful life. How should these
two different types of intangibles be amortized?
Solution 12-137