Question 1

Criteria for capitalization of development costs
List the criteria that must be met before development costs of a project may be capitalized.

Accepted Answer

The six criteria that must be met are:
1. Technical feasibility of completing the intangible asset,
2. The entity's intention to complete it for use or sale,
3. The entity's ability to use or sell it,
4. Availability of technical, financial, and other resources needed to complete, use or sell it,
5. The way in which the future economic benefits will be received; including the existence of a market for the asset if it will be sold, or its usefulness to the entity if it will be used internally,
6. The ability to reliably measure the costs associated with and attributed to the intangible asset during its development.

Question 2

Alternative treatments of goodwill after recognition
Once goodwill has been recognized in the accounts, there has been much disagreement over how it should be treated in subsequent periods. Discuss the alternative treatment approaches.

Accepted Answer

1. Charge goodwill off immediately to shareholders' equity. Goodwill is not an asset that is separable from the business itself and therefore should not be recognized as a separate asset. In addition, immediate expensing would be consistent with the expensing of costs of internally generated goodwill. As well, there is no rational method to amortize goodwill, due to the many uncertainties involved; therefore, financial statements will be more reliable if it is expensed.
2. Amortize goodwill over its useful life. Goodwill at the time of purchase erodes in value over time and therefore it should be charged to income over the estimated period in which it is expected to benefit the business.
3. Retain goodwill indefinitely at cost (i.e., do not amortize), unless impairment occurs. Current and future expenses help to maintain existing goodwill; therefore, it can have an indefinite life. Amortization of goodwill is entirely arbitrary and leads to distortions of net income.

Question 3

Which of the following is NOT generally true of intangible assets and goodwill?

Accepted Answer

A)   Many major public companies have significant amounts of intangible assets and goodwill listed on their balance sheets.
B)   The major assets of today's information and service providers are likely to be tangible.
C)   The major assets of today's information and service providers are likely to be intangible.
D)   Since identifying and measuring intangibles and goodwill is often difficult, they are not always reported on the balance sheet. B

Question 4

Cayman Corp. incurred $ 140,000 of basic research and $ 35,000 of development costs to develop a product for which a patent was granted on January 2, 2015. Legal fees and other costs associated with registration of the patent totalled $ 50,000. On March 31, 2020, Cayman paid $ 75,000 for legal fees in a successful defence of the patent. The total amount capitalized for the patent through March 31, 2020 should be

Accepted Answer

A)   $ 300,000.
B)   $ 265,000.
C)   $ 160,000.
D)   $ 125,000.

Question 5

The steps involved in testing goodwill for impairment using ASPE do NOT include

Accepted Answer

A)   comparing the current implied fair value of goodwill with its carrying amount.
B)   comparing the fair value of the reporting unit against its carrying amount including goodwill.
C)   all of these (all of these steps are involved in testing goodwill for impairment using ASP
E)  .
D)   calculating the implied current fair value of goodwill.

Question 6

Calculation of goodwill
Great Corporation is interested in purchasing Big World Company Ltd. The total of Big World's net income amounts over the past five years is $ 745,000. During one of those years, Big World reported a gain on discontinued operations of $ 93,000. The fair value of Big World's net identifiable assets is $ 684,000. A normal rate of return is 14%, and Great Corporation wants to capitalize excess earnings at 19%.
Instructions
Calculate the estimated value of goodwill.

Accepted Answer

The answer of Calculation of goodwill
Great Corporation is interested in...

Question 7

The proper accounting for the costs incurred in creating computer software products that are to be sold, leased, or otherwise marketed to external parties, is to

Accepted Answer

A)   capitalize all costs until the software is sold to external parties.
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 uses.
D)   capitalize all costs as incurred until a detailed program design or working model is created.

Question 8

On January 2, 2017, Albion Corp. purchased a patent for a new consumer product for $ 45,000. At the time of purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2020, the product was permanently removed from the market because of a potential health hazard. What amount should Albion recognize as an impairment loss for calendar 2020, assuming amortization has been recorded annually using the straight-line method with no residual value?

Accepted Answer

A)   $ 4,500
B)   $ 27,000
C)   $ 31,500
D)   $ 36,000

Question 9

Intangible assets that have a finite life are amortized over a period NOT to exceed

Accepted Answer

A)   intangible assets are not amortized.
B)   0 years.
C)   their useful life.
D)   the legal life.

Question 10

Terminology
In the space provided at right, write the word or phrase that is defined or indicated.

Accepted Answer

The answer of Terminology
In the space provided at right, write...

Question 11

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

Accepted Answer

A)   depreciation deducted as part of research and development costs.
B)   research and development expense in the period(s)  of construction.
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.

Question 12

Calculating goodwill
Explain how the amount to be recognized as goodwill can be calculated. Can goodwill be sold? If so, how? Explain.

Accepted Answer

The answer of Calculating goodwill
Explain how the amount to be...

Question 13

Capitalization versus expensing intangible-related costs
Identify whether the following costs would be expensed (E) or capitalized (C):
___ Lawyer fees related to the successful defence of a patent
___ Routine website maintenance
___ Costs incurred to register a company's name and trademark
___ Interest or borrowing costs related to an internally generated intangible
___ Lawyer fees related to the unsuccessful defence of a patent

Accepted Answer

The answer of Capitalization versus expensing intangible-related costs
Identify whether the...

Question 14

Carrying value of patent
On July 1, 2017, Dominica Corp. purchased a patent from Surama Ltd. for $ 60,000. On July 1, 2020, Dominica paid $ 12,000 for successful litigation in defence of the patent. Dominica estimates that the useful life of the patent will be 15 years from the date of acquisition.
$\bold{Instructions}$
Prepare a calculation of the carrying value of the patent at December 31, 2020. Label all calculations.

Accepted Answer

The answer of Carrying value of patent
On July 1, 2017,...

Question 15

Definitions
Provide clear, concise answers for the following:
1. What are intangible assets?
2. How are research costs accounted for?
3. How are development costs accounted for?
4. What are the two models that are used to measure intangible assets after initial acquisition?
5. What are the factors that should be considered when determining the useful life of limited-life intangible assets?
6. What are the major categories of intangible assets?
7. What are the two models that are used to account for the impairment of intangible assets?

Accepted Answer

The answer of Definitions
Provide clear, concise answers for the following:
1....

Question 16

Similar to impairment models and standards that apply to long-lived tangible assets, the rational entity impairment model applies also to

Accepted Answer

A)   limited-life intangible assets for organizations using IFRS.
B)   indefinite-life intangible assets for organizations using ASPE.
C)   indefinite-life intangible asset for organizations using IFRS.
D)   limited-life intangible assets for organizations using ASPE.

Question 17

Goodwill is the excess of the purchase price of the acquired enterprise over the

Accepted Answer

A)   fair value of the tangible net assets acquired.
B)   book value of the identifiable net assets acquired.
C)   book value of the tangible net assets acquired.
D)   fair value of the identifiable net assets acquired.

Question 18

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

Accepted Answer

A)   expensed 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.

Question 19

Which of the following explains the rationale for using "normalized" earnings under the excess-earnings valuation approach?

Accepted Answer

A)   Historic asset values are the best reflection of the assets' value in use.
B)   The company's future earnings should always be higher than the past earnings.
C)   The past often provides useful information about the future; past earnings are a good starting point.
D)   Normalized earnings are not used under the excess-earnings valuation approach.

Question 20

During 2020, Elysium Inc. incurred the following costs: Researeh Expense...................................................................................$360,000
Routine design of tools, jigs, moulds, and dies......................................$250,000$
Modification of the formulation of a process...........................................610,000
Development services performed by Orchard Corp. for Elysium .......... ${ 3 2 5 , 0 0 0 }$ Assuming the 6 specific conditions have been demonstrated, in 2020, Elysium Corp. would report development costs of

Accepted Answer

A)   $ 1,545,000.
B)   $ 1,295,000.
C)   $ 935,000.
D)   $ 610,000.

Exam 12: Intangible Assets and Goodwill

Criteria for capitalization of development costs List the criteria that must be met before development costs of a project may be capitalized.

Alternative treatments of goodwill after recognition Once goodwill has been recognized in the accounts, there has been much disagreement over how it should be treated in subsequent periods. Discuss the alternative treatment approaches.