Question 1

Define the following terms.
(a) Goodwill 
(b) Negative goodwill

Accepted Answer

(a) Varying approaches are used to define goodwill. They are:

$\bullet$Goodwill should be measured initially as the excess of the fair value of the acquisition cost over the fair value of the net assets acquired.
$\bullet$Goodwill is sometimes defined as one or more unidentified intangible assets and identifiable intangible assets that are not reliably measurable. Examples of elements of goodwill include new channels of distribution, synergies of combining sales forces, and a superior management team.
$\bullet$Goodwill may also be defined as the intrinsic value that a business has acquired beyond the mere value of its net assets whether due to the personality of those conducting it, the nature of its location, its reputation, or any other circumstance incidental to the business and tending to make it permanent. Another definition is the capitalized value of the excess of estimated future profits of a business over the rate of return on capital considered normal in the industry.
(b) Negative goodwill develops when the fair value of the assets purchased is higher than the cost. This situation may develop from a market imperfection. In this case, the seller would have been better off to sell the assets individually than in total. However, situations do occur (e.g., a forced liquidation or distressed sale due to the death of the company founder), in which the purchase price is less than the value of the identifiable net assets.

Question 2

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

Accepted Answer

A)  Associating cause and effect 
B)  Systematic and rational allocation 
C)  Income tax minimization 
D)  Immediate recognition as an expense 
A)  Associating cause and effect 
B)  Systematic and rational allocation 
C)  Income tax minimization 
D)  Immediate recognition as an expense D

Question 3

Intangible assets may be internally generated or purchased from another party. In either case, what costs should be included in the initial valuation of the asset is an issue.

Instructions

(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a "basket purchase." Provide a numerical example involving intangibles being acquired for a total price of $90,000.

Accepted Answer

(a) The typical costs included in the purchase of an intangible asset are: purchase price, legal fees, and other incidental expenses.
(b) In a non-cash acquisition of an intangible asset, the initial cost of the intangible is either the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.
(c) When several intangible assets are acquired in a "basket purchase", the cost of the individual assets is based on their relative fair values. For example:

Question 4

Dennis Company purchases Miles Company for $4,200,000 cash on January 1, 2015. The book value of Miles Company's net assets reported on its December 31, 2014 financial statement was $3,800,000. An analysis indicated that the fair value of Miles's tangible assets exceeded the book value by $600,000, and the fair value of identifiable intangible assets exceeded book value by $320,000. What amount of gain or goodwill is recognized by Dennis?

Accepted Answer

A)  $920,000 gain. 
B)  $400,000 goodwill. 
C)  $520,000 gain. 
D)  $520,000 goodwill. 
A)  $920,000 gain. 
B)  $400,000 goodwill. 
C)  $520,000 gain. 
D)  $520,000 goodwill.

Question 5

While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.

Accepted Answer

A) True 
 B)False

Question 6

Internally generated intangible assets are initially recorded at fair value.

Accepted Answer

A) True 
 B)False

Question 7

On January 1, 2011, Russell Company purchased a copyright for $1,500,000, having an estimated useful life of 16 years. In January 2015, Russell paid $225,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2015, should be

Accepted Answer

A)  $0. 
B)  $93,750. 
C)  $107,812. 
D)  $112,500. 
A)  $0. 
B)  $93,750. 
C)  $107,812. 
D)  $112,500.

Question 8

As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into

Accepted Answer

A)  two components, the research phase and the production phase. 
B)  two components, the research phase and the development phase. 
C)  three components, the planning phase, the research phase and the production phase. 
D)  three components, the analysis phase, the development phase and the production phase. 
A)  two components, the research phase and the production phase. 
B)  two components, the research phase and the development phase. 
C)  three components, the planning phase, the research phase and the production phase. 
D)  three components, the analysis phase, the development phase and the production phase.

Question 9

Operating losses incurred during the start-up years of a new business should be

Accepted Answer

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. 
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.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The intangible asset goodwill may be

Accepted Answer

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. 
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.

Question 12

Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  other assets. 
B)  indirect costs. 
C)  goodwill. 
D)  direct costs. 
A)  other assets. 
B)  indirect costs. 
C)  goodwill. 
D)  direct costs.

Question 14

According to a Financial Accounting Standards Board Statement, how are research and development costs accounted for?

Accepted Answer

A)  They must be capitalized when incurred and then amortized over their estimated useful lives. 
B)  They must be expensed in the period incurred. 
C)  They may be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved. 
D)  They 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. 
A)  They must be capitalized when incurred and then amortized over their estimated useful lives. 
B)  They must be expensed in the period incurred. 
C)  They may be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved. 
D)  They 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.

Question 15

Thompson Company incurred research and development costs of $100,000 and legal fees of $30,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?

Accepted Answer

A)  $ -0-. 
B)  $ 3,000. 
C)  $ 6,500. 
D)  $13,000. 
A)  $ -0-. 
B)  $ 3,000. 
C)  $ 6,500. 
D)  $13,000.

Question 16

Which of the following types of intangible assets result from interactions and relationships with outside parties?

Accepted Answer

A)  Marketing-related intangible assets 
B)  Customer-related intangible assets 
C)  Contract-related intangible assets 
D)  Artistic-related intangible assets 
A)  Marketing-related intangible assets 
B)  Customer-related intangible assets 
C)  Contract-related intangible assets 
D)  Artistic-related intangible assets

Question 17

IFRS and U.S. GAAP

Accepted Answer

A)  are diametrically opposed in their accounting for impairments of assets held for disposal. 
B)  are similar in the accounting for impairments of assets held for disposal. 
C)  are moving toward common ground in their accounting for impairments of assets held for disposal. 
D)  are moving further apart in their accounting for impairments of assets held for disposal. 
A)  are diametrically opposed in their accounting for impairments of assets held for disposal. 
B)  are similar in the accounting for impairments of assets held for disposal. 
C)  are moving toward common ground in their accounting for impairments of assets held for disposal. 
D)  are moving further apart in their accounting for impairments of assets held for disposal.

Question 18

Which of the following would be considered research and development costs?

Accepted Answer

A)  Routine efforts to refine an existing product. 
B)  Periodic alterations to existing production lines. 
C)  Marketing research to promote a new product. 
D)  Construction of prototypes. 
A)  Routine efforts to refine an existing product. 
B)  Periodic alterations to existing production lines. 
C)  Marketing research to promote a new product. 
D)  Construction of prototypes.

Question 19

Which of the following is reported as part of discontinued operations?

Accepted Answer

A)  Amortization expense. 
B)  Impairment losses for intangible assets. 
C)  Research and development costs. 
D)  None of these answer choices are correct. 
A)  Amortization expense. 
B)  Impairment losses for intangible assets. 
C)  Research and development costs. 
D)  None of these answer choices are correct.

Question 20

The following costs are incurred during the research and development phases of a laser bone scanner   Identify which of these are research phase items and will be immediately expensed underU.S. GAAP and IFRS.

Accepted Answer

The answer of The following costs are incurred during the...

Exam 12: Intangible Assets

Define the following terms. (a) Goodwill (b) Negative goodwill

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

While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.

Internally generated intangible assets are initially recorded at fair value.

On January 1, 2011, Russell Company purchased a copyright for $1,500,000, having an estimated useful life of 16 years. In January 2015, Russell paid $225,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2015, should be

As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into

Operating losses incurred during the start-up years of a new business should be

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

The intangible asset goodwill may be

Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.

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

According to a Financial Accounting Standards Board Statement, how are research and development costs accounted for?

Thompson Company incurred research and development costs of $100,000 and legal fees of $30,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?

Which of the following types of intangible assets result from interactions and relationships with outside parties?

IFRS and U.S. GAAP

Which of the following would be considered research and development costs?

Which of the following is reported as part of discontinued operations?

The following costs are incurred during the research and development phases of a laser bone scanner Identify which of these are research phase items and will be immediately expensed underU.S. GAAP and IFRS.

Financial Accounting and Accounting Standards

Conceptual Framework for Financial Reporting

The Accounting Information System

Income Statement and Related Information

Balance Sheet and Statement of Cash Flows

Accounting and the Time Value of Money

Cash and Receivables

Valuation of Inventories: a Cost-Basis Approach

Inventories: Additional Valuation Issues

Acquisition and Disposition of Property, Plant, and Equipment

Depreciation, Impairments, and Depletion

Current Liabilities and Contingencies

Long-Term Liabilities

Stockholders Equity

Dilutive Securities and Earnings Per Share

Investments

Revenue Recognition

Accounting for Income Taxes

Accounting for Pensions and Postretirement Benefits

Accounting for Leases

Accounting Changes and Error Analysis

Statement of Cash Flows

Full Disclosure in Financial Reporting

Appendix

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