Deck 8: Accounting for Intangibles

Question 1

Identifiable intangible assets are those intangible assets that:

A) Have been purchased by the entity from external parties.
B) Have an unlimited life.
C) Can have a value placed on them separately from other assets of the entity.
D) Cannot be separately sold.
E) All of the given answers.

Answer 1

C

Question 2

Intangible assets that are amortised are no longer subjected to impairment testing.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

If the fair value of a revalued intangible asset can no longer be determined by reference to an active market,AASB 136 requires the use of the cost model.

Question 5

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

Question 6

Internally generated brands,mastheads,publishing titles and customer lists are permitted to be recognised as intangible assets.

Question 7

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

Question 8

AASB 138 prohibits the recognition of intangible assets using the revaluation model.

Question 9

Expenditure on an intangible asset that was initially expensed may be recognised as part of an intangible asset at a later date.

Question 10

AASB 138 permits the use of revaluation model for intangible assets if there is an active market to determine fair value.

Question 11

According to AASB 138 on intangible assets,if an entity buys another entity separate values can be assigned to purchased goodwill and to a brand name:

Question 12

Intangible assets without a limited useful life cannot be recorded under AASB 138 as they cannot be amortised.

Question 13

There are only rare occasions when an identifiable intangible asset should be amortised.

Question 14

Compared to the requirement in the US,the treatment of research and development costs in Australia is less conservative (that is,likely to result in higher profits):

Question 15

Development costs are less likely to meet the test for deferral than research costs:

Question 16

Goodwill is a term used for the composite asset of identifiable intangibles:

Question 17

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

Question 18

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

Question 19

Examples of intangible assets include:

A) Loyal customers.
B) Patents and trademarks.
C) Provisions.
D) Loyal customers, patents and trademarks.
E) All of the given answers.

Question 20

AASB 138 requires that all intangibles,whether purchased or internally generated,be capitalised.

Question 21

There is a concern that research and development may be reduced as a result of the new requirements in AASB 138 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.
E) None of the given answers.

Question 22

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 2004 expenditure on the project is as follows: The window is expected to earn revenues of $70,000 per year for the 10 years commencing 1 July 2004.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 2007?

A) Expensed in 2004: $58,500 Amortisation in 2007: $58,500
B) Expensed in 2004: $235,000 Amortisation in 2007: $35,000
C) Expensed in 2004: $235,000 Amortisation in 2007: $28,000
D) Expensed in 2004: $350,000 Amortisation in 2007: $23,500
E) None of the given answers.

Question 23

Earth Ltd acquired Moon Ltd on 1 July 2009 for the sum of $100,000.On the same date Moon Ltd has the following assets and liabilities: What is the value of goodwill,if any?

A) Not required to recognise goodwill.
B) $35,000
C) $75,000
D) Surplus of $5,000
E) None of the given answers.

Question 24

Far-flung Co Ltd purchases Local Co Ltd for the purchase consideration of: Far-flung incurred legal fees of $6,000 to complete the acquisition.Local Co Ltd had the following assets and liabilities at the time of the purchase:
What is the value of goodwill,if any?

A) $0
B) $80,000
C) $141,000
D) $86,000
E) None of the given answers.

Question 25

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 2 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 of another entity by an acquiring entity over the recoverable value of the identifiable net assets acquired.
E) 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 26

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.
E) If acquired from an external party at a cost, and at the cost of the asset, which must exclude any additional expenditure required to prepare the asset for use.

Question 27

Which of the following statements is correct with respect to research and development expenditures in accordance with AASB 138?

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.
E) All of the given answers.

Question 28

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 2004 are: 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 2004 and what amount should be amortised in the year ended 30 June 2006 (rounded to the nearest dollar)?

A) Expensed in 2004: $1 200,000 Amortisation in 2006: $100,000
B) Expensed in 2004: $950,000 Amortisation in 2006: $216,667
C) Expensed in 2004: $950,000 Amortisation in 2006: $65,000
D) Expensed in 2004: $1,200,000 Amortisation in 2006: $30,000
E) Expensed in 2004: $160,000 Amortisation in 2006: $160,000

Question 29

AASB 138 describes the distinction between the treatment of internally generated goodwill and purchased goodwill (as well as other intangibles)as arising because:

A) The two different sources of goodwill result in two different types of asset.
B) Internally generated goodwill is developed in order to be sold, so its value will be recognised at that time.
C) Internally generated goodwill cannot be reliably measured.
D) Recording purchased goodwill could lead to the manipulation of profit and asset amounts.
E) None of the given answers.

Question 30

What is the test for deferral of research costs as required by AASB 138?

A) Research costs can be deferred (recorded as an asset) when it is probable that the project they are applied to will bring future economic benefits.
B) Research costs may not be deferred unless it is almost certain that the project they are applied to will bring future economic benefits.
C) Research costs may not be recorded as an intangible asset.
D) Research costs may be deferred if the entity can demonstrate that an intangible asset exists and that it will generate future economic benefits.
E) Research costs may be recorded as an intangible asset if the company intends to develop the product further.

Question 31

In order to determine whether or not expenditure should be treated as an intangible asset,the relevant test to apply in Australia 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.
E) None of the given answers.

Question 32

AASB 138 defines development as:

A) The activities undertaken with specific commercial objectives, including original research, to develop plans or designs for new products or significant improvements to existing products.
B) The application of research findings or other knowledge to a plan or design for the production of new or substantially improved material, devices, processes, systems or services prior to the commencement of commercial production or use.
C) The activities undertaken to translate research findings into feasible projects for subsequent development for commercial objectives such that the recoverable amount is expected to be greater than the cost.
D) The activities undertaken with the expectation by management that future economic benefits in the form of new products or improvements to existing products are likely to result, based on research completed to date.
E) None of the given answers.

Question 33

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 2003.Since 2001 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 2002?

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
E) None of the given answers.

Question 34

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) They cannot be sold separately and must all be classified as unidentifiable.
E) None of the given answers.

Question 35

The requirement of AASB 138 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.
E) None of the given answers.

Question 36

AASB 138 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.
E) None of the given answers.

Question 37

The release of AASB 138 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.
E) None of the given answers.

Question 38

The treatment of internally generated goodwill varies from purchased goodwill under AASB 138 in that:

A) Purchased goodwill is not amortised whereas internally generated goodwill is assumed to be maintained indefinitely.
B) Purchased goodwill may be recorded as an asset, whereas internally generated goodwill may not.
C) Internally generated goodwill is to be amortised over a period of no greater than 20 years, whereas purchased goodwill may not be recorded.
D) Purchased goodwill is to be expensed in the period it is bought whereas internally generated goodwill is to be deferred and amortised over a period of no less than 20 years.
E) None of the given answers.

Question 39

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.
E) All of the given answers.

Question 40

Buster Ltd 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 Ltd'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 AASB 138 "Intangible Assets" and AASB 136 "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.
E) None of the given answers.

Question 41

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.
E) None of the given answers.

Question 42

Big Ltd has purchased 100 per cent of Little Ltd for a cash payment of $800,000.The additional costs to Big Ltd to complete the purchase were $3,000.An extract from the balance sheet 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 accounts.Its fair value is $150,000.
What is the amount of purchased goodwill,if any,that has been acquired by Big Ltd?

A) $242,000
B) $344,000
C) $252,000
D) $102,000
E) None of the given answers.

Question 43

Prior to the introduction of impairment testing companies had attempted to manipulate their accounts 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) 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.
E) All of the given answers.

Question 44

Broadbeach Ltd is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Ltd for the year ended 30 June 2009: In accordance with AASB 136,what is the net effect of above goodwill accounts on the income statement and balance sheet of Broadbeach Ltd?

Question 45

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 twenty years.
C) Internally generated brands are not recognized 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 recognized as intangible assets because expenditures in these assets are not distinguishable from the cost of developing the business as a whole.
E) None of the given answers.

Question 46

Shelley Beach Ltd 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 2012. The carrying amounts of the assets as at 30 June 2012 are as follows:
In accordance with AASB 136 "Impairment of Assets",what should be the carrying amounts for buildings,equipment and goodwill as at 30 June 2012,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;
E) None of the given answers.

Question 47

Which of the following statement(s)in regard to goodwill is/are correct in accordance with AASB 136 "Impairment of Assets"?

A) An impairment loss must be recognised when the carrying amount of a cash-generating unit exceeds it recoverable amount.
B) An impairment loss recognised may be reversed in 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 answers.
E) An impairment loss must be recognised when the carrying amount of a cash-generating unit exceeds it recoverable amount and an impairment loss recognised may be reversed in subsequent period.

Question 48

Which of the following statements in regard to goodwill is/are correct in accordance with AASB 136 "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) All of the given answers.
E) None of the given answers.

Question 49

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.
E) All of the given answers.

Question 50

Prior to the introduction of AASB 138 companies had found ways to circumvent the requirements of the revised (1996)version of AASB 1013.These methods included.

A) Using the inverted sum-of-digits amortisation technique.
B) Calculating goodwill as the difference between the carrying value of the net assets of the acquired company and the consideration paid.
C) Requiring the purchased company to make excessive provisions for restructuring costs to be undertaken after the company is purchased.
D) Attributing the excess of the cost of acquisition over the fair value of the net identifiable assets of the company acquired to brands, licences and other identifiable intangible assets.
E) All of the given answers.

Question 51

AASB 138 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.
E) All of the given answers.

Question 52

Which of the following intangible assets should be recognised in the balance sheet?

A) Internally generated goodwill in excess of recoverable amount.
B) Licenses with active market.
C) Purchased trademark.
D) All of the given answers.
E) Licenses with active market and purchased trademark.

Question 53

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.
E) None of the given answers.

Question 54

The argument by Pacific Dunlop (1994)is that the accounting treatment of goodwill,particularly the requirement to amortise it over 20 years,places Australian companies at a competitive disadvantage internationally.Miller (1995)analyses this view and argues that:

A) The research that has shown accounting figures to be used in a mechanistic way suggests that Australian firms will be disadvantaged relative to international competitors in the takeovers market.
B) Sophisticated users will be aware that there are no direct cash-flow effects of the different amortisation treatments for goodwill. The effect of differential taxation treatments (since the ATO does not permit a deduction for the amortisation of goodwill) will, however, have a negative impact on Australian companies.
C) The efficient market hypothesis maintains that the capital market will impound accounting information efficiently into the price of shares. Therefore if Australian companies are required to report lower earnings through goodwill amortisation they will be valued at a lower amount than they would otherwise be by investors in the capital market. This would reduce their ability to bid for other companies in a takeover situation.
D) The amortisation of goodwill can be a very significant cost for companies that have purchased a reasonable number of subsidiaries. Companies that are active in the takeover market in this way will be negatively impacted by the reporting of lower profits as a result of Australia's requirement that they amortise goodwill over a maximum of 20 years, whereas other countries permit a 40 year or unlimited life for goodwill.
E) None of the given answers.

Question 55

The approach to accounting for intangibles raises some issues because:

A) Assets are now subject to impairment testing, which will remove the professional judgement required for amortisation.
B) Consistency has now been achieved regarding research and development meaning entities cannot claim to have expended resources on potential benefits while other entities could not.
C) Many intangible assets will not be recognised under this approach, particularly in regard to internally generated assets.
D) Intangible assets are more likely to be recorded at fair values because of the active market criteria, which may overstate asset values.
E) None of the given answers.

Question 56

In accordance with AASB 136 "Impairment of Assets" what should be the carrying amount of equipment as at 30 June 2012?

A) $0
B) $100,000
C) $150,000
D) $190,000
E) None of the given answers.

Question 57

Palm Beach Ltd 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.
In accordance with AASB 136 "Impairment of Assets" what should be the carrying amount of buildings as at 30 June 2012?

A) $720,000
B) $760,000
C) $800,000
D) $900 000
E) None of the given answers.

Question 58

As part of adopting IFRS,goodwill acquired in a business combination is no longer amortised.Instead,the acquirer shall test goodwill for impairment (AASB 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.
E) None of the given answers.

Question 59

Broadbeach Ltd is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Ltd for the year ended 30 June 2009: What is the carrying amount of goodwill as at 30 June 2009 consistent with AASB 136 "Impairment of Assets"?

A) Zero
B) $100 000
C) S140 000
D) $150 000
E) None of the given answers.

Question 60

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)
E) None of the given answers.

Question 61

Shelley Beach Ltd 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 2012. The carrying amounts of the assets as at 30 June 2012 are as follows:
In accordance with AASB 136 "Impairment of Assets",what is the appropriate journal entry to recognize the impairment loss for Shelley Beach Ltd?

A)
B)
C)
D)
E) None of the given answers.