Deck 8: Accounting for Intangibles

Question 1

Because intangible assets have no physical form:

A)They are not subject to the recognition criteria of other assets and may be recorded if they satisfy the three elements of the definition.
B)They must be expensed immediately, as assets must be able to be measured.
C)They have no real value and should be excluded from accounting reports.
D)None of the given answers are correct.

Answer 1

D

Question 2

International convergence has meant that there is no longer one specific standard related to intangibles

Answer 2

False

Question 3

The revaluation model requires all intangible assets in the same class to have a fair value determined by reference to an active market.

Answer 3

True

Question 4

There is a concern that research and development may be reduced as a result of the new requirements in IAS 38 because:

A)Companies will not have the cash available to pay for the research expenses up-front.
B)Recognising expenses early will allow for larger profits later, which will help smaller firms.
C)The 'horizon problem' suggests managers will not invest in long-term projects that do not immediately increase profits.
D)Shareholders are only interested in short-term profits and will not be impressed by strategies that attempt to increase the long-term value of their shares.

Question 5

Which of the following statements is correct with respect to research and development expenditures in accordance with IAS 38?

A)Activities aimed at obtaining knowledge that is likely to produce a viable commercial product can be capitalised.
B)Formulation, design, evaluation and final selection of alternative materials to be used in producing a viable commercial product can be capitalised.
C)Design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production can be capitalised.
D)Search for, evaluation and final selection of, applications of research findings and other knowledge can be capitalised.

Question 6

IAS 38 permits the use of revaluation model for intangible assets if there is an active market to determine fair value.

Question 7

Walking on Air is developing a new form of individual transport that will act like a personal hovercraft.Costs for the year ended 30 June 2012 are: $$\begin{array} { | l | l | } \hline \text { Research } & \$ 950000 \\\hline \text { Development costs } & \$ 650000 \\\hline\end{array}$$ Due to the high individual cost of items,sales of this 'prototype' model will be small and generate $100 000 per year over the next 4 years.Following that time,a new and cheaper consumer model will be under production based on the research developed for the prototype; however,it will require additional development expenditure.How much of the research and development cost should be expensed in the period ended 30 June 2012 and what amount should be amortised in the year ended 30 June 2006 (rounded to the nearest dollar)?

A)Expensed in 2012: $1 200 000; amortisation in 2014: $100 000
B)Expensed in 2012: $950 000; amortisation in 2014: $216 667
C)Expensed in 2012: $950 000; amortisation in 2014: $65 000
D)Expensed in 2012: $1 200 000, amortisation in 2014: $30 000

Question 8

IAS 38 states that intangible assets:

A)may not be revalued and must be amortised over their useful lives.
B)are only able to be revalued if they have been internally generated and there is an active market for them.
C)may only be revalued to their fair value as assessed by a licensed valuer.
D)may be measured by using either the cost model or the revaluation model.

Question 9

IAS 38 prohibits the recognition of intangible assets using the revaluation model.

Question 10

Examples of elements of a business that commonly make up goodwill are:

A)patents and licences.
B)trademarks and brand names.
C)research and development.
D)established reputation and loyal customers.

Question 11

According to IAS 38 on intangible assets,if an entity buys another entity separate values can be assigned to purchased goodwill and to a brand name.

Question 12

In order to determine whether or not expenditure should be treated as an intangible asset,the relevant test to apply is:

A)It should be recognised when (a) it is definite that future economic benefits will eventuate or (b) the asset possesses a cost or other value that can be measured reliably.
B)It should be recognised if (a) the expenditure is with an external party in an arm's length transaction for a separately identifiable intangible asset or (b) the intangible asset arises as the difference between the net tangible assets of an entity and the price paid for that entity.
C)It should be recognised if (a) it is part of a specified plan by management to develop and maintain a separately identifiable asset or (b) the intangible asset was purchased in an arm's length transaction and is actively traded in a market.
D)It should be recognised when and only when (a) it is probable that future economic benefits will eventuate and (b) the asset possesses a cost or other value that can be measured reliably.

Question 13

If the fair value of a revalued intangible asset can no longer be determined by reference to an active market,IAS 36 requires the use of the cost model.

Question 14

Internally generated identifiable intangible assets may be recognised for financial accounting purposes in Europe.

Question 15

An intangible asset may be recorded:

A)if acquired from an external party at a cost.
B)if it is internally generated and fits the definition of an asset and meets the associated recognition criteria.
C)at a value other than cost if that value more reliably records the worth of the intangible asset.
D)at the cost of the asset, which must exclude any additional expenditure required to prepare the asset for use.

Question 16

Glass 4 Windows is involved in a research and development project to create a filtering window that removes the need for curtains.For the current year ended 30 June 2011 expenditure on the project is as follows: $$\begin{array} { | l | l | } \hline \text { Research } & \$ 235000 \\\hline \text { Development costs } & \$ 350000 \\\hline\end{array}$$ The window is expected to earn revenues of $70 000 per year for the 10 years commencing 1 July 2011.Assuming straight-line amortisation,how much of the research and development cost should be expensed this period and what amount should be amortised in the year ended 30 June 2014?

A)Expensed in 2011: $58 500; amortisation in 2014: $58 500
B)Expensed in 2011: $235 000; amortisation in 2014: $35 000
C)Expensed in 2011: $235 000; amortisation in 2014: $28 000
D)Expensed in 2011: $350 000; amortisation in 2014: $23 500

Question 17

Where a revaluation occurs,it is to be to the fair value of the asset.

Question 18

Research of market potential prior to the launch of a product is permissible to be capitalised as an intangible asset.

Question 19

The requirement of IAS 38 in relation to the amortisation of development cost is that:

A)It is to be amortised straight-line over a period not greater than 20 years.
B)It is to be amortised from the time of deferral so as to match the cost to the related benefits.
C)It is to be amortised using an accelerated depreciation rate over a period not exceeding 10 years.
D)It is to be amortised from the time the asset is available for use and shall reflect the consumption of the economic benefits by the entity.

Question 20

Continuously Contemporary Accounting (CoCoA)emphasises an entity's ability to adapt.Therefore goodwill is considered an important asset in this model.

Question 21

The release of IAS 38 has had what impact on the methods of amortising goodwill?

A)The choice to use the inverted sum-of-digits method was phased out over a period of 15 years, to be replaced by straight-line depreciation.
B)The option to amortise goodwill was removed and replaced with annual impairment testing.
C)Entities were given the option of continuing to amortise goodwill or to subject it to impairment testing each year.
D)All entities were required to amortise goodwill over 20 years using the straight-line method to allow comparisons.

Question 22

Which of the following statement(s)in regard to goodwill is/are correct in accordance with IAS 36 Impairment of Assets?

A)An impairment loss must be recognised when the carrying amount of a cash-generating unit exceeds its recoverable amount.
B)An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
C)Value in use is the present value of future cash flows expected to be derived from a cash-generating unit.
D)All of the given statements are correct.

Question 23

IAS 38 contains some elements that seem to be reactions to opportunistic behaviour by preparers of accounts and to the degree of uncertainty surrounding goodwill as an unidentifiable intangible asset.These elements include:

A)the prohibition on recording internally generated goodwill.
B)the requirement to use a specific rate of amortisation.
C)the specification of impairment testing.
D)the prohibition on recording internally generated goodwill and the specification of impairment testing.

Question 24

Earth Ltd acquired Moon Plc on 1 July 2013 for the sum of £100 000.On the same date Moon Plc has the following assets and liabilities: $$\begin{array} { | l | r | r | r | } \hline & \text { Carrying amount } & \text { Recoverable amount } & \text { Fair value } \\\hline \text { Assets: } & & & \\\hline \text { Land } & 100000 & 130000 & 150000 \\\hline \text { Machinery } & 50000 & 30000 & 40000 \\\hline \text { Cash } & 20000 & & \\\hline \text { Liabilities: } & & & \\\hline \text { Loan } & 105000 & & \\\hline \text { Contingent liabilities } & 80000 & & \\\hline\end{array}$$ What is the value of goodwill,if any?

A)They are not required to recognise goodwill.
B)£35 000
C)£75 000
D)surplus of £5000

Question 25

During 2001 the Financial Accounting Standards Board in the United States indicated they would look to change a requirement for the treatment of goodwill.That change is:

A)to remove the requirement to amortise goodwill and replace it with a requirement to write down goodwill to reflect any impairment in value.
B)to allow the recognition of internally generated goodwill.
C)to extend the period over which goodwill may be amortised.
D)to allow the inverted sum-of-digits method of amortisation.

Question 26

Prior to the introduction of impairment testing companies had attempted to manipulate their financial statements through amortisation:

A)because where managers were rewarded based on profits attained it was in their best interests to reduce expenses while they held that position.
B)because contractual arrangements such as debt covenants often required asset values to be maximised.
C)because recording higher amortisation expenses allowed profits to be reduced, thus allowing tax payments to be minimised without any cash outflows.
D)because where managers were rewarded based on profits attained it was in their best interests to reduce expenses while they held that position and because contractual arrangements such as debt covenants often required asset values to be maximised.

Question 27

Big Ltd has purchased 100% of Little Ltd for a cash payment of $800 000.The additional costs to Big Ltd to complete the purchase were $3000.An extract from the statement of financial position for Little Ltd at the date of acquisition shows: Additional information:
The assets and liabilities of Little Ltd are stated at fair value except that:
Land and buildings have a fair value of $300 000
Accounts receivable have a fair value of $20 000.
Little owns a licence that has not been recorded in the financial statements.Its fair value is $150 000.
What is the amount of purchased goodwill that has been acquired by Big Ltd?

A)$242 000
B)$344 000
C)$252 000
D)$102 000

Question 28

Purchased goodwill is recognised as the amount of:

A)the excess of the cost of acquisition incurred by an acquirer over the fair value of the identifiable net assets acquired.
B)the difference between the cost of acquisition of a subsidiary and the realisable value of net assets of the subsidiary.
C)the lower of the sum of related expenditures on advertising and promotion undertaken in the last two years by the subsidiary being purchased and the independent valuation of the market value of that subsidiary's goodwill.
D)the excess of the cost of acquisition incurred by an acquirer over the fair value of the identifiable net assets and contingent liabilities acquired.

Question 29

Castle Co Ltd is working on three research projects.Project Jonah is government-sponsored research on synthesising currently available research results on the possible triggers of asthma attacks.Project Beta involves researching the genetic tags associated with heart disease based on the genome project.A test to identify the predisposition to heart disease in children has been developed and will be on the market in 2013.Since 2011 research and development expenditures on this project are applied development costs only.Project Sigma is cutting edge research being conducted to try and discover a means of 'disassembling' molecules and then 'reassembling' them in their original form.The company hopes that this work will lay the basis for future dreams of teleportation as a method of transport.Details of expenditures and recoverable amounts expected beyond a reasonable doubt at this time are: What is the total research and development deferral for each project as at the end of the year 2012?

A)Jonah: $15 000; Beta $90 000; Sigma $0
B)Jonah: $20 000; Beta $50 000; Sigma $30 000
C)Jonah: $15 000; Beta $70 000; Sigma $50 000
D)Jonah: $0; Beta $90 000; Sigma $0

Question 30

Which of the following statements is correct with respect to intangible assets?

A)Internally generated publishing titles may be revalued if fair value is determined by reference to an active market.
B)Purchased goodwill should be amortised over a period of 20 years.
C)Internally generated brands are not recognised as intangible assets because expenditures in these assets are not distinguishable from the cost of developing the business as a whole.
D)Internally generated brands are recognised as intangible assets because expenditures in these assets are not distinguishable from the cost of developing the business as a whole.

Question 31

Broadbeach Plc is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Plc for the year ended 30 June 2013: $$\begin{array} { | l | r | r | r | r | } \hline\text { (in dollars) } & \text { Goodwill } & \begin{array} { c } \text { Accumulated } \\\text { impairment loss }\end{array} & \begin{array} { c } \text { Carrying amount } \\\text { of CGU }\end{array} & \begin{array} { c } \text { Recoverable amount } \\\text { of CGU }\end{array} \\\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \\\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \\\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \\\hline\end{array}$$ What is the carrying amount of goodwill as at 30 June 2013 consistent with IAS 36 Impairment of Assets?

A)Zero
B)£100 000
C)£140 000
D)£150 000

Question 32

Which of the following statements in regard to goodwill is/are correct in accordance with IAS 36 Impairment of Assets?

A)Goodwill may be amortised when it has a finite life.
B)Goodwill is subjected to impairment testing every three years.
C)Upward revaluation of goodwill is permitted as long as it is a reversal of prior years' impairment losses.
D)None of the given statements are correct.

Question 33

As part of adopting IFRS,goodwill acquired in a business combination is no longer amortised.Instead,the acquirer shall test goodwill for impairment (IFRS 3 Business Combinations).When is goodwill considered to be impaired?

A)If the recoverable amount of the cash generating unit is greater than the unit's carrying amount.
B)If the recoverable amount of the cash generating unit is less than the unit's carrying amount.
C)If the value in use of the cash generating unit is greater than the unit's carrying amount.
D)If the fair value less costs to sell is greater than the unit's carrying amount.

Question 34

Buster Plc had purchased goodwill to the value of €100 000 recorded in its consolidated financial statements.The goodwill has been determined to have an indefinite useful life.However,one year later Buster Plc's cash generating units has been determined to have incurred an impairment loss of €13 000.What is the appropriate action for Buster limited to comply with IAS 38 Intangible Assets and IAS 36 Impairment of Assets?

A)Write-off goodwill in its entirety as goodwill no longer exists.
B)Recognise impairment loss of €13 000 and credit goodwill.
C)Amortise goodwill for 20 years using straight-line method.
D)Recognise impairment loss of €13 000 and credit equity.

Question 35

Which of the following combination best demonstrates the value of goodwill?
I)purchase consideration of subsidiary
II)book value of net assets held by subsidiary
III)fair value of net identifiable assets
IV)contingent liabilities

A)I less II
B)I less III
C)I less (II-IV)
D)I less (III-IV)

Question 36

After initial recognition,the acquirer shall recognise goodwill at:

A)historical cost.
B)fair value.
C)cost less accumulated amortisation.
D)cost less accumulated impairment losses.

Question 37

Which of the following expenses are likely to satisfy the definition of an asset,and hence may be capitalised as an intangible asset?

A)expenses incurred to develop a brand name
B)advertising expenses
C)research expenses
D)none of the given answers

Question 38

Serendipity Ltd is working on two independent research and development projects.Project A has recently been fruitful and the resulting product has been marketed,unfortunately with limited success.Development of the product is continuing in an effort to improve its marketability.Project B is due for product release in one year's time.The initial marketing surveys and forward contracts suggest that the outcome for this product is very favourable.The following information relates to the expenditures for the current period and budgeted figures for the next 3 years.All research costs in prior periods were expensed.The budgeted figures are considered accurate beyond a reasonable doubt. What is the research and development deferral for each project in 2013?

A)Project A $5000; Project B $0
B)Project A $47 000; Project B $131 000
C)Project A $30 000; Project B $90 000
D)Project A $62 000; Project B $131 000

Question 39

Broadbeach Plc is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Plc for the year ended 30 June 2013. $$\begin{array} { | l | r | r | r | r | } \hline & \text { Goodwill } & \begin{array} { c } \text { Accumulated } \\\text { impairment loss }\end{array} & \begin{array} { c } \text { Carrying amount } \\\text { of CGU }\end{array} & \begin{array} { c } \text { Recoverable amount } \\\text { of CGU }\end{array} \\\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \\\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \\\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \\\hline\end{array}$$ In accordance with IAS 36,what is the net effect of above goodwill accounts on the statement of comprehensive income and statement of financial position of Broadbeach Plc?

A) $$\begin{array} { | l | l | } \hline \begin{array} { l } \text { Statement of comprehensive } \\\text { income }\end{array} & \begin{array} { l } \text { Statement of financial } \\\text { position }\end{array} \\\hline \text { Increase } & \text { Increase } \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline\begin{array} { l } \text { Statement of comprehensive } \\\text { income }\end{array} & \begin{array} { l } \text { Statement of financial } \\\text { position }\end{array} \\\hline \text { Decrease } & \text { Decrease } \\\hline\end{array}$$
C) $$\begin{array} { | l | l | } \hline\begin{array} { l } \text { Statement of comprehensive } \\\text { income }\end{array} & \begin{array} { l } \text { Statement of financial } \\\text { position }\end{array} \\\hline \text { Increase } & \text { Decrease } \\\hline\end{array}$$
D) $$\begin{array} { | l | l | } \hline \begin{array} { l } \text { Statement of comprehensive } \\\text { income }\end{array} & \begin{array} { l } \text { Statement of financial } \\\text { position }\end{array} \\\hline \text { Decrease } & \text { Increase } \\\hline\end{array}$$

Question 40

Far-flung Co Ltd purchases Local Co Ltd for the purchase consideration of: $\begin{array}{|l|l|}\hline \text { Cash } & \$ 100,000 \\\hline \text { Shares in Far-flung Co Ltd } & 50000 \text { shares with a market value of } \$ 1.60 \\\hline{\text { Land }} & \text { Carrying value of } \$ 90,000 \\\hline& \text { Fair value of } \$ 100,000\\\hline\end{array}$ Far-flung incurred legal fees of $6000 to complete the acquisition.Local Co Ltd had the following assets and liabilities at the time of the purchase $$\begin{array} { | l | r | r | r | } \hline & \text { Carrying amount } & \text { Recoverable amount } & \text { Fair value } \\\hline \text { Assets: } & & & \\\hline \text { Land } & 100000 & 150000 & 200000 \\\hline \text { Machinery } & 50000 & 80000 & 85000 \\\hline \text { Cash } & 20000 & & \\\hline \text { Liabilities: } & & & \\\hline \text { Loan } & 105000 & & \\\hline\end{array}$$ What is the value of goodwill,if any?

A)$0
B)$80 000
C)$141 000
D)$86 000

Question 41

Outline the requirements of IAS 38 on recognition and measurement of research and development activities.

Question 42

Explain why intangible assets are required to be reported as a separate class of asset in the statement of financial position.

Question 43

Brighton Shores Plc has a cash generating unit (CGU)and has been assessed for impairment and it has determined an impairment loss of £100 000. The following information relates to the assets as at 30 June 2012. $$\begin{array} { | l | r | r | } \hline & \text { Carrying amount } & \text { Recoverable amount } \\\hline \text { Buildings } & 800000 & 900000 \\\hline \text { Equipment } & 200000 & 150000 \\\hline \text { Goodwill } & 50000 & \\\hline\end{array}$$ In accordance with IAS 36 Impairment of Assets what should be the carrying amount of equipment as at 30 June 2014?

A)£0
B)£100 000
C)£150 000
D)£190 000

Question 44

Discuss the benefits of subjecting goodwill to impairment testing as opposed to amortisation.In your answer,consider the relevance and faithfully represented qualitative characteristics of financial information.

Question 45

Explain the difference between an 'infinite life' and an 'indefinite life'.

Question 46

The gain or loss on the disposal of an intangible asset is determined as the difference between:

A)net proceeds from the disposal and the amortised amount.
B)net proceeds from the disposal and the recoverable amount.
C)net proceeds from the disposal and the carrying amount.
D)net proceeds from the disposal and the initial cost.

Question 47

Brighton Shores Plc has a cash generating unit (CGU)and has been assessed for impairment and it has determined an impairment loss of £100 000. The following information relates to the assets as at 30 June 2014. $$\begin{array} { | l | r | r | } \hline & \text { Carrying amount } & \text { Recoverable amount } \\\hline \text { Buildings } & 800000 & 900000 \\\hline \text { Equipment } & 200000 & 150000 \\\hline \text { Goodwill } & 50000 & \\\hline\end{array}$$ In accordance with IAS 36 Impairment of Assets what should be the carrying amount of buildings as at 30 June 2014?

A)£720 000
B)£760 000
C)£800 000
D)£900 000

Question 48

Explain why research expenditures and expenditures on internally generated such as,brands,mastheads and publishing titles are not capitalised regardless of whether they are likely to generate future economic benefits.

Question 49

Which of the following is not a directly attributable cost of research and development?

A)costs of employee benefits arising from the generation of the intangible asset
B)fees to register a legal right
C)costs of materials consumed in generating the intangible asset
D)All of the given answers are correct.

Question 50

Discuss the considerations outlined in IAS 38 on revaluation of intangible assets.What are the implications of this standard on the relevance of financial information?

Question 51

Shelley Beach Plc has one cash generating unit (CGU)and it has been determined that the CGU has incurred an impairment loss of £80 000 for the year ended 30 June 2014. The carrying amounts of the assets as at 30 June 2014 are as follows: $$\begin{array} { | l | r | } \hline & \text { Carrying amount } \\\hline \text { Buildings } & 300000 \\\hline \text { Equipment } & 300000 \\\hline \text { Goodwill } & 20000 \\\hline \text { Total } & \underline { 620000 } \\\hline\end{array}$$ In accordance with IAS 36 Impairment of Assets,what should be the carrying amounts for buildings,equipment and goodwill as at 30 June 2014,respectively?

A)£240 000; £300 000; £0
B)£260 000; £260 000; £20 000
C)£270 000; £270 000; £0
D)£300 000; £300 000; £20 000

Question 52

Discuss the factors considered to determine amortisation of deferred development costs.

Question 53

Explain how IAS 38 Intangible Assets may advantage European companies with heavy research and development activities.Contrast this with US companies.

Question 54

Shelley Beach Plc has one cash generating unit (CGU)and it has been determined that the CGU has incurred an impairment loss of £80 000 for the year ended 30 June 2014. The carrying amounts of the assets as at 30 June 2014 are as follows $$\begin{array} { | l | r | } \hline & \text { Carrying amount } \\\hline \text { Buildings } & 300000 \\\hline \text { Equipment } & 300000 \\\hline \text { Goodwill } & 20000 \\\hline \text { Total } & 620000 \\\hline\end{array}$$ In accordance with IAS 36 Impairment of Assets,what is the appropriate journal entry to recognise the impairment loss for Shelley Beach Plc?

A) $$\begin{array} { | c | l | l | l | } \hline \mathrm { Dr } & \text { Impairment loss } & 80000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-buildings } & & 30000 \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-equipment } & & 30000 \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-goodwill } & & 20000 \\\hline\end{array}$$
B) $$\begin{array} { | c | l | r | l | } \hline \text { Dr } & \text { Impairment loss-identifiable intangible assets } & 80000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-buildings } & & 40000 \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-equipment } & & 40000 \\\hline\end{array}$$
C) $$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Impairment loss-identifiable intangible assets } & 60000 & \\\hline \mathrm { Dr } & \text { Impairment loss-goodwill } & 20000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-buildings } & & 30000 \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-equipment } & & 30000 \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-goodwill } & & 20000 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | r | l | } \hline \mathrm { Dr } & \text { Impairment loss } & 80000 & \\\hline \mathrm { Cr } & \text { Buildings } & & 30000 \\\hline \mathrm { Cr } & \text { Equipment } & & 30000 \\\hline \mathrm { Cr } & \text { Goodwill } & & 20000 \\\hline\end{array}$$

Question 55

An active market is defined in the standards as a market that has:

A)willing buyers and sellers.
B)prices are publicly available.
C)items traded are homogeneous.
D)All of the given answers are necessary.