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115. Listed below is a series of statements about various costs associated with intangibles.
____
a.
Software production costs incurred prior to technological feasibility being
established.
____
b.
Continuing franchise costs.
____
c.
The cost paid over the fair value of an acquired company’s net assets.
____
d.
Maintenance and customer support costs incurred after a software package is
released for sale.
____
e.
Legal costs incurred on the successful defense of a patent infringement suit.
____
f.
The cost of acquiring a copyright.
____
g.
Software production costs incurred after technological feasibility is established.
____
h.
Costs of improving the software used in a company’s management information
system.
____
i.
Legal fees incurred in conjunction with the unsuccessful defense of a patent
infringement lawsuit.
____
j.
Employee training costs associated with training employees to run new software.
E
C
i.
b.
E
C
C
g.
C
d.
E
h.
E
Required:
Indicate whether each of these costs should be expensed (E) or capitalized (C) in the space provided.
116. In March of 2016, Marian Corp. applied for a trade name. Legal costs associated with the application were $25,000.
At the time of filing the application, the company projected extra annual income to be generated through having the
trade name to be $100,000. On Feb. 5, 2018, the company incurred $20,000 in an unsuccessful defense of the trade
name.
Required:
a.
What is the amount of income or expense associated with the trade name for the year
2016? For the year 2017? For the year 2018?
b.
What is the accounting rationale for the amounts recorded in each year?
2016: $0
2017: $0
117. On January 1, 2016, Sally, Inc. bought a patent for $100,000. There were ten years left of the patent’s legal life. On
July 1, 2018, the company successfully defended the patent in court at a cost of $30,000.
Required:
Compute the amount of patent amortization expense for 2018. Assume Sally calculates amortization to the nearest
month and uses the straight-line method.
$100,000/10 yr =
118. The Ripkin Corporation was organized and began to operate on January 1 of the current year to manufacture and sell
children’s clothes. During the year, the following expenditures were recorded in the company’s goodwill account:
Goodwill
January
2
Corporate registration legal fees
$ 5,000
January
2
Underwriter’s fee for the issuance of common stock
7,500
January
2
Discount on bond issue
40,000
January
2
Cost of a major advertising campaign to promote the company’s
name and merchandise
75,000
January
14
Cost of employee training program
25,000
January
14
Excess of purchase price over market value of Mannekin’s net
identifiable assets paid in acquiring Mannekin Corporation
150,000
January
14
Cost of a patent purchased from a competitor with an expected
life of ten years
25,000
July
1
Operating loss for first six months
45,000
July
1
Legal fees for the successful defense of patent acquired on
January 14
10,000
December
20
Cost of Christmas party
12,000
Total
$394,500
Required:
a.
Prepare an entry as of December 31, to reclassify the appropriate items from the goodwill
account to appropriate accounts.
b.
Prepare the adjusting entry or entries required to amortize the intangible assets using the
straight-line method. Calculate amortization to the nearest month.
The above transactions were recorded by an inexperienced data entry clerk.
Organization Expense ($5,000 + $7,500)
Discount on Bonds Payable
Advertising Expense
Employee Training Expense
Patent ($25,000 + $10,000)
Retained Earnings
Miscellaneous Expense
Goodwill
244,500
b.
Amortization Expense-Patents
Accumulated Amortization-Patents
3,026
Patent amortization:
1,776
Total
ACCT.WHAL.16.12.4 – LO: 12.4
ACCT.WHAL.16.12.5 – LO: 12.5
United States – BUSPORG: Analytic
119. Pleasantville Company had the following balance sheet on January 1.
On January 2, Carrs Company came to an agreement to purchase Pleasantville by acquiring all of its outstanding
shares for $575,000 in cash. On that date in time, the fair value of their inventory was $150,000, and the fair value of
the equipment was $225,000. The book value is accurate as of January1, and was equal to fair value.
Cash
$ 175,000
Accounts Payable
$ 57,000
Inventory
157,000
Notes Payable
250,000
Property, plant, and equipment
200,000
Mortgage Payable
150,000
Patent
25,000
Retained Earnings
100,000
$ 557,000
$ 557,000
Purchase Price of Pleasantville
Pleasantville Company
Book value of identifiable net assets
($557,000 – $457,000)
Revaluation of inventory
Revaluation of equipment
Current fair value of identifiable net assets
Cash
Inventory
Property, plant, and equipment
Patent
Goodwill
Accounts Payable
Notes Payable
Mortgage Payable
Cash
Required:
1.) Compute the goodwill associated with the purchase of Pleasantville.
2.) Prepare the journal entry necessary at January 1, to record the acquisition of Pleasantville.
120. Boggs Company is looking to purchase the Grafton Company below is their balance sheet at December 31, 2015.
Boggs Company is looking to purchase the Grafton Company for $150,000 cash. The fair value of their equipment is
$35,600, the fair value of their inventory is $20,000, their accounts receivable fair value is $24,500, and they have an
unrecorded patent of $15,000. All other book values equal fair value as of January 1, 2015.
Cash
$ 17,500
Accounts Payable
$ 5,700
Accounts Receivable
35,000
Notes Payable
22,500
Inventory
15,700
Property, plant, and equipment
25,000
Retained Earnings
65,000
$ 93,200
$ 93,200
1.)Purchase Price of Grafton Company
Grafton Company
Book value of identifiable net assets
($93,200 – $28,200)
Revaluation of inventory
4,300
Revaluation of Accounts Rec.
Cash
Accounts Receivable
Inventory
Property, plant, and equipment
Patent
Goodwill
Accounts Payable
Notes Payable
22,500
Cash
150,000
Required:
1.) Compute the goodwill associated with the purchase of Grafton.
2.) Prepare the journal entry necessary at January 1, 2015 to record the purchase of Grafton.
3.) What if the purchase price was $69,000 would any goodwill be reported?
121. Grier purchased Walters Company several years ago. Walters become a reporting unit of Griers. At the end of 2014,
Grier had a net book value of $1.6 million which includes $400,000 of goodwill. A goodwill impairment test is done
as part of the year end closing process. Grier estimates the fair value of Walters to be $1.4 million. The fair value of
Walters identifiable net assets, excluding goodwill, is $1.3 million.
Required:
1.) Determine if goodwill is impaired
2.) Prepare the journal entry required for the impairment if necessary.
122. What factors should a company consider when estimating the useful life of an intangible asset?
123. What characteristics do Intangible and tangible noncurrent assets have in common?
124. List 3 activities that can be included in R&D.
125. List 5 activities that would be excluded from R & D.
126. For intangible assets that are amortized what does a company need to disclose on its balance sheet regarding
those assets?
127. If intangible assets are acquired during the period, what does GAAP require company’s to disclose?
128. What are the five basic categories that identifiable intangible assets can be classified?
129. What are the two methods that a company can amortize software developments costs and which one is more likely to
be used?
130. Provide two examples of internally developed goodwill and what distinguishes them from other identifiable
intangible assets?
131. Provide two examples that would indicate goodwill is impaired.
1
Moderate
ACCT.WHAL.16.12.5 – LO: 12.5
United States – BUSPROG: Communication
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Remembering
132. The Arnett Corporation is contemplating building a research and development facility and performing R&D
activities in the area of robotics. The president of the company is interested in the accounting required for R&D costs
such as materials, facilities, personnel costs, equipment, intangibles purchased from others, and any indirect costs.
Arnett’s president has asked the company’s controller to describe current GAAP requirements with respect to R&D
expenditures.
Required:
a.
Based on current GAAP, describe the accounting and reporting requirements for R&D
expenditures such as the ones listed above.
b.
Describe the rationale that was used by the FASB in its decision to account for R&D costs
as prescribed in your answer to requirement a.
1
Challenging
ACCT.WHAL.16.12.2 – LO: 12.2
ACCT.WHAL.16.12.4 – LO: 12.4
United States – BUSPROG: Communication
Bloom’s: Evaluating
133. GAAP requires that research and development costs be expensed and that purchased goodwill be capitalized and not
be amortized.
Required:
From a conceptual viewpoint, discuss the validity of the different treatments for these two types of expenditures.
134. The Jessie Company acquired a competitor company in January 2015. When Jessie’s accountant recorded the
purchase, she correctly recorded an amount for goodwill based on the expectation of the acquired company’s earning
a rate of return on its assets that was in excess of the industry’s rate of return. In fact, the acquired company doubled
the expected rate of return in 2015 and 2016. As a result of these increased earnings, in early 2017 the president of
the Jessie Company asked the company’s accountant to increase the amount recognized as goodwill.
Required:
a.
Define the term “goodwill.” In addition, discuss several possible factors that might
contribute to a company having goodwill.
b.
Discuss the accounting treatment under current GAAP for goodwill that is internally
developed. Discuss the rationale for this treatment.
c.
Discuss the accounting treatment under current GAAP for goodwill that is acquired
through an external transaction.
d.
Discuss the appropriateness of the president’s request to increase the recorded amount of
goodwill.
another company and its purchase price is in excess of the fair value of its
written up since the goodwill after acquisition would be considered to be
1
Challenging
United States – BUSPROG: Communication
Bloom’s: Evaluating
135. IFRS and GAAP differ in the application of the fair value concept for impairment tests applied to intangible assets.
Required:
Describe the fair value concept as it is applied for impairment tests in IFRS and GAAP, highlighting the differences.
136. Because goodwill only produces cash flows in connection with other assets, it is tested for impairment within the
context of its reporting unit. Assume that an assessment of qualitative factors indicates that it is more likely than not
that the fair value of the reporting unit is less than its carrying value, describe the ensuing two-step quantitative
impairment test.
Required:
Briefly describe the process for testing for impairment of goodwill.
