Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 34
Ex. 12-138
What factors are considered in estimating the useful life of an intangible asset?
Solution 12-138
Ex. 12-139
Barkley Corp. obtained a trade name in January 2013, incurring legal costs of $36,000. The
company amortizes the trade name over 8 years. Barkley successfully defended its trade
name in January 2014, incurring $9,800 in legal fees. At the beginning of 2015, based on new
marketing research, Barkley determines that the fair value of the trade name is $30,000.
Estimated total future cash flows from the trade name are $32,000 on January 4, 2015.
Instructions
Prepare the necessary journal entries for the years ending December 31, 2013, 2014, and
2015. Show all computations.
Solution 12-139
Intangible Assets
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Ex. 12-140—Intangible assets theory.
It has been argued on the grounds of conservatism that all intangible assets should be written off
immediately after acquisition. Discuss the accounting arguments against this treatment.
Solution 12-140
Ex. 12-141
Listed below is a selection of accounts found in the general ledger of Marshall Corporation
as of December 31, 2015:
Accounts receivable Research & development costs
Goodwill Internet domain name
Organization costs Initial operating loss
Prepaid insurance Non-competition agreement
Radio broadcasting rights Customer list
Premium on bonds payable Video copyrights
Trade name Notes receivable
Instructions
List those accounts that should be classified as intangible assets.
Solution 12-141
Ex. 12-142
Define the following terms.
(a) Goodwill (b) Negative goodwill
Solution 12-142
Test Bank for Intermediate Accounting, Fifteenth Edition
12 – 36
Solution 12-142 (cont.)
Ex. 12-143—Carrying value of patent.
Sisco Co. purchased a patent from Thornton Co. for $620,000 on July 1, 2012. Expenditures of
$119,000 for successful litigation in defense of the patent were paid on July 1, 2015. Sisco
estimates that the useful life of the patent will be 20 years from the date of acquisition.
Instructions
Prepare a computation of the carrying value of the patent at December 31, 2015.
Solution 12-143
Ex. 12-144—Accounting for patent.
In early January 2013, Lerner Corporation applied for a patent, incurring legal costs of $60,000. In
January 2014, Lerner incurred $9,000 of legal fees in a successful defense of its patent.
Instructions
(a) Compute 2013 amortization, 12/31/13 carrying value, 2014 amortization, and 12/31/14
carrying value if the company amortizes the patent over 10 years.
(b) Compute the 2015 amortization and the 12/31/15 carrying value, assuming that at the
beginning of 2015, based on new market research, Lerner determines that the fair value of
the patent is $44,000. Estimated future cash flows from the patent are $49,000 on January 3,
2015.
Solution 12-144
Intangible Assets
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Ex. 12-145
Under what circumstances is it appropriate to record goodwill in the accounts? How should
goodwill, properly recorded on the books, be written off in accordance with generally
accepted accounting principles?
Solution 12-145
Ex. 12-146
Fred’s Company is considering the write-off of a limited life intangible asset because of its
lack of profitability. Explain to the management of Fred’s how to determine whether a
writeoff is permitted.
Solution 12-146
Ex. 12-147
Leon Corp. purchased Spinks Co. 4 years ago and at that time recorded goodwill of
$480,000. The Sinks Division’s net assets, including goodwill, have a carrying amount of
$1,150,000. The fair value of the division is estimated to be $1,200,000.
Instructions
(a) Explain whether or not Leon Corp. must prepare an entry to record impairment of the
goodwill. Include the entry, if necessary.
(b) Repeat instruction (a) assuming that the fair value of the division is estimated to be
$1,070,000 and the implied goodwill is $360,000.
Solution 12-147
Test Bank for Intermediate Accounting, Fifteenth Edition
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Ex. 12-148—Impairment of copyrights.
Presented below is information related to copyrights owned by Wamser Corporation at December
31, 2014.
Cost $4,500,000
Carrying amount 3,900,000
Expected future net cash flows 3,500,000
Fair value 2,400,000
Assume Wamser will continue to use this asset in the future. As of December 31, 2014, the
copyrights have a remaining useful life of 5 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31,
2014.
(b) Prepare the journal entry to record amortization expense for 2015.
(c) The fair value of the copyright at December 31, 2015 is $2,500,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.
Solution 12-148
Ex. 12-149
Research and development activities may include (a) personnel costs, (b) materials and
equipment costs, and (c) indirect costs. What is the recommended accounting treatment for
these three types of R&D costs?
Solution 12-149
Intangible Assets
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Solution 12-149 (cont.)
Ex. 12-150
Recently, a group of university students decided to incorporate for the purposes of selling a
process to recycle the waste product from manufacturing cheese. Some of the initial costs
involved were legal fees and office expenses incurred in starting the business, state
incorporation fees, and stamp taxes. One student wishes to charge these costs against
revenue in the current period. Another wishes to defer these costs and amortize them in the
future. Which student is correct and why?
Solution 12-150
Ex. 12-151—Acquisition of tangible and intangible assets.
Vasquez Manufacturing Company decided to expand further by purchasing Wasserman
Company. The balance sheet of Wasserman Company as of December 31, 2015 was as follows:
Wasserman Company
Balance Sheet
December 31, 2015
Assets Liabilities and Equities
Cash $ 210,000 Accounts payable $ 375,000
Receivables 550,000 Common stock 800,000
Inventory 275,000 Retained earnings 885,000
Plant assets (net) 1,025,000
Total assets $2,060,000 Total liabilities and equities $2,060,000
An appraisal, agreed to by the parties, indicated that the fair value of the inventory was $370,000
and that the fair value of the plant assets was $1,325,000. The fair value of the receivables is
equal to the amount reported on the balance sheet. The agreed purchase price was $2,275,000,
and this amount was paid in cash to the previous owners of Wasserman Company.
Instructions
Determine the amount of goodwill (if any) implied in the purchase price of $2,275,000. Show
calculations.
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 12-151
PROBLEMS
Pr. 12-152—Intangible assets.
The following transactions involving intangible assets of Minton Corporation occurred on or near
December 31, 2014. Complete the chart below by writing the journal entry (ies) needed at that
date to record the transaction and at December 31, 2015 to record any resultant amortization. If
no entry is required at a particular date, write “none needed.”
On Date On
of Transaction December 31, 2015
1. Minton paid Grand Company $500,000 for the
exclusive right to market a particular product,
using the Grand name and logo in promotional
material. The franchise runs for as long as
Minton is in business.
2. Minton spent $600,000 developing a new
manufacturing process. It has applied for a
patent, and it believes that its application will be
successful.
3. In January, 2015, Minton’s application for a
patent (#2 above) was granted. Legal and
registration costs incurred were $180,000. The
patent runs for 20 years. The manufacturing
process will be useful to Minton for 10 years.
4. Minton incurred $140,000 in successfully
defending one of its patents in an infringement
suit. The patent expires during December, 2018.
5. Minton incurred $480,000 in an unsuccessful
patent defense. As a result of the adverse
verdict, the patent, with a remaining unamortized
cost of $252,000, is deemed worthless.
6. Minton paid Sneed Laboratories $104,000 for
research and development work performed by
Sneed under contract for Minton. The benefits
are expected to last six years.
Intangible Assets
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Solution 12-152
Pr. 12-153—Goodwill, impairment.
On May 31, 2015, Armstrong Company paid $3,500,000 to acquire all of the common stock of
Hall Corporation, which became a division of Armstrong. Hall reported the following balance
sheet at the time of the acquisition:
Current assets $ 900,000 Current liabilities $ 600,000
Noncurrent assets 2,700,000 Long-term liabilities 500,000
Stockholders’ equity 2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of
Hall was $2,800,000. At December 31, 2015, Hall reports the following balance sheet information:
Current assets $ 800,000
Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000
It is determined that the fair value of the Hall division is $2,200,000. The recorded amount for
Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and
equipment, which has a fair value of $200,000 above the carrying value.
Test Bank for Intermediate Accounting, Fifteenth Edition
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Pr. 12-153 (Cont.)
Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2015.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2015.
(c) Assume that the fair value of the Hall division is $2,050,000 instead of $2,200,000. Prepare
the journal entry to record the impairment loss, if any, on December 31, 2015.
Solution 12-153
Intangible Assets
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IFRS QUESTIONS
True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are
segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once
technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated
intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable
there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it
requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic
conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot
be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over
the assets discounted cash flow.
Answers to True/False:
Multiple-Choice Questions
11. As in U.S. GAAP, under IFRS the costs associated with research and development are
segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.
Test Bank for Intermediate Accounting, Fifteenth Edition
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12. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.
13. The following costs are incurred during the research and development phases of a laser bone
scanner
Laboratory research aimed at discovery of new knowledge
$800,000
Search for application of new research findings
400,000
Salaries of research staff designing new laser bone scanner
1,200,000
Material, labor and overhead costs of prototype laser scanner
850,000
Costs of testing prototype and design modifications
450,000
Engineering costs incurred to advance the laser scanner to full production stage
(technological feasibility reached)
700,000
Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,200,000 $1,200,000
b. 2,400,000 1,400,000
c. 4,400,000 4,400,000
d. 4,400,000 3,700,000
14. The following costs are incurred during the research and development phases of a laser bone
scanner
Laboratory research aimed at discovery of new knowledge
$800,000
Search for application of new research findings
400,000
Salaries of research staff designing new laser bone scanner
1,200,000
Material, labor and overhead costs of prototype laser scanner
850,000
Costs of testing prototype and design modifications
450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached)
700,000
Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,200,000 $1,200,000
b. 2,400,000 1,400,000
c. 2,400,000 3,400,000
d. 3,400,000 3,400,000
15. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.
Intangible Assets
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16. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company’s operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.
17. Under U.S. GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original
impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company’s
operations.
c. cannot be reversed for assets to be held and used.
d. none of these answer choices are correct.
18. IFRS and U.S. GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for
disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.
19. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under U.S. GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful
ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company’s fiscal
year.
Answers to Multiple Choice:
Test Bank for Intermediate Accounting, Fifteenth Edition
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Short Answer
20. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for intangible assets.