Exam 9: Intangible Assets, Goodwill, Mineral Resources, and Government Grants

Lilly Limited is planning to enlarge its factory in an economically challenged area of Canada. The federal, provincial, and municipal governments are all keen to assist the firm in making this investment successful, and hopefully generate permanent and significant economic and social benefits for the region. Collaboratively the three levels of government and the company have made the following commitments: i. Lilly will build a factory that will cost $90 million. ii. The city will donate the land for the factory, which has a fair value of $6,000,000. Upon completing construction, the legal title of the land will be transferred to Lilly. iii. For the next five years, the city will reduce the property and municipal taxes the company has to pay on the new factory by 15%. It is estimated that these taxes would be $2,200,000 per year before the discount. iv. The federal government will provide a forgivable loan of $7,500,000 to assist in the financing of the factory. The loan will be forgiven over five years if the company employs at least 220 workers per year in the new factory. v. For the next five years, the provincial government will provide a training subsidy of $2,500,000 a year for the employment and skill development of local residents. vi. The federal government will give Lilly a $1,200,000 grant immediately for having had a factory in the region for the past 10 years. vii. The federal government will give Lilly $15,000,000 in five years if it maintains an average workforce of 920 workers employed at the new factory. During the first year an average of 235 workers were employed, as the factory was in the start-up stage. Required: a. Prepare journal entries to record each of the seven items described above for the first year. Assume all estimates and expectations for the first year are correct and the factory is built and operational in the first year. Lilly Limited uses the net method to record grants. No depreciation will be recorded in the first year. b. What will be the annual depreciation expense for the factory starting in year two? Lilly Limited uses the net method to record grants. The factory is expected to have useful life of 30 years (excluding the first year in the start-up phase)and no material residual value. The company uses straight-line depreciation. c. By how much was net income increased because of government assistance in the first year? For the second year, assume all continuing conditions to be eligible for the grants are met. How much was net income increased by in the second year? Ignore income taxes.

Which statement is not correct?

Listed below are several transactions that occurred during the year. In each case, all the amounts were debited to an account called "R and D costs." At the end of the year the company wants this account closed out and the amounts either expensed or capitalized to an asset account called "Development costs." a. During the year $34,000,000 was paid to staff in the research division of a pharmaceutical firm. Supplies used totaled $3,000,000. Rent on the research building totaled $1,000,000. Utilities totaled $1,400,000. Head office allocated $1,500,000 in general overhead to the research division. The total spent on research was $40,900,000. The company is completing five different projects investigating whether five different drug combinations effectively reduce cancer in patients. One of the five drugs was very successful in most cases. Market research shows there is a huge market for this drug. The Board has committed resources to complete the project and market the drug; 10% of the total research staff is working on the successful drug combination. b. During the year $22,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer. The drug was very successful in most cases. Management is committed to continuing this project and has secured financial and technical resources to see if the drug will prove to be commercially viable. c. Last year $70,000,000 in costs were capitalized as all the development cost criteria were satisfied for a specific drug combination. During the current year a further $10,000,000 was spent that can be directly attributed to this drug's development. Near the end of the year a competitor surprisingly started selling a similar drug. The first-mover advantage of the competing drug seriously challenges the market usefulness and success of the drug this company is researching. Management and the Board are nonetheless financially and strategically committed to launching their drug in 18 months. Required: Prepare the journal entry required for each case. Explain your proposed treatment

Patent Corp., a publicly accountable entity, purchased the following assets: How much, if any, of the costs can be capitalized as intangible assets?

Which statement is correct?

GoodResources incurred the following costs: How much would be recorded as depletion expense under the full cost method?

GoodResources incurred the following costs: How much would be capitalized as "property, plant or equipment" under the full cost method?

Which criteria under IAS 38 would be met if there is a "project budget that outlines the specific costs, so the costs of the project are likely to be measured with sufficient reliability"?

Patent Corp., a publicly accountable entity, purchased a company with the following assets and liabilities for $100,000: How much goodwill should be recorded?

Kryan Corp. mines and produces aluminum. During 2012, the company explored two new sites and evaluated them for aluminum ore potential. By the December 31, 2012 year-end, both sites remained in the evaluation stage. During 2013, evaluation of site Atlanta was completed and the site was deemed to have sufficient quantities of ore; consequently, development of the site began. However, site Blenty was determined to have ore concentrations too low to be commercially viable. The following is the cost of exploration and evaluation incurred on the two sites: Required: Record the journal entries in 2012 and 2013 relating to the exploration and evaluation costs using the full cost method.

Soorya Resources incurred the following costs: How much would be capitalized as "intangible assets" under the successful efforts method?

Soorya Resources incurred the following costs: How much would be recorded as depreciation expense under the successful efforts method?

Which statement is correct?

The following transactions occurred in fiscal 2012: •Synthesize Inc. exchanged machinery with Energize Corp. •Synthesize Inc. purchased equipment by signing a 5 year non-interest bearing note payable for $200,000. The implicit rate of interest was 5%. •Synthesize received a government grant of $10,000 to help purchase the equipment. Required: a)Assuming the machinery exchange has commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. b)Assuming the machinery exchange does not have commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. c)Prepare the required journal entry to record the purchase of the equipment purchased by the non-interest bearing note. d)Prepare the required journal entries to record the government grant using both the gross method and the net method.

Which statement describes the "full cost" method?

New Ventures Corp., a publicly accountable entity, incurred the following costs in its research and development division: At April 30, 2012, New Ventures determined that the project was technically feasible and commercially viable. New Ventures had sufficient resources and intentions to complete the project and was confident that there was demand in the marketplace for the product. How much, if any, of the costs can be capitalized for fiscal 2012?

New Ventures Corp., a publicly accountable entity, capitalized the following costs: Which statement is correct?

SuperIdeas Corp, a publicly accountable entity, incurred the following costs in its research and development division: At August 1, 2012, SuperIdeas determined that the project was technically feasible but not commercially viable. How much, if any, of the costs can be capitalized for fiscal 2012?

Patent Corp., a publicly accountable entity, incurred the following costs: How much of the costs can be capitalized as intangible assets?

GoodResources incurred the following costs: How much would be recorded as depreciation expense under the full cost method?