Since 1977

THEORY OF ACCOUNTS OCAMPO/CABARLES

ToA.1611 – Intangible Assets MAY 2014

REVIEW QUESTIONS

1. PAS 38 applies to d. If payment for an intangible asset is deferred

a. Intangible assets that are not within the scope of beyond normal credit terms, its cost is equal to the
another Standard. total payments over the credit period.
b. Financial assets, as defined in PAS 32 Financial
Instruments: Presentation. 7. The cost of internally generated intangible asset
c. The recognition and measurement of exploration includes the following, except
and evaluation assets. a. Cost of materials and services used or consumed in
d. Expenditure on the development and extraction of generating the intangible asset
minerals, oil, natural gas and similar non- b. Expenditure on training staff to operate the asset
regenerative resources. c. Cost to register a legal right
d. Salaries, wages and other employment related
2. Which is not within the definition of an intangible costs of personnel directly engaged in generating
asset? the asset
a. Identifiable nonmonetary asset without physical
substance 8. Legal fees incurred by a company in defending its
b. A resource controlled by an entity as a result of patent rights should be expensed when the outcome of
past event the litigation is
c. A resource from which future economic benefits Successful Unsuccessful
are expected to flow to the entity a. Yes Yes
d. Held for use in the production or supply of goods b. Yes No
or services, for rental to others, or for c. No No
administrative purposes. d. No Yes

3. Which item listed below does not qualify as an 9. When an internally generated asset meets the
intangible asset? recognition criteria, the appropriate treatment for costs
a. Computer software previously expensed is:
b. Registered patent a. Reinstatement.
c. Copyrights that are protected b. No adjustment as these amounts may not be
d. Notebook computer reinstated.
c. Include in the cost of the development of the
4. Which of the following items qualify as an intangible
asset under PAS 38? asset.
a. Advertising and promotion on the launch of a huge d. Capitalize into the cost of the asset and adjust
product the opening balance of retained earnings.
b. College tuition fees paid to employees who decide
to enroll in an executive M.B.A. program at 10. According to the definition provided in PAS 38
Harvard University while working with the company Intangibles, activities undertaken in the ‘research’
c. Operating losses during the initial stages of the phase of the generation of an asset may include:
project a. The application of knowledge to a design for the
d. Legal costs paid to intellectual property lawyers to production of new materials;
register a patent b. The use of research findings to create a
substantially improved product;
5. The cost of an intangible asset is composed of c. Using knowledge to materially improve a
a. Purchase price excluding import duties and manufacturing device.
nonrefundable taxes d. Original and planned investigation with the
b. Purchase price including import duties and prospect of gaining new scientific knowledge;
nonrefundable taxes
c. Purchase including both refundable and 11. Which statement is correct regarding initial recognition
nonrefundable taxes of research and development costs?
d. Purchase price including trade discounts and a. All research costs should be charged to
rebates expense.
b. All development costs should be
6. Which is incorrect concerning the recognition and capitalized.
measurement of an intangible asset? c. If an enterprise cannot distinguish the
a. If an intangible asset is acquired separately, the research phase of an internal project to create an
cost comprises its purchase price, including import intangible asset from the development phase, the
duties and taxes and any directly attributable enterprise treats the expenditure for that project
expenditure of preparing the asset for its intended as if it were incurred in the development phase
use. only.
b. If an intangible asset is acquired in a business d. A research and development project
combination that is an acquisition, the cost is acquired in a business combination is not
based on its fair value at the date of acquisition. recognized as an asset.
c. If an intangible asset is acquired free of charge or
by way of government grant, the cost is equal to
its fair value.

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EXCEL PROFESSIONAL SERVICES, INC.

12. According to PAS 38 Intangibles, in order to be b. Depreciation deducted as part of research

able to capitalize ‘development’ outlays an entity and development costs.
must be able to demonstrate the following: c. Depreciation or immediate write-off
I. Technical feasibility and intention of depending on company policy.
completing the asset so it will be available d. An expense at such time as productive
for use or sale. research and development has been
II. Its ability to reliably measure the obtained from the facility.
expenditure on the development of the
asset. 17. Operating losses incurred during the start-up
III. Ability to use or sell the asset. years of a new business should be
IV. How the asset will generate probable future a. Accounted for and reported like the
economic benefits. operating losses of any other business.
b. Written off directly against retained
a. I, II and IV only c. II, III and
earnings.
IV only
c. Capitalized as a deferred charge and
b. II, and IV only d. I, II, III
amortized over five years.
and IV
d. Capitalized as an intangible asset and
amortized over a period not to exceed 20
13. PAS 38 Intangibles, prohibits the recognition of
years.
the following internally generated identifiable
intangibles:
18. Start-up costs include organizational costs, such
I. Brands
as legal and state fees incurred to organize a
II. Mastheads
new business entity. These costs should be
III. Publishing titles
a. Capitalized and never amortized.
IV. Customer lists
b. Capitalized and amortized over 40 years.
a. I, II and IV only c. II, III and c. Capitalized and amortized over 5 years.
IV only d. Expensed as incurred.
b. II, and IV only d. I, II, III
and IV
19. Which statement is correct concerning the
14. Which of the following would be considered amortization of an intangible asset?
research and development? I. The cost less residual value of an intangible
a. Routine efforts to refine an existing product. asset with a finite useful life should be
b. Periodic alterations to existing production amortized over that life
lines. II. An intangible asset with an indefinite useful
c. Marketing research to promote a new life should not be amortized.
product. III. The maximum amortization period cannot
d. Construction of prototypes. exceed twenty years.
a. I only
15. Which of the following costs would be
b. I and II only
capitalized?
c. I and III only
a. Acquisition cost of equipment to be used on
d. Neither I, II nor III
current research project only.
b. Engineering costs incurred to advance the
20. A consideration not relevant in determining the
product to the full production stage.
useful life of the intangible asset is the
c. Cost of research to determine whether a
a. The period of control over the asset and
market for the product exists.
legal or similar limits on the use of the asset
d. Salaries of research staff.
b. Technical, technological, commercial or other
types of obsolescence
16. If a company constructs a laboratory building to
c. Expected actions of competitors or potential
be used as a research and development facility,
competitors
the cost of the laboratory building is matched
d. Initial cost
against earnings as
a. Research and development expense in the
period(s) of construction. 21. The residual value of an intangible asset

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EXCEL PROFESSIONAL SERVICES, INC.

a. Is always equal to zero d. A company has exceptional customer

b. Is equal to zero unless a third party commits relations.
to buy the asset at the end of its useful life
and there is an active market for the asset 25. The reason goodwill is sometimes referred to as
c. Is equal to zero unless a third party commits a master valuation account is because
to buy the asset at the end of its useful life a. It represents the purchase price of a
or there is an active market for the asset business that is about to be sold.
d. May be increased for the purpose of b. It is the difference between the fair value of
computing amortization amount the net identifiable assets as compared with
the purchase price of the acquired business.
22. The method of amortization used for an c. The value of a business is computed without
intangible asset with a finite life consideration of goodwill and then goodwill is
a. Should always be the straight-line method added to arrive at a master valuation.
b. Need not reflect the pattern of use of the d. It is the only account in the financial
asset statements that is based on value, all other
c. Should be the straight-line method if the accounts are recorded at an amount other
pattern of use cannot be determined reliably than their value.
d. Should always be the units of production
method 26. Which of the following intangible assets should
be shown as a separate item on the statement of
23. Which of the following factors should not be financial position?
considered in determining the useful life of an a. Goodwill
intangible asset? b. Franchise
a. Effects of obsolescence, changes in market c. Patent
demand for the product d. Trademark
b. The salvage value of the asset 27. Which of the following disclosures is not required
c. Expected actions of competitors and by PAS 38?
potential competitors a. Useful lives of the intangible assets
d. The period of control over the asset and b. Reconciliation of carrying amount at the
legal or similar limits on the use of the asset, beginning and the end of the year
such as expiry dates of related leases or c. Contractual commitments for the acquisition
contractual or regulatory provisions. of intangible assets
d. Fair value of similar intangible assets used
24. Goodwill may be recorded when: by its competitors
a. It is identified within a company.
b. One company acquires another in a business
combination.
c. The fair value of a company’s assets exceeds - now do the DIY drill -
their cost.

DO-IT-YOURSELF (DIY) DRILL

1. A newly set up dot-com entity has engaged you technical feasibility of the project being
as its financial advisor. The entity has recently established are met
completed one of its highly publicized research c. Training costs of technicians used in research
and development projects and seeks your advice can be capitalized
on the accuracy of the following statements d. Designing of jigs and tools qualify as
made by one of its stakeholders. Which one is research activities
true? 1.
a. Costs incurred during the “research phase” 2. When an intangible asset is acquired by an
can be capitalized exchange of assets, which of the following
b. Costs incurred during the “development measures will need to be considered in the
phase” can be capitalized if criteria such as determination of that cost? The:
a. Fair value of the asset given up.

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EXCEL PROFESSIONAL SERVICES, INC.

b. Carrying amount of the asset received. 13. c. Are not subject to an amortization
c. Initial cost of the asset given up. charge;
d. Replacement cost of the asset received. 14. d. Should not be amortized in a period in
2. which maintenance of the asset occurs.
3. A brand name that was acquired separately 15.
should initially be recognized, according to PAS38 8. In relation to the amortisation of intangible
Intangible assets, at assets, the general rule in PAS 38 Intangibles, is
a. Recoverable amount that unless demonstrated otherwise:
b. Either cost or fair value at the choice of the a. The residual value does not enter into the
acquirer determination of the amortisation charge.
c. Fair value b. The residual need no be reviewed at the end
d. Cost
of each annual reporting period.
3.
4. Once recognized, intangible assets can be c. All intangible assets have a residual value at
carried at least equal to the amount of maintenance
a. Cost less accumulated amortization costs incurred.
b. Cost less accumulated amortization and less d. The residual value is presumed to be zero.
accumulated impairment losses
16.
c. Revalued amount less accumulated
9. Which statement is incorrect concerning
amortization
internally generated intangible asset?
d. Cost plus a notional increase in fair value
a. To assess whether an internally generated
since the intangible asset is acquired
4. intangible asset meets the criteria for
5. According to PAS38 Intangible assets, recognition, an enterprise classifies the
amortization of an intangible asset with a finite generation of the asset into a research phase
useful life should commence when and a development phase.
a. It is first recognized as an asset
b. The cost of an internally generated asset
b. it is probable that it will generate future
economic benefits comprises all expenditure that can be
c. It is available for use directly attributed or allocated on a
d. The costs can be identified with reasonable reasonable and consistent basis to creating,
certainty producing and preparing the asset for its
5.
intended use.
6. In relation to the amortization of intangible
assets, if an intangible asset has a finite useful c. Internally generated brands, mastheads,
life: publishing titles, customer lists and items
6. a. It must be amortized over a period similar in substance should not be
not exceeding 40 years; recognized as intangible assets.
7. b. It must be amortized across a period
d. Internally generated goodwill may be
not exceeding 5 years;
8. c. It is not subject to an annual recognized as an intangible asset.
amortization charge; 17.
9. d. It must be amortized over that life. 10. Internally generated goodwill is prohibited from
10. recognition in the financial statements of an
7. In relation to amortization of intangible assets, entity. The reason for this treatment is that:
PAS 38 Intangibles, requires that intangible a. Goodwill is not identifiable;
assets with indefinite useful lives: b. Goodwill is not measurable;
11. a. Are amortized by the straight-line c. It is not comparable to any other intangible
method across their useful lives; assets;
12. b. Must be amortized across a period of d. It is not prudent to recognize intangible
no more than 20 years; assets.
18.
20.
19.  - end of ToA.1611 - 
21.

22.

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ToA.1611
 CPAR-CHAPTER 12
INTANGIBLE ASSETS

TRUE-FALSE—Conceptual
Answer No. Description
F 1. Characteristics of intangible assets.
F 2. Internally created intangibles.
F 3. Recording internally generated intangibles.
F 4. Amortization of limited-life intangible assets.
T 5. Amortization of intangible assets.
T 6. Amortizing limited-life intangibles.
T 7. Accounting for a customer list.
F 8. Amortization of patents.
T 9. Modification of an existing patent.
T 10. Basic concept of goodwill.
T 11. Internally generated goodwill.
F 12. Recording internally generated goodwill.
T 13. Impairment of intangibles.
T 14. Recognition of impairment loss.
F 15. Recovery of impairment loss.
F 16. Impairment of intangibles.
T 17. Example of research and development costs.
F 18. Capitalizing research and development costs.
T 19. Recording research and development costs.
F 20. Reporting intangible assets.

MULTIPLE CHOICE—Conceptual
Answer No. Description
c 21. Accounting for internally-created intangibles.
b 22. Amortization methods for intangible assets.
d 23. Cost of intangible asset.
d 24. Factors in determining useful life.
S
b 25. Classifying intangible assets.
d 26. Patent amortization.
c 27. Patent amortization.
d 28. Legal fees associated with patent infringement.
b 29. Identification of intangible assets.
c 30. Amortization of intangible assets.
a 31. Entry to record patent amortization.
S
c 32. Accounting for goodwill.
S
b 33. Goodwill as master valuation account.
a 34. Reporting of "negative goodwill."
d 35. Accounting for goodwill.
a 36. Recording goodwill.
b 37. Impairment of intangible asset.
S
c 38. Impairment test for indefinite-life intangibles.
P
b 39. Accounting for organization costs.
12 - 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
a 40. Capitalization of certain R & D costs.
d 41. Accounting principle for R & D expenditures.
d 42. Accounting for R & D costs.
c 43. Costs excluded from R & D expense.
b 44. Depreciation of laboratory building used in R & D.
a 45. Operating losses during start-up period.
P
d 46. Accounting for organization costs.
S
a 47. Classification of R & D expense.
P
c 48. Reporting patent amortization.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—Computational
Answer No. Description
d 49. Valuation of patent.
d 50. Valuation of patent.
c 51. Intangible asset amortization.
c 52. Intangible asset amortization.
b 53. Computing patent amortization expense.
b 54. Computing patent amortization expense.
c 55. Calculate total intangible assets.
b 56. Determine amount of worthless patent to be written off.
b 57. Calculate patent amortization.
a 58. Calculate trademark amortization.
c 59. Exchange of similar intangible assets.
b 60. Calculate patent amortization.
c 61. Calculate goodwill amount.
c 62. Calculate goodwill amount.
d 63. Calculate amount of goodwill.
a 64. Calculate goodwill impairment.
b 65. Proper accounting when fair value of net assets acquired exceeds cost.
b 66. Calculate impairment loss.
c 67. Calculate patent carrying value.
d 68. Calculate patent carrying value.
b 69. Calculate loss on impairment of goodwill.
b 70. Calculate loss on impairment of goodwill.
d 71. Calculate R & D expense.
c 72. Calculate R & D expense.
c 73. Calculate R & D expense.
a 74. Calculate R & D expense.
a 75. Calculate R & D expense.
c *76. Computing computer software costs.
c *77. Computing computer software costs.
 Intangible Assets 12 - 3

MULTIPLE CHOICE—CPA Adapted

Answer No. Description
a 78. Determine capitalized patent costs.
c 79. Valuation of patent exchanged for common stock.
d 80. Valuation of patent exchanged for treasury stock.
d 81. Valuation and amortization of a patent.
c 82. Amortization of a patent.
d 83. Amortization of a trademark.
c 84. Capitalization of legal fees.
a 85. Amortization of goodwill.
c 86. Calculate R & D expense.
a 87. Determine R & D expense for the year.

EXERCISES
Item Description
E12-88 Short essay questions.
E12-89 Intangible assets questions.
E12-90 Intangible assets theory.
E12-91 Carrying value of patent.
E12-92 Accounting for patent.
E12-93 Impairment of copyrights.
E12-94 Acquisition of tangible and intangible assets.

PROBLEMS
Item Description
P12-95 Intangible assets.
P12-96 Goodwill, impairment.

CHAPTER LEARNING OBJECTIVES

1. Describe the characteristics of intangible assets.
2. Identify the costs to include in the initial valuation of intangible assets.
3. Explain the procedure for amortizing intangible assets.
4. Describe the types of intangible assets.
5. Explain the conceptual issues related to goodwill.
6. Describe the accounting procedures for recording goodwill.
7. Explain the accounting issues related to intangible-asset impairments.
8. Identify the conceptual issues related to research and development costs.
9. Describe the accounting procedures for research and development costs and for other
similar costs.
10. Indicate the presentation of intangible assets and related items.
*11. Understand the accounting for computer software costs.
12 - 4
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 83. E
Learning Objective 2
2. TF 3. TF 21. MC 49. MC 50. MC
Learning Objective 3
S
4. TF 6. TF 23. MC 25. MC 52. MC 90. E
5. TF 22. MC 24. MC 51. MC 89. E
Learning Objective 4
7. TF 27. MC 53. MC 57. MC 78. MC 82. MC 91. E
8. TF 28. MC 54. MC 58. MC 79. MC 83. MC 92. E
9. TF 29. MC 55. MC 59. MC 80. MC 84. MC 93. E
26. MC 30. MC 56. MC 60. MC 81. MC 89. E 95. P
Learning Objective 5
S
10. TF 31. MC 32. MC 85. MC 88. E 89. E 96. P
Learning Objective 6
S
11. TF 33. MC 35. MC 61. MC 63. MC 65. MC 94. E
12. TF 34. MC 36. MC 62. MC 64. MC 89. E
Learning Objective 7
13. TF 15. TF 37. MC 66. MC 68. MC 70. MC 93. E
S
14. TF 16. TF 38. MC 67. MC 69. MC 92. E 96. P
Learning Objective 8
P
17. TF 18. TF 39. MC 40. MC 41. MC 42. MC
Learning Objective 9
19. TF 45. MC 71. MC 74. MC 86. MC
P
43. MC 46. MC 72. MC 75. MC 87. MC
S
44. MC 47. MC 73. MC 78. MC 95. P
Learning Objective 10
P
20. TF 48. MC
Learning Objective *11
76. MC 77. MC
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
 Intangible Assets 12 - 5

TRUE-FALSE—Conceptual
1. Intangible assets derive their value from the right (claim) to receive cash in the future.

2. Internally created intangibles are recorded at cost.

3. Internally generated intangible assets are initially recorded at fair value.

4. Amortization of limited-life intangible assets should not be impacted by expected residual

values.

5. Some intangible assets are not required to be amortized every year.

6. Limited-life intangibles are amortized by systematic charges to expense over their useful
life.

7. The cost of acquiring a customer list from another company is recorded as an intangible
asset.

8. The cost of purchased patents should be amortized over the remaining legal life of the
patent.

9. If a new patent is acquired through modification of an existing patent, the remaining book
value of the original patent may be amortized over the life of the new patent.

10. In a business combination, a company assigns the cost, where possible, to the identifiable
tangible and intangible assets, with the remainder recorded as goodwill.

11. Internally generated goodwill should not be capitalized in the accounts.

12. Internally generated goodwill associated with a business may be recorded as an asset
when a firm offer to purchase that business unit has been received.

13. All intangibles are subject to periodic consideration of impairment with corresponding
potential write-downs.

14. If the fair value of an unlimited life intangible other than goodwill is less than its book
value, an impairment loss must be recognized.

15. If market value of an impaired asset recovers after an impairment has been recognized,
the impairment may be reversed in a subsequent period.

16. The same recoverability test that is used for impairments of property, plant, and
equipment is used for impairments of indefinite-life intangibles.

17. Periodic alterations to existing products are an example of research and development
costs.

18. Research and development costs that result in patents may be capitalized to the extent of
the fair value of the patent.
12 - 6
19. Research and development costs are recorded as an intangible asset if it is felt they will
provide economic benefits in future years.

20. Contra accounts must be reported for intangible assets in a manner similar to accumu-
lated depreciation and property, plant, and equipment.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. T 16. F
2. F 7. T 12. F 17. T
3. F 8. F 13. T 18. F
4. F 9. T 14. T 19. T
5. T 10. T 15. F 20. F

MULTIPLE CHOICE—Conceptual
21. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.

22. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

23. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.

24. Factors considered in determining an intangible asset’s useful life include all of the
following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.

25. Under current accounting practice, intangible assets are classified as

a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
 Intangible Assets 12 - 7

26. The cost of purchasing patent rights for a product that might otherwise have seriously
competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product
whose market would have been impaired by competition from the newly patented
product.

27. Riser Corporation was granted a patent on a product on January 1, 1998. To protect its
patent, the corporation purchased on January 1, 2007 a patent on a competing product
which was originally issued on January 10, 2003. Because of its unique plant, Riser
Corporation does not feel the competing patent can be used in producing a product. The
cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2007.

28. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-
ment by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.

29. Which of the following is not an intangible asset?

a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights

30. Which of the following intangible assets should not be amortized?

a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.

31. When a patent is amortized, the credit is usually made to

a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.

32. Goodwill
a. generated internally should not be capitalized unless it is measured by an individual
independent of the enterprise involved.
b. is easily computed by assigning a value to the individual attributes that comprise its
existence.
c. represents a unique asset in that its value can be identified only with the business as a
whole.
d. exists in any company that has earnings that differ from those of a competitor.
12 - 8
33. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair market value of the net tangible and identifiable
intangible assets as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then
goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other
accounts are recorded at an amount other than their value.

34. Easton Company and Lofton Company were combined in a purchase transaction. Easton
was able to acquire Lofton at a bargain price. The sum of the market or appraised values
of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost
to Easton. After revaluing noncurrent assets to zero, there was still some "negative
goodwill." Proper accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

35. Purchased goodwill should

a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period
benefited.
d. not be amortized.

36. The intangible asset goodwill may be

a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.

37. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.

38. Weaver Boxing Company needs to determine if its indefinite-life intangibles other than
goodwill have been impaired and should be reduced or written off on its balance sheet.
The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No

39. The carrying amount of an intangible is

a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related amortization recorded to date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.
 Intangible Assets 12 - 9

40. Which of the following research and development related costs should be capitalized and
amortized over current and future periods?
a. Research and development general laboratory building which can be put to alternative
uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research
project currently in process

41. Which of the following principles best describes the current method of accounting for
research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

42. How should research and development costs be accounted for, according to a Financial
Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful
lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality
of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future uses or unless contractually reimbursable.

43. Which of the following costs should be excluded from research and development
expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing
stage

44. If a company constructs a laboratory building to be used as a research and development

facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained
from the facility.

45. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

46. 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. These
costs should be
12 - 10
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.

47. Which of the following would not be considered an R & D activity?

a. Adaptation of an existing capability to a particular requirement or customer's need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.

48. The total amount of patent cost amortized to date is usually

a. shown in a separate Accumulated Patent Amortization account which is shown contra
to the Patent account.
b. shown in the current income statement.
c. reflected as credits in the Patent account.
d. reflected as a contra property, plant and equipment item.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 25. b 29. b 33. b 37. b 41. d 45. a
22. b 26. d 30. c 34. a 38. c 42. d 46. d
23. d 27. c 31. a 35. d 39. b 43. c 47. a
24. d 28. d 32. c 36. a 40. a 44. b 48. c

MULTIPLE CHOICE—Computational
49. Lynne Corporation acquired a patent on May 1, 2008. Lynne paid cash of $20,000 to the
seller. Legal fees of $800 were paid related to the acquisition. What amount should be
debited to the patent account?
a. $800
b. $19,200
c. $20,000
d. $20,800

50. Maris Corporation acquired a patent on May 1, 2008. Maris paid cash of $25,000 to the
seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be
debited to the patent account?
a. $1,000
b. $24,000
c. $25,000
d. $26,000

51. Jeff Corporation purchased a limited-life intangible asset for $120,000 on May 1, 2006. It
has a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2008?
 Intangible Assets 12 - 11

a. $ -0-
b. $24,000
c. $32,000
d. $36,000

52. Rich Corporation purchased a limited-life intangible asset for $180,000 on May 1, 2006. It
has a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2008?
a. $ -0-.
b. $36,000
c. $48,000
d. $54,000

53. ELO Corporation purchased a patent for $180,000 on September 1, 2006. It had a useful
life of 10 years. On January 1, 2008, ELO spent $44,000 to successfully defend the patent
in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What
amount should be reported for patent amortization expense for 2008?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.

54. LRF Corporation purchased a patent for $450,000 on September 1, 2006. It had a useful
life of 10 years. On January 1, 2008, LRF spent $110,000 to successfully defend the
patent in a lawsuit. LRF feels that as of that date, the remaining useful life is 5 years.
What amount should be reported for patent amortization expense for 2008?
a. $103,000.
b. $100,000.
c. $94,000.
d. $78,000.

55. The general ledger of Vance Corporation as of December 31, 2007, includes the following
accounts:
Copyrights $ 20,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 67,500
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 390,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2007, what should be
reported as total intangible assets?
a. $594,500.
b. $527,000.
c. $500,000.
d. $460,000.

56. In January, 2002, Findley Corporation purchased a patent for a new consumer product for
$720,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful life
of only ten years. During 2007 the product was permanently removed from the market
under governmental order because of a potential health hazard present in the product.
12 - 12
What amount should Findley charge to expense during 2007, assuming amortization is
recorded at the end of each year?
a. $480,000.
b. $360,000.
c. $72,000.
d. $48,000.

57. Kerr Company purchased a patent on January 1, 2006 for $180,000. The patent had a
remaining useful life of 10 years at that date. In January of 2007, Kerr successfully
defends the patent at a cost of $81,000, extending the patent’s life to 12/31/18. What
amount of amortization expense would Kerr record in 2007?
a. $18,000
b. $20,250
c. $21,750
d. $27,000

58. On January 2, 2007, Klein Co. bought a trademark from Royce, Inc. for $500,000. An
independent research company estimated that the remaining useful life of the trademark
was 10 years. Its unamortized cost on Royce’s books was $400,000. In Klein’s 2007
income statement, what amount should be reported as amortization expense?
a. $50,000.
b. $40,000.
c. $25,000.
d. $20,000.

59. Wildcat Baseball Company had a player contract with Carter that was recorded in its
accounting records at $5,800,000. Aggie Baseball Company had a player contract with
Jeter that was recorded in its accounting records at $5,600,000. Wildcat traded Carter to
Aggie for Jeter by exchanging each player's contract. The fair value of each contract was
$6,000,000. What amount should be shown in the accounting records after the exchange
of player contracts?
Wildcat Aggie
a. $5,600,000 $5,600,000
b. $5,600,000 $5,800,000
c. $5,800,000 $5,600,000
d. $6,000,000 $6,000,000

60. A company acquires a patent for a drug with a remaining legal and useful life of six years
on January 1, 2005 for $1,200,000. The company uses straight-line amortization for
patents. On January 2, 2007, a new patent is received for a timed-release version of the
same drug. The new patent has a legal and useful life of twenty years. The least amount
of amortization that could be recorded in 2007 is
a. $200,000.
b. $40,000.
c. $54,545.
d. $60,000.
 Intangible Assets 12 - 13

61. Blue Sky Company’s 12/31/08 balance sheet reports assets of $5,000,000 and liabilities
of $2,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except
for land, which has a fair value that is $300,000 greater than its book value. On 12/31/08,
Horace Wimp Corporation paid $5,100,000 to acquire Blue Sky. What amount of goodwill
should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $100,000
c. $1,800,000
d. $2,100,000

62. Turner Company’s 12/31/08 balance sheet reports assets of $6,000,000 and liabilities of
$2,500,000. All of Turner’s assets’ book values approximate their fair value, except for
land, which has a fair value that is $400,000 greater than its book value. On 12/31/08,
Benedict Corporation paid $6,100,000 to acquire Turner. What amount of goodwill should
Benedict record as a result of this purchase?
a. $ -0-
b. $ 100,000
c. $2,200,000
d. $2,600,000

63. Distributor Company purchases Supplier Company for $800,000 cash on January 1, 2007.
The book value of Supplier Company’s net assets, as reflected on its December 31, 2006
balance sheet is $620,000. An analysis by Distributor on December 31, 2006 indicates
that the fair value of Supplier’s tangible assets exceeded the book value by $60,000, and
the fair value of identifiable intangible assets exceeded book value by $45,000. How
much goodwill should be recognized by Distributor Company when recording the
purchase of Supplier Company?
a. $ -0-
b. $180,000
c. $120,000
d. $75,000

64. General Products Company bought Special Products Division in 2006 and appropriately
booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair
value of Special Products Division is $2,000,000 and it is carried on General Product’s
books for a total of $1,700,000, including the goodwill. An analysis of Special Products
Division’s assets indicates that goodwill of $200,000 exists on December 31, 2007. What
goodwill impairment should be recognized by General Products in 2007?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.

65. During 2007, Bond Company purchased the net assets of May Corporation for $950,000.
On the date of the transaction, May had $300,000 of liabilities. The fair value of May's
assets when acquired were as follows:
Current assets $ 540,000
Noncurrent assets 1,260,000
$1,800,000
How should the $550,000 difference between the fair value of the net assets acquired
($1,500,000) and the cost ($950,000) be accounted for by Bond?
12 - 14
a. The $550,000 difference should be credited to retained earnings.
b. The $550,000 difference should be recognized as an extraordinary gain.
c. The current assets should be recorded at $375,000 and the noncurrent assets should
be recorded at $875,000.
d. A deferred credit of $550,000 should be set up and then amortized to income over a
period not to exceed forty years.

66. The following information is available for Barkley Company’s patents:

Cost $1,720,000
Carrying amount 860,000
Expected future net cash flows 800,000
Fair value 640,000
Barkley would record a loss on impairment of
a. $1,080,000.
b. $220,000.
c. $160,000.
d. $60,000.

67. Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for
$5,000,000. It was expected to have a 10 year life and no residual value. Mining uses
straight-line amortization for patents. On December 31, 2007, the expected future cash
flows expected from the patent were expected to be $600,000 per year for the next eight
years. The present value of these cash flows, discounted at Mining’s market interest rate,
is $2,800,000. At what amount should the patent be carried on the December 31, 2007
balance sheet?
a. $5,000,000
b. $4,800,000
c. $4,000,000
d. $2,800,000

68. Malrom Manufacturing Company acquired a patent on a manufacturing process on

January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual
value. Malrom uses straight-line amortization for patents. On December 31, 2007, the
expected future cash flows expected from the patent were expected to be $800,000 per
year for the next eight years. The present value of these cash flows, discounted at
Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried
on the December 31, 2007 balance sheet?
a. $10,000,000
b. $8,000,000
c. $6,400,000
d. $4,800,000

69. Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for

$2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December
31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net
identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at
that time. What amount of loss on impairment of goodwill should Twilight record in 2008?
a. $ -0-
b. $125,000
c. $175,000
d. $300,000
 Intangible Assets 12 - 15

70. Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000,
and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008,
the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable
assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time.
What amount of loss on impairment of goodwill should Fleming record in 2008?
a. $ -0-
b. $250,000
c. $350,000
d. $600,000

71. In 2006, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 80,000
Personnel 120,000
Indirect costs 150,000
$350,000
These costs relate to a product that will be marketed in 2007. It is estimated that these
costs will be recouped by December 31, 2009. The equipment has no alternative future
use. What is the amount of research and development costs that should be expensed in
2006?
a. $0.
b. $200,000.
c. $270,000.
d. $350,000.

72. Hall Co. incurred research and development costs in 2007 as follows:
Materials used in research and development projects $ 450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2007 on above equipment 300,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 150,000
Indirect costs reasonably allocable to research and development projects 225,000
$4,875,000
The amount of research and development costs charged to Hall's 2007 income statement
should be
a. $1,500,000.
b. $1,650,000.
c. $1,875,000.
d. $4,050,000.

73. Martin Inc. incurred the following costs during the year ended December 31, 2007:
Laboratory research aimed at discovery of new knowledge $180,000
Costs of testing prototype and design modifications 45,000
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 2007 is
12 - 16
a. $555,000.
b. $855,000.
c. $585,000.
d. $285,000.

74. MaBelle Corporation incurred the following costs in 2008:

Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
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 350,000
What amount should MaBelle record as research & development expense in 2008?
a. $500,000
b. $640,000
c. $950,000
d. $1,340,000

75. Leeper Corporation incurred the following costs in 2008:

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 Leeper record as research & development expense in 2008?
a. $700,000
b. $840,000
c. $1,300,000
d. $1,540,000

*76. Shangra-La Company incurred $1,500,000 ($400,000 in 2007 and $1,100,000 in 2008) to
develop a computer software product. $500,000 of this amount was expended before
technological feasibility was established in early 2008. The product will earn future
revenues of $4,000,000 over its 5-year life, as follows: 2008 – $1,000,000; 2009 –
$1,000,000; 2010 – $800,000; 2011 – $800,000; and 2012 – $400,000. What portion of
the $1,500,000 computer software costs should be expensed in 2008?
a. $250,000
b. $300,000
c. $350,000
d. $1,100,000

*77. Pesavento Company incurred $3,000,000 ($800,000 in 2007 and $2,200,000 in 2008) to
develop a computer software product. $1,000,000 of this amount was expended before
technological feasibility was established in early 2008. The product will earn future
revenues of $8,000,000 over its 5-year life, as follows: 2008 – $2,000,000; 2009 –
$2,000,000; 2010 – $1,600,000; 2011 – $1,600,000; and 2012 – $800,000. What portion
of the $3,000,000 computer software costs should be expensed in 2008?
 Intangible Assets 12 - 17

a. $500,000.
b. $600,000.
c. $700,000.
d. $2,200,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
49. d 54. b 59. c 64. a 69. b 74. a
50. d 55. c 60. b 65. b 70. b 75. a
51. c 56. b 61. c 66. b 71. d *76. c
52. c 57. b 62. c 67. c 72. c *77. c
53. b 58. a 63. d 68. d 73. c

MULTIPLE CHOICE—CPA Adapted

78. Lopez Corp. incurred $420,000 of research and development costs to develop a product
for which a patent was granted on January 2, 2002. Legal fees and other costs associated
with registration of the patent totaled $80,000. On March 31, 2007, Lopez paid $120,000
for legal fees in a successful defense of the patent. The total amount capitalized for the
patent through March 31, 2007 should be
a. $200,000.
b. $500,000.
c. $540,000.
d. $620,000.

79. On June 30, 2007, Cey, Inc. exchanged 2,000 shares of Seely Corp. $30 par value
common stock for a patent owned by Gore Co. The Seely stock was acquired in 2007 at a
cost of $55,000. At the exchange date, Seely common stock had a fair value of $45 per
share, and the patent had a net carrying value of $110,000 on Gore's books. Cey should
record the patent at
a. $55,000.
b. $60,000.
c. $90,000.
d. $110,000.

80. On May 5, 2007, Flynn Corp. exchanged 2,000 shares of its $25 par value treasury
common stock for a patent owned by Denson Co. The treasury shares were acquired in
2006 for $45,000. At May 5, 2007, Flynn's common stock was quoted at $32 per share,
and the patent had a carrying value of $55,000 on Denson's books. Flynn should record
the patent at
a. $45,000.
b. $50,000.
c. $55,000.
d. $64,000.
12 - 18
81. Ely Co. bought a patent from Baden Corp. on January 1, 2007, for $300,000. An
independent consultant retained by Ely estimated that the remaining useful life is 30
years. Its unamortized cost on Baden 's accounting records was $150,000; the patent had
been amortized for 5 years by Baden. How much should be amortized for the year ended
December 31, 2007?
a. $0.
b. $5,000.
c. $10,000.
d. $20,000.

82. January 2, 2004, Koll, Inc. purchased a patent for a new consumer product for $180,000.
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, 2007, the product was permanently withdrawn from sale under
governmental order because of a potential health hazard in the product. What amount
should Koll charge against income during 2007, assuming amortization is recorded at the
end of each year?
a. $18,000
b. $108,000
c. $126,000
d. $144,000

83. On January 1, 2003, Unruh Company purchased a copyright for $800,000, having an
estimated useful life of 16 years. In January 2007, Unruh paid $120,000 for legal fees in a
successful defense of the copyright. Copyright amortization expense for the year ended
December 31, 2007, should be
a. $0.
b. $50,000.
c. $57,500.
d. $60,000.

84. 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

85. Which of the following costs of goodwill should be amortized over their estimated useful
lives?
Costs of goodwill from a
business combination Costs of developing
accounted for as a purchase goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No
 Intangible Assets 12 - 19

86. During 2007, 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 510,000
Research and development services performed by Beck Corp. for Leon 325,000
In Leon's 2007 income statement, research and development expense should be
a. $510,000.
b. $835,000.
c. $1,185,000.
d. $1,435,000.

87. Riley Co. incurred the following costs during 2007:

Modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Costs of marketing research for new product 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 215,000
In its income statement for the year ended December 31, 2007, Riley should report
research and development expense of
a. $575,000.
b. $725,000.
c. $415,000.
d. $335,000.

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
78. a 80. d 82. c 84. c 86. c
79. c 81. d 83. d 85. a 87. a

DERIVATIONS — Computational
No. Answer Derivation
49. d $20,000 + $800 = $20,800.

50. d $25,000 + $1,000 = $26,000.

51. c ($120,000 ÷ 10) × 2 2/3 = $32,000.

52. c ($180,000 ÷ 10) × 2 2/3 = $48,000.

53. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

($156,000 + $44,000) ÷ 5 = $40,000.

54. b $450,000 – [($450,000 ÷ 10) × 1 1/3] = $390,000.

($390,000 + $110,000) ÷ 5 = $100,000.
12 - 20
DERIVATIONS — Computational (cont.)
No. Answer Derivation
55. c $20,000 + $390,000 + $90,000 = $500,000.

56. b ($720,000 ÷ 10) × 5 = $360,000.

57. b [($180,000 – $18,000) + $81,000] ÷ 12 = $20,250.

58. a $500,000 ÷ 10 = $50,000.

59. c Wildcat: $6,000,000 – $200,000 (deferred gain) = $5,800,000.

Aggie: $6,000,000 – $400,000 (deferred gain) = $5,600,000.

60. b $1,200,000 – [($1,200,000 ÷ 6) × 2] = $800,000.

$800,000 ÷ 20 = $40,000.

61. c ($5,000,000 + $300,000) – $2,000,000 = $3,300,000

$5,100,000 – $3,300,000 = $1,800,000.

62. c ($6,000,000 + $400,000) – $2,500,000 = $3,900,000.

$6,100,000 – $3,900,000 = $2,200,000.

63. d $620,000 + $60,000 + $45,000 = $725,000.

$800,000 – $725,000 = $75,000.

64. a Since $2,000,000 > $1,700,000, $0 impairment.

65. b $1,500,000 – $950,000 = $550,000 extraordinary gain.

66. b $860,000 – $640,000 = $220,000.

67. c $5,000,000 – [($5,000,000 ÷ 10) × 2] = $4,000,000.

68. d $10,000,000 – [($10,000,000 ÷ 10) × 2] = $8,000,000.

Since $8,000,000 > ($800,000 × 8), patent is reported at $4,800,000 (present
value of cash flows.

69. b $1,700,000 – $1,450,000 = $250,000

$375,000 – $250,000 = $125,000.

70. b $3,400,000 – $2,900,000 = $500,000

$750,000 – $500,000 = $250,000.

71. d Expense total of $350,000.

72. c $4,875,000 – $3,000,000 = $1,875,000.

73. c $180,000 + $45,000 + $360,000 = $585,000.

74. a ($600,000 ÷ 4) + $350,000 = $500,000.

 Intangible Assets 12 - 21

DERIVATIONS — Computational (cont.)

No. Answer Derivation
75. a ($800,000 ÷ 4) + $500,000 = $700,000.

*76. c ($1,500,000 – $500,000) × ($1,000,000 ÷ $4,000,000) = $250,000.

$250,000 + ($500,000 – $400,000) = $350,000.

*77. c ($3,000,000 – $1,000,000) × ($2,000,000 ÷ $8,000,000) = $500,000.

$500,000 + ($1,000,000 – $800,000) = $700,000.

DERIVATIONS — CPA Adapted

No. Answer Derivation
78. a $80,000 + $120,000 = $200,000.

79. c $2,000 × $45 = $90,000.

80. d $2,000 × $32 = $64,000.

81. d $300,000 ÷ (20 – 5) = $20,000.

82. c $180,000 – [($180,000 ÷ 10) × 3] = $126,000.

83. d ($800,000 – [($800,000 ÷ 16) × 4] = $600,000

($600,000 + $120,000) ÷ 12 = $60,000.

84. c Conceptual.

85. a Conceptual.

86. a $350,000 + $510,000 + $325,000 = $1,185,000.

87. a $160,000 + $200,000 + $215,000 = $575,000.

EXERCISES

Ex. 12-88—Short essay questions.

1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?

Solution 12-88
1. Intangible assets are assets that derive their value from the rights and privileges granted to
the company using them. They provide services over a period of years and are normally
12 - 22
classified as long-term assets. Examples are patents, copyrights, franchises, goodwill,
trademarks, and trade names.
Solution 12-88 (cont.)
2. Limited-life intangibles are amortized by systematic charges to expense over their useful life.
In addition, they are reviewed for impairment each year. Impairment occurs when the future
net cash flows are less than the carrying amount of the intangible asset. The intangible asset
is reduced for the amount by which its carrying value exceeds its fair value at year end.

Ex. 12-89—Intangible assets questions.

Indicate the best answer by circling the proper letter.

1. Copyrights should be amortized over

a. their legal life.
b. the life of the creator plus fifty years.
c. twenty years.
d. their useful life or legal life, whichever is shorter.

2. A patent should be amortized over

a. twenty years.
b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.

3. The major problem of accounting for intangibles is determining

a. fair market value.
b. separability.
c. salvage value.
d. useful life.

4. Limited-life intangibles are reported at their

a. replacement cost.
b. carrying amount unless impaired.
c. acquisition cost.
d. liquidation value.

5. Negative goodwill arises when the ______________ of the net assets acquired is higher than
the purchase price of the assets.
a. useful life
b. carrying value
c. fair market value
d. excess earnings

Solution 12-89
1. d 2. d 3. d 4. b 5. c
 Intangible Assets 12 - 23

Ex. 12-90—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 12-90
Intangible assets provide revenues over a period of years. Limited-life intangibles are therefore
capitalized and amortized by systematic charges to expense over their useful life. This treatment
is in accordance with the matching principle—deducting expenses in the same period(s) that
revenues are reported.

Ex. 12-91—Carrying value of patent.

Fehr Co. purchased a patent from Wells Co. for $180,000 on July 1, 2004. Expenditures of
$51,000 for successful litigation in defense of the patent were paid on July 1, 2007. Fehr
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, 2007.

Solution 12-91
Cost of patent $180,000
Amortization 7/1/04 to 7/1/07 [($180,000 ÷ 20) × 3] (27,000)
Carrying value at 7/1/07 153,000
Cost of successful defense 51,000
Carrying value 204,000
Amortization 7/1/07 to 12/31/07 [$204,000 × 1/(20 – 3) × 1/2] (6,000)
Carrying value at 12/31/07 $198,000

Ex. 12-92—Accounting for patent.

In early January 2005, Lerner Corporation applied for a patent, incurring legal costs of $50,000. In
January 2006, Lerner incurred $9,000 of legal fees in a successful defense of its patent.

Instructions
(a) Compute 2005 amortization, 12/31/05 carrying value, 2006 amortization, and 12/31/06
carrying value if the company amortizes the patent over 10 years.
(b) Compute the 2007 amortization and the 12/31/07 carrying value, assuming that at the
beginning of 2007, 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 $45,000 on January 3,
2007.
12 - 24
Solution 12-92
(a) 2005 amortization: $50,000 ÷ 10 yrs. = $5,000
12/31/05 carrying value: $50,000 – $5,000 = $45,000
2006 amortization: ($45,000 + $9,000) ÷ 9 yrs. = $6,000
12/31/06 carrying value: ($45,000 + $9,000) – $6,000 = $48,000

(b) Since the expected future cash flows ($45,000) are less than the carrying value ($48,000),
an impairment loss must be computed.
Loss on impairment: $48,000 carrying value – $44,000 fair value = $4,000
2007 amortization: $44,000 ÷ 8 yrs. = $5,500
12/31/07 carrying value: $44,000 – $5,500 = $38,500

Ex. 12-93—Impairment of copyrights.

Presented below is information related to copyrights owned by Wamser Corporation at December
31, 2006.
Cost $2,700,000
Carrying amount 2,400,000
Expected future net cash flows 2,100,000
Fair value 1,400,000

Assume Wamser will continue to use this asset in the future. As of December 31, 2006, 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,
2006.
(b) Prepare the journal entry to record amortization expense for 2007.
(c) The fair value of the copyright at December 31, 2007 is $1,500,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.

Solution 12-93
(a) December 31, 2006
Loss on Impairment..................................................................... 1,000,000
Copyrights......................................................................... 1,000,000
Carrying amount $2,400,000
Fair value 1,400,000
Loss on impairment $1,000,000

(b) December 31, 2007

Amortization Expense................................................................. 280,000
Copyrights......................................................................... 280,000
New carrying amount $1,400,000
Useful life ÷ 5 years
Amortization $ 280,000

(c) No entry necessary. Restoration of any impairment loss is not permitted for assets held for
future use.
 Intangible Assets 12 - 25

Ex. 12-94—Acquisition of tangible and intangible assets.

Fowler Manufacturing Company decided to expand further by purchasing Abel Company. The
balance sheet of Abel Company as of December 31, 2007 was as follows:

Abel Company
Balance Sheet
December 31, 2007

Assets Equities
Cash $ 210,000 Accounts payable $ 325,000
Receivables 450,000 Common stock 800,000
Inventory 275,000 Retained earnings 835,000
Plant assets (net) 1,025,000
Total assets $1,960,000 Total equities $1,960,000

An appraisal, agreed to by the parties, indicated that the fair market value of the inventory was
$350,000 and that the fair market value of the plant assets was $1,225,000. The fair market value
of the receivables is equal to the amount reported on the balance sheet. The agreed purchase
price was $2,100,000, and this amount was paid in cash to the previous owners of Abel
Company.

Instructions
Determine the amount of goodwill (if any) implied in the purchase price of $2,100,000. Show
calculations.

Solution 12-94
Purchase price $2,100,000
Less tangible net assets acquired:
Book value $1,635,000
Appraisal increment—inventory 75,000
Appraisal increment—plant assets 200,000
Total fair market value of tangible net assets acquired 1,910,000
Goodwill $ 190,000
12 - 26
PROBLEMS

Pr. 12-95—Intangible assets.

The following transactions involving intangible assets of Minton Corporation occurred on or near
December 31, 2006. Complete the chart below by writing the journal entry(ies) needed at that
date to record the transaction and at December 31, 2007 to record any resultant amortization. If
no entry is required at a particular date, write "none needed."

On Date On
of Transaction December 31, 2007
1. Minton paid Grand Company $250,000 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 $300,000 developing a new manu-

facturing process. It has applied for a patent, and
it believes that its application will be successful.

3. In January, 2007, Minton's application for a

patent (#2 above) was granted. Legal and
registration costs incurred were $60,000. The
patent runs for 20 years. The manufacturing
process will be useful to Minton for 10 years.

4. Minton incurred $96,000 in successfully defend-

ing one of its patents in an infringement suit. The
patent expires during December, 2010.

5. Minton incurred $240,000 in an unsuccessful

patent defense. As a result of the adverse
verdict, the patent, with a remaining unamortized
cost of $126,000, is deemed worthless.

6. Minton paid Sneed Laboratories $52,000 for

research and development work performed by
Sneed under contract for Minton. The benefits
are expected to last six years.

Solution 12-95
On Date of Transaction On December 31, 2007
1. Franchise............. 250,000 1. “None needed.”
Cash.............. 250,000

2. Research and 2. "None needed."

Devel. Expense.... 300,000
Cash.............. 300,000
 Intangible Assets 12 - 27

Solution 12-95 (cont.)

3. Patents................. 60,000 3. Patent Amortization
Cash.............. 60,000 Expense..................... 6,000
Patents................. 6,000

4. Patents................. 96,000 4. Patent Amortization

Cash.............. 96,000 Expense..................... 24,000
Patents................. 24,000

5. Legal Fees Exp.... 240,000 5. “None needed.”

Cash.............. 240,000
Patent Expense. . . 126,000
Patents........... 126,000

6. Research and 6. "None needed."

Devel. Expense.... 52,000
Cash.............. 52,000

Pr. 12-96—Goodwill, impairment.

On May 31, 2007, Porter Company paid $3,200,000 to acquire all of the common stock of Eaton
Corporation, which became a division of Porter. Eaton reported the following balance sheet at the
time of the acquisition:

Current assets $ 800,000 Current liabilities $ 600,000

Noncurrent assets 2,700,000 Long-term liabilities 500,000
Stockholders’ equity 2,400,000
Total liabilities and
Total assets $3,500,000 stockholders’ equity $3,500,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of
Eaton was $2,700,000. At December 31, 2007, Eaton reports the following balance sheet
information:

Current assets $ 600,000

Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $1,800,000

It is determined that the fair market value of the Eaton division is $1,900,000. The recorded
amount for Eaton’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.

Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2007.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2007.
(c) Assume that the fair value of the Eaton division is $1,700,000 instead of $1,900,000. Prepare
the journal entry to record the impairment loss, if any, on December 31, 2007.
12 - 28
Solution 12-96
(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
$3,200,000 – $2,700,000 = $500,000.

(b) No impairment loss is recorded, because the fair value of Eaton ($1,900,000) is greater than
the carrying value ($1,800,000) of the new assets.

(c) Computation of impairment loss:

Implied fair value of goodwill = Fair value of division less the carrying value of the division
(adjusted for fair value changes), net of goodwill:

Fair value of Eaton division $1,700,000

Carrying value of division $1,800,000
Increase in fair value of PP&E 200,000
Less goodwill (500,000)
(1,500,000)
Implied value of goodwill 200,000
Carrying amount of goodwill (500,000)
Loss on impairment $ (300,000)

Loss on Impairment.................................................................. 300,000

Goodwill......................................................................... 300,000
 Page 1 of 3

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

INTANGIBLE ASSETS - THEORY
Related standard: PAS 38
1. An entity shall choose either the cost model or revaluation model as its accounting policy in
measuring intangible asset. Which statement is correct?
I. The cost model means that an intangible asset shall be carried at cost less any
accumulated amortization and any accumulated impairment loss.
II. The revaluation model means that an intangible asset shall be carried at revalued
amount less any subsequent accumulated amortization and any subsequent
accumulated impairment loss.
a. I only b. II only c. Both I and II d. Neither I nor II

2. Which is not within the definition of an intangible asset?

a. Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
b. Identifiable nonmonetary asset without physical substance.
c. A resource controlled by an enterprise as a result of past events.
d. A resource from which future economic benefits are expected to flow to the enterprise.

3. Which is incorrect concerning the recognition and measurement of an intangible asset?

a. If an intangible asset is acquired separately, the cost comprises its purchase price,
including import duties and taxes and any directly attributable expenditure of preparing
the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the
cost is based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the cost
is equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is
equal to the total payments over the credit period.

4. The appropriate method of amortizing intangible asset is best described by which of the
following?
a. The straight line method, unless the pattern in which the asset’s economic benefits are
consumed by the enterprise can be determined reliably.
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to
any particular method
d. The straight line method in all circumstances

5. The best definition of useful life of an intangible asset is

a. The legal life of the intangible.
b. The period over which management believes the intangible asset will contribute to the
revenue-producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted for income tax purposes.

6. Which of the following factors should not be considered in estimating the useful life of
intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset

7. It is the systematic allocation of the cost of an intangible asset less any residual value as
an expense over the asset’s useful life?
a. Depreciation c. Depletion
b. Realization d. Amortization
 Page 2 of 3

8. The residual value of an intangible asset should be presumed zero, unless

I. There is a commitment by a third party to purchase the asset at the end of its useful life.
II. There is an active market for the asset and residual value can be determined by
reference to that market and it is probable that such market will exist at the end of the
asset’s useful life.
a. Both I and II b. Neither I nor II c. II only d. I only

9. Which one of the following is not a component of the cost of internally generated intangible
asset?
a. Cost of materials and services used or consumed in generating the intangible asset.
b. Cost of employee benefits arising from the generation of the intangible asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.

10. Which statement is incorrect concerning internally generated intangible asset?

a. To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into a research phase
and a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs
necessary to create, produce and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.

11. The following expenditures should be expensed when incurred, except

a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs

12. A lessee incurred costs to construct office space in a leased warehouse. The estimated
useful life of the office is 10 years. The remaining term of the nonrenewable lease is 15
years. The cost should be
a. Capitalized as leasehold improvement and depreciated over 15 years.
b. Capitalized as leasehold improvement and depreciated over 10 years.
c. Capitalized as leasehold improvement and expensed in the year in which the lease
expires
d. Expensed as incurred

13. Research is
I. Original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
II. Application of research finding or other knowledge to a plan or design for the production
of new or substantially improved material, device, product, process, system or service,
prior to the commencement of commercial production or use.
a. I only b. II only c. Both I and II d. Neither I nor II

14. If a company constructs a laboratory building to be used as a research and development

facility, the cost of the laboratory building is matched against earnings as
a. Research and development expense in the period of construction
b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility

15. A research and development activity for which the cost should be expensed as incurred is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototypes and models
c. Trouble shooting in connection with breakdowns during commercial production
d. Periodic design changes to existing products
 Page 3 of 3

16. On January 1, 2005, Haze Company had capitalized costs for a new computer software
product with an economic life of five years. Sales for 2005 were 30 percent of expected
total sales of the software and the pattern of future sales can be measured reliably. At
December 31, 2005, the software had a net realizable value equal to 90 percent of the
capitalized cost. What percentage of the original capitalized cost should be reported as the
net amount on the December 31, 2005 balance sheet?
a. 70% b. 72% c. 80% d. 90%

17. The proper accounting for the costs incurred in creating computer software products is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until technological feasibility
has been established for the product.
c. Charge research and development expense only if the computer software has
alternative future use.
d. Capitalize all costs as incurred until a detailed program design or working model is
created.

18. Which statement is correct regarding the proper accounting treatment for internal-use
software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as incurred.
a. I only b. II only c. Both I and II d. Neither I and II

19. Which of the following statements is incorrect regarding internal – use software?
a. The application and development costs of internal-use software should be amortized on
the straight line basis unless another systematic and rational basis is more appropriate.
b. Internal-use software is considered to be software that is marketed as a separate
product or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should expensed as incurred.

20. Which following statements is correct regarding the treatment of start-up activities related
to the opening of the new facility?
I. Cost of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their
intended use should be expensed as incurred.
a. I only b. II only c. Both I and II d. Neither I nor II

21. Operating losses incurred during the start up years of a new business should be
a. Accounted for and reported like the operating losses of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortized over 5 years.
d. Capitalized as an intangible asset and amortized over 5 years.

22. Which of the following is not a method of computing goodwill?

a. Capitalize excess earnings.
b. Discount the excess earnings for a limited number of years.
c. Capitalize total average earnings and subtract the fair value of net assets.
d. All of these are methods of computing goodwill.

23. Identifiable intangible assets include all of the following, except

a. Computer software c. Franchise
b. Trademark d. Goodwill

24. In accordance with the new international accounting standard, which statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for impairment at least
annually.
a. I only b. II only c. Both I and II d. Neither I nor II

- end -
 THEORIES

1. An intangible asset is defined as

a. An identifiable asset without physical substance
b. A nonmonetary asset without physical substance
c. An identifiable nonmonetary asset without physicalsubstance.
d. An identifiable monetary and nonmonetary asset without physical substance

2. Which of the following statements is true concerning the criterion of identifiability of an intangible asset?

I. An intangible asset is identifiable when it is separable, meaning, the asset could be sold,
transferred, licensed, rented or exchanged.
II. An intangible asset is identifiable when it arises from contractual or legal right.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

3. Which of the following statements is true concerning the criterion of control by the entity of an
intangible asset?
I. The capacity of the entity to control the economic
benefits from an intangible asset would normally stem from legal rights that are enforceable in a
court of law.
II. The skill of employees arising out of the benefits of training costs can be recognized as intangible
asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. An intangible asset shall be recognized if

I. It is probable that future economic benefits attributable to the asset will flow to the entity.
II. The cost of the intangible asset can be measured reliably.

a. Both I and II
b. Neither I nor I
c. I only
d. II only

5. Which of the following statements is true concerning separate acquisition of an intangible asset?
I. If an intangible asset is acquired separately, the cost of the intangible asset can usually be
measured reliably.
II. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the
cash price equivalent.
 a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. Which is incorrect concerning acquisition of an intangible asset as part of a business combination?

a. The cost of the intangible asset is based on its fair value at the date of acquisition.
b. If there is an active market from the intangible asset, the fair value is equal to the quoted market
price which is usually the current bid price.
c. If there is no active market for the intangible asset, the fair value is equal to the amount that would
be paid by the entity in an arm's length transaction between knowledgeable and willing parties.
d. The fair value of an intangible asset acquired in abusiness combination cannot be
measuredsufficient reliability separately from goodwill.

7. Which of the following statements in relation to intangible assets is true?

I. Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.
II. The cost of internally generated intangible asset comprises all directly attributable cost necessary
to create, produce and prepare the asset for its intended use.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

8. The cost of an internally generated asset includes all of the following, except
a. Cost of materials and services used in generating the intangible asset.
b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditure on training staff to operate the asset.

9. All of the following expenditures shall be expensed when incurred, except

a. Start up costs
b. Advertising and promotion costs
c. Business relocation or reorganization cost
d. Payment in advance of delivery of goods or the rendering of services

10. Which of the following statements is true concerning amortization of intangible assets?
I. Intangible assets with limited or finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but are tested for impairment at least
annually.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

11. It is the systematic allocation of the depreciable amount of an intangible asset over the asset's useful life.
a. Amortization
 b. Allocation
c. Realization
d. Expiration

12. The amortization method used shall reflect the pattern in which the asset's economic benefits are
consumed by the entity. If such pattern cannot be determined reliably, what is the amortization method
used?
a. Straight line
b. Production method
c. Diminishing balance method
d. Ratio of current year's sales to the total expected sales

13. The residual value of an intangible asset shall be presumed to zero, unless
I. There is a commitment by a third party to purchase the asset at the end of its useful life.
II. There is an active market for the asset and residual value determined by reference to that market
and it is probable that such market will exist at the end of the asset's useful life.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

14. The factors that are considered in determining the useful life of an intangible asset include all of the
following, except
a. Technical obsolescence
b. Expected action of competitors
c. Expected usage of the asset by the entity
d. Residual value

15. Which of the following statements is true concerning useful life of an intangible asset?
I. An intangible asset is regarded as having an indefinite useful life when there is no foreseeable limit
to the period over which the asset is expected to generate net cash inflows to the entity.
II. The useful life of an intangible asset arising from contractual or other legal rights shall not exceed
the period of those rights but may be shorter depending on the period over which the asset is
expected to be used by the entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

16. An intangible asset acquired by way of government grant may be initially recorded at
I. Fair value
II. Nominal amount or zero, plus any expenditure that is directly attributable to preparing the asset for
its intended use
a. I only
b. II only
c. Either I or II
d. Neither I nor I
17. The cost of a separately acquired intangible asset comprises its purchase price, including import duties and
nonrefundable purchase taxes, and
a. Costs of introducing a new product or service
b. Costs of conducting a business in a new location
c. Administration and other general overhead costs
d. Directly attributable costs of preparing the asset for its intended use.

18. Directly attributable costs of preparing the intangible asset for its intended use include all, except
a. Cost of employee benefits arising directly from bringing the asset to its working condition
b. Professional fees arising directly from bringing the asset to its working condition
c. Cost of testing whether the asset is functioning properly
d. Initial operating losses

19. After initial recognition, an intangible asset shall be carried using the
a. Cost model only
b. Revaluation model only
c. Either cost model or revaluation model
d. Neither cost model nor revaluation model

20. Which of the following represents the maximum amortization period mandated for intangible assets with
maximum finite useful life?
a. 10 years
b. 20 years
c. 40 years
d. No arbitrary cap on the useful life has been established.

21. Which of the following items does not qualify as an intangible asset?
a. Computer software
b. Registered patent
c. Copyright that is protected
d. Notebook computer

22. Which of the following items would qualify as an intangible asset?

a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A program at
Harvard University while working with the entity.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers toregister a patent.

23. Once recognized, intangıble assets can be carried at

a. Cost less accumulated amortization
b. Cost less accumulated amortization and impairment losses
c. Revalued amount less accumulated amortization
d. Cost plus a notional increase in fair value since the intangible asset is acquired
24. Which disclosure is not required with respect to intangible assets?
a. Useful lives of the intangible assets
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitments for the acquisition of intangible assets
d. Fair value of similar intangible assets used by its competitors

25. A consideration in determining the useful life of an intangible asset is not the
a. Legal, regulatory or contractual provision
b. Provision for renewal or extension
c. Initial cost
d. Obsolescence

26. Amortization of an intangible asset with a finite useful life shall commence when
a. It is first recognized as an asset.
b. It is probable that it will generate future economic benefits.
c. It is available for use.
d. The cost can be identified with reasonable certainty.

27. A brand name that was acquired separately shall initially be recognized at
a. Recoverable amount
b. Either cost or fair value at the choice of the acquirer
c. Fair value
d. Cost

28. The recognition criteria for an intangible asset include which of the following conditions?
I. It must be measured at cost.
II. Its cost can be measured reliably.
III. It is probable that future economic benefits will arise from its use.
a. I, II, and III
b. I and II only
c. I and III only
d. II and III only

29. Which of the following statements in relation to intangible assets is true?

I. Intangible assets cannot be treated as having an indefinite useful life.
II. Intangible assets with a finite useful life shall be measured at cost and tested annually for
impairment.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

30. Which of the following statements in relation to intangible assets acquired in a business combination is
true?
 I. Intangible assets acquired in a business combination shall only be recognized if they have already
been recognized by the entity being acquired.
II. Intangible assets acquired in a business combination shall not be recognized separately from
goodwill.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

31. Goodwill shall be recognized only when

a. It is purchased from another entity.
b. It can be established that a definite benefit or advantage has resulted to an entity from some item
such as good name, capable staff or reputation.
c. It is acquired through the purchase of another business entity.
d. An entity reports super normal earnings for five or more consecutive years.

32. What does the standard require with respect to accounting for goodwill?
a. Goodwill should be amortized over a five-year period.
b. Goodwill should be amortized over the expected useful life.
c. Goodwill should be recorded and never adjusted.
d. Goodwill should be recorded and periodically evaluated for impairment.

33. Goodwill should be tested periodically for impairment

a. For the entity as a whole.
b. At the subsidiary level.
c. At the industry segment level.
d. At the operating segment level or one level below.

34. An entity is performing its annual test of the impairment of goodwill for a cash generating unit. The entity
has determined that the fair value of the unit exceeds the carrying amount. Which of the following
statements is true concerning the test of impairment?
a. Impairment is not indicated and no additional analysis is necessary.
b. Goodwill should be written down as impaired.
c. The assets and liabilities should be valued to determine there has been an impairment of goodwill.
d. Goodwill should be retested at the entity level.

35. An impairment loss recognized for goodwill

a. Shall not be reversed in a subsequent year.
b. May be reversed fully in a subsequent year.
c. May be reversed partly in a subsequent year.
d. Shall be reversed in a subsequent year.

36. How should research and development costs be accounted for?

a. Must be capitalized when incurred and then amortized over the useful life.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred depending upon the materiality.
 d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future use or unless contractually reimbursable.

37. Which of the following would be considered research and development?

a. Routine effort to refine an existing product
b. Periodic alteration to existing production line
c. Marketing research to promote a new product
d. Construction of prototype

38. Which of the following costs should not be capitalized?

a. Acquisition cost of equipment to be used on current and future research projects.
b. Engineering cost incurred to advance the product to the full production stage.
c. Cost incurred to file for patent.
d. Cost of testing prototype before economic feasibility has been demonstrated.

39. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product.
b. Acquisition of research and development equipment for use on a current project only.
c. Cost of marketing research for a new product.
d. Engineering activity required to advance the design of a product to the manufacturing stage.

40. Which of the following should not be considered research and development activity?
a. Adaption of an existing capability to a particular requirement or customer need.
b. Application of research finding or other knowledge to a plan for a new product.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product alternative.

PROBLEMS:
41. Queenie Company reported the following data at year-end:

Franchise P 1,500,000
Computer software 2,275,000.
Patent 1,750,000
Deferred charges 350,000
Bond sinking fund 1,200,000
Trademark 3,000,000

What total amount should be reported as intangible assets?

a. 8,525,000
b. 10,075,000
c. 8,875,000
d. 9,725,000

Solution: A.

Franchise P 1,500,000

Computer software 2,275,000.

Patent 1,750,000

Trademark 3,000,000

TOTAL P 8,525,000

42. Yasmin Company paid P3,500,000 to purchase intangible assets with the following fair value:

Internet domain name P 1,000,000

Order backlog 750,000
In-process research and development 1,250,000
Operating permit 1,000,000

In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the local
community.

What amount should be recognized as cost of the order backlog?

a. 875,000
b. 656,275
c. 750,000
d. 656,250

Solution: D.

Internet domain name (1,000,000/4,000,000) x 3,500,000 P875,000

43. Sweet Company incurred P1,600,000 of research and development costs to develop a product for which a
patent was granted at the beginning of current year.

Legal fees and other costs associated with registration of the patent totaled P300,000. At the year-end, the
entity paid P450,000 for legal fees in a successful defense of the patent.

What is the total amount that should be capitalized for the patent at year-end?
a. 2,050,000
b. 2,350,000
c. 300,000
d. 750,000

Solution: C.

Legal fees and other costs associated with registration P 300,000

44. Aynie Company acquired a patent for a drug with a remaining legal and useful life of six years on
January 1, 2015 for P5,400,000. On January 1, 2017, a new patent is received for an improved version of
the same drug. The new patent has a legal and useful life of twenty years.

What is the amortization expense for 2017?

a. 300,000
b. 180,000
c. 200,000
d. 900,000

Solution: B.

Cost – Jan. 1, 2015 P 5,400,000

Amortization for 2015 & 2016 (5.4M / 6 x 2) (1,800,000)

Carrying amount – Jan. 1, 2017 P 3,600,000

Use the following for the next two questions
Amortization for 2017 (3.6M / 20) P180,000
 Mikhail Company developed a new machine for manufacturing baseballs. Because the machine is very
valuable, the entity had it patented.

The following expenditures were incurred in developing and patenting the machine:

Purchase of special equipment to be used solely for development of the new machine P 2,000,000
Drawings required by patent office to be filed with patent application 30,000
Cost of testing prototype 300,000
Fees paid to government patent office 100,000
Research salaries and fringe benefits for engineers 350,000
Legal cost for filing patent 250,000

45. What amount of research and development cost should be expensed in the current year?
a. 2,650,000
b. 2,750,000
c. 3,030,000
d. 2,330,000

Solution: A.

Purchase of special equipment P 2,000,000

Research salaries and FB 350,000

Cost of testing prototype 300,000

TOTAL P 2,650,000

46. What amount should be capitalized as cost of patent?

a. 380,000
b. 630,000
c. 240,000
d. 400,000

Solution: A.

Legal cost for filing patent P 250,000

Fees paid to government patent office 100,000

Drawings required by patent office 30,000

TOTAL P 380,000

47. Bob Co. purchased a patent for P7,140,000 on January 1, 2014. The patent is being amortized over the
remaining legal life of 15 years expiring on January 2029.
 During 2017, the entity determined that the economic benefits of the patent would not last longer than ten
years from the date of acquisition.

What is the carrying amount of patent on December 31, 2017?

a. 4,896,000
b. 5,236,000
c. 4,284,000
d. 5,050,000

Solution: A.

Cost - Jan. 1,2014 P 7,140,000

Amortization for 2014, 2015 & 2016 (7.140M / 15 x 3) (1,428,000)

Carrying amount - Jan. 1, 2017 P 5,712,000

Amortization for 2017 (5.712M / 7) (816,000)

Carrying amount - December 31, 2017 P 4,896,000

Revised life 10 years

Years expired – 2014, 2015 & 2016 (3)

Remaining revised life 7 years

48. Pengie Company incurred the following costs during the current year:

Routine on-going efforts to refine, enrich or otherwise improve an existing product P 125,000
Design, construction and testing of preproduction models 110,000
Quality control during commercial productions including routine testing of products 150,000
Laboratory research for discovery of new knowledge 180,000

What total amount should be reported as research and development expense?

a. 235,000
b. 275,000
c. 290,000
d. 330,000

Solution: C.

Design, construction and testing 110,000

Laboratory research 180,000

49. Dolphie Company bought a franchise at the beginning of current year for P3,500,000. An independent
TOTAL P 290,000
consultant estimated that the remaining useful life of the franchise was 70 years.
 The unamortized cost of the franchise was P680,000. The entity decided to amortize the franchise over the
maximum period allowed.

What amount should be recorded as amortization of franchise for the current year?
a. 50,000
b. 50,800
c. 40,286
d. 17,000

Solution: A.

Amortization of franchise (3,500,000 / 70 years) P 50,000

50. Panpan Company acquired a trademark relating to the introduction of a new manufacturing process. The
entity incurred the following costs:

Cost of trademark P 4,500,000

Employee benefits relating to testing of new process 300,000
Expenditure on promoting the new product 50,000

What total cost should be capitalized a intangible noncurrent asset in respect of the new process?
a. 4,750,000
b. 4,800,000
c. 4,250,000
d. 4,150,000
Solution: B.

Total cost (4,500,000 + 300,000) P 4,800,000

51. Adelie Company incurred the following costs during the current year:

Research and development services performed by Key Company for Adelie P 100,000
Design, construction, and testing of preproduction prototypes 200,000
Testing in search for new products or process alternatives 250,000

What total amount should be reported as research and development expense?

a. 550,000
b. 300,000
c. 450,000
d. 100,000
Solution: A.
Research and development services performed by Taisan Company for Adelie P 100,000
 Design, construction, and testing of preproduction prototypes 200,000
Testing in search for new products or process alternatives 250,000
Research and development expense P 550,000

52. Badelie Company incurred the following costs during the current year:

Design of tools, jigs, molds, and dies involving new technology P 125,000
Modification of the formulation of a process 260,000
Trouble-shooting in connection with breakdowns during commercial
production 115,000

What total amount should be reported as research and development expense?

a. 500,000
b. 375,000
c. 285,000
d. 125,000

Solution: C.
Design of tools, jigs, molds, and dies P 125,000
Modification of the formulation of a process 260,000
Research and development expense P 285,000

53. Dolphie Company made the following expenditures during the current year:

Costs to develop computer software for internal use in Dolphie's general

management information system P 750,000
Cost of market research activities 250,000

What is the research and development expense?

a. 750,000
b. 250,000
c. 500,000
d. 1,000,000

Solution: B.
Cost of market research activities P 250,000

Questions 54 - 56 are based on the following:

 During the current year, Pengie Company incurred the following costs to develop and produce a computer
software product:

Packaging product P 1,000,000

Completion of detailed program design 500,000
Costs incurred for coding and testing to establish technological feasibility 250,000
Costs of producing product masters for training materials 2,000,000
Duplication of computer software and training materials from product masters 140,000
Other coding costs after establishment of technological feasibility 200,000
Other testing costs after establishment of technological feasibility 300,000

54. What amount should be reported as inventory?

a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 1,140,000

Solution: D.
Packaging product P 1,000,000
Duplication of computer software and training materials from product master 140,000
Inventory P 1,140,000

55. What total amount of the costs incurred should be expensed immediately?
a. 750,000
b. 500,000
c. 1,500,000
d. 1,750,000

Solution: A.
Completion of detailed program design P 500,000
Costs incurred for coding and testing to establish technological feasibility 250,000
Start-up costs to be expensed P 750,000

56. What amount should be capitalized as software cost?

a. 3,000,000
b. 3,500,000
 c. 2,500,000
d. 5,500,000

Solution: C.
Costs of producing product masters for training materials P 2,000,000
Other coding costs after establishment of technological feasibility 200,000
Other testing costs after establishment of technological feasibility 300,000
Software cost P 2,500,000

57. On January 1, 2017, Lasagna Company signed an eight-year lease for office space. The entity has the
option to renew the lease for an additional four-year period on or before January 1, 2024.

During January 2019, two years after occupying the leased premises, the entity made general
improvements costing P7,200,000 and having a useful life of ten years.

On December 31, 2019, the entity's intention as to exercise of the renewal option is uncertain.

What is the depreciation of leasehold improvement for 2019?

a. 600,000
b. 1,200,000
c. 720,000
d. 1,440,000

Solution: B.
Depreciation (7,200,000 / 6) P 1,200,000

58. Geller Company incurred the following costs in the current year:

Laboratory research aimed at discovery of new knowledge P 250,000

Advertising expense to introduce a new product 1,000,000
Quality control during commercial production 600,000

What is the total amount of research and development expense?

a. 1,000,000
b. 1,850,000
c. 250,000
d. 600,000
Solution: C.
Laboratory research aimed at discovery of new knowledge P 250,000
 59. Green Company incurred the following costs during the current year:

Start-up costs incurred when opening a new plant P 600,000

R and D equipment with useful life of four years in various R and D projects 500,000
Advertising expense to introduce a new product 1,000,000

What amount should be recorded as research and development expense?

a. 1,500,000
b. 500,000
c. 600,000
d. 2,100,000

Solution: B.
R and D equipment with useful life of four years P 500,000

60. Shawarma Company spent P3,000,000 on a new software package that is to be used only for internal use.
The amount was spent after the application development stage.

The economic life of the product is expected to be three years. The equipment on which the package is to
be used is being depreciated over six years.

What amount of expense should be reported for the first full year?
a. 3,000,000
b. 2,000,000
c. 1,000,000
d. 500,000

Solution: C.
Amortization (3,000,000 / 3) P 1,000,000

Questions 61 - 62 are based on the following:

Monkey Company has been working on creating a new tablet to compete with existing tablets. The entity
is confident it has the ability to sell the asset and show a profit.
The entity spent P2,000,000 during the first quarter of the year studying alternatives.
During the second quarter, the entity spent an additional P500,000 improving one alternative at which
point it became technologically and economically feasible.
 During the third quarter, the entity spent another P1,000,000 on the tablet making it ready for use and sale
by the end of the year.

61. What amount should be capitalized?

a. 2,000,000
b. 1,000,000
c. 3,000,000
d. 2,500,000

Solution: B.
Capitalizable cost P 1,000,000

62. What amount should expensed immediately?

a. 2,000,000
b. 1,000,000
c. 3,000,000
d. 2,500,000

Solution: D.
First quarter P 2,000,000
Second quarter 500,000
Costs charged as expense P 2,500,000

63. On January 1, 2019, Baby Company signed an eight-year lease for office space. The entity has the option
to renew the lease for an additional four-year period on or before January 1, 2026.

During January 2019, the entity incurred the following costs:

 P1,200,000 for general improvements to the leased premises with an estimated useful life of ten years.
 P690,000 for office furniture and equipment with an estimated useful life of ten years.
 P420,000 for moveable assembly line equipment with useful life of five years.

On December 31, 2019, the entity's intention as to exercise of the renewal option is uncertain.

What is the accumulated depreciation of leasehold improvement on December 31, 2019?

a. 292,500
b. 175,000
c. 150,000
d. 125,000
 Solution: C.
Accumulated depreciation - December 31, 2019 (1,200,000 / 8) P 150,000

64. At the beginning of the current year, Masbud Company purchased Fat Company at a cost that resulted in
recognition of goodwill of P1,000,000.

During the year, Masbud Company spent an additional P500,000 on expenditures designed to develop and
maintain goodwill by training and hiring new employees.

Due to these expenditures, Masbud Company estimated that the benefit period of goodwill was indefinite.

What amount should be reported as goodwill at year-end?

a. 1,000,000
b. 1,500,000
c. 500,000
d. 750,000

Solution: A.
Cost of goodwill - January 1 2019 P 1,000,000

65. At year-end, Bing Company purchased for P20 per share all 200,000 of Geller Company's outstanding
ordinary shares.

On this date, the carrying amount of net assets of the acquiree was P3,000,000.

The fair value of identifiable assets on this date was P100,000 in excess of their carrying amount.

What amount should be reported as goodwill?

a. 900,000
b. 1,000,000
c. 100,000
d. 4,000,000

Solution: A.
Acquisition cost (200,000 x 20) P 4,000,000
Fair value of net assets (3,000,000 + 100,000) (3,100,000)
Goodwill P 900,000
66. At year-end, Tribbiani Company reported assets of P5,000,000 and liabilities of P2,000,000. The carrying
amounts of the assets approximate fair value, except for land which has a fair value that is P200,000
greater than carrying amount.

On the same date, Buffay Company paid P6,000,000 to acquire Tribbiani Company.

What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. 1,000,000
b. 2,800,000
c. 2,700,000
d. 3,000,000

Solution: B.
Acquisition cost P 6,000,000
Net assets at fair value (3,000,000 + 200,000) (3,200,000)
Goodwill P 2,800,000

67. Taco Company purchased another entity for P8,000,000 at year-end. The carrying amount of the
acquiree's net assets on the date of purchase is P6,200,000.

An analysis indicated that the fair value of the acquiree's tangible assets exceeded the carrying amount by
P800,000.

What amount of goodwill should be recognized by the acquirer?

a. 1,800,000
b. 1,200,000
c. 8,000,000
d. 1,000,000

Solution: D.
Acquisition cost P 8,000,000
Net assets at fair value (6,200,000 + 800,000 (7,000,000)
Goodwill P 1,000,000

68. Taisan Company made the following expenditures relating to product Y:

Legal costs to file a patent on Product Y. Production of the finished product

would not have been undertaken without the patent P 100,000
Cost of testing the prototype 225,000
Labor and material costs incurred in producing a prototype model 775,000
 What is total amount of costs that should be expensed when incurred?
a. 325,000
b. 875,000
c. 775,000
d. 1,000,000

Solution: D.
Cost of testing the prototype P 225,000
Labor and material costs incurred in producing a prototype model 775,000
Research and development expense P 1,000,000

69. Chicharap Company incurred the following costs during the current year:

Seasonal design changes to existing products P 900,000

Modification to the formulation of a chemical product 200,000
Trouble-shooting in connection with breakdowns during commercial production 700,000

What amount should be reported as research and development expense?

a. 200,000
b. 700,000
c. 900,000
d. 1,800,000

Solution: A.
Modification to the formulation of a chemical product P 200,000

70. Boobear Company incurred the following costs related to a new solar-powered car:

Salaries of laboratory employees researching how to build the new car P 700,000
Legal fees for the patent application for the new car 200,000
Marketing research to promote the new car 950,000
Design, testing, and construction of prototype 300,000
What amount should be reported as research and development expense for the current year?
a. 950,000
b. 1,150,000
c. 1,000,000
d. 300,000
Solution: C.
Salaries of laboratory employees researching how to build the new car P 700,000
Design, testing, and construction of prototype 300,000
Research and development expense P 1,000,000