Harvard University - ACCOUNTING FN314

CHAPTER 12

INTANGIBLE ASSETS

MULTIPLE CHOICE Conceptual

1)Costs incurred internally to create intangibles are

1. 1. capitalized.
   2. capitalized if they have an indefinite life.
   3. expensed as incurred.
   4. expensed only if they have a limited life.

2. Which of the following methods of amortization is normally used for intangible assets?
   1. Sum-of-the-years'-digits
   2. Straight-line
   3. Units of production
   4. Double-declining-balance

3. The cost of an intangible asset includes all of the following except
   1. purchase price.
   2. legal fees.
   3. other incidental expenses.
   4. all of these are include

4. Factors considered in determining an intangible asset’s useful life include all of the following except
   1. the expected use of the asset.
   2. any legal or contractual provisions that may limit the useful life.
   3. any provisions for renewal or extension of the asset’s legal life
   4. the amortization method use

5. 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
   1. charged off in the current period.
   2. amortized over the legal life of the purchased patent.
   3. added to factory overhead and allocated to production of the purchaser's product.
   4. 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.

6. Riser Corporation was granted a patent on a product on January 1, 1995. To protect its patent, the corporation purchased on January 1, 2004 a patent on a competing product which was originally issued on January 10, 2000. Because of its unique plant, Riser Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be
   1. amortized over a maximum period of 20 years.
   2. amortized over a maximum period of 16 years.
   3. amortized over a maximum period of 11 years.
   4. expensed in 2004.

7. Wriglee, Inc. went to court this year and successfully defended its patent from infringe- ment by a competitor. The cost of this defense should be charged to
   1. patents and amortized over the legal life of the patent.
   2. legal fees and amortized over 5 years or less.
   3. expenses of the period.

7. 4. patents and amortized over the remaining useful life of the patent.
8. Which of the following is not an intangible asset?
   1. Trade name
   2. Research and development costs
   3. Franchise
   4. Copyrights

9. Which of the following intangible assets should not be amortized?
   1. Copyrights
   2. Customer lists
   3. Perpetual franchises
   4. All of these intangible assets should be amortize

10. When a patent is amortized, the credit is usually made to
    1. the Patent account.
    2. an Accumulated Amortization account.
    3. a Deferred Credit account.
    4. an expense account.

11. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as
    1. an extraordinary gain.
    2. part of current income in the year of combination.
    3. a deferred credit and amortize it.
    4. paid-in capital.

12. Purchased goodwill should
    1. be written off as soon as possible against retained earnings.
    2. be written off as soon as possible as an extraordinary item.
    3. be written off by systematic charges as a regular operating expense over the period benefited.
    4. not be amortize

13. The intangible asset goodwill may be
    1. capitalized only when purchased.
    2. capitalized either when purchased or created internally.
    3. capitalized only when created internally.
    4. written off directly to retained earnings.

14. A loss on impairment of an intangible asset is the difference between the asset’s
    1. carrying amount and the expected future net cash flows.
    2. carrying amount and its fair value.
    3. fair value and the expected future net cash flows.
    4. book value and its fair value.

15. Which of the following research and development related costs should be capitalized and amortized over current and future periods?
    1. Research and development general laboratory building which can be put to alternative uses in the future
    2. Inventory used for a specific research project
    3. Administrative salaries allocated to research and development
    4. Research findings purchased from another company to aid a particular research project currently in process

16. Which of the following principles best describes the current method of accounting for research and development costs?
    1. Associating cause and effect
    2. Systematic and rational allocation
    3. Income tax minimization
    4. Immediate recognition as an expense

17. How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?
    1. Must be capitalized when incurred and then amortized over their estimated useful lives.
    2. Must be expensed in the period incurred.
    3. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved.
    4. 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.

18. Which of the following costs should be excluded from research and development expense?
    1. Modification of the design of a product
    2. Acquisition of R & D equipment for use on a current project only
    3. Cost of marketing research for a new product
    4. Engineering activity required to advance the design of a product to the manufacturing stage

19. 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
    1. research and development expense in the period(s) of construction.
    2. depreciation deducted as part of research and development costs.
    3. depreciation or immediate write-off depending on company policy.
    4. an expense at such time as productive research and development has been obtained from the facility.

20. Operating losses incurred during the start-up years of a new business should be
    1. accounted for and reported like the operating losses of any other business.
    2. written off directly against retained earnings.
    3. capitalized as a deferred charge and amortized over five years.
    4. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

MULTIPLE CHOICE—Computational

21. The general ledger of Waner Corporation as of December 31, 2004, includes the following accounts:

In the preparation of Waner's balance sheet as of December 31, 2004, what should be reported as total intangible assets?

a. $714,500.

b. $647,000.

c. $620,000.

d. $580,000.

22. In January, 1999, Sanford Corporation purchased a patent for a new consumer product for $1,200,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2004 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Sanford charge to expense during 2004, assuming amortization is recorded at the end of each year?

a. $800,000.

b. $600,000.

c. $120,000.

d. $80,000.

23. Dade Company purchased a patent on January 1, 2003 for $120,000. The patent had a remaining useful life of 10 years at that date. In January of 2004, Dade successfully defends the patent at a cost of $54,000, extending the patent’s life to 12/31/15. What amount of amortization expense would Dade record in 2004?

a. $12,000

b. $13,500

c.   $14,500

d. $18,000

24. On January 2, 2004, Klein Co. bought a trademark from Royce, Inc. for $300,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $240,000. In Klein’s 2004 income statement, what amount should be reported as amortization expense?

a. $30,000.

b. $24,000.

c. $15,000.

d. $12,000.

25. Hornet Baseball Company had a player contract with Carter that was recorded in its accounting records at $4,400,000. Sting Baseball Company had a player contract with Jeter that was recorded in its accounting records at $4,200,000. Hornet traded Carter to Sting for Jeter by exchanging each player's contract. The fair value of each contract was

$4,500,000. What amount should be shown in the accounting records after the exchange of player contracts?

26. The following information is available for Friend Company’s patents:

Friend would record a loss on impairment of a. $810,000

b. $165,000

c. $120,000

d. $45,000

27. During 2004, Bond Company purchased the net assets of May Corporation for

$1,270,000. On the date of the transaction, May had $400,000 of liabilities. The fair value of May's assets when acquired were as follows:

Current assets                                                                  $ 720,000

Noncurrent assets                                                          1,680,000

$2,400,000

How should the $730,000 difference between the fair value of the net assets acquired ($2,000,000) and the cost ($1,270,000) be accounted for by Bond?

1. 1. The $730,000 difference should be credited to retained earnings.
   2. The $730,000 difference should be recognized as an extraordinary gain.
   3. The current assets should be recorded at $501,000 and the noncurrent assets should be recorded at $1,169,000.
   4. A deferred credit of $730,000 should be set up and then amortized to income over a period not to exceed forty years.

28. In 2004, Edwards Corporation incurred research and development costs as follows:

These costs relate to a product that will be marketed in 2005. It is estimated that these costs will be recouped by December 31, 2007. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2004?

a. $0.

b. $330,000.

c. $405,000.

d. $555,000.

29. Hall Co. incurred research and development costs in 2004 as follows:

Indirect costs reasonably allocable to research and development projects                     270,000

$5,610,000

The amount of research and development costs charged to Hall's 2004 income statement should be

a. $1,560,000.

b. $1,740,000.

c. $2,010,000.

d. $4,620,000.

30. Martin Inc. incurred the following costs during the year ended December 31, 2004:

Laboratory research aimed at discovery of new knowledge                                               $200,000 Costs of testing prototype and design modifications                                                                                    45,000 Quality control during commercial production, including routine testing

of products                                                                                                                                      270,000

Construction of research facilities having an estimated useful life of

5 years but no alternative future use                                                                                    400,000

The total amount to be classified and expensed as research and development in 2004 is a. $595,000.

b. $915,000.

c. $645,000.

d. $325,000.

MULTIPLE CHOICE—CPA Adapted

31. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the patent totaled $100,000. On March 31, 2004, Gomez paid

$150,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2004 should be

a. $250,000.

b. $450,000.

c.   $500,000.

d. $600,000.

32. On June 30, 2004, Dax, Inc. exchanged 6,000 shares of Trane Corp. $30 par value common stock for a patent owned by Gore Co. The Trane stock was acquired in 2004 at a cost of $160,000. At the exchange date, Trane common stock had a fair value of $45 per share, and the patent had a net carrying value of $320,000 on Gore's books. Dax should record the patent at

a. $160,000.

b. $180,000.

c. $270,000.

d. $320,000.

33. On May 5, 2004, Pitts Corp. exchanged 6,000 shares of its $25 par value treasury common stock for a patent owned by Denson Co. The treasury shares were acquired in 2003 for $135,000. At May 5, 2004, Pitts' common stock was quoted at $32 per share, and the patent had a carrying value of $165,000 on Denson's books. Pitts should record the patent at

a. $135,000.

b. $150,000.

c. $165,000.

d. $192,000.

34. Ely Co. bought a patent from Backo Corp. on January 1, 2004, for $180,000. An independent consultant retained by Ely estimated that the remaining useful life is 30 years. Its unamortized cost on Backo's accounting records was $90,000; the patent had been amortized for 5 years by Backo. How much should be amortized for the year ended December 31, 2004?

a. $0.

b. $3,000.

c.   $6,000.

d. $12,000.

35. January 2, 2001, Koll, Inc. purchased a patent for a new consumer product for $270,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2004, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2004, assuming amortization is recorded at the end of each year?

a. $27,000

b. $162,000

c. $189,000

d. $216,000

36. On January 1, 2000, Watts Company purchased a copyright for $600,000, having an estimated useful life of 16 years. In January 2004, Watts paid $90,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2004, should be

a. $0.

b. $37,500.

c.   $43,125.

d. $45,000.

37. Which of the following legal fees should be capitalized?

Legal fees to                 Legal fees to successfully obtain a copyright                                   defend a trademark

37. 1. No                                                  No
    2. No                                                 Yes
    3. Yes                                                 Yes
    4. Yes                                                  No
38. Which of the following costs of goodwill should be amortized over their estimated useful lives?

Costs of goodwill from a

business combination                      Costs of developing

   accounted for as a purchase                goodwill internally

38. 1. No                                                          No
    2. No                                                         Yes
    3. Yes                                                         Yes
    4. Yes                                                          No
39. During 2004, Ming Co. incurred the following costs:

Testing in search for process alternatives                                                                           $ 720,000 Costs of testing prototype and design modifications                                                                             500,000

Modification of the formulation of a process                                                                       1,220,000 Research and development services performed by Beck Corp. for Ming                     650,000

In Ming's 2004 income statement, research and development expense should be a. $1,220,000.

b. $1,870,000.

c. $2,590,000.

d. $3,090,000.

40. Tyson Co. incurred the following costs during 2004:

EXERCISES

Ex. 12-41—Intangible assets questions.

Indicate the best answer by circling the proper letter.

1. Copyrights should be amortized over
   1. their legal life.
   2. the life of the creator plus fifty years.
   3. twenty years.
   4. their useful life or legal life, whichever is shorter.

2. A patent should be amortized over
   1. twenty years.
   2. its useful life.
   3. its useful life or twenty years, whichever is longer.
   4. its useful life or twenty years, whichever is shorter.

3. The major problem of accounting for intangibles is determining
   1. fair market value.
   2. separability.
   3. salvage value.
   4. useful life.

4. Limited-life intangibles are reported at their
   1. replacement cost.
   2. carrying amount unless impaired.
   3. acquisition cost.
   4. liquidation value.

5. Negative goodwill arises when the                                             of the net assets acquired is higher than the purchase price of the assets.
   1. useful life
   2. carrying value
   3. fair market value
   4. excess earnings

Ex. 12-42—Intangible assets theory.

It has been argued on the grounds of conservatism that all intangible assets should be written off immediately after acquisition. Discuss the accounting arguments against this treatment.

Ex. 12-43—Short essay questions.

1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?

Ex. 12-44—Carrying value of patent.

Fehr Co. purchased a patent from Wells Co. for $120,000 on July 1, 2002. Expenditures of

$34,000 for successful litigation in defense of the patent were paid on July 1, 2005. Fehr estimates that the useful life of the patent will be 20 years from the date of acquisition.

Instructions

Prepare a computation of the carrying value of the patent at December 31, 2005.

Ex. 12-45—Accounting for patent.

In early January 2003, Kenner Corporation applied for a patent, incurring legal costs of $30,000. In January 2004, Kenner incurred $9,000 of legal fees in a successful defense of its patent.

Instructions

1. 1. Compute 2003 amortization, 12/31/03 carrying value, 2004 amortization, and 12/31/04 carrying value if the company amortizes the patent over 10 years.
   2. Compute the 2005 amortization and the 12/31/05 carrying value, assuming that at the beginning of 2005, based on new market research, Kenner determines that the fair value of the patent is $27,500. Estimated future cash flows from the patent are $30,000 on January 3, 2005.

Ex. 12-46—Impairment of copyrights.

Presented below is information related to copyrights owned by Yaeger Corporation at December 31, 2004.

Assume Yaeger will continue to use this asset in the future. As of December 31, 2004, the copyrights have a remaining useful life of 5 years.

Instructions

1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2004.
2. Prepare the journal entry to record amortization expense for 2005.
3. The fair value of the copyright at December 31, 2005 is $2,000,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Ex. 12-47—Acquisition of tangible and intangible assets.

Fowler Manufacturing Company decided to expand further by purchasing Blye Company. The balance sheet of Blye Company as of December 31, 2004 was as follows:

Blye Company Balance Sheet December 31, 2004

An appraisal, agreed to by the parties, indicated that the fair market value of the inventory was

$320,000 and that the fair market value of the plant assets was $1,425,000. The fair market value of the receivables is equal to the amount reported on the balance sheet. The agreed purchase price was $2,300,000, and this amount was paid in cash to the previous owners of Blye Company.

Instructions

Determine the amount of goodwill (if any) implied in the purchase price of $2,300,000. Show calculations.

PROBLEMS

Pr. 12-48—Intangible assets.

The following transactions involving intangible assets of Penner Corporation occurred on or near December 31, 2004. Complete the chart below by writing the journal entry(ies) needed at that date to record the transaction and at December 31, 2005 to record any resultant amortization. If no entry is required at a particular date, write "none needed."

1. Penner paid Grand Company $200,000 for the exclusive right to market a particular product, using the Grand name and logo in promotional material. The franchise runs for as long as Penner is in business.

2. Penner spent $300,000 developing a new manu- facturing process. It has applied for a patent, and it believes that its application will be successful.

3. In January, 2005, Penner's application for a patent (#2 above) was granted. Legal and registration costs incurred were $50,000. The patent runs for 20 years. The manufacturing process will be useful to Penner for 10 years.

4. Penner incurred $80,000 in successfully defend- ing one of its patents in an infringement suit. The patent expires during December, 2008.

5. Penner incurred $200,000 in an unsuccessful patent defense. As a result of the adverse verdict, the patent, with a remaining unamortized cost of $105,000, is deemed worthless.

6. Penner paid Sneed Laboratories $52,000 for research and development work performed by Sneed under contract for Penner. The benefits are expected to last six years.

On Date                                     On

of Transaction             December 31, 2005

Pr. 12-49—Goodwill, impairment.

On May 31, 2004, Porter Company paid $2,100,000 to acquire all of the common stock of Dryer Corporation, which became a division of Porter. Dryer reported the following balance sheet at the time of the acquisition:

It was determined at the date of the purchase that the fair value of the identifiable net assets of Dryer was $1,800,000. At December 31, 2004, Dryer reports the following balance sheet information: