D104: Unit 3 Book Questions

What is true regarding a purchased limited-life intangible asset?

It is amortized; tested for recoverability test, and fair value tested.

Which is true concerning intangible assets?

Intangible assets derive their value from the rights and privileges granted to the company using them.

Which characteristic do intangible assets possess?

Long-lived

How are costs incurred internally to create intangibles treated?

They are expensed as incurred.

What would marketing-related intangibles include?

A trade name

Tiburon Corporation purchased a patent for $1,850,000 on November 30, 2018. It has a remaining legal life of 18 years. Tiburon estimates that the remaining useful life of the patent is 15 years. What balance will be reported on the December 31, 2020 balance sheet for the patent (if necessary, round your answer to the nearest dollar)?

$1,593,056

On December 31, 2020, the asset would be amortized for 25 months [1 month in 2018 + 12 months in 2019 + 12 months in 2020]. $1,850,000 / 180 months = monthly amortization of $10,277.78 x 25 months = $256,944.50 total amortization expense. The book value at December 31, 2020 is $1,593,056 ($1,850,000 - $256,944.50).

What is a federally granted right?

Copyright

On July 1, 2020, Adele Company bought a patent from Robert, Inc. for $2,750,000. An independent research company estimated that the remaining useful life of the patent was 10 years. Its unamortized cost on Robert's books was $1,600,000. In Adele's 2020 income statement, what amount should be reported as amortization expense?

$137,500

$2,750,000 / 10 years = $275,000 per year X 1/2 a year = $137,500.

St. Sebastian Company and A. Jamison Company were combined in a purchase transaction. St. Sebastian was able to acquire Jamison at a bargain price. The fair market value of Jamison's net assets exceeded the price paid by St. Sebastian to acquire the company.

How would St. Sebastian report the excess fair value over purchase price?

As a gain

In a business combination, companies record identifiable intangible assets that they can reliably measure. What are all other intangible assets, too difficult to identify or measure, recorded as?

Goodwill

Which intangible asset cannot be sold by a business to raise needed cash for a capital project?

Goodwill

What is true about the intangible asset, goodwill?

It may be capitalized only when purchased.

On which type of intangible assets is the recoverability test used to determine any impairment loss?

Limited Life Intangibles

Which of the following intangible assets should be shown as a separate item on the balance sheet?

Goodwill

The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?

5

How is the total amount of patent cost amortized to date usually reported on the balance sheet?

It is shown as credits in the Patents account and not in a contra account.

Which principle best describes the current method of accounting for research and development costs?

Immediate recognition as an expense

Which research and development costs may be capitalized?

Costs for assets with alternative future uses

If a company constructs a laboratory building to be used as a research and development facility, what would the cost of the laboratory building be matched against earnings as?

Depreciation expensed as part of research and development costs

The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life.

How should these costs be treated?

Expensed as incurred

Truffle Inc. acquired a patent on January 1, 2018 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2021, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle's market interest rate, is $2,120,000.

What amount, if any, of impairment loss will be reported on Truffle's 2021 income statement?

$2,560,000

calculated as: $7,800,000 - ($780,000 x 4) = $4,680,000. Sum of expected cash flows is $3,108,000 ($518,000 x 6 years).The impairment loss is calculated as: $4,680,000 - $2,120,000 = $2,560,000.

Coral Corporation began operating as a business in 2020. During January 2020, the company paid $300,000 in design costs to develop its trademark and $250,000 in legal and registration fees to secure the trademark. During October 2020, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Coral Corporation report its trademark on its December 31, 2020 balance sheet?

$700,000

Therefore, Coral should report the value of the trademark at $700,000 ($300,000 + $250,000 + $150,000).

Bryson Corporation purchased a limited-life intangible asset for $1,162,500 on May 1, 2018. It has a remaining useful life of 15 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2020 (if necessary, round your answer to the nearest dollar)?

$206,667

On December 31, 2020, the asset would be amortized for 32 months [8 month in 2018 + 12 months in 2019 + 12 months in 2020]. $1,162,500 / 180 months = monthly amortization of $6,458.33 x 32 months = $206,667 total amortization expense.

Which method of amortization is normally used for intangible assets?

Straight-line

Easton Company and Lofton Company were combined as result of a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost of acquiring Easton.

How will Easton report the excess amount?

As a gain.

Company A has recently purchased Company B. One of the terms of the sale stipulates that the current president of Company B will remain with the business for a period of three years.

Which type of intangible asset is this agreement between Company A and Company B?

Contract-related

Which item is a primary type of patent?

Product

Which treatment accurately records the legal costs of a purchased patent?

Amortized over the remaining estimated useful life of the patent

A company purchased a limited-life intangible asset for $1,162,500 on January 1 of Year 1. It has a useful life of 15 years.

Which amount should the balance sheet reflect for the limited-life intangible asset at the end of Year 3?

$930,000

= $1,162,500 - ($1,162,500 / 15 X 3). This reflects the historical cost less three years of amortization expense.

Which cost is expensed when creating an intangible asset?

Research and development costs

Which statement describes a characteristic of goodwill?

It does not carry contractual or other legal rights.

A loss has occurred on an intangible asset, and the accountant uses the recoverability test to determine if there is any impairment loss.

Which intangible asset is being examined by the accountant?

Patent of products.

A company purchased a patent from a competitor, and there were related legal costs incurred while securing the patent.

How should these costs be charged?

To patents and amortized over the remaining useful life of the patent.

Which action is considered a research activity?

Implementing a research study to create knowledge related to a company's product

Which activity may be included in research and development costs?

Development of new product prototypes

How should a company treat research and development costs in the year in which they occurred?

Immediate recognition as an expense

A company compared the fair value of one of its reporting units to its carrying amount, including goodwill. In which scenario is an entry for impairment needed?

The fair value of the reporting unit is less than the carrying amount.